The Governmental Accounting Standards Board (GASB) recently issued an Exposure Draft (ED) of a proposed Statement, The Financial Reporting Entity. The proposed Statement would amend GASB Statements No. 14 and No. 34 to improve guidance for the inclusion, presentation, and disclosure of information about component units and equity interest transactions of a governmental entity.
Component units are legally separate organizations that governmental entities include in their basic financial statements, based on the criteria included in GASB Statements No. 14 and No. 39. The proposed Statement would modify the existing criteria for inclusion of organizations that are “fiscally dependent” on a government by adding a requirement that the potential component unit and the primary government also have a financial benefit or burden relationship. In cases where the government determines it would be misleading to exclude an organization that does not meet the financial accountability concept from its financial reports, the proposed Statement would clarify the manner in which that determination should be made.
The proposed Statement also would amend the criteria for “blending,” or the reporting of component units as if they were part of the primary government. For component units that are currently blended based on the “substantially the same governing body” provision, additional parameters would have to be met, such as (1) the primary government and the component unit would have a financial benefit or burden relationship and (2) management of the primary government would have operational responsibility for the activities of the component unit. Other blending provisions would be added for business-type activities reporting as a single column and clarification that funds of the blended component unit have the same characteristics and the same reporting options as the fund of the primary government.
Finally, it would clarify the reporting of equity interests in legally separate organizations. Provisions of the proposed Statement would be effective for financial statements for periods beginning after June 15, 2012, with earlier application encouraged.
RubinBrown will continue to monitor the re-examination of GASB component unit reporting guidance, and its impact on financial reporting for governmental entities. The comment deadline is June 30, 2010.
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