Question

Provide complete answers to the following on Governmental Reporting Entities:

1) The Governmental Accounting Standards Board has established rules for determining when a government should include another entity in its financial statements.

2) Distinguish between a primary government and a component unit. Include one example of each.

3) GASB permits two methods of reporting component units in the financial reporting entity. Describe the two methods and indicate when each should be used.

4) The City of X is deciding whether or not to include a transit system in its financial report and how the transit system would be reported if a positive decision were made. The transit system is a legally separate entity, has its own governing board, not appointed by the city, has a different auditor, and issues its own financial report. The city has signed an agreement that, for the next ten years (the life of a bond issue related to transit operations), it will make up the deficit of the transit system. During the last two years, the deficit has been $10 million, approximately 50% of the amount reported as a profit of its other enterprise operations. Make recommendations to the city, including whether or not to include the transit system and, if so, how to report it.

Answer 1

1) The Governmental Accounting Standards Board has established rules for determining when a government should include another entity in its financial statements

Answer ;

An entity that does not recognize and capitalize its collections shall report the following on the face of its statement of activities, separately from revenues, expenses, gains, and losses: a. Costs of collection items purchased as a decrease in the appropriate class of net assets b. Proceeds from sale of collection items as an increase in the appropriate class of net assets c. Proceeds from insurance recoveries of lost or destroyed collection items as an increase in the appropriate class of net assets. Similarly, an entity that capitalizes its collections prospectively shall report proceeds from sales and insurance recoveries of items not previously capitalized separately from revenues, expenses, gains, and losses. An entity that does not recognize and capitalize its collections or that capitalizes collections prospectively shall describe its collections, including their relative significance, and its accounting and stewardship policies for collections. If collection items not capitalized are deaccessed during the period, it also shall (a) describe the items given away, damaged, destroyed, lost, or otherwise deaccessed during the period or (b) disclose their fair value. In addition, a line item shall be shown on the face of the statement of financial position that refers to the disclosures required by this paragraph. That line item shall be dated if collections are capitalized prospectively

2) Distinguish between a primary government and a component unit. Include one example of each.

Answer ;

• Component Units

  It is essential that governmental financial statements provide an overview of the reporting entity that is based on financial accountability, yet allows users to distinguish between the primary government and its component units. Component units are defined as legally separate organizations for which the primary government is financially accountable or for which the nature and significance of the relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete .

  Financial accountability for a potential component unit is determined by either of the following:

  If a potential component unit does not meet either of the two tests above for financial accountability, an organization may still be included in the financial statements of the primary government based on the criterion that exclusion would result in a misleading or incomplete presentation of the financial reporting entity.

  • appointment of the voting majority of the potential component unit governing board by the primary government and either
    • the ability to impose its will on the potential component unit; or
    • a relationship of financial benefit or burden with the potential component unit.
  • whether or not the potential component unit is fiscally dependent upon the primary government.

The primary government can be a state government, a general-purpose local government such as a city or county, or a special purpose government such as a schooldistrict.

3) GASB permits two methods of reporting component units in the financial reporting entity. Describe the two methods and indicate when each should be used.

Answer ;

This Statement establishes standards for defining and reporting on the financial reporting entity. It also establishes standards for reporting participation in joint ventures. It applies to financial reporting by primary governments, governmental joint ventures, jointly governed organizations, and other stand-alone governments; and it applies to the separately issued financial statements of governmental component units. In addition, this Statement should be applied to governmental and nongovernmental component units when they are included in a governmental financial reporting entity.

The financial reporting entity consists of (a) the primary government, (b) organizations for which the primary government is financially accountable, and (c) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete.

The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization's governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it.

A primary government has the ability to impose its will on an organization if it can significantly influence the programs, projects, or activities of, or the level of services performed or provided by, the organization. A financial benefit or burden relationship exists if the primary government (a) is entitled to the organization's resources; (b) is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization; or (c) is obligated in some manner for the debt of the organization.

