Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

The Financial Reporting Entity
Component Units

GASB 14, paragraph 20, as amended by GASB 61, paragraph 4b, defines component units as legally separate organizations for which the elected officials of the agency are financially accountable. In addition, component units can be other organizations of which the nature and significance of their relationship with the agency is such that exclusion of these organizations from the agency’s financial statements is misleading or incomplete.

The agency is financially accountable for an outside organization if either of the following applies:

1. The agency can appoint a voting majority of the outside organization’s governing body and:
   • Is able to impose its will on the outside organization
     –OR–
     
   • There is potential for the outside organization to provide specific financial benefits to or impose specific financial burdens on the agency
2. The outside organization is fiscally dependent on the agency and there is the potential for the organization to:
   • Provide specific financial benefits to the agency
     –OR–
     
   • Impose specific financial burdens on the agency

Financial accountability remains the primary basis for determining whether an organization is included in the reporting entity. However, as clarified by GASB 61, fiscal dependency alone is not sufficient—there must also be a financial benefit or burden relationship.

GASB 39 provides additional guidance for determining if a certain organization for which the agency is not financially accountable is reported as a component unit if the relationship with the agency is such that exclusion would be misleading. This guidance is most commonly applied to legally separate, tax-exempt organizations. The evaluation of whether exclusion would be misleading is inherently judgmental and requires consideration of both the financial significance of the relationship and the degree of operational integration. GASB 39 also amended paragraph 41 of GASB 14 to provide a more precise definition of the term “closely related to.”

According to GASB 39, “closely related to” means the potential component unit is financially integrated with the agency. Financial integration may be exhibited and documented through the wording of charters and bylaws of either the agency or the potential component unit. Some examples of financial integration include:

• The organization’s resources are held for the benefit of the agency.
• The agency is entitled to or can otherwise access those resources.
• The organization’s activities are substantively aligned with those of the agency.
• Administrative or operational support is shared between the entities.

Blended vs. Discretely Presented Component Units

Component units are reported using either blending or discrete presentation, depending on the nature of the relationship with the agency.

Blending is required when the component unit is, in substance, part of the agency’s operations. As established in GASB 14, as amended by GASB 61 and further clarified by GASB 80, a component unit must be blended if any of the following criteria are met:

• Component unit provides services entirely or almost entirely to the agency.
• Component unit’s total outstanding debt (including leases) is expected to be repaid using resources of the agency.
• Component unit is a not-for-profit corporation, the agency is the sole corporate member of the component unit, and the component unit is included not because of GASB 39.

Blended component units are reported as though they are part of the agency itself. Their funds are incorporated into the agency’s financial statements and are subject to the same reporting requirements as the agency’s own funds.

If the component unit does not meet any one of the blending criteria above, it is reported as a discretely presented component unit. Discrete component units are reported in separate columns in the government-wide financial statements to emphasize that they are legally separate from the agency. Under GASB 103, in basic financial statements, agencies should present each major component unit separately in the reporting entity’s statements of net position and activities. Alternative methods like footnote presentation are no longer permitted.

GASB 85 clarifies reporting requirements for blended component units, particularly those engaged in business-type activities, and ensures consistency in financial statement presentation.

The financial activity of discrete component units is reported in FT15 using the full accrual basis of accounting in the same manner as proprietary funds. Report discretely presented component units in a separate column. When reporting more than one discretely presented component unit, consolidate the activities of the component units into one component unit column on the statement of activities and statement of net position and individually present each component unit in a combining schedule. Exhibits VIII and IX may be used to report discretely presented component unit financial information.

The transactions of blended component units are blended with those of the agency rather than discretely presented. The funds of a blended component unit are subject to the same reporting requirements as the agency’s own funds. For example, if a blended component unit has its own debt service fund, the activities of that fund are included in the debt service fund financial statements of the agency and are reported in the same manner as the agency’s own debt service funds. However, although a blended component unit may have a general fund of its own, an agency can only report one general fund (that is, the state of Texas’ general revenue fund 0001). Therefore, report the general fund of a blended component unit as a special revenue fund.

GASB 99 addresses pledges of future revenues when resources are not received by the pledging agency. In the process of blending the financial statements of a debt-issuing component unit into the financial statements of an agency pledging revenue for the component unit’s debt, the agency must reclassify an amount due to the component unit as an interfund payable and an interfund transfer out simultaneously with the recognition of the revenues that are pledged. The debt-issuing component unit (presented as a fund of the agency) must recognize an interfund receivable and a transfer-in when the agency is obligated to make the payments. This applies only to blended component units and provides instructions on how to consolidate the free-standing statements of the agency with those of the blended component unit.

Fiduciary Activities and Component Units

GASB 84 significantly updated the criteria for identifying and reporting fiduciary activities, including those of component units.

Under GASB 84, component units that hold assets in a fiduciary capacity must be evaluated based on:

• Control of the assets
• The beneficiaries of those assets (whether they are for an external party)
• The absence of administrative or direct financial involvement by the agency

If a component unit’s activities meet the fiduciary criteria, those activities are reported in the agency’s fiduciary fund financial statements rather than as part of governmental or proprietary activities.

GASB 97 amends the component unit and fiduciary requirements in limited areas, including situations where the primary government performs the duties of a governing board and certain defined contribution and IRC §457 plans. Apply GASB 84 and GASB 97 when determining whether a legally separate organization must be reported as a fiduciary component unit.

Majority Equity Interests and Related Considerations

GASB 90 provides guidance for situations in which an agency acquires a majority equity interest in a legally separate organization.

The existence of a majority equity interest does not automatically result in component unit classification. Instead, the agency must evaluate whether the:

• Organization meets the definition of a component unit under GASB 14 (as amended)
• Interest represents an investment or another type of financial relationship

If the equity interest qualifies as an investment, it is reported using the equity method. If it does not, it is reported as an asset. In either case, the relationship must still be evaluated under the component unit criteria to determine whether inclusion in the reporting entity is required.

Some component units may apply a different GAAP reporting model other than the governmental reporting model (such as for non-profit component units or those that use the statutory basis for financial statement presentation). GASB 14, paragraphs 9 and 43, however, state that the provisions of GASB 14 must be applied to all governmental and nongovernmental component units when being included in the financial information of the agency. GASB 34, paragraph 125, states that the financial reporting requirements for a discrete component unit can be met by presenting its financial data in the statement of net position and the statement of activities of the agency, which are presented on the full accrual basis. In order for the financial information of a component unit to be presented with the agency, the financial statements of the component unit may need to be reformatted to comply with the display and classification requirements of GASB 14 and GASB 34.

All agencies must complete and submit the GASB 14/39/61/80/84/90/97 – Component Unit Questionnaire listed on the GASB Questionnaires webpage by Aug. 15, 20CY.

Each agency must submit the GASB 14/39/61/80/84/90/97 Component Unit Questionnaire for each component unit or organization that has either:

• A newly identified potential component unit/organization.
  –OR–
• Changes to the reporting of an existing component unit/organization (for example, from a blended component unit to a discretely presented component unit).

For more information on decision-making to determine your agency’s component units, see GASB 14/39/61/80/84/90/97 – Component Unit Questionnaire PDF Preview listed on the GASB Questionnaires webpage.

For more information on the note disclosure requirements for component units, see Component Units in Note 19 — The Financial Reporting Entity.