Accounting for affiliated organizations.

• Author: Gauthier, Stephen
• Position: Issues in Accounting

In May, the Governmental Accounting Standards Board issued Statement No. 39, Determining Whether Certain Organizations are Component Units. The provisions of GASB Statement No. 39 are effective for fiscal periods beginning after June 15, 2003. Earlier application is encouraged. This latest GASB standard will directly affect units of government that receive significant financial support from legally separate nonprofit organizations such as foundations.

GASB Statement No. 14, The Financial Reporting Entity, established broad standards for determining whether separate legal entities should be included within a government's financial reporting entity. When GASB Statement No. 14 was issued, the board promised to explore the possibility of providing additional criteria for evaluating whether certain legally separate, tax-exempt entities affiliated with government units should be included within the financial reporting entity, and if so, how (i.e., blending or discrete presentation). GASB Statement No. 39 is the fulfillment of that long-standing pledge.

Criteria for Inclusion

GASB Statement No. 39 provides specific criteria for evaluating whether legally separate, tax-exempt entities should be included as component units because of the nature and significance of their relationship with the primary government and its component units. Specifically, GASB Statement No. 39 directs that such entities be treated as component units if they meet all three of the following criteria:

* 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. The intent of this requirement is to eliminate organizations that benefit multiple constituent groups (e.g., federated fund-raising organizations).

* 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. Examples include (1) the primary government s past receipt of the majority of the tax-exempt entity's economic resources, (2) the primary governments successful past requests for economic resources from the tax-exempt entity, and (3) the fact that the tax-exempt entity is financially interrelated with the primary government as that term is defined by the Financial Accounting Standards Board in Statement No. 136, Transfers...