Some organizations are included as component units because of their fiscal dependency on the primary government. An organization is fiscally dependent on the primary government if it is unable to adopt its budget, levy taxes or set rates or charges, or issue bonded debt without approval by the primary government.

The financial statements of the reporting entity generally should allow the users to distinguish between the primary government and its component units. To accomplish this goal, the financial statements should generally communicate information about the component units and their relationships with the primary government rather than create the perception that the primary government and all of its component units are one legal entity.

Most component units should be included in the financial reporting entity by discrete presentation. Discrete presentation entails reporting component unit financial data in one or more columns separate from the financial data of the primary government. Certain information should be disclosed about each major component unit included in the component units column. The required information may be presented by using more than one column in the general purpose financial statements (GPFS) for the component units and either including appropriate combining statements for the discretely presented component units in the reporting entity's GPFS or presenting appropriate condensed financial statements of the discretely presented component units in the notes to the reporting entity's financial statements.

Some component units, despite being legally separate from the primary government, are so intertwined with the primary government that they are, in substance, the same as the primary government and should be reported as part of the primary government. That is, the component unit's balances and transactions should be reported in a manner similar to the balances and transactions of the primary government itself. This method of inclusion is known as blending.

The notes to the reporting entity's financial statements should distinguish between information pertaining to the primary government (including its blended component units) and that of its discretely presented component units. The reporting entity's financial statements should make those component unit disclosures that are essential to fair presentation of the financial reporting entity's GPFS. The notes to the financial statements also should include a brief description of the component units and their relationships to the primary government as well as information about how the separate financial statements of individual component units may be obtained.

This Statement also requires certain disclosures about the entity's relationships with organizations other than component units, including related organizations, joint ventures, jointly governed organizations, and component units of another government with characteristics of a joint venture or jointly governed organization. This Statement also provides financial statement display requirements for joint ventures in which the participating government has an equity interest.

4) The City of X is deciding whether or not to include a transit system in its financial report and how the transit system would be reported if a positive decision were made. The transit system is a legally separate entity, has its own governing board, not appointed by the city, has a different auditor, and issues its own financial report. The city has signed an agreement that, for the next ten years (the life of a bond issue related to transit operations), it will make up the deficit of the transit system. During the last two years, the deficit has been $10 million, approximately 50% of the amount reported as a profit of its other enterprise operations. Make recommendations to the city, including whether or not to include the transit system and, if so, how to report it.

Answer ;

According to Rubin, “the mission of transit is to maximize the mobility of people, with specific emphasis on the provision of transportation for residents who do not have other transportation options.”63 Transit users are categorized into two groups: transitdependent and choice riders. Transit-dependent riders cannot drive due to health, age or licensing reasons or do not have access to an automobile. Choice riders prefer to use transit even though they are capable of driving and have access to an automobile. Rubin asserts in order to attract a choice rider, “he/she must be presented with a transit option that goes from where he/she wants to go, at a high speed of travel, with high trip frequency, in a comfortable environment, with very high reliability, with a minimum of transfers — preferably none, with high actual and perceived safety, with the ‘proper’ level of status commensurate with the choice rider’s view of his/her position in the world, and, at low cost.”64 Rubin contends, “since transit-dependent riders use transit for nonwork trips during non-peak hours, many of these trips are relatively inexpensive to provide, while choice riders utilize transit almost exclusively for home-to-work trips, the most expensive trips for transit operators.”65 Thus, it costs more to carry a choice rider than a transit-dependent rider. So, then the question arises, should innovation discriminate between a choice rider and a transit-dependent rider? One would hope that transit innovations would encourage all types of riders to take advantage of transit options. There are many literature reviews on the topic of innovations, but not many on the topic of transit innovations specifically. One study specific to transit innovations was in the Transit Cooperative Research Program Report #70 that discussed transit systems in rural and small urban areas. Transit systems in rural and small urban areas serve very large geographic areas usually with low density. Like many other transit systems, rural and small urban area transit operators meet the diverse needs of their riders with limited funding. According to the report, “some rural and small urban transit systems