Case 9-11: Identification Of Component Units Question 1

Case 9 11identification Of Component Unitsq 1 Following Are Descriptio

Following are descriptions of several relationships between primary governments and other organizations. Using just the information provided, indicate whether you believe the primary government should include the organization as a component unit and give an explanation of how you came to that conclusion. You may find it helpful to use the flowchart discussed in the power points.

Is this a component unit?

Explanation

a. Tesser Municipal Hospital is a not-for-profit corporation, whose governing board is appointed by the Tesser city mayor. The hospital manages its day-to-day operations and sets its own fee schedule. The governing board provides preliminary approval of the hospital budget, with final approval required by the Tesser city council. Bonded debt for the hospital is repaid with the hospital’s revenues.

b. The Atkins Convention and Visitor’s Bureau is a not-for-profit organization funded by hotel tax levied by the City of Atkins. By city statute, the hotel tax is set by the city and can be used only by the Convention and Visitor’s Bureau.

c. The County Aviation Authority has issued bonds that are guaranteed by the City of Middle Falls. The Aviation Authority will use its revenues to service the debt. Middle Falls believes that the probability it will have to cover any debt service requirements related to the Aviation Authority bonds is remote.

d. The Sports Authority of Dawson County is a legally separate organization with its own elected board. It annually presents its budget to the Dawson County Commission for commissioners’ input and recommendations. The Sports Authority incorporates those recommendations it deems beneficial.

e. Help for Kids is a not-for-profit organization that receives funding from Alice County. Each year Help for Kids is required to submit its audited financial statements and approved budget to Alice County. County commissioners review the financial statements and budgets to ensure that the resources provided by the county are used in an approved manner.

Paper For Above instruction

Introduction

The identification of component units is a critical aspect of government accounting that ensures transparency and accountability in financial reporting. Governments must determine whether organizations associated with them should be included as part of their financial statements. This determination is guided by specific criteria outlined in accounting standards, such as the Governmental Accounting Standards Board (GASB) Statements. These criteria distinguish between organizations that are inherently part of the government’s operations and those that are separate but reportable as component units due to their relationship and significance. This paper evaluates five provided organizational relationships, applying these criteria to decide whether each qualifies as a component unit.

Analysis of Each Relationship

a. Tesser Municipal Hospital

Tesser Municipal Hospital is a not-for-profit organization whose governing board is appointed by the city mayor. Although the hospital manages its own operations and sets fees, the city's influence is significant, given the appointment authority over the governing board and the preliminary approval of the budget, with final approval by the city council. Moreover, bonded debt is repaid from hospital revenues, indicating a financial dependency. According to GASB standards, organizations that are financially accountable or have a significant relationship with the government, such as the ability to influence operations or budget approval, should be included as component units. Therefore, Tesser Municipal Hospital meets the criteria for a component unit because of the city's significant influence on its governance and financial matters.

b. Atkins Convention and Visitor’s Bureau

This organization is funded exclusively by hotel taxes levied by the city and can only use these resources. The statutory restriction on the use of hotel taxes and the funding source indicates a close relationship with the city, but it does not imply financial accountability or significant operational control. GASB standards generally exclude organizations where the government’s only involvement is through funding and statutory restrictions, without inherent control or ability to appoint governing board members. Hence, the Convention and Visitor’s Bureau is not a component unit but a related organization financed by the city.

c. County Aviation Authority

The bonds issued are guaranteed by the City of Middle Falls, but the revenue used to service the debt primarily comes from the authority itself, and the city does not significantly influence the authority’s operations. Middle Falls perceives the probability of the city having to cover debt service as remote. According to GASB criteria, organizations with debt guarantees but with limited influence or financial dependence are generally not included as component units. The guarantee alone does not confer sufficient control or accountability to warrant inclusion; hence, this authority is not a component unit.

d. Sports Authority of Dawson County

This entity is legally separate, with its own elected board, but it submits its budget annually to the county commissioners, who provide input and incorporate suggestions. While there is some oversight, the autonomy and separate governance suggest a lower level of government control. GASB standards typically require a government to have financial accountability—i.e., the ability to appoint or remove a majority of the governing body or impose its will—or a fiscal relationship such that the government is essentially responsible for the organization’s debts or activities. Since the Sports Authority has autonomous governance and supply of substantial independence, it does not meet the criteria for inclusion as a component unit.

e. Help for Kids

Although Help for Kids receives funding and reports to Alice County, the review of financial statements and budgets by county officials appears to be a form of oversight rather than control or governance. The relationship lacks the criteria of financial accountability or ability to influence or appoint the organization’s governing body. As such, it is a related organization rather than a component unit, provided that the county’s oversight does not extend to controlling operations or finances.

Conclusion

In conclusion, among the provided relationships, only Tesser Municipal Hospital appears to meet the criteria for a component unit due to significant influence over governance and financial dependency. The other organizations, although related or funded by the government, lack sufficient control or accountability mechanisms to be classified as components. Proper identification of component units ensures clarity in financial reporting, enhances transparency, and provides a comprehensive view of a government’s financial position. Applying these standards consistently promotes accountability and improves the quality of financial disclosures.

References

• GASB Codification of Governmental Accounting and Financial Reporting Standards (GASB Statement No. 14)
• GASB Statement No. 34: Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments
• GASB Statement No. 61: The Financial Reporting Entity: Omnibus —an Amendment of GASB Statements No. 14 and No. 34
• Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification.
• Government Finance Officers Association (GFOA). (2021). Best Practices in Government Financial Reporting.
• Harrison, K., & Lockhart, E. (2019). Governmental & Nonprofit Accounting: Theory and Practice. Wiley.
• Boyce, G. (2022). Governmental Accounting & Financial Reporting. McGraw-Hill Education.
• U.S. Government Accountability Office. (2020). Principles of Federal Appropriations and Budgeting.
• Public Sector Accounting Standards Board. (2018). Framework for the Financial Reporting of Governments.
• Seal, R. (2021). Financial Accountability in Local Governments. Routledge.