When a government transfers money to a utility fund, receives operating assistance for a transit system, or provides support to another activity, the accounting treatment has often been relatively straightforward. Under GASB 103, however, governments may need to take a closer look.
One of the more significant changes introduced by GASB Statement No. 103, Financial Reporting Model Improvements, is the formal guidance surrounding subsidies. While the concept itself is not entirely new, GASB 103 provides a clearer framework for identifying and reporting subsidies within proprietary funds.
For many governments, the challenge won’t be understanding the definition—it will be determining which existing transactions now need to be evaluated differently.
What Is a Subsidy Under GASB 103?
GASB 103 defines subsides as: resources received from another party or fund for which the proprietary fund doesn’t provide goods or services to the other party or fund that directly or indirectly keep the proprietary fund’s current or future fees and charges lower than they would be otherwise. Or resources provided to another party of fund for which the other party or fund doesn’t provide goods and services to the proprietary funds that are recoverable through the proprietary fund’s current or future pricing policies.
In simple terms, subsidies often occur when one party helps cover costs that would otherwise need to be recovered from customers, users, or ratepayers.
GASB 103 requires governments to distinguish between:
- Operating revenues and expenses
- Noncapital subsidies received
- Noncapital subsidies provided
- Other Nonoperating revenues and expenses
- Capital subsidies received
- Capital subsidies provided
The classification depends on the purpose of the funding and how the resources are being used.
Example 1: General Fund Support for a Water Utility
A city’s water utility is facing rising operating costs due to increased treatment expenses. Rather than raising water rates, the City Council approves a transfer of $500,000 from the General Fund to help offset operating costs.
Key Question
Would water rates need to increase if the transfer were not provided?
If the answer is yes, the transfer may meet the definition of a noncapital subsidy received because the funding helps keep rates lower than they otherwise would be.
Why It Matters
Historically, governments may have simply reported this transaction as a transfer. Under GASB 103, the transaction may require additional evaluation to determine whether it qualifies as a subsidy.
Example 2: Transit Operating Assistance
A public transit agency receives annual state funding intended to support bus operations and maintain affordable fares for riders.
The transit agency does not provide goods or services back to the state in exchange for the funding.
Because the funding helps support operations and keep fares lower than they otherwise would be, the assistance would likely be considered a noncapital subsidy received.
Example 3: Grant Funding for New Buses
A transit district receives a federal grant specifically restricted for purchasing replacement buses.
Unlike operating assistance, these resources are limited to acquiring capital assets.
In this situation, the grant would likely be classified as a capital subsidy received because the resources are intended for capital asset acquisition rather than ongoing operations.
Example 4: Internal Service Fund Support
A city’s IT Internal Service Fund charges departments for technology services.
The city intentionally keeps those rates below actual cost and supplements the fund each year with General Fund resources.
Because the support helps reduce the rates charged to departments, the contribution may qualify as a subsidy under GASB 103.
This is one reason internal service funds should not be overlooked during implementation.
Common Areas Governments Should Review
As governments prepare for implementation, several transactions deserve closer attention:
Enterprise Funds
- Water utilities
- Sewer utilities
- Electric utilities
- Solid waste operations
- Airports
- Transit agencies
Internal Service Funds
- Information technology
- Fleet maintenance
- Equipment replacement
- Risk management operations
Transactions to Evaluate
- Operating grants
- General Fund support
- Rate stabilization transfers
- Interfund assistance
- Capital project contributions
- External funding used to offset operating costs
The goal is not to assume every transfer is a subsidy, but rather to ensure each transaction is evaluated using the GASB 103 framework.
Frequently Asked Questions
FAQ #1: Are All Transfers Now Considered Subsidies?
Only for proprietary funds. Governments will need to look at their accounts used for transfers and separate what fall into the capital subsidy category and noncapital subsidy category. It is recommended new accounts are considered for this tracking.
FAQ #2: Are All Grants Subsidies?
No. Some grants may meet the definition of a subsidy, while others may not. The purpose of the funding matters.
For example:
- Operating assistance may qualify as a noncapital subsidy.
- Funding restricted to capital asset acquisition may qualify as a capital subsidy.
- Other grants may require separate analysis based on their terms and conditions.
FAQ #3: What Is the Difference Between a Capital and Noncapital Subsidy?
The distinction generally comes down to how the resources are intended to be used.
Capital Subsidies
- Used or limited for acquiring or constructing capital assets.
- Examples include grant awards limited for capital, debt proceeds for capital related purposes, extra fee approved for recovery of prior or future capital costs.
Noncapital Subsidies
- Support ongoing operations.
- Examples include operating assistance, fare support, and rate stabilization funding.
- Grants with multi-purpose funding (Capital and Noncapital) do not need to be separated. Should be reported as noncapital subsidy
FAQ #4: Do Internal Service Funds Need to Worry About GASB 103 Subsidies?
Absolutely. Many governments focus on enterprise funds because utility operations commonly receive subsidies. However, internal service funds often receive support designed to keep service charges lower than actual cost. Those arrangements may require evaluation under GASB 103.
FAQ #5: How Will GASB 103 Impact Financial Statement Presentation?
One of the primary goals of GASB 103 is to improve consistency in proprietary fund reporting.
Governments may see changes in how certain transactions are presented within the Statement of Revenues, Expenses, and Changes in Net Position, particularly when subsidies are involved.
As a result, governments should review existing transfer, grant, and funding arrangements before implementation to identify any reporting changes that may be necessary.
Put GASB 103 Into Practice
Understanding the new subsidy guidance is only one part of preparing for GASB 103. Governments must also review how these transactions will affect proprietary fund presentation, MD&A, budgetary comparisons, and other areas of their financial statements.
To help, LSL created a complimentary GASB 103 Implementation Tool. This interactive Excel-based resource walks your team through the standard’s key requirements using simple dropdowns and a built-in dashboard that tracks progress and highlights items that may still need attention.
Use the tool to evaluate your organization’s readiness, document implementation decisions, and create a clearer roadmap for completing the transition.
[Download the Complimentary GASB 103 Implementation Tool]
Final Thoughts
GASB 103 may require governments to reconsider transactions that have been reported the same way for years—particularly within utilities, transit operations, airports, and internal service funds. Reviewing grants, transfers, operating assistance, and rate-support arrangements early can help prevent last-minute reporting issues.
If your organization needs additional assistance identifying subsidies, evaluating reporting requirements, or preparing for implementation, contact us today!
