Component Units: Which To Include or Exclude Statement No. 61 Says..
Statement No. 61, The Financial Reporting Entity: Omnibus is simply an amendment of the requirements of Statement No. 14, The Financial Reporting Entity, and No. 34, Basic Financial Statements---and Management’s Discussion and Analysis---for State and Local Governments. It was issued on December 17, 2010 by the Governmental Accounting Standards Board (GASB). The goal of Statement 61 is to help governments decide which component units to include or exclude and to guide governments in displaying and disclosing financial information about component units in the most appropriate and useful manner.
Component units are defined as legally separate organizations over which the primary government has some degree of authority or control, or from which the primary government receives a benefit or burden. Component units are typically presented discretely in the financial statements as a separate column(s) or blended within the same columns as the primary government activities.
To Include or Not – Pre Statement 61
Prior to Statement 61, governments used Statement 14 as their main guidance in determining which entity to include or exclude as well as what information to disclose. Under Statement 14, fiscal dependency is the key factor in making this determination. As long as an entity is ‘fiscally dependent’ on the primary government then it should be included as a component unit in the primary government’s financial statements. Per Statement 14, ‘fiscal dependency’ involves any one of three criteria. The primary government must have the authority over the potential component unit’s budget, approve taxes, rates, charges or approve its issuance of debt. If any of these three criteria is absent, the potential component unit is considered independent and would be excluded from the primary government’s statements.
However, there is one more criterion that Statement 14 requires if a potential component unit is not fiscally dependent on the primary government. If the exclusion of a potential component unit would render the primary government’s financial statements incomplete or misleading, then that entity should be included.
Further, component units are required to be blended in the financial statements of the primary governments if the governing body of both is substantially the same. An instance would be where the governing board of the component unit has significant representation from the primary government.
To Include or Not – Post Statement 61
With the issuance of Statement 61, fiscal dependency is no longer the key factor in deciding which potential component unit to include. Under Statement 61, a financial benefit or burden relationship must also be present between the primary government and the potential component unit. For example, if your Township is only required to approve the budget for the Water and Sewer Municipal Authority in the Township’s limit, but the Authority does not receive a subsidy from your Township, nor does it provide resources to the Township, then the Authority would not be considered a component unit of your Township.
Further, under Statement 61, a component unit would simply not be included because its exclusion would cause the financial statements of the primary government to be misleading. Statement 61 emphasizes that the determination should be based on whether a significant financial benefit or burden relationship exists between the two entities.
Again with regards to blending, the decision should not only be based on whether the component unit and the primary government have the same governing body as required under Statement 14. Under Statement 61, the determination should also include whether there is a significant financial benefit or burden relationship between the two entities or that lower level management of the primary government manages the component unit as if it were just one of the primary government’s funds, departments or programs.
Other key changes in Statement 61 include new criteria regarding the blending of a component unit debt that is expected to be repaid entirely or almost entirely with the finances of the primary government, and clarifications related to the reporting of equity interests in legally separate organizations. More information is available at www.gasb.org.
Statement 61 does not require any new note disclosures. But, it clarifies that note disclosures should explain the reasoning for including each component unit as well as the method of presentation of those units.
Governments are required to implement Statement 61 for financial statements for periods beginning after June 15, 2012. Earlier application is encouraged. Still have questions? Allow me to help you evaluate and apply this standard.
