Changes for component units: GASB Statement No. 61 amends the rules that govern how component units are identified and presented.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle

In November 2010, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 61, The Financial Reporting Entity: Omnibus. The new standard amends the rules that currently govern how component units are identified and presented. This article examines the most important changes that will result from the implementation of GASB Statement No. 61.

FISCAL DEPENDENCE AS A CRITERION FOR INCLUSION

Under current authoritative standards, the simple fact that a legally separate entity is fiscally dependent on another government is sufficient to warrant its inclusion as a component unit of that government. Fiscal dependency results whenever another government is able to do any of the following:

* Determine a potential component unit's budget;

* Establish a potential component unit's rates, tax levies, or charges; or

* Approve or modify the issuance of a potential component unit's debt.

Under GASB Statement No. 61, fiscal dependency will be a basis for including a potential component unit only if there is also financial interdependence between the potential component unit and the other government. That is, a legally separate entity will have to be included as a component unit if it is fiscally dependent on another government and there also is a relationship of potential financial benefit or burden between the two.

APPLICATION OF THE MISLEADING TO EXCLUDE CRITERION

Under current authoritative standards, a legally separate entity must be included as a component unit of another government if the nature and significance of the relationship between the two is such that excluding the former would render the latter's financial statements misleading or incomplete. GASB Statement No. 61 makes two changes to this existing guidance.

As just noted, a potential component unit must be included if its exclusion would make the other government's financial statements misleading or incomplete. Since incomplete financial statements are inherently misleading, GASB Statement No. 61 has dropped the term incomplete as being redundant.

Of course, a variety of relationships can exist between a potential component unit and another government. GASB Statement No. 61 clarifies that relevant relationships for this purpose generally would be financial in nature.

IDENTIFYING MAJOR DISCRETELY PRESENTED COMPONENT UNITS

Governments are required to provide separate information on each major discretely presented component unit somewhere within the basic financial statements...