A local government first determines which organizations belong in its reporting entity, then determines their financial statement presentation. Governmental Accounting Standards Board (GASB) standards govern both decisions.
A primary government is a state government, a general purpose local government, or a qualifying special-purpose government. A primary government has a separately elected governing body, is legally separate, and is fiscally independent. A special-purpose government must satisfy all three characteristics.
A component unit is a legally separate organization included because of financial accountability or another qualifying reporting-entity relationship. The financial reporting entity comprises the primary government and its component units, including units requiring blended presentation.
Departments without separate legal standing already belong to the primary government. Separate incorporation, ownership of property, and capacity to sue or be sued provide evidence of legal separation.
Financial accountability connects an organization's governance or fiscal decisions with the primary government's powers, financial benefits, or obligations. The two ordinary inclusion paths apply separately.
- Appointment path: The primary government appoints a voting majority and can either impose its will or receive specific financial benefits or incur specific financial burdens.
- Fiscal-dependency path: The organization depends on the primary government's substantive fiscal approvals and has a financial benefit or burden relationship with that government. Board appointment is unnecessary.
Common mistakes
- Appointment treated as sufficient. Four of seven appointments still require ability to impose will or financial benefit or burden under the appointment path.
- No appointments ends the inquiry. Fiscal dependency with financial benefit or burden can establish inclusion despite zero county appointees.
- Dissolution treated as operating access. Residual assets available only on dissolution do not establish access to an organization's ongoing resources.
Bottom line
- The reporting entity includes the primary government and its qualifying legally separate component units.
- Majority appointment requires either ability to impose will or financial benefit or burden; substantive fiscal dependency requires financial benefit or burden.
- Inclusion can arise without appointment power through fiscal dependency, qualifying noninvestment majority equity ownership, or other reporting-entity criteria.
- Discrete presentation ordinarily applies to included nonfiduciary units unless an applicable blending rule requires primary-government presentation; inclusion under the special tax-exempt rule retains discrete presentation.
Exam shortcut
The inclusion analysis starts with legal separation, then identifies the appointment, veto, resource-access, deficit-funding, or fiscal-approval facts supporting inclusion. When appointment is absent, the fiscal-dependency pair and other inclusion relationships require evaluation before exclusion. After inclusion, the presentation analysis checks fiduciary status and the special tax-exempt rule before testing every applicable blending route. “Serves residents” weighs against the exclusive-government-service route; debt repayment and corporate membership still require evaluation.
The full lesson (about 3,651 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.A9
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