Question

What are acceptable inclusion methods for component units?

Answer 1

Component units may be presented using blended presentation or discrete presentation.

In case of Discrete Presentation:

An entity is required to report its equity interest in a component unit as an asset, rather than as an outflow of resources, in discrete presentation method.

When the discrete presentation method is used, there is a clear distinction between the balances and activities of the primary entity and discretely presented component units. This distinction is achieved by presenting information for the discrete component units only in the financial statements using one of the following approaches:

• Present each major component unit in a separate column in the financial statements
• Present combining statements
• Present condensed financial statements in a note to the financial statements

In case of Blended Presentation:

The component unit's balances and transactions should be reported in a manner similar to the balances and transactions of the entity's itself.

When the blending method is used, transactions of a component unit are presented as if they were executed directly by the primary entity. That is, the funds for the blended component units are evaluated as either major or non-major funds and reported accordingly, just like all other funds (except Fiduciary Funds) of the primary entity. The balances and activities of the blended component units cannot be distinguished from those of the primary entity. In a similar manner, balances in a component unit’s financial statements are merged with similar balances of the primary entity in the preparation of the financial statements.

The notes to the reporting entity’s financial statements should include a brief description of the component units of the financial reporting entity and their relationships to the primary entity. This disclosure should include a discussion of the rationale for including each component unit in the financial reporting entity and whether it is discretely presented, blended, or included in the fiduciary fund financial statements. Component units may be disclosed together if they have common characteristics as long as each component unit is separately identified. The notes should also include information about how the separate financial statements for the individual component units may be obtained.