I well remember how confused I was when GASB 14 came out – even though Harold Monk did his best to enlighten me. Since then, I don’t know how many entities I’ve looked at, trying to determine whether they were component units. I do know I have become well acquainted with the flowchart in GASB 14; strangely enough, we have become friends (yes, I know it’s weird having a flowchart for a friend, but such is my life). We now have an updated flowchart in GASB 61 – a new friend I guess.
GASB reconsidered GASB 14 and created GASB 61, Financial Reporting Entity: Omnibus – an Amendment to GASB Statements No. 14 and No. 34. The effective date is for periods beginning after June 15, 2012.
Let’s take a look at GASB 61. First, we will consider whether an entity should be included as a component unit, and then we will look at whether the entity should be blended or discretely presented.
1. Evaluating Inclusion of Potential Component Units
First ask, “does the primary government appoint a voting majority of the potential component unit’s board?”
If yes, you will include the component unit if the primary government:
- has the ability to impose its will upon the potential component unit or
- has a potential financial benefit or burden related to the potential component unit (PCU)
If no, consider whether the potential component unit meets the fiscal dependency and financial benefit/burden criteria. If yes, then include the component unit. If no, ask whether it would be misleading to exclude the potential component unit; if it would be misleading, then you will include the PCU (normally discretely presented).
2. Blended or Discretely Presented Decision
Blend the component unit if any of the following three criteria is true:
1. If the component unit’s governing body is substantively the same (basically having the same board members) as the governing body of the primary government, then you will blend the component unit into the primary government provided:
- there is a financial benefit or burden relationship, or
- the primary government has operational responsibility for the component unit.
Operational responsibility is defined as managing “the activities in the essentially the same manner in which it manages its own programs, departments, or agencies.”
(Notice the primary government’s legal control of the component unit does not affect the blending decision.)
2. Another consideration – commonly known as the exclusive benefit criterion – is whether the component unit’s goods or services are entirely or almost entirely provided to the government itself (this does not include providing services to the government’s citizenry or customers). If the answer is yes, then the component unit will be blended.
A university foundation, for example, is usually designed to (and often does) exclusively benefit the university (the primary government) and would, therefore, be blended.
A university hospital, by contrast, will be presented discretely (in the university’s financial statements) since the hospital is primarily providing benefits to patients rather than the government. (This is true even if the articles of incorporation for the hospital state that the entity is designed for the exclusive benefit of the university.)
3. GASB 61 includes one new blending criteria: if the primary government will repay entirely or almost entirely (with resources of the primary government) a component unit’s total debt outstanding (including leases), the component unit will be blended. The standard does allow for discrete presentation if the primary government’s resources are the second source of debt repayment or if resources received from the primary government are among other sources of repayment available.
If the component unit does not meet any of the three blending criteria, then it will be presented discretely.
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