What State and Local Government Financial Leaders Need to Know - On June 23, 2025, the Governmental Accounting Standards Board (GASB) released GASB Implementation Guide No. 2025-1, Implementation Guidance Update–2025 (IG 2025-1), providing clarity on a range of accounting issues for state and local governments. With sixteen new questions and two amendments to previous guidance, IG 2025-1 addresses practical implementation challenges and helps with consistent application of GASB standards. This article summarizes the key topics, provides clear explanations, and includes practical examples to help government professionals understand the impact of these updates.
The Role of GASB
The GASB was established in 1984 as an independent, private-sector organization to develop accounting and financial reporting standards for U.S. state and local governments. GASB’s mission is to promote clear, consistent, and comparable financial reporting, thereby increasing transparency and accountability for public sector entities.
Why Implementation Guides?
The GASB issues implementation guides to help governments apply its standards consistently and correctly. These guides are developed through a public due process, including exposure drafts and stakeholder feedback, to address real-world questions that arise as governments implement new or revised standards. Implementation guides are considered Category B authoritative guidance under the GAAP hierarchy, meaning they provide essential clarification when the primary (Category A) standards do not address a specific issue.
Evolution of Implementation Guidance
Over the years, the GASB has released multiple implementation guides to address evolving accounting issues, including those related to pensions, leases, financial reporting models, amongst others. Each guide is intended to supplement, not replace, the underlying standards. For example, the implementation guide for leases (IG 2019-3) provided critical assistance for applying complex new guidance related to leases under GASB 87.
IG 2025-1 continues this tradition by updating and expanding on previous guidance, reflecting new standards like GASB 100 (Accounting Changes and Error Corrections), GASB 101 (Compensated Absences), and GASB 103 (Financial Reporting Model Improvements). The guide also amends earlier Q&As for alignment with current standards and best practices.
Cash Flows Reporting: Key Points
When a transaction is reported as part of operating income in the operating statement but is classified in a different category on the statement of cash flows, it must also be presented as a reconciling item in the reconciliation of operating income to net cash flow from operating activities.
Example
A government-owned utility receives a grant that is included in operating income but is classified as a non-operating cash inflow on the cash flow statement. The grant must be shown as a reconciling item in the cash flow reconciliation.
Why It Matters
This clarification helps prevent double-counting or omission of significant transactions in the reconciliation process, supporting more accurate and transparent cash flow reporting.
Operating and Nonoperating Revenues and Expenses: Key Points
Interest revenue earned by a proprietary fund whose main activity is lending is considered operating revenue.
Example
A city’s revolving loan fund earns interest from loans to local businesses. This interest is operating revenue. If the fund borrows money to make those loans, the interest paid on those borrowings is a nonoperating expense. If the city leases property and recognizes interest revenue from the lease, that interest is nonoperating revenue, and the amortization of deferred inflows of resources from the lease is operating revenue.
Why It Matters
Proper classification of revenues and expenses is essential for accurately reflecting the results of operations and for compliance with GASB 103, which redefines operating and nonoperating activities for proprietary funds.
Leases: Key Points
Example
A school district leases equipment for five years or until a grant expires. The five-year period is the lease term unless the grant ends earlier, in which case the lease is remeasured. If the lease is modified in year three, the liability is remeasured from the modification date.
Why It Matters
These clarifications help governments apply the complex lease accounting model under GASB 87, reducing the risk of misstatement and securing comparability across entities.
Conduit Debt Obligations: Key Points
Example
A city’s housing authority (component unit) issues bonds on behalf of the city (primary government). Because both are within the same reporting entity, the bonds are not conduit debt.
Why It Matters
This distinction affects how debt is reported and disclosed, impacting both the primary government and its component units and establishing proper classification in the financial statements.
Accounting Changes and Error Corrections: Key Points
Example
A special revenue fund that was reported as major in the prior year is not a major fund in the current year. In the current year statement of revenues, expenditures, and changes in fund balance, a separate column for the special revenue fund should be presented displaying only opening fund balance and an adjustment to zero out the balance, with a corresponding adjustment to opening fund balance in the nonmajor funds column.
Why It Matters
These details help governments implement GASB 100 correctly, making sure that changes and corrections are reported transparently and consistently.
Compensated Absences: Key Points
Example
An employee’s pay rate is to increase from $25 per hour to $28 per hour effective the first day of the subsequent year. In calculating the compensated absences liability as of year-end for the current year, the $25 per hour rate should be used.
Why It Matters
This prevents overstatement or understatement of liabilities, aligning with GASB 101’s focus on accurate measurement and making sure liabilities reflect current obligations.
Other Matters: Key Points
Why It Matters
These clarifications allow for proper classification and reporting of subsidies, PILOTs, and other transactions, supporting compliance and transparency in financial statements.
Effective Date & Transition
Note: This article is based on information available as of June 2025. For the most current guidance, consult the official GASB website or your professional advisor.
Related Reference Material