Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Interfund Activity

Subsidies and Transfers

GASB 103 establishes the requirements for identifying, classifying, and reporting subsidies in proprietary funds in accordance with a formal definition and consistent reporting framework for subsidies in proprietary funds. A subsidy exists when a proprietary fund receives or provides resources in a transaction in which:

• No goods or services are exchanged.
  –AND–
• The transaction directly or indirectly affects the proprietary fund’s current or future rates or charges.

If resources are received or provided in a way that allows a fund to charge lower rates, or requires it to charge higher rates, the transaction meets the definition of a subsidy. This guidance applies to all proprietary funds and business-type activities, including enterprise funds and internal service funds, reported by the agency.

GASB 103 organizes subsidies into three categories:

• Subsidies received
• Subsidies provided
• All other transfers

Transfers are no longer treated as a distinct category—they are explicitly incorporated into the definition of subsidies and must be evaluated accordingly. Transactions historically described as transfers, grants, or similar nonexchange activities must be evaluated under the subsidy framework, with classification driven by the substance of the transaction rather than its label.

The three categories for subsidies are:

• Subsidies Received: Resources received from another party or fund for which the proprietary fund does not provide goods or services in return and that directly or indirectly keep the fund’s fees and charges lower than they otherwise would be.
• Subsidies Provided: Resources provided to another party or fund for which the proprietary fund does not receive goods or services in return and that are recoverable through the proprietary fund’s current or future pricing policies.
• All Other Transfers: All transfers must be evaluated as subsidies under GASB 103 as capital or noncapital and must not be treated as a separate classification.

The determination of whether a transaction is a subsidy begins with assessing whether an exchange exists. If a proprietary fund provides goods or services in return for the resources received, the transaction is not a subsidy, regardless of how it may be labeled. For example, payments received from third-party payors, such as insurance companies, are not subsidies because they represent payment for services provided. Conversely, payments such as certain payments in lieu of taxes (PILOTs), or other support that offset costs without a direct exchange, may meet the definition of a subsidy if they affect the rates charged to customers.

Capital or Noncapital Subsidies

Once a transaction is determined to be a subsidy, it must be classified as either capital or noncapital. This classification is not based on how the recipient uses the resources, but rather on any restrictions imposed by the provider. If the provider restricts the resources for capital purposes, the subsidy is classified as a capital subsidy and reported with other nonoperating revenues and expenses. If no such restriction exists, or if the resources are restricted for purposes other than capital acquisition, the subsidy is classified as noncapital.

This distinction between capital and noncapital subsidies is one of the most common areas of misapplication. A frequent error occurs when agencies classify subsidies based on how the funds are ultimately spent rather than on the restrictions imposed by the provider. For example, if a subsidy is not restricted for capital purposes but is used to acquire capital assets, it must still be reported as a noncapital subsidy. The governing factor is the nature of the restriction, not the use of the funds.

GASB 103 also requires agencies to reconsider how they evaluate transactions that include multiple components. Some payments or transfers may contain both exchange and nonexchange elements or may include portions that meet the definition of a subsidy alongside portions that do not. In these cases, the transaction must be analyzed and, if necessary, separated into its component parts, with each portion classified and reported appropriately. A single payment may therefore be reflected across multiple sections of the statement of revenues, expenses, and changes in net position (SRECNP).

Recognition and Presentation

The agency must report subsidies in the SRECNP as follows:

• Noncapital Subsidies: Reported immediately following operating income (loss) and included in a subtotal combining operating income (loss) and noncapital subsidies.
• Capital Subsidies: Reported with other nonoperating revenues and expenses

The agency must ensure that the presentation clearly distinguishes between operating results and the effects of subsidies. This presentation is intended to provide a clearer measure of the overall results of operations, including the effect of external financial support. This is the format of a basic SRECNP.

Statement of Revenues, Expenses and Change in Fund Net Position

• Operating revenues (detailed)
  • Total operating revenues
• Operating expenses (detailed)
  • Total operating expenses
  • Operating income (loss)
• Noncapital subsidies (detailed)
  • Total noncapital subsidies
    • Operating income (loss) and noncapital subsidies
• Other nonoperating revenues and expenses (detailed)
  • Total other nonoperating revenues and expenses
    • Income (loss) before unusual or infrequent items
• Unusual or infrequent items (detailed)
  • Increase (decrease) in fund net position
• Fund net position—beginning of period
• Fund net position—end of period

Each caption, subtotal, and total shown in the format above must be presented, as applicable.

Implementation Guide No. 2025-1

Question 4.5:

How must 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?

Answer

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 must be reported as other nonoperating revenues and expenses.

Question 4.6:

Do payments in lieu of taxes (PILOTs) made by a business-type activity (BTA) or a proprietary fund meet the definition of subsidies?

Answer

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 (agency) 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 (agency) 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.

Question 4.7:

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 for purposes of the definition of subsidies?

Answer

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 definition of a subsidy. 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.