17.2 Pathway 3: Misleading to Exclude & Affiliated Organizations (GASB 39 & 90)

Pathway 3: Misleading to Exclude & Affiliated Organizations (GASB 39 & 90)

An organization that does not meet the voting-majority or fiscal-dependency criteria must nonetheless be included as a component unit if its relationship with the primary government is so close that its exclusion would render the financial statements misleading or incomplete.

GASB Statement No. 39 Criteria for Affiliated Organizations

Public universities, hospitals, and parks frequently have legally separate, tax-exempt 501(c)(3) foundations (e.g., alumni foundations, hospital endowments). Under GASB Statement No. 39, an affiliated organization must be discretely presented as a component unit if all three of the following objective criteria are satisfied:

1. The economic resources received or held by the affiliated organization are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents.
2. The primary government (or its component units) is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the affiliated organization.
3. The economic resources received or held by the affiliated organization that the primary government can access are significant to that primary government.

GASB Statement No. 90 on Majority Equity Interests

GASB Statement No. 90 dictates that if a government acquires a majority equity interest (more than 50% voting stock or ownership stake) in a legally separate organization, it must determine whether the holding meets the definition of an investment under GASB Statement No. 72. If the entity is held primarily for investment profit, it is reported as an investment. If it is held for operational capacity or to provide public services, it must be reported as a component unit.

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Methods of Presenting Component Units: Blended vs. Discrete

Once an organization is classified as a component unit, the government must determine the appropriate method of financial presentation: blended presentation or discrete presentation.

+-----------------------------------------------------------------------------------+
|                         COMPONENT UNIT PRESENTATION CRITERIA                      |
+-----------------------------------------------------------------------------------+
|  BLENDED PRESENTATION (Must meet at least ONE of the following under GASB 61):     |
|  1. Substantively Identical Governing Boards AND:                                 |
|     • A financial benefit or burden relationship exists, OR                       |
|     • Management of the primary government has operational responsibility.         |
|  2. Exclusively Benefits Primary Government:                                      |
|     • Services provided entirely or almost entirely to the primary government.    |
|  3. Total Debt Expected to be Repaid by Primary Government:                       |
|     • Debt repaid entirely or almost entirely with primary government resources.  |
+-----------------------------------------------------------------------------------+
|  DISCRETE PRESENTATION:                                                           |
|  • Default presentation for all other component units.                            |
|  • Reported in one or more separate columns to the right of the Primary Gov.     |
|  • Excluded from fund financial statements; reported only on government-wide.     |
+-----------------------------------------------------------------------------------+

Blended Presentation

In blended presentation, the financial data of the component unit is combined directly into the fund columns and government-wide columns of the primary government. The component unit is treated, for accounting purposes, as if it were a fund or department of the primary government.

Key operational rules for blending:

• The component unit's balances and transactions are reported in the appropriate fund type (e.g., special revenue fund, capital projects fund, debt service fund, or enterprise fund).
• The General Fund Rule: A governmental reporting entity can have only one General Fund. Therefore, if a blended component unit has its own general fund, it must be reported as a special revenue fund in the primary government's financial statements.

Under GASB Statement No. 61, blending is restricted to three specific situations:

1. Substantively Identical Boards with Financial Benefit/Burden or Operational Management:
   • The governing body of the component unit is substantively identical to the governing body of the primary government (e.g., the city council sits as the ex officio board of the redevelopment agency), AND:
     • There is an ongoing financial benefit or burden relationship between the primary government and the component unit, OR
     • Management of the primary government has operational responsibility for the component unit (meaning primary government personnel manage the day-to-day operations of the component unit in the same manner as a line agency).
2. Exclusive Service / Financing Authority:
   • The component unit provides services entirely, or almost entirely, to the primary government, or exclusively benefits the primary government even if it does not provide services directly to it. A classic example is a municipal building authority formed solely to issue debt, construct a police headquarters or city hall, and lease the facility back to the city.
3. Debt Repaid Entirely by Primary Government:
   • The component unit's total debt outstanding is expected to be repaid entirely or almost entirely with resources of the primary government (e.g., through direct general fund appropriations or lease-purchase subsidies).

Discrete Presentation

Discrete presentation is the default method for presenting component units that do not satisfy the strict criteria for blending. Under discrete presentation:

• The component unit's financial data is reported in one or more separate columns to the right of the Total Primary Government column in the government-wide statements (Statement of Net Position and Statement of Activities).
• Discretely presented component units are completely excluded from the primary government's fund financial statements.
• This separation preserves the legal distinction between the primary government and independent public authorities, while still presenting a transparent picture of the broader public reporting entity.

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Major Component Unit Disclosures

When a government has multiple discretely presented component units, reporting users need sufficient detail regarding the most significant entities. Under GASB standards, a government must provide information for each major component unit.

A component unit is designated as "major" based on:

• Its relative financial size (assets, liabilities, revenues, or expenses) compared to the other component units, or
• The nature and significance of its relationship to the primary government and its importance to financial statement users.

Governments must satisfy the major component unit reporting requirement through one of three permissible presentation options:

1. Separate Columns in Government-Wide Statements: Devoting individual discrete columns to each major component unit on the face of the Statement of Net Position and Statement of Activities, with nonmajor component units aggregated into a single column.
2. Combining Statements in Basic Financial Statements: Presenting combining financial statements for all component units (with individual columns for each major unit and a combined column for nonmajor units) immediately following the fund financial statements as part of the basic statements.
3. Condensed Financial Statements in Note Disclosures: Presenting condensed financial statements for each major component unit in the notes to the basic financial statements, including condensed balance sheet/net position data, condensed operating results, and significant transfers.

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Joint Ventures, Jointly Governed Organizations, and Related Organizations

Governments frequently collaborate across jurisdictional lines to deliver regional infrastructure, emergency communications, or environmental protection. GASB standards distinguish between these multi-governmental structures based on voting control, financial interest, and financial burden.