Question

Harland County is in a financially distressed area of Missouri. In hopes of enticing business to this county, the state legislature appropriated $3 million to start an industrial development commission. The federal government provided an additional $1 million. The state appointed 15 individuals to a board to oversee the operations of this commission, and Harland County officials named five additional members. The commission began operations by raising funds from local citizens and businesses. Over the past 12 months, it received $700,000 in donations and pledges. The county provided clerical assistance and allowed the commission to use one wing of a county office building for its headquarters. The Harland County government must approve the commission’s annual operating budget. The county will also cover any deficits that might occur.

During the current period, the commission spent $2.4 million and achieved notable success. Several large manufacturing companies recently began to explore the possibility of opening plants in the county.

Harland County is currently preparing its comprehensive annual financial report. Should the county’s CAFR include the revenues, expenditures, assets, expenses, and liabilities of the industrial development commission? Is it a fund within the county’s primary government, a component unit, or a related organization?

Is the industrial development commission a component unit of the State of Missouri? How should its activities be presented in the state’s comprehensive annual financial report?

Answer 1

The CAFR should include the revenue,expenditures, assets, expenses, and liabilities of the industrial development commission. The Comprehensive Annual Financial Report (CAFR) is a detailed presentation of the state's financial position. It reports the country's activities and balances for each fiscal year. It consists of three main sections namely -Introductory, Finanacial and Statistical.

An activity,only if it is fiscally dependant on a primary government is categorised as a component unit. In this case, as the commission's budget has to seek approval from the county government,it will appear as a component for Harland County.

In this case,the State of Missouri is the primary government. For any component unit(in this case, the industrial development commission) to be a component of the primary government has to fulfill any one of the following conditions :

1) There should be fiscal dependence; or

2)the primary government appoints a voting majority of the board and the latter imposes its will on that board or

3) a separate organisation provides a financial benefit for the primary government or imposes a financial burden or

4) the primary government does not appoint fifteen out of twenty of the board members.

Appointment of this number of board members does decide primary government's control.

In our case here, there is no clear information to the show that the primary government that is, the State of Missouri imposes a financial burden. Thus, unless necessary information clearly mentions that any one of the above conditions are present, the industrial commission is not a component unit of the State of Missouri. As, the appoinment of majority of the board members is done by the State, the industrial commission being a related organisation to the State of Missouri must disclose the nature of this relationship in its Financial Statements.