GASB 61, The Financial Reporting Entity Purpose & Objective

(1)

GASB Statement No. 61, The Financial

Reporting Entity: Omnibus

An Amendment of GASB Statements No. 14 and No. 34

Presented by

Andrew Richards, CPA, Partner Christopher Telli, CPA, Senior Manager November 13, 2012

GASB 61, The Financial Reporting Entity

Purpose & Objective

• Amends GASB Statement 14 & 34 to improve

financial reporting for a governmental financial

reporting entity

• Clarifies/Amends

o

Financial Accountability Concept

o

“Misleading to Exclude” criteria

o

Blending criteria

o

Reporting of equity interest in legally separate

(2)

Purpose & Objective

• Improves guidance relating to component units & equity

interest transactions, making financial statements more

relevant

• Allows users to better assess accountability of elected

officials

• Improves focus of the financial reporting entity on the

primary government & allows for better distinction of

primary government (PG) & component unit (CU)

• Helps ensure PG doesn’t understate financial position for

equity interests

5

• Provisions of this Statement are effective for

financial statements for periods beginning after

June 15, 2012

o

Earlier application is encouraged

Effective Date

(3)

• Primary governments

• Stand-alone governments

• Separately issued financial statements of

governmental components

• Nongovernmental component units when included

in a governmental financial reporting entity

7

Scope

•

Component unit: Legally separate organizations for

which elected officials of the primary government

are financially accountable. In addition, a

component unit can be another organization for

which the nature and significance of its relationship

with a primary government is such that exclusion

would cause the reporting entity's financial

statements to be misleading

⁰

Can be governmental organization, nonprofit of

for-profit corporation

Component Unit Definition

(4)

• GASB 14 requires inclusion of a legally separate

entity if it’s fiscally dependent on the primary

government

o

GASB 61 amends this to ALSO require a financial benefit or

burden relationship, in addition to being fiscally

dependent

o

If the financial accountability concept is met, the

organization should be reported as part of the primary

government’s financial reporting entity

9

Amended Inclusion Criteria

• Fiscally dependent: A government that cannot do one or

more of the following without the substantive approval of

another government: (a) determine and modify its budget,

(b) levy taxes or set rates or charges, or (c) issue bonded debt

• A financial benefit or burden relationship exists if the

primary government is

o

Legally entitled to or can access the organization’s resources

o

Legally obligated or has otherwise assumed the obligation to finance

deficits of, or provide financial support to the organization

(5)

• The primary government is financially accountable if

it appoints voting majority of the organization’s

governing board &

1.

It is able to impose its will on the organization, OR

2.

There is potential for the organization to provide specific

financial benefit to, or burden on, the primary

government

11

• Primary government may be financially accountable

for a fiscally dependent government even if that

government has a:

1)

Separately elected governing board (elected school

board but fiscally dependent on local government)

2)

Governing board appointed by a higher level of

government (school board appointed by State

officials but fiscally dependent on local government)

3)

Jointly appointed board (board appointed jointly by

several local governments but fiscally dependent on

one)

(6)

Question #1

It is possible for a component unit of a municipality to

be which of the following

a) another governmental organization

b) a for-profit corporation

c) a not-for-profit corporation

d) all of the above

e) Not sure

13

• Potential for dual inclusion

o

Organization could meet financial accountability criteria

for one primary government, but fiscally dependent on

another

o

Can only be component unit in one reporting entity

o

Requires careful judgment

o

Generally, fiscal dependency will govern, but not always

(7)

• Paragraphs 12, 20, 39 and 66 of Statement 14

allowed for legally separate entities to be included as

component units, even if they do not meet criteria

for inclusion, if exclusion would make the financial

statements misleading or incomplete

• GASB 61 eliminates “incomplete” & amends GASB 14

to clarify the manner in which “misleading to

exclude” provisions should be applied in making this

determination

15

“Misleading to Exclude” Criterion

• For organizations not meeting the financial

accountability criteria

o

Management may include if professional judgment

determines exclusion is misleading

o

Determinations based on nature & significance of

organization’s relationship to primary government

o

Should be applied for all separately issued financial

statements

“Misleading to Exclude” Criterion

(8)

