In June 2025, the GASB published Implementation Guide 2025-1, Implementation Guidance Update—2025 (IGU). The IGU contains 16 new questions and answers (Q&As) and amends two previously issued Q&As. A prior post looked at the four new Q&As related to GASB Statement No. 100, Accounting Changes and Error Corrections, including so-called “ghost columns.” Let’s take a look now at the guidance relevant to Statement No. 103, Financial Reporting Model Improvements, particularly the reporting of operating and nonoperating revenues and expenses and subsidies in the proprietary funds.

Question 4.2 – Operating Revenue Exception

• Q—Paragraph 13 of Statement No. 103, Financial Reporting Model Improvements, indicates that interest revenues of a proprietary fund established to provide loans to first-time homeowners should be reported as operating revenues because those transactions constitute the proprietary fund’s principal ongoing operations. If this proprietary fund reports interest expenses associated with borrowings that finance operations, would the interest expenses be reported as operating expenses?
• A—No. Interest expenses related to financing are always reported as nonoperating expenses. The interest revenues are related to the operations of the program, whereas the interest expenses are related to how the fund obtained resources (financing) to operate its lending program.

This exception to the general rule that financing flows are nonoperating originated in footnote 42 of Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments. However, whereas Statement 34’s exception addressed both revenues and expenses, Statement 103’s exception applies only to revenues. With the implementation of Statement 103 the proprietary fund’s interest income would be reported as operating revenue but its interest expenses would be nonoperating.

Question 4.3 – Lessor Revenues

• Q—If the principal ongoing operation of a business-type activity (BTA) or an enterprise fund is leasing property to other entities, should interest revenue related to leases be reported as operating revenue?
• A—No. Interest revenue is a revenue related to financing, which, in accordance with paragraph 13 of Statement 103, is a nonoperating revenue unless financing transactions constitute the proprietary fund’s principal ongoing operations. If the principal ongoing operation of a BTA or an enterprise fund is leasing property to other entities, the principal ongoing operation is conveying control of the right to use an underlying asset. Because interest revenue related to a lease is recognized from financing the operation of conveying control of the right to use an underlying asset, rather than from the operation itself, interest revenue from a lease should not be reported as operating revenue. Although the foundational principle of Statement No. 87, Leases, as amended, is that leases are financings, leases are different from other types of financings (such as loans) because, in addition to interest revenue, a lease results in revenue from conveying control of the right to use an underlying asset through the recognition of the deferred inflow of resources as inflows of resources in subsequent periods.

A lease transaction that is not short term has two components: the transfer of the right to use the underlying asset and the financing of the first component. The first component constitutes the operation, not the second (financing) component. Therefore, the revenues associated with the first component (which derive from the amortization of the deferred inflow of resources) are considered operating but the interest revenue from the second component is nonoperating. With the exception of an entity whose principal ongoing operation is financing (like the first-time homeowner lending example), interest revenue always should be nonoperating.

Although this question is in the context of leasing being a BTA or fund’s principal ongoing operation for the purpose of addressing lease interest revenue specifically, the answer applies equally to all leases that are not short term.

Question 4.4 – Amortization of the Lease Deferral

• Q—Paragraph 54 of Statement 87 requires that the deferred inflow of resources related to a lease be recognized as inflows of resources (for example, revenue) over the term of the lease. If reported as revenue, should a BTA or an enterprise fund report those inflows of resources as operating revenue?
• A—Yes. Paragraph 13 of Statement 103 provides that operating revenues are revenues other than nonoperating revenues and that revenues related to financing are nonoperating revenues. As discussed in Question 4.3, only interest revenue recognized from a lease is related to financing. Revenue recognized from the deferred inflow of resources related to a lease, therefore, is not related to financing. Such revenue does not meet any of the other categories for nonoperating revenue and, therefore, should be reported as operating revenue.

This Q&A supplements the answer to Question 4.3 on lessor accounting. The operating portion of the lessor’s revenue comes from the amortization of the deferred inflow and effectively is the payment for transferring the right to use the lessor’s asset.

Question 4.5 – Subsidies

• Q—How should subsidies be classified if resources are used for the acquisition of capital assets in circumstances in which the provider of a subsidy did not limit the use of the resources to the acquisition of capital assets?
• A—Subsidies are classified as noncapital subsidies if the provider of the subsidy either does not limit the use of the resources or limits the use of the resources to something other than the acquisition of capital assets. Subsidies are only classified as capital subsidies (that is, all subsidies other than noncapital subsidies) if the provider of the subsidy has limited the use of the resources to the acquisition of capital assets. The recipient’s use of all or a portion of a subsidy for capital purposes does not, by itself, result in all or a portion of the subsidy being classified as a capital subsidy. Subsidies other than noncapital subsidies should be reported as other nonoperating revenues and expenses. (See also Question 7.73.2 in Implementation Guide 2015-1, as amended.)

