Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 17 – Risk Management
Concentrations or Constraints

GASB 102 establishes financial reporting for certain risks that agencies face. Risks are conditions that give rise to the potential for loss or harm to an agency. Certain conditions may exist that make an agency vulnerable to those risks by exposing it to an increased possibility of loss or harm by limiting its ability to acquire resources or control spending.

GASB 102 also amends the National Council on Governmental Accounting (NCGA) Interpretation 6, Notes to the Financial Statements Disclosure, paragraph 5.

A concentration is a lack of diversity related to an aspect of significant inflow of resources (revenues) or outflow of resources (expenses). Examples include any composition of:

• Employers
• Industries
• Revenues
• Workforce covered by collective bargaining agreements
• Providers of financial resources
• Suppliers of material, labor or services

A concentration can occur from a tax or grant revenue that comprises a large portion of an agency’s overall revenue or from a small group of potential suppliers necessary for the agency’s operations.

A constraint is a limitation on revenue, spending or borrowing imposed by an external party or by formal action of an agency’s or the state’s highest level of decision-making authority, such as:

• Limitations on raising revenue
• Limitations on spending
• Limitations on the incurrence of debt
• Mandated spending

A constraint can also result from mandated spending because it prevents alternative uses of funds. These mandates are generally imposed by an external party but can be self-imposed in a manner that would make it externally enforceable and difficult to reverse. The Texas Constitution or bills passed through the legislative process are examples of potential mandated spending.

Disclosure Criteria

Agencies must make a note disclosure to the financial statements if all the following criteria are met:

• A concentration or constraint is known to the agency prior to the issuance of the financial statements.
• The concentration or constraint makes the agency vulnerable to the risk of a substantial impact.
  –AND–
• An event or events associated with the vulnerability:
  • Has occurred
  • Has begun to occur
    –OR–
  • Is more likely than not to begin occurring within 12 months of the date the financial statements are issued

A note disclosure to the financial statement is made prospectively and only applies to the current reporting period.

A disclosure is not required if the agency takes mitigating action that causes one or more of the above criteria not to be met.

Notes to the Financial Statements

Agencies must make disclosures about each concentration or constraint that meets all the above requirements. Agencies must also provide sufficient information to enable users of financial statements to understand the nature of the circumstances and the agency’s vulnerability to the risk of a substantial impact associated with the concentration or constraint. Agencies must also disclose any actions it took to mitigate the risk prior to the issuance of the financial statements.