Question

Explain in your own words what a component unit is, and why such component units are established. For a full answer, you need to give the criteria for when an entity is considered a component unit, and you must also give some reason why these component units are set up to be legally separate from the related primary government. .

Answer 1

COMPONENT UNIT?

A component unit is a legally separate organization for which the elected officials of the primary government are financially accountable. In addition, component units can be other organizations for which the nature and significance of their relationship with a primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading due to close relations and financial integration with the primary government.

WHY COMPONENT UNITS ARE ESTABLISHED?

Ultimately, it is up to the professional judgment of the primary government’s management to ultimately determine what entities should be included as component units. Most often, governmental component units are typically entities or nonprofits whose purpose is to benefit a government by soliciting contributions and managing those funds.

FOLLOWING UNITS FULLFILLS THE CRITERIA OF A COMPONENT UNIT

Examples of governmental component units include:

Utility companies (water, electricity, wastewater, etc.)
Foundations
Charter schools
Alumni associations
Housing authorities
Not-for-profit corporations
HOW GOVERNMENT SEPERATES IT FROM PRIMARY GOVERNEMT?

Depending on the relationship to the government, a government’s component units are presented one of two ways: blended or discretely presented. A blended component unit’s financial information is reported within the government’s financial statements (as if it were part of the government), and a discretely presented component unit’s financial information is reported in a separate column in the government’s government-wide financial statements.