Statement 103 introduces a new section to the statement of revenues, expenses, and changes in fund net position: noncapital subsidies. Therefore, inflows and outflows that meet the definition of a subsidy in paragraph 14 must be divided between those related to capital asset transactions and those that are not, the latter being noncapital subsidies.

For the purpose of making that distinction, the key factor is what the provider of the subsidy stipulates that the recipient may use the subsidy for. If the provider says it may be used only to install sewer lines, it is a capital subsidy and should be reported in the “other nonoperating revenues and expenses” section of the financial statement. If the provider does not limit the subsidy to being used for capital-related purposes, the fact that the recipient chooses to use the subsidy for capital-related purposes is irrelevant. The subsidy is categorized as noncapital because the provider did not limit it to being used for capital purposes.

Question 4.6 – PILOTs

• Q—Do payments in lieu of taxes (PILOTs) made by a BTA or a proprietary fund meet the definition of subsidies?
• A—It depends on the substance of the transaction. In many circumstances, a PILOT is an arrangement in which (a) a payment from a BTA or proprietary fund is made either to the general fund of the primary government or to another government to compensate for tax revenue lost due to tax exemptions for the purpose of supporting general governmental activities and (b) the BTA or proprietary fund establishes a rate or fee that produces operating income greater than or equal to the amount of the PILOT. In these circumstances, the PILOT would meet the definition of subsidies. However, in other circumstances, a PILOT is a payment from a BTA or proprietary fund to another government or fund for goods or services provided to the BTA or proprietary fund. In those circumstances, the PILOT would not meet the definition of subsidies. The name of the arrangement is not relevant to the determination of whether it is a subsidy for accounting and financial reporting purposes. (See also paragraph 112 of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as amended, regarding interfund services provided and used and interfund transfers.)

When transactions are called one thing in practice but mean something different in the context of governmental accounting and financial reporting, the GASB’s guidance has been consistent in emphasizing that governments focus on the substance of the transaction and not its name. As it has done for leases, conduit debt, and tax abatements, the GASB states in this Q&A that a transaction called a PILOT is a subsidy only if it meets the Statement 103 definition of a subsidy. The fact that it is called a PILOT is not relevant in and of itself.

Question 4.7 – Third-Party Insurance Payments

• Q—An insured individual receives covered healthcare services from a governmental healthcare provider, resulting in recognition of a revenue and receivable by the governmental healthcare provider. The third-party insurer is responsible for making payments to the governmental healthcare provider in accordance with the terms of the insurance contract. Does this circumstance meet the criterion established in paragraph 14a of Statement 103 for purposes of the definition of subsidies?
• A—No. Even though the third-party insurer did not directly receive goods or services from the governmental healthcare provider, those payments do not meet the criterion in paragraph 14a. The insured individual received goods or services from the governmental healthcare provider that resulted in the healthcare provider receiving resources in the form of a receivable. The third-party insurer is paying the governmental healthcare provider in place of the insured individual because of the contractual relationship between the insured individual and the third-party insurer.

Paragraph 14a requires that the resources received “directly or indirectly keep the proprietary fund’s current or future fees and charges lower than they would be otherwise.” Payments from insurers reduce how much the patient pays out of pocket but they do not reduce the healthcare provider’s fees or charges. Therefore, payments from third-party insurers are not subsidies from the perspective of the healthcare provider.

Question 4.16 – Effective Date and Component Units

• Q—If a primary government is implementing Statement 103 for its fiscal year ended June 30, 2026, and it will include in its financial statements a component unit with a fiscal year-end of December 31, 2025 (in accordance with the provisions in paragraph 59 of Statement No. 14, The Financial Reporting Entity), when should the component unit implement Statement 103?
• A—For the purposes of implementing Statement 103, which requires changes to the presentation of certain financial statements, the component unit should implement that Statement in its December 31, 2025 financial statements.

If a component unit has a fiscal year that ends during the primary government’s fiscal year, rather than on the same date, then the component unit needs to implement for that fiscal year even if it is earlier than its effective date as a freestanding entity. In this case, rather than implementing for the fiscal year ending December 31, 2026, the component unit must implement for the fiscal year ending December 31, 2025.