CHAPTER 15

FINANCIAL REPORTING: THE COMPREHENSIVE ANNUAL

FINANCIAL REPORT AND THE FINANCIAL REPORTING ENTITY
SOLUTIONS TO QUESTIONS
Question 15-1
The basic financial statements (BFS) include the government-wide financial statements and the
fund financial statements (governmental funds, proprietary funds, and fiduciary funds), and notes
to those statements. These statements are accompanied by Management's Discussion and
Analysis and other required supplementary information. The GASB classifies Managements
Discussion and Analysis as required supplementary information even though it precedes the
financial statements. The financial statements are intended to present the financial position and
operating results (1) of the governmental activities and business-types activities of the primary
government as well as that of the primary government as a whole and its discretely presented
component units and (2) of the individual major governmental funds and Enterprise Funds of the
primary government.
The CAFR contains the BFS, and therefore is intended to meet all of the purposes of separately
issued BFS. In addition, however, the CAFR contains combining financial statements for
nonmajor funds and for certain fund types, as well as individual fund financial statements and
schedules, in its financial section and also contains introductory materials and statistical data.
The CAFR therefore is also intended to "present fairly" the financial position, operating results,
and, where appropriate, cash flows of each individual fund of the government.
Question 15-2
The transmittal letter typically communicates:

the legal requirements for the presentation of the CAFR,

the fact that the report is management's responsibility and consists of management's
representations regarding the financial position and operating results of the
government, and
the results of the audit of the financial statements.

The letter of transmittal may also contain a profile of the government and information that
readers are apt to find useful in evaluating the financial condition of the government. This may
include such topics as the local economy, long-term financial planning information regarding
items for which final decisions are not yet made, cash management practices, and risk
management practices. Many areas that would otherwise be covered in the letter are not
included because the information is included in managements discussion and analysis (MD&A)
(Illustration 13-15, page 540 in the text). The transmittal letter is not to duplicate information in
the MD&A, but may refer readers to the MD&A.

Question 15-2 (continued)

The nature and purposes of the transmittal letter and Management's Discussion and Analysis
differ. First, the transmittal letter introduces and relates to the entire CAFR; the MD&A relates
only to the basic financial statements. Also, the MD&A covers only certain GASB-specified
topics and must be based only upon currently known facts, conditions, or decisions. The
transmittal letter can cover other topics and discuss the implications of events that might happen
or decisions that are not yet made. The possible impact of such a decision must not be included
in the MD&A unless the decision has been made by the date of the auditor's report.
Question 15-3
The Basic Financial Statements include the government-wide statement of net position and the
government-wide statement of activities, the governmental funds financial statements, the
proprietary funds financial statements, and the fiduciary funds financial statements. The
government-wide financial statements distinguish between governmental activities of the
primary government, business-type activities of the primary government, the primary
government as a whole, and discretely presented component units.
The governmental funds financial statements present individual fund data for major
governmental funds, but aggregate data for all the other (nonmajor) governmental funds in a
single column. Likewise, major Enterprise Funds are reported in separate columns in the
proprietary funds financial statements but all nonmajor Enterprise Funds are aggregated in a
single column. Internal Service Funds are presented by fund type in the proprietary funds
financial statements. The fiduciary funds statements present fiduciary funds by fund typenot
by individual funds.
Combining statements, on the other hand, are prepared to provide individual fund information on
funds that are aggregated in the fund financial statements in the BFS or for fund types.
Combining financial statements present information for each individual fund of a particular fund
type, or for each nonmajor governmental fund included in the "Other Governmental Funds"
column of the corresponding governmental funds financial statement, or for each nonmajor
Enterprise Fund included in the Other Enterprise Funds" column of the corresponding
proprietary funds financial statement.
Question 15-4
(a) The notes to the basic financial statements are intended to complete those statements and
help the user understand them. The GASB Codification specifies certain notessome
overall, such as the summary of significant accounting policies, and some that require
individual fund disclosures in certain instances (e.g., fund deficits, interfund receivables and
payables).
(b) The narrative explanations are in essence additional notes, beyond those in the notes to the
BFS, that are considered necessary to (1) assure an understanding of the combining and
individual fund financial statements and schedules and combining and individual component
unit statements, and (2) demonstrate compliance with finance-related legal and contractual
provisions.
2