• GASB 61 further clarifies what types of relationships

should be considered when determining if

misleading to exclude

o

Closely related or financially integrated

 Closely related: Focus on financial relationships

 Financially integrated: Documented through policies, practices or

organizational documents of either primary government or the

organization being evaluated

17

“Misleading to Exclude” Criterion

• Clarifies types of relationships that affect the

determination of major component units

• Eliminates requirement to consider each component

unit’s significance relative to other component units

• Requires consideration of nature and significance of

relationship to primary government

o

Services provided

o

Transactions

o

Significant burden or benefit relationship

Major Component Unit Requirement

(9)

• Presentation & reporting requirements

o

Major component unit reporting requires one of the

following

 Presenting each major component unit in a separate column in

the reporting entity’s statements of net assets & activities

 Combining statements of major component units in reporting

entity’s basic financial statements after the fund financial

statements, or

 Presenting condensed financial statements in notes

o

Nonmajor component units should be aggregated in a

single column

o

Combining statements allowed but not required

19

Major Component Unit Requirement

Question #2

An organization is included with a primary government’s

reporting entity if that organization is fiscally dependent

AND

a) A potential financial benefit or burden relationship

exists

b) The primary government appoints all of the board

members

c) The entity is not a component unit of another

government

d) the entity has a derivative instrument

e) Not sure

(10)

• Amends paragraph 53 of Statement No. 14 to

include additional provision when governing bodies

are substantively the same

• Adds provision for component units whose total

debt outstanding is expected to be repaid entirely or

almost entirely with resources from primary

government

21

Blending Criteria

• Substantively the same

o

Sufficient representation of primary government’s entire

governing body on the component unit’s governing body

so decisions of the primary government cannot be

overridden by component units

o

Happens when primary government’s board is essentially

the same as component unit’s board

o

Example: city redevelopment authority is comprised

(11)

• Blending method should be used when governing

bodies substantively the same

&

o

There is financial benefit or burden relationship

OR

o

Management of the primary government has

operational responsibility for component unit

23

Blending Criteria

• Operational responsibility

o

Management in this context are people below the

governing board

 Responsible for day-to-day operation

o

Achieved if management manages activities of the

component unit in essentially the same manner in which it

manages its own programs, departments or agencies

(12)

• Blending method should also be used if

o

Services provided by component unit are

entirely, or almost

entirely, to primary government or exclusively, or almost

exclusively, benefits primary government

 Similar to internal service funds

o

Requirement still met if

 Services provided to others are insignificant to overall activities of

component unit

 Services are provided indirectly to primary government (i.e. to

employees)

25

Blending Criteria

• Blending also required for component units whose

total debt outstanding, including leases, is expected

to be repaid entirely, or almost entirely, with

resources of primary government

o

New Requirement

o

Repayment generally occurs through continuing pledge &

appropriation by the primary government to component

unit

Blending Criteria

(13)

• Reporting blended component units

o

Statement clarifies that funds of a blended component

unit have the same financial reporting requirements as a

fund of primary government

 Included as part of primary government’s other funds in fund

statements &/or combining statements

 General fund of blended component unit is still reported as a

special revenue fund

27

Blending Criteria – Reporting

Question #3

Major component units should be determined based

on:

a) The component unit's significance to other

component units

b) The component unit's total assets

c) The component unit's total net assets

d) The component unit's significance to the primary

government

(14)

Blending Criteria – Reporting

• Business-type activities

o

Business-type activity (BTA) that reports in a single column may

blend component unit into single column

 Present condensed combining information in notes

 Condensed information should include (minimum)

Condensed statement of net assets

Condensed statement of revenues, expenditures & changes in net assets Condensed statement of cash flows

o

May also show blended component unit in separate column &

combining primary government total column

o

Multi-column BTA may add additional columns as if fund of

primary government

29

• The Statement clarifies reporting of equity interests

in legally separate organizations

o

Primary government should report an asset for its equity

interest in a discretely presented component unit

 If government’s intent is to directly enhance its ability to

provide governmental services, it should be discretely

presented as a component unit

 If government’s intent is to obtain income or profit, it should

report equity as investment

o

Minority interest in joint ventures are shown in net assets

as “restricted, nonexpendable”

(15)

• Clarifies that governments should disclose the

rationale for including each component unit &

manner in which it is included

• Additionally, notes should include

o

Brief description of the component unit and its

relationship to primary government

o

If component unit is discretely presented, blended or

included in the fiduciary fund financial statements

o

How separate financial statements for component

units may be obtained

31

Amendments to Note Disclosures

• Notes essential to fair presentation in reporting

entity’s basis financial statements include

o

Governmental & business-type activities, major funds,

nonmajor funds, including blended component units

o

Major discretely presented component units (DPCU)

• Selected DPCU disclosures throughout notes

o

Use professional judgment

(16)

Impact

• Expected some component units may no longer

meet inclusion criteria under new Standard

• Not expecting the reverse

• All component units will need reevaluation by

primary government

• Blending must be reevaluated under new criteria

o

If no longer meets requirements to blend, then discretely

presented (de-blended)

• Change in reporting entity will result in restatement

33

Question #4

The blending criteria of GASB 61 is met if the governing

bodies are substantively the same and

a) A financial benefit or burden relationship exists

b) The entities are financially integrated

c) The financial statements are not otherwise

incomplete

d) It's based solely on professional judgment

e) Not sure

(17)

35

Transition

• In first period applied, treated as adjustment of prior

periods & restatement of all prior periods

• If restatement is not practical, cumulative effect

should be reported as a restatement of beginning

net assets (or fund equity or fund balance, as

appropriate) for earliest period restated

• Financial statements should disclose nature of

restatement & its effect

(18)

Examples

All examples taken from GASB 2011-12 Comprehensive

Implementation Guide

37

Examples – Case 6

Case 6 – Board of Education with Appointed Members

Facts: Local boards of education are created as bodies corporate. The county board of commissioners

appoints members of the board of education for municipalities located within the county, but may remove members only for cause. The local boards of education select their own management and control their own day-to-day operations.

State law gives the state legislature the responsibility for providing a uniform system of free public schools. Accordingly, the state grants the county the following budgetary authority:

Local school boards submit their entire budget to the county commissioners.

The county commissioners make appropriations to the local boards of education for that portion of the budget that is to be funded by the county.

The county commissioners approve the local school boards' budgets, which are then adopted by the local school boards.

If the county board allocates funds specifically to certain purposes or functions, the local boards of education are permitted to change the appropriation for the intended program or purpose within certain limits.

Changes in the school budget resolution, whether increases or decreases to projects in (1) acquisition of land or (2) building acquisition and construction, require county commissioner approval.

(19)

Examples – Case 6 (cont.)

Case 6 – Board of Education with Appointed Members (cont.)

The county may allocate part or all of each appropriation by purpose, function or project. The authority of the county is limited by a statutory requirement that the county provide adequate school facilities. However, the county has no authority over the administration of the construction. A local board of education has legal recourse if it feels that the county is not providing adequate facilities or is not fulfilling its statutory funding responsibilities. A clerk of court or a judge can order a county to increase its financial support of a local board of education.

Conclusion: The local board of education would be discretely presented as a component unit of

the county. The county board of commissioners appoints the members of each local board of education and is able to impose its will through its budgetary authority, which grants the county approval authority over the entire budget and thus is not merely a compliance approval required as a condition to receive financial aid. In addition, the county commissioners have approval authority over the capital acquisitions of the local board of education.

39

GASB 61, The Financial Reporting Entity

Examples – Case 6a

Case 6a – Board of Education with Elected Members

Facts: Consider the same facts as in Case 6, except that the members of the local

board of education are separately elected.

Conclusion: If the members of the local board of education are separately elected,

the board of education would be evaluated as a component unit of the counties

county based on the fiscal dependency criteria, which include the financial benefit or

burden criteria. The board of education is fiscally dependent on the county based on

the county’s budgetary approval authority. In addition, the local board of education

imposes a financial burden because the county provides resources for its operations.

The board should be reported as a discretely presented component unit.

(20)

Examples – Case 13

Case 13 – Library Association

Facts: A library association is a body corporate and politic. It is governed by a fourteen-member board,

serving staggered seven-year terms.

Seven of the fourteen members are direct appointees of the town.

The remaining seven members are elected by the other board members. (Vacancies are filled by a majority vote of the remaining thirteen members, seven of whom—a voting majority—are direct appointees of the town.)

The town may not remove the members of the library's board, except for cause. The town has no authority over the budget of the association; however, the town provides funding for approximately 90% of the library's funding for library operations. The library also receives donations and does a substantial amount of fund raising to finance capital improvements. The library board controls the management of the library's day-to-day operations and holds property in its own name.

Conclusion: The library would be reported as a discretely presented component unit of the town. All of

the library board members are either appointed directly by the town or selected by a group that is controlled by appointees, which means that the town does appoint a voting majority of the board. The funding provided by the town for the library's operations imposes a financial burden on the town.

41

GASB 61, The Financial Reporting Entity

Examples – Case 13a

Case 13a – Library Association

Facts: Consider the same facts as in Case 13, except that the

two boards are substantively the same and the library

association is managed in the same manner as a department of

the town.

Conclusion: The library would be reported as a blended

component unit of the town because the two boards are

substantively the same and management of the town has

operational responsibility for the component unit.

(21)

Examples – Case 21

Case 21 – Art Foundation

Facts: The Carol Sauer Art Foundation was established as a legally separate, tax-exempt organization to

support fine arts in the greater Anytown metro area. The foundation has a history of providing substantial financial support to several different entities each year including XYZ Art Museum, Anytown’s public museum; community theatre groups; and other organizations with objectives consistent with the foundation’s charter. Occasionally, donations received by the foundation are restricted for the benefit of specific organizations, but generally, restricted donations are distributed currently, rather than held. An accumulation of restricted resources would not be significant to any of the designated beneficiaries. The support given to XYZ Art Museum during the current year was significant to the museum. However, depending on the ongoing needs of other qualifying organizations and the foundation’s resources available for distribution, this level of support to the museum has varied considerably over the years.

Conclusion: The Carol Sauer Art Foundation is not required to be reported as a component unit of XYZ Art

Museum because at least one of the three criteria is not satisfied. The “direct benefit” criterion is not met because the foundation supports several other organizations, and the resources it receives and holds are not entirely or almost entirely restricted for the benefit of XYZ Art Museum. Because the first criterion is not met, neither the “entitlement/ability to access” criterion nor the “significance” criterion needs to be considered. However, the “incomplete or misleading to exclude” concept in paragraph 41 of Statement 14, as amended, should be considered.

43

Andrew Richards, CPA | Partner | 501.372.1040 | [email protected]

Christopher Telli, CPA | Senior Manager | 719.471.4290 | [email protected]

(22)

45 45

Continuing Professional Education (CPE) Credits

BKD,LLPis registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.

The information in BKD webinars is presented by BKD professionals, but applying specific information to your

situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting

on any matters covered in these webinars.

CPE Credit

• Up to 1 CPE credit will be awarded upon verification

of participant attendance; however, credits may vary

depending on state guidelines

• For questions, complaints or comments regarding

CPE credit, please email the BKD Learning &

Development Department at

[email protected]