In December 2010, the Governmental Accounting Standards Board issued Statement No. 61, The Financial Reporting Entity: Omnibus which amends the reporting standards for reporting component units in a government’s financial statements.
This new statement was the result of a reexamination of the previous reporting entity guidance contained in Statement No. 14. GASB No. 61 is effective for periods beginning after June 15, 2012, however, early application is encouraged.
The most significant effect of the new standard is the increased emphasis on a financial benefit or burden relationship between the primary government and component units. There are two general ways this change is impacting previously reported component units:
- In the past, the presence of “fiscal dependency" alone would result in the reporting of component units. Fiscal dependency, under this definition, meant the primary government had the authority over the component unit’s budget, the setting of taxes or charges, or the issuance of debt. Statement No. 61 further modifies these requirements by stating that fiscal dependency alone does not warrant inclusion; but rather, a financial benefit or burden relationship must also be present between the potential component unit and the primary government. This change could result in some component units no longer being reported in the primary government financial statements.
- In other situations, component units were blended in the financial statements of the primary government if both entities had substantially the same governing body. This common board alone is no longer enough to qualify for blending. The new standard also requires either the existence of a financial benefit or burden relationship, or the primary government has management operational responsibility for the activities of the component unit. This change could result in some component units previously blended to now be reported as discretely presented.
Other key elements of GASB No. 61 include:
- New blending criteria when the component unit’s debt is expected to be repaid entirely or almost entirely with resources of the primary government (for example, a CDA with lease revenue bonds repaid with TIF District increments)
- Clarification of the reporting of equity interests in legally separate organizations
- Expanded note disclosures explaining the rationale for the classification of each component unit
- Clarification of the “misleading to exclude" criteria which allows reporting of entities that do not otherwise meet the component unity criteria
Similar to GASB Statement No. 14, the new standard also contains an updated flow chart in Appendix C that will help guide you through the proper reporting of entities that may qualify as potential component units.
If your government anticipates potential changes under GASB 61, we recommend you review the standard and discuss with your Baker Tilly contact.