Chapter 8
Presentation of Component Units (Blended vs. Discretely Presented)
Overview
In November 2010, the Governmental Accounting Standards Board (GASB) issued Statement No. 61, The Financial Reporting Entity: Omnibus to improve financial reporting for a governmental financial reporting entity. This Statement addresses reporting entity issues that have arisen since the issuance of GASB Statement No. 14, The Financial Reporting Entity, and the related financial reporting requirements of GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis – for State and Local Governments. Due to the issuance of GASB Statement No. 61, certain requirements for inclusion of component units in the financial reporting entity have been modified, and although component units that are currently discretely presented are not generally expected to become blended component units as a result of GASB Statement No. 61, it is still necessary to evaluate each component unit based on its governance structure and financial relationship with the primary government to determine whether the component unit meets the blending criteria or should be discretely presented and appropriate adjustment should be made accordingly.
GASB Statement No. 61 modifies existing requirements for the assessment of potential component units in determining what should be included in the financial reporting entity, and also amends financial reporting entity display and disclosure requirements. Although financial accountability remains central to the determination of component units, the GASB Statement No. 61’s most significant change is the requirement that a financial benefit or burden relationship be present between a primary government and an organization for it to be included in the reporting entity as a component unit, if the organization was previously required to be included as component units by meeting the criterion of fiscal dependency. Furthermore, for organizations that do not meet the financial accountability criteria for inclusion as component units but should be included because the primary government’s management determines that it would be misleading to exclude them, GASB Statement No. 61 clarifies the manner in which that determination should be made and the types of relationships that generally should be considered in making the determination.
If a potential component unit has been determined to be a reportable component unit, the next step is to determine whether it should be presented as a blended component unit or a discretely presented component unit in the primary government’s financial statements. According to the stated intent of the GASB Statement No. 14, it is desirable for users of the financial statements to be able to distinguish between the primary government and its component units unless blended presentation is necessary because the component units are so intertwined with the primary government that they are, in substance, the same as the primary government. For component units that are currently blended based on the “substantively the same governing body” criterion, GASB Statement No. 61 imposes additional requirements that (1) the primary government and the component unit have a financial benefit or burden relationship or (2) management of the primary government have operational responsibility for the activities of the component unit. Another change is the addition of a new criterion to require blending of component units whose total debt outstanding is expected to be repaid entirely or almost entirely with the resources of the primary government.
In February 2016, the GASB issued Statement No. 80, Blending Requirements for Certain Component Units. This Statement amends the blending requirements for the financial statement presentation of component units of all state and local governments. The Statement is intended to provide clarity about how certain component units incorporated as not-for-profit corporations should be presented in the financial statements of the primary state or local government. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. Statement 80 clarifies the display requirements in GASB Statement No. 14, The Financial Reporting Entity, by requiring these component units to be blended into the primary state or local government’s financial statements in a manner similar to a department or activity of the primary government. This Statement amends the blending requirements established in paragraph 53 of Statement No. 14, The Financial Reporting Entity, as amended. The additional criterion does not apply to component units included in the financial reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units.
Component Units
Paragraph 20 of GASB Statement No. 14 as amended by GASB Statement No. 61 defines a component unit as a legally separate organization for which the elected officials of the primary government are financially accountable, which can be other organizations for which the nature and significance of its relationship with a primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete.
GASB 61 adds clarification to the following situations:
1. Financial Accountability
The primary government is financially accountable if it appoints a voting majority of the organization’s governing body and (1) it is able to impose its will on that organization or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.
The primary government is financially accountable if an organization is fiscally dependent on and there is a potential for the organization to provide specific financial benefits to, or impose financial burdens on the primary government. Under GASB Statement No. 61, fiscal dependence alone is no longer a sufficient reason for inclusion; a financial benefit or burden relationship also must be present between the primary government and the organization. An organization has a financial benefit or burden relationship with the primary government if, for example, any one of these conditions exists:
· The primary government is legally entitled to or can otherwise access the organization’s resources.
· The primary government is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide support to, the organization.
· The primary government is obligated in some manner for the debt of the organization.
2. Misleading to Exclude
An organization may need to be included in the reporting entity’s financial statements even though the primary government is not financially accountable if such exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. The ultimate responsibility to decide whether an organization is a component unit rests with the primary government, not with the potential component unit. GASB statements provide no specific criteria to apply in determining whether it would be misleading to exclude an organization. It is a matter of professional judgment, considering all relevant factors. The decision to include or exclude should be based on all pertinent considerations, including the organization’s significance in relation to the primary government and other component units and the extent to which the organization is financially integrated with the primary government.
If an organization has been determined to be a component unit, then the next step is to determine how it will be presented in the reporting entity’s financial statements, either as a discretely presented component unit or a blended component unit as part of the primary government.
Discretely Presented Component Units
A legally separate, tax-exempt organization should be reported as a component unit of a reporting entity if all of the following criteria are met: (GASB Statement No. 14 paragraph 40a, as amended by GASB Statement No. 39, paragraph 5):
a) The economic resources received or held by the separate organization are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents (includes CSU students).
b) The primary government, or its component units, is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the separate organization. The ability of a primary government to otherwise access the resources of an organization does not necessarily imply control over that organization or its resources, rather, the ability to access the resources of an organization – not necessarily whether there was an actual transaction during the period – is the important factor for determining when a primary government is entitled to an organization’s resources.
c) The economic resources received or held by an individual organization that the specific primary government, or its component units, is entitled to, or has the ability to otherwise access, are significant to the primary government.
Organizations that meet the three criteria above should be discretely presented, even if they also meet the blending criteria in paragraph 53b or 53c in GASB Statement No. 14 described below.
Blended Component Units
GASB Statement No. 14 paragraph 53, as amended by GASB Statement No. 61 paragraph 8 and GASB Statement No. 80, states that: a component unit should be blended in any of the following circumstances:
a) The component unit's governing body is substantively the same as the governing body of the primary government (i.e., the governing body of the component unit substantially includes the same individuals as the Board of the Trustees of the CSU) and 1) there is a financial benefit or burden relationship between the primary government and the component unit, or 2) management of the primary government has operational responsibility for the component unit. Substantively the same means sufficient representation of the primary government’s entire governing body on the component unit’s governing body so that decisions of the primary government cannot be overridden by the component unit.
b) The component unit provides services entirely, or almost entirely, to the primary government or otherwise exclusively, or almost exclusively, benefits the primary government even though it does not provide services directly to it.
As explained in question 4.32.2 of the GASB Comprehensive Implementation Guide, the primary government is the “institution” rather than the populace. The “essence of this type of arrangement is much the same as an internal service fund—the goods or services are provided to the government itself rather to the citizenry.” The services or benefits provided to the CSU may be direct or indirect. In a direct relationship, the services or benefits are provided to CSU, whereas in an indirect relationship, the services or benefits are provided to the employees of the CSU.
In the context of this criterion, the populace (i.e., students) is not considered to be the same as the institution itself. Given this definition, then, the following examples do not meet the second blending criterion:
· ASI that serves students
· Foundation that provides scholarships to students as part of its main function
· Research foundation that receives funding from external sources and does not exclusively benefit the university
c) The component unit's total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government.
d) The component unit is organized as a not-for-profit corporation in which the primary government is the sole corporate member, as identified in the component unit’s articles of Incorporation or bylaws, and the component unit is included in the financial reporting entity pursuant to the provisions in paragraph 21-37 of GASB Statement 14, as amended.
Assessment Flowchart
The following flowchart is intended to aid in the application of the provisions of GASB Statement No. 61. This is nonauthoritative and does not cover all aspects of GASB 61.
Each campus will need to complete the Component Unit questionnaire (Blended vs. Discretely Presented Component Units) at Chapter 8.0.1 for newly formed component unit and if there is a significant change in the structure of existing component which requires re-evaluation of the criteria and submit to the CO for consolidation. See master timeline for the relevant due dates.
Examples From the GASB Implementation Guide
Case 17 – State University Foundation
Facts:A not-for-profit organization was created under state law to perform fund-raising activities on behalf of a state university. The seven-member governing board of the foundation is appointed by the university board of trustees and may be removed for cause. The university provides office space free of charge, but the majority of the funding for the foundation's operations is provided by its fund-raising efforts. The foundation selects its own management and controls its day-to-day operations. All of the foundation's projects benefit the university, but the foundation board specifies the use of foundation funds.
Conclusion:The foundation would be a blended component unit of the university. The university appoints the foundation's board of trustees and receives financial benefits from the foundation, which creates financial accountability. The foundation provides services entirely to the university, which would meet the criteria for blending.
Case 17a
Facts:Consider the same facts as above, except that 10% of the foundation's funds are used to provide direct scholarships to students of the university and another 5% are used to provide services directly to alumni of the university in the form of informational services. The scholarships are administered by the financial aid office of the university, but awards are approved by the foundation board.
Conclusion:The foundation would be a discretely presented component unit of the university. The university is financially accountable for the foundation based on its appointment of the governing board and the financial benefits that the foundation provides. However, the foundation would not meet the criteria for blending because its services are not provided entirely, or almost entirely, to the university. (Students are not part of the university when determining whether the component unit should be blended).
Case 18—University Childcare Center
Facts:A legally separate not-for-profit corporation provides childcare services and preschool education for children of the faculty, students, and employees of the university. The services of the corporation are not available to individuals that are not affiliated with the university. The corporation is governed by a board of directors appointed by the university. The majority of the funding for the corporation is provided by tuition and fees paid by those using the daycare services. Day-to-day operations are controlled by a director, who is selected by the board. The corporation adopts its own budget. However, through a contractual arrangement with the university, the corporation operates as a department of the university. In the past, capital assets have been financed through no-interest loans from the university to the corporation, which were forgiven through an agreement between the parties.