Question 15-5
Schedules are used principally to (1) demonstrate finance-related legal and contractual
compliance, (2) present other data management wants to present that is not required in the
CAFR, such as cash receipts and disbursements data, and (3) present more detailed data than that
in the combining and individual fund statements. Statements, on the other hand, are used to
present data in conformity with GAAP. Schedules may also appear in the notes to the financial
statements or be referenced in those notes. In these cases the schedules are considered an
integral part of the financial statements.
Question 15-6
Whereas the purpose of financial statements is to present data for a year in conformity with
GAAP, many of the statistical tables present data for several years, usually 10, or for other
purposes. The primary purpose of the statistical section is to provide trend information in a
variety of areas that cannot be derived from the financial statements themselves. There are five
basic categories of statistical information financial trends information, revenue capacity
information, debt capacity information, demographic and economic information, and operating
information.
Question 15-7
Yes, such a discrepancy canand often doesexist under GAAP applicable to governments.
Revenues are reported using different measurement focuses and bases of accounting in these two
statements. Modified accrual accountingthe flow of current financial resources measurement
focus and the accrual basis of accountingapplies in governmental funds financial statements.
Revenues must be both legally usable to finance expenditures of the period and available,
collected within not more than 60 days after year end, to be recognized. Revenues not collected
by the end of the cutoff period are reported as deferred inflows in the governmental funds
balance sheet. They are recognized in subsequent yearsdepending upon the timing of
collection. In the government-wide financial statements, revenues of governmental activities are
reported using the flow of economic resources measurement focus and the accrual basis of
accounting. Failure to collect revenues during the year or within not more than 60 days
thereafter does not delay revenue recognition. Indeed, the timing of collection has no impact on
when revenues are recognized under the measurement focus used in the government-wide
financial statements. This difference is the primary cause of the difference between tax revenues
reported for governmental funds and for governmental activities and a common reconciling item
between governmental funds fund balance and governmental activities net position in the
government-wide financial statements.

Question 15-8
a.

According to the GASB Codification, a joint venture is a legal entity or other organization
that results from a contractual arrangement and that is owned, operated, or governed by two
or more participants as a separate and specific activity subject to joint control, in which the
participants retain (a) an ongoing financial interest or (b) an ongoing financial responsibility.
For there to be joint control, no party in the joint venture can have the authority to
unilaterally control the joint venture's financial or operating policies.

b.

The joint venture accounting and reporting requirements apply to all of a government's joint
ventures that are not part of its reporting entity. If a government has a majority equity
interest in a joint venture, it should report the joint venture as a component unit.

c.

A government is required to report its joint venture participation in the following manner:
The explicit and measurable amount of any equity interest in a joint venture is
reported as an asset.
Proprietary fund joint venture investments are reported in the investing proprietary
fund using the equity method.
Governmental fund joint venture investments are reported as assets in the investing
fund if they represent financial resources receivable (or payable) reported in the fund.
Governmental fund revenues and expenditures are reported only when the
governmental fund recognition criteria are met.
The notes to the financial statements should describe the general nature of each joint
venture, including any ongoing financial interest in or responsibility for the joint
venture and information on whether the joint venture is either accumulating significant
financial resources or experiencing fiscal stress and should provide information on
related party transactions.

Question 15-9
A government has the ability to impose its will over another entity if it has the ability to
significantly influence the types and levels of services provided by a potential component unit.
This significant influence (and ability to impose will) is presumed if certain relationships exist,
but may be determined to exist even if none of the presumptive relationships are present. The
presumptive relationships include substantive authority to:

Remove appointed governing board members at will or

Approve or require modification of the organization's budget or
Approve or require modification of rate or fee changes affecting the organization's
revenues or
Appoint, hire, reassign, or dismiss the organization's management

If a government has the ability to impose its will on a potential component unit and meets the
appointment criterion, that entity is a component unit. If a government cannot impose its will on a
potential component unit, the potential component unit may meet other criteria for inclusion.

It should be noted that the second and third criteria listed above would also make the component
unit fiscally dependent upon the primary government. In this case, the entity is a component unit
even if there also is a financial benefit or burden relationship between the two entities.

Question 15-10
A primary government is financially accountable for another entity if the other entity is fiscally
dependent on the government and there is a financial benefit or burden relationship between the
entities.
If any one of three relationships exists between a primary government and a potential component
unit, the potential component unit is fiscally dependent on a primary government. Those
relationships include the primary government having substantive approval authority over the
component unit's:

Budget
Tax levy or setting of other rates or charges
Issuance of bonded indebtedness

For a fiscally dependent entity to be treated as a component unit, there must also be a financial
benefit or burden relationship with the primary government. A financial benefit or burden
relationship is indicated by one of three criteria:

The PG has the ability to access the resources of the entity without dissolution of the
entity.
The PG is legally or otherwise obligated to finance the deficits of or provide financial
support (other than in exchange or exchange-like transactions) to the organization.
The PG is obligated in some manner for the debt of the organization.

Question 15-11
A government is financially accountable for another entity if the other entity is fiscally dependent
on the government and has a financial benefit or burden relationship with it. (See the answer to
Question 15-10.)
If, there is not fiscal dependence a government is also financially accountable for another entity
if both of the following conditions are met:
1.

The primary government either (a) appoints (or has ex officio representation
constituting) a voting majority of the potential component unit's governing body or (b)
created and can unilaterally abolish the other organization.
AND

2.

The primary government either (a) has the ability to impose its will on the potential
component unit or (b) has the potential to receive specific financial benefits from or
incur specific financial burdens because of the organization.

Question 15-12
Blending and discrete presentation are the two methods used to report component units. Discrete
presentation is the typical approach that is required. Blending is permitted only if very restrictive
conditions are met.
Blending incorporates the data of a component unit into the financial statements of the primary
government as if the primary government and the blended component unit were a single entity.
The primary government combines the data of the funds of the component unit with the data of
the corresponding fund types of the primary government legal entity in its fund financial
statements. (One exception is that the component unit General Fund is reported as a primary
government Special Revenue Fund.) The component unit's assets, liabilities, revenues, expenses,
etc., are reported as part of the primary government in the government-wide financial statement
as well.
Discrete presentation presents component unit data along with, but separate from, primary
government data in the government-wide financial statements. With the exception of fiduciary
component units, discretely presented component units are not reported in the fund financial
statements. Discretely presented component units are reported in a separate column to the right
of the primary government data in the government-wide financial statements.
Question 15-13
Component units that serve or benefit only the primary government entitysuch as a component
unit that provides financing only for primary government projects or purposesmust be
blended. However, most component units provide services to and benefit the public or other
organizations (usually other governments). Therefore, for most component units to other criteria
apply. These component units are blended only if :

The component unit has substantively the same governing body as the primary
government's governing body. (This means that at least a voting majority of the
primary government's governing body serves on the component unit governing body
by virtue of being members of the primary government governing body and those
members also constitute a voting majority of the component unit's governing body.)
AND
Either there is a financial benefit or burden relationship between the primary
government OR the day-to-day management (below the governing board) of the
primary government has operational responsibility for the component unit.
Finally, there are a few primary governments that have a component unit whose total debt
outstanding, including leases, is expected to be repaid entirely or almost entirely with resources
of the primary government. These component units must be blendedand likely are simply
financing vehicles of the primary government.

Question 15-14
Blended component units are reported in the fund financial statements. The data are also
included in the government-wide financial statements (as part of the primary government data).
Discretely presented component units are reported in the government-wide financial statements,
but are not included in the governmental fund financial statements or in the proprietary fund
financial statements. If a government has a fiduciary component unit, it is reported in the related
fund type column in the fiduciary fund financial statementsbut is not reported in the
government-wide financial statements.
Question 15-15
According to GASB Statement No. 39, any affiliated, legally separate, tax-exempt entity whose
economic resources entirely (or almost entirely) benefit directly the primary government
reporting entity or its constituency is a component unit if the primary government is entitled to
(or can otherwise access) the majority of the organization's resources and the amount of the
accessible resources of that individual organization is significant to the primary government.
All component units included in a government's reporting entity under the guidance of GASB
Statement No. 39 must be discretely presented.
Question 15-16
The parks commission provides services to the publicnot solely to the county government. For
the county to blend the parks commission in preparing the county financial statements, the two
entities must have substantively the same governing bodies and meet one of two additional
criteria. There must either be a financial benefit or burden relationship between the county and
the parks commission, or the countys management (below the county commissioners) must have
operational responsibility for the parks commission. The question does not indicate that either of
the latter conditions are true. Therefore, even though the county and the parks commission have
substantively the same governing body (actually the same governing body in this case), blending
is not permitted.
Question 15-17
The reporting requirements for component units results in two entity definitionthe in substance
primary government and the reporting entity. The GASB indicates that the focal entity is the
primary government but requires the broader entity to be reported as well. The notion of a dual
reporting entity is based on the notion that one reporting entity is the primary government and
blended component units and the second reporting entity is the primary government (including
blended component units) plus discretely presented component units. Transactions between the
primary government and the discretely presented transactions are classified and reported as if the
discretely presented component units are external entities.
It is unique and questionable to define a reporting entity, then to identify a subset of that entity as
the focus of the financial report, much less to treat transactions between portions of the reporting
entity as if they were between two entities that are not part of the same reporting entity.
8

SOLUTIONS TO EXERCISES
Exercise 15-1
1. b
2. d
3. d
4. d
5. d
6. d
7. c
8. b
9. a
10. d
Exercise 15-2
1. d
2. b
3. d
4. c
5. c
6. a
7. d
8. a
9. d
10. a
Exercise 15-3
a.

The required combining financial statements in the Zaccaro County Comprehensive Annual
Financial Report include:
Combining Balance SheetNonmajor Governmental Funds
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances
Nonmajor Governmental Funds
Combining Statement of Net PositionNonmajor Enterprise Funds
Combining Statement of Revenues, Expenses, and Changes in Net Position
Nonmajor Enterprise Funds
Combining Statement of Cash FlowsNonmajor Enterprise Funds
Combining Statement of Net PositionInternal Service Funds
Combining Statement of Revenues, Expenses, and Changes in Net Position--Internal
Service Funds
Combining Statement of Cash FlowsInternal Service Funds

Exercise 15-3 (continued)

b.

For the combining statements for nonmajor governmental funds, the following
columns are required:
Special Revenue Fund #2
Special Revenue Fund #3
Debt Service Fund #1
Debt Service Fund #2
TotalAll Nonmajor Governmental Funds (This total ties to the Other Governmental
Funds column in the corresponding fund financial statements for governmental funds in
the Basic Financial Statements.)
For the combining statements for nonmajor Enterprise Funds, the following
columns are required:
Enterprise Fund #2
Enterprise Fund #3
Enterprise Fund #5
TotalAll Nonmajor Enterprise Funds (This total ties to the Other Enterprise Funds
column in the corresponding fund financial statements for Enterprise Funds in the
Basic Financial Statements.)
For the combining statements for Internal Service Funds, the following columns are
required:
- Internal Service Fund #1
- Internal Service Fund #2
- Internal Service Fund #3
- Total-All Internal Service Funds (This total ties to the Internal Service Funds column
in the corresponding fund financial statements for proprietary funds in the Basic
Financial Statements.)

Exercise 15-4
1.

This component unit does not meet the substantively the same criterion. Appointing
members is not equivalent to the council members or a majority of the council members
serving as a majority of the board of the component unit.

2.

Yes. This component unit meets the substantively the same governing body criterion. 100%
of the council comprises 100% of the governing body of the component unit.

3.

This component unit does not meet the criterion. The city council members do not
constitute a voting majority of the component unit board.

10

Exercise 15-4 (continued)

4.

This component unit does not meet the criterion. Although both the city council members
and the other city officialsthe finance director and managerdo count as the equivalent of
city appointees in applying the appointment criterion, only the city council members count
as members of the city governing board. Therefore, the 5 city council members on the
governing board are not a voting majority of the component unit board members, and the
two boards are not substantively the same.

5.

While all board members of the component unit are city council members, a majority of the
council does not serve in this capacity.

Having substantively the same governing body is not enough to justify blending. The primary
government also would either have to have a financial benefit or burden relationship with the
component unit in number 2 or the primary governments management would have to have
oversight responsibility for the component unit for blending to be required.
Exercise 15-5
1.

Component unitThe fiscal dependence criterion of having substantive approval authority

over the setting of the component units tax rate is met. Also, since the government
guarantees substantial portions of the other entitys debt, a benefit/burden relationship exists.

2.

Component unitThe government appoints a voting majority of the other entitys governing
body. It also guarantees some of the debt of the other entitywhich meets the financial
benefit or burden criterion.

3.

Component unitThe government appoints a voting majority of the other entitys governing
body. It also has a pattern of providing significant financial resources in nonexchange
transactions, which is a financial benefit or burden relationship.

4.

Component unitAlthough the government does not appoint a voting majority of the board
of the other entity, it created and can abolish the other entity. Additionally, the government
is deemed to have the ability to impose its will on the other entity because it has the
authority to hire and fire key management personnel.

SOLUTIONS TO PROBLEMS
Problems 15-1 and 15-2
Summary reports on these research and analysis problems should be evaluated in terms of the
specific requirements. The depth of analysis and understanding should be apparent--particularly
if several reports are evaluated concurrently.

11

Problem 15-3
The treatment of the three component units depends upon whether they meet the criteria for
"blending." The school district and the airport authority must be discretely presented. The only
blending criterion that apply to entities that provide public services is having substantively the
same governing body and either having a financial benefit or burden relationship or the countys
management having operational authority. These component units do not meet the do not meet
the substantively the same criteria. Only the public employee retirement system's board meets
the substantively the same governing body criterion, but it is a fiduciary component unit.
Fiduciary component units are reported in the appropriate fund type column in the fiduciary fund
financial statements. They are not included in the government-wide financial statements.
The nonfiduciary component units that are to be discretely presented would not be reported in
the countys fund financial statements. These component units government-wide reporting
entity total information would be used. The information for the two component units most likely
would be aggregated and reported in a single separate column(s) (or rows) in the appropriate
government-wide financial statements though individual columns are permitted. Nonmajor
discretely presented component units also are reported in combining nonmajor component unit
financial statements.
The chart below indicates the Maynor County fund types that would be used to report the various
funds of the school district and authority if blending had been required. It is not required by the
question.
Maynor County
Funds
Component
Units Funds
Puryear Corner School District
General Fund

SRF

CPF

DSF

AF

EF

ISF

PTF

Gymnasium Construction Fund

Educational Buildings
Improvement Fund

Gymnasium Debt Service Fund

Payroll Withholding Fund

Food Services Enterprise Fund

Central Printing Services Fund

Dalen-Fricke-Maynor Tri-County
Airport Authority (EF)
Maynor
Public
Employee
Retirement System

X
X
X

12

Problem 15-4
Potential
Component Unit
Mensah City
Recreation Center

District Home Board

Northern Region
Health Center
Commission

Maysami Regional
Special Education
Program
Adult Detention
Center (ADC)

Park Authority

County Parkway
District

Harrington County
School Board

a.
Entity
Decision
CUAppointment authority
and financial benefit/burden
criteria are met

Not a CUNot fiscally

dependent on the county and the
appointment criterion is not met.
The county does not have a
majority equity interest.
Is a CU if it can abolish the
commission--which is doubtful.
Its authority to establish
operating policies would be
viewed by some to constitute
ability to impose will
There is nothing to indicate that
it should be a component unit.
CUCounty appoints majority
of board and has the ability to
impose its will on the center
because it hires management as
well as establishing operating
policies
CUAppointment criterion and
financial benefit or burden
criteria are met
CUAppointment criterion and
financial benefit/burden criteria
are met.

b.
Discrete Presentation (DP)
or Blending (B)
DPSubstantively the same governing body
criterion is not met and the CU does not
provide services solely to the county
government or benefit solely the county
government. The county is not expected to
repay the total debt of the component unit.

No

DP, if a CUSubstantively the same

governing body criterion is not met and the CU
does not provide services solely to the county
government or benefit solely the county
government. The county is not expected to
repay the total debt of the component unit.

No

No

DPSubstantively the same governing body

criterion is not met and the CU does not
provide services solely to the county
government or benefit solely the county
government. The county is not expected to
repay the total debt of the component unit.
BlendThe entities have substantively the
same governing bodies and a financial benefit
or burden relationship.
DPThe CU does not have substantively the
same governing body as the county nor does it
provide services solely to or benefit solely the
county government. The county is not expected
to repay the total debt of the component unit.

Not a CUAlthough fiscally

dependent because of the
countys budget approval, there
is not a financial benefit or
burden relationship.

*Basic financial statements must be included in a CAFR for each component unit that does not have its own
separately issued financial statements.

13

c.
More
Detail
No

Yes*

No

No

No

Problem 15-5
1. (a) No, the Duncanville School District is not a component unit of the city of Duncanville.
The School District is fiscally dependent upon the city because the city must approve the
Districts tax rate. However, no financial benefit or burden relationship exists. Therefore, the
School District is not a CU.
(b) N/A
(c) N/A
2. (a) Yes, the Greater Duncanville Natural Gas Cooperative is a component unit of the city of
Duncanville. The Cooperative is fiscally dependent on the city, which must approve its budget
and rates, and has a financial benefit or burden relationship with the city. Even if this were not
the case, the city is financially accountable for the Cooperative because it appoints a voting
majority of the Cooperatives board and has the ability to impose its will on the Cooperative.
(b) The Greater Duncanville Natural Gas Cooperative will be reported as a discrete
component unit in the government-wide financial statements of the city of Duncanville. The
governing board of the Cooperative is not substantively the same as that of the City, nor does the
Cooperative solely provide services to or solely benefit the City government itself. The city is
not expected to repay the total debt of the cooperative. Therefore, the blending criteria are not
met.
(c) The Greater Duncanville Natural Gas Cooperative will not be reported in the fund
financial statements of the city of Duncanville. Only blended component units and fiduciary
component units are reported in the fund financial statements.
3. (a) Yes, the Duncanville Library District is a component unit of the city of Duncanville.
Specifically, the city is financially accountable for the Library District because it appoints the
Library Districts board and has financial benefit or burden criteria with city because the city
guarantees some of the debt of the Library District.
(b) The Duncanville Library District will be reported as a blended component unit because
the governing board of the city and the governing board of the Library District are the same, and
the two entities have a financial benefit or burden relationshipthe debt guarantee. Thus, it will
be reported as part of governmental activities in the government-wide financial statements. The
Districts general capital assets and general long-term liabilities will be included in these
statements as well.
(c) The Duncanville Library District will also be reported in the fund financial statements
as it is a blended component unit. Its General Fund will be reported as a separate city Special
Revenue Fund, as will its other Special Revenue Fund. The Permanent Fund will be reported as
separate Permanent Fund.

14

Problem 15-5 (continued)

4. (a) Yes, the Duncanville Financing Authority is a component unit of the city of
Duncanville. The appointment criterion is met, and there is a financial benefit or burden
relationship The city has the ability to impose its will as the authoritys ability to engage in a
project is subject to the willingness of the city to enter into a lease agreement to support the debt.
(b) The Duncanville Financing Authority will be reported as a blended component unit as it
provides services entirely for the city of Duncanville governmental entity. As it provides
financing for the Citys water and wastewater projects, it would be included in business-type
activities in the government-wide financial statements. Recognize that the lease transactions
become a governments transactions with itself and must be eliminated.
(c) The Duncanville Financing Authority also will be reported in the fund financial
statements as a blended component unit. The appropriate approach is to include the authority in
the Water and Wastewater Enterprise Fund. The lease transactions will be eliminated, leaving the
debt issued by the authority as debt of the fund and the assets acquired as fund assets.
Note that students may reasonably respond, based on the chapter, that the authority should be
reported as a blended component unit which is to be reported as an additional Enterprise Fund.
This problem illustrates the necessity of considering the substance of transactions in practice.
First, once the authority is viewed as a part of the city primary government, the best reporting is
to eliminate the lease transactions. Even if one were to argue that it should be reported as a
separate fund, it could not properly be viewed as an Enterprise Fund because as part of the
blended entity, its only customer is an internal onemaking Enterprise Fund reporting
inappropriate.
Problem 15-6
(a) Discretely presented component units are reported only in the government-wide financial
statements. Discretely presented component units are reported in a column(s) separate from
the primary government.

15

Assuming that the discrete component units are a utility operation, a hospital, and a school
district, there are three specific reporting options. First, the three component units could be
aggregated and reported together in a single column. (This option is most common in
practice.) Second, the discrete component units could each be reported separately in its own
column. Finally, there could be two discrete reporting columnsone for governmental
activities type discrete component units and one for business-type activities component
units. The school district would be reported in the governmental activities type column and
the utility operation and the hospital would be combined in the business-type activities
column. Problem 15-6 (continued)
The note disclosure requirements for discrete component units include:

identification of each component unit and how it is reported,

the specific reasons that it is a component unit, and
how to obtain separate financial statements of the component unit.

If the reporting entity chooses to combine discrete component units into columns at the
government-wide level, they have the option to use the note disclosures to provide
condensed financial statements for each major or significant component unit.
Finally, if the major discrete component units do not publish separate external financial
statements, then more detailed disclosures about the component unit(s) may also be
necessary (e.g., cash and investment disclosures, capital assets, long-term liabilities).
(b) Blended component units are considered to be an integral part of the primary government
and as such their financial information is blended into the fund structure of the primary
government. Blending is required when one of three criteria is met:

There must be a benefit/burden relationship between the primary government and the
component unit or management of the primary government has operational
responsibility for the component unit.
The component unit serves only the primary government or the component unit
benefits the primary government exclusively or almost exclusively (even though it
does not provide services to the primary government).
The component units total debt outstanding, including leases, is expected to be repaid
entirely or almost entirely with resources of the primary government.

Blended component units are reported as part of the fund structure of the primary
government and are thus included in the fund financial statements. Accordingly, they
become part of the government-wide financial statements, either as part of governmental
activities or business-type activities. Fiduciary component unit information is combined
with the corresponding fiduciary fund type information in the fiduciary fund financial
statements.
The note disclosure requirements for blended component units are basically the same as the
basic disclosures required for discretely presented component units:
identification of each component unit and how it is reported,
16

the specific reasons that each component unit is treated as a component unit, and
how to obtain separate financial statements of the component unit.

17

Problem 15-7
S
I
F
I
S
F
I
F
F
F
S
F

Computation of legal debt margin

Organization chart
Required supplementary information
Letter of transmittal
List of principal taxpayers
Independent auditors report
GFOA Certificate of Achievement for Excellence in Financial Reporting
Managements Discussion and Analysis
Combining financial statements
Reporting entity note disclosures
Fund balance for the past 10 years
Budget-to-actual information for an Enterprise Fund

Problem 15-8
GW
FF
ND
GW & FF
FF
ND
FF
GW
ND
FF

Statement of Activities
Balance Sheet
Reporting entity description
Statement of Net Position
Statement of Revenues, Expenditures, and Changes in Fund Balance
Subsequent events information
Statement of Cash Flows
Discrete component unit financial information
Description of compliance violations
Statement of Revenues, Expenses, and Changes in Net Position

Problems 15-9 and 15-10

Summary reports on these research and analysis problems should be evaluated in terms of the
specific requirements. The depth of analysis and understanding should be apparent.
SOLUTIONS TO CASES
Case 15-1
1.

The Myrtle Beach Public Facilities Corporation would qualify to be reported as a blended
component unit. It is a legally separate entity, the Myrtle Beach City Council appoints the
board members, and its purpose is to provide a service to the government of the city of
Myrtle Beach. GAAP requires component units that provide a service exclusively or almost
exclusively to the governmental entity to be blended.

18

Case 15-1 (continued)

2.

The Myrtle Beach Downtown Redevelopment Corporation and the Myrtle Beach
Convention Center Hotel Corporation both meet the criteria to be component units. They
are each legally separate, the Myrtle Beach City Council appoints the majority of the board
members for each entity, and the city of Myrtle Beach imposes its will on the boards of the
respective corporations. Each of these component units should be discretely presented.
They do not benefit exclusively or provide services exclusively to the city of Myrtle Beach
government, and neither component unit has substantively the same governing board as the
city. These are the only criteria for blending a component unit.

Case 15-2
1.

The St. Louis Municipal Finance Corporation should be reported as a blended component
unit (a). It is a legally separate entity, the board membership is comprised of city officials.
Therefore, the appointment criterion is met. Further, because the council could remove the
city officials, they can effectively remove the component unit governing board members at
will, which gives the city the ability to impose its will over the Corporation. As the
Corporations sole purpose is to provide financing for the city, blending is required.
The St. Louis Development Corporation should be reported as a discretely presented
component unit (b). It is a legally separate entity, the governing board is appointed by the
City Council, and the city imposes its will on the activities of the entity through its budget
approval authority.
The Development Corporation is discretely presented because it does not have substantively
the same governing body as the City and does not meet any other blending criteria.
The St. Louis Housing Authority should be reported as a related organization (d). The City
Council does appoint a voting majority of the board members of the Authority, and it is a
legally separate entity. However, there is no imposition of will or financial benefit or burden
relationship noted between the Authority and the City. Further, there is no indication that the
city has a majority equity interest in the authority. Therefore, it is not required to be reported
as a component unit.
The St. Louis Public Library should be reported as a related organization (d). The City
Council does appoint a voting majority of the board members of the Library and it is a
separate legal entity. However, there is no imposition of will or financial benefit or burden
relationship noted between the Library and the City. The city does not have a majority
equity interest in the library. Therefore, the library is not required to be included as a
component unit.

19

Case 15-2 (continued)

The St. Louis Regional Convention and Sports Complex Authority should be reported as a
joint venture (c). The Authority is a separate legal entity, but its operations are jointlycontrolled by three separate governmental entities the city, the county, and the State.
Furthermore, there is an on-going financial relationship between the joint venture and the
three participating governmental entities. Because the component unit criteria are not met
for any of the three primary governments and none has a majority equity interest, each
participating entity would report the Authority as a joint venture.
The Harry S. Truman Restorative Center should be reported as a discretely presented
component unit (b). It is a legally separate entity, the city appoints a voting majority of the
Centers board, and the city imposes its will on the board of the Center. The imposition of
will criterion that is met is budget approval authority.
The Center does not have
substantively the same governing body as the city nor does it meet the other criteria for
blending.
The Public Facilities Protection Corporation should be reported as a blended component
unit (a). It is a legally separate entity, the board members are comprised of city officials, and
it exists to provide services exclusively for the city of St. Louis.
2a. A blended component unit is reported directly in the fund financial statements. The fund
structure of the blended component unit is blended into the fund structure of the primary
governments funds. Ultimately, the blended component unit is reported at the governmentwide level within either the governmental or business-type activities column. The note
disclosures identify the blended component units and briefly describe the criteria they met to
be considered a blended component unit.
2b. A discretely presented component unit is only reported in the government-wide financial
statements. It is reported separately from the governmental or business-type activities
columns. The note disclosures identify the discretely presented component units and briefly
describes the criteria they met to be considered a discretely presented component unit.
2c. A joint venture is identified in the note disclosures. Furthermore, if the primary government
has an equity interest in the joint venture, that interest would be reported in the governmentwide financial statements, as well as the fund financial statements.
2d. Related organizations are simply identified in the note disclosures. They do not affect the
government-wide or fund financial statements.

20