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Glenn Hegar  ·  Texas Comptroller of Public Accounts

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 would be misleading.

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

  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


    • 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 outside organization to:
    • Provide specific financial benefits to the agency


    • Impose specific financial burdens on the agency

GASB 14 established standards for defining and reporting of the financial reporting agency and its organizations. It also established standards for reporting related organizations, joint ventures and jointly governed organizations. Answering the questions in the Component Unit Flowchart below can help an agency determine its relationship with an organization.

GASB 39 provides additional guidance in determining if certain organizations for which the agency is not financially accountable should be reported as component units based on the nature and significance of their relationship with the agency. Specifically, this statement added paragraph 40a outlining specific criteria that must be met in order for a legally separate, tax-exempt organization to be reported as a component unit. GASB 39 also replaced paragraph 41 of GASB 14 to better define the meaning of “closely related to.”

Per GASB 39, “closely related” 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:

  • Failure of the potential component unit to distribute resources to the agency may cause the potential component unit to lose its tax-exempt status
  • Participation by employees of the potential component unit in programs sponsored by the agency
  • Representation in financial aid accountability systems of work-study fellowships granted to students of a agency for work performed for the potential component unit
  • Participation by employees of the primary government in research activities of the potential component unit and inclusion of that activity in the effort reports of the agency
  • Provision of office space and administrative services to or from the potential component unit

GASB 61 amends GASB 14 to address reporting issues for the agency and a potential component unit that developed since the issuance of GASB 14 and GASB 34.

GASB 61 amends the fiscal dependency criterion by adding the requirement that a financial benefit or burden relationship must also exist between the potential component unit and the agency in order for the fiscal dependency criterion to be met.

GASB 61 also clarified the “closely related to” criterion used in determining if it would be misleading to exclude a potential component unit by explaining that when applying the criterion, the focus of the relationship between the agency and the potential component unit would generally be financial in nature.

GASB 61 adds the requirement to blend a component unit’s activities when the component unit’s total debt outstanding is expected to be repaid entirely or almost entirely with resources of the agency. The blending provisions were amended to clarify that funds of a blended component unit have the same financial reporting requirements as a fund of the agency.

GASB 80 adds the requirement to blend a component unit’s activities if the component unit is organized as a not-for-profit corporation in which the agency is the sole corporate member, as identified in the component unit’s articles of incorporation or bylaws. GASB 80 does not apply to component units included in the financial reporting agency pursuant to the provisions of GASB 39.

GASB 14, GASB 61 and GASB 80 establish standards for reporting the component unit as blended if any one of the following criteria is 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

If the component unit does not meet any one of the blending criteria above, it is reported as a discretely presented component unit.

All agencies must complete and submit the GASB 14/39 – Component Unit Questionnaire by Aug. 15, 20CY.

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

  • a newly identified potential component unit/organization,
  • 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 Questionnaire PDF Preview.

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 would be included in the debt service fund financial statements of the agency and would be 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, a financial reporting entity 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 34, paragraph 125, directs that the activities of component units that are fiduciary in nature be included in the agency’s fiduciary fund financial statements. The purpose of this inclusion is to account for assets held by the component units acting in a fiduciary capacity.

Some component units may apply a different GAAP reporting model 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 discrete component units can be met by presenting their financial data in the statement of net position and the statement of activities of the financial reporting entity, 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.

For more information on the note disclosure requirements for component units, see Component Units in Note 19 — The Financial Reporting Entity. Also, copies of GASB 14, GASB 61 and GASB 80 may be purchased from the GASB store or a PDF version may be downloaded from the Pronouncement’s page of GASB’s website.

Glenn Hegar
Texas Comptroller of Public Accounts
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