Blending Requirements for Certain Business-Type Activities
Project Description: The objective of this project is to improve financial reporting by addressing issues related to inconsistent presentation of component units in financial reporting of governments engaged only in business-type activities (BTA). The stated focus of the objective would need to be balanced against the information needs of financial statement users by considering what information is deemed essential to assess accountability, comparability and transparency in these circumstances.
Currently being deliberating
Added to Research Agenda: December 2013
Added to Current Agenda: August 2014
- Project Plan
- Recent Minutes
- Tentative Board Decisions to Date
- Project staff:
BLENDING REQUIREMENTS FOR CERTAIN BUSINESS-TYPE ACTIVITIES—PROJECT PLAN
Background: At a 2012 liaison meeting with interested parties from the Healthcare Financial Management Association (HFMA), financial reporting entity issues were discussed. During that discussion, HFMA representatives encouraged the Board to allow the optional single or multiple-column approach set forth in Statement 61, The Financial Reporting Entity: Omnibus, for blending component units to be applied to all component units of BTAs. Although some would view the introduction of such an option as a fundamental shift in the presentation of component units, others would view such a change as an enhancement of special-purpose entity reporting. This topic is an important issue to other types of BTAs as well, such as public colleges and universities.The pre-agenda research showed that BTAs in the healthcare sector have some specific challenges in their operations because of the unique manner in which they are organized. As the primary government seeks to expand its operations, it may acquire legally separate entities to add or increase services, or it may spin off operations to incorporate them into legally separate entities. In practice, these legally separate entities—acquired or created by the BTA—often are blended into the primary government’s financial reports, citing control as the reason for this presentation. Based on the criteria set forth in Statement 14, as amended, these entities met the criteria for inclusion in the reporting entity; however, they generally do not meet the criteria for blending established in Statement 61 for several reasons:
- Holding or appointing a voting majority of the governing body or being the sole corporate member or majority shareholder is not equivalent to having substantively the same governing body (paragraph 53a, as amended).
- The main purpose of these legally separate entities is to expand the governmental healthcare services by providing services to the general public, entities, or individuals other than the primary government and its employees (paragraph 53b, as amended).
- While it is possible that the primary government may have some responsibility for the total outstanding debt of the acquired or spun off entities, it is generally expected that those entities will generate sufficient resources to meet their own obligations and not impose a financial burden on the primary government (paragraph 53c).
The limited user interviews conducted by the project staff highlighted the importance of including detailