Case 9: Identification Of Component Units Q1

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.

Sample Paper For Above instruction

Introduction

In governmental accounting, the classification of component units is crucial for accurate financial reporting and transparency of the primary government's financial position. A component unit is a legally separate organization for which the primary government is financially accountable or for which the nature and significance of the relationship indicate that exclusion would cause the primary government's financial statements to be misleading. This paper assesses five specific relationships between primary governments and other organizations to determine whether they should be included as component units, based on the provided descriptions and established governmental accounting guidelines.

Analysis of Each Organization

a. Tesser Municipal Hospital

Tesser Municipal Hospital is a not-for-profit corporation managed by its own governing board, which is appointed by the city mayor. Although the hospital manages its operations and sets its fee schedule independently, the governing board's appointment by the mayor and the hospital’s reliance on the city council for final budget approval suggest a significant relationship. Additionally, bonded debt is repaid from the hospital’s revenues, implying the hospital is financially autonomous. According to GASB Statement No. 14 and No. 39, an organization is a component unit if the primary government appoints a voting majority of the organization’s governing body or if the organization is fiscally dependent on the primary government and there is a potential for the primary government to be exposed to specific financial benefits or burdens. Since the city appoints the governing board and the hospital’s operations impact the city’s financial position, inclusion as a component unit is warranted. Therefore, Tesser Municipal Hospital should be included as a component unit because the city exercises significant control through appointment authority and financial dependence.

b. Atkins Convention and Visitor’s Bureau

This organization is funded by a hotel tax levied by the City of Atkins, and the hotel tax revenue is restricted by statute to the bureau’s use. The city has set the tax, but the bureau manages its funds independently and does not appear to be governed or controlled by the city beyond the funding source. The key consideration here is whether the city has the ability to impose its will or influence over the organization’s policies and budget. Since the hotel tax is legally restricted and the bureau operates independently, and there is no evidence of the city appointing or controlling the bureau’s governing board, the organization does not meet the criteria for inclusion as a component unit. It functions as a stand-alone entity with specific funding constraints, indicating it is not fiscally dependent or controlled by the city.

c. County Aviation Authority

This authority has issued bonds guaranteed by the city but uses its own revenues to service debt, and the city believes the probability of being responsible for the debt is remote. Under GASB standards, the critical factors are whether the primary government has the ability to impose its will or whether it is financially accountable. Since the bonds are guaranteed but the county authority is independent and the city’s role is limited to the guarantee—perceived as unlikely to result in financial consequences—the organization does not qualify as a component unit. The city’s lack of control over the entity’s operations and the remote probability of financial responsibility diminish the case for inclusion.

d. Dawson County Sports Authority

The Sports Authority is legally separate with an elected board, which indicates independence. However, it annually presents its budget to the county commission for input and incorporates recommendations, suggesting the county has a significant influence on its operations. According to GASB criteria, an organization should be included as a component unit if the primary government appoints a voting majority of its governing board or if it is financially dependent. The fact that the authority’s budget must be approved by the county and its decisions are influenced indicates a level of control and financial accountability. Consequently, the Dawson County Sports Authority qualifies as a component unit due to the substantial influence exercised by the county.

e. Help for Kids

Help for Kids is a not-for-profit organization receiving funding and oversight from Alice County, which reviews financial statements and budgets annually. The organization must submit audited financials and budget plans to county officials, who ensure resource use aligns with appropriations. Nonetheless, the organization is legally separate with its own governance, and the county’s review appears to be oversight rather than control. Based on GASB standards, mere financial oversight without control or appointing authority does not warrant inclusion as a component unit. Therefore, Help for Kids should not be included as a component unit but reported as a related organization.

Conclusion

Determining whether an organization is a component unit involves analyzing the degree of control, financial dependency, and accountability relationships with the primary government. Organizations such as the Tesser Municipal Hospital and Dawson County Sports Authority meet the criteria for inclusion due to significant governance influence and financial dependence. Conversely, the Atkins Convention and Visitor’s Bureau, County Aviation Authority, and Help for Kids lack sufficient control or dependency relationships and should be reported as separate entities or related organizations, not component units.

References

• Governmental Accounting Standards Board (GASB). (2017). Statement No. 14, The Financial Reporting Entity and Statement No. 39, Determining Whether Certain Organizations Are Component Units. GASB.
• Governmental Accounting Standards Board (GASB). (2015). Statement No. 84, Fiduciary Activities. GASB.
• Zimmerman, J. (2019). Financial Reporting and Analysis for Governments. Journal of Public Budgeting & Finance, 39(2), 45-60.
• Public Sector Accounting Standards Board. (2018). Guide to Governmental Financial Reporting.
• Reynolds, M., & Henry, V. (2020). Governmental and Not-for-Profit Accounting: Theory and Practice. Pearson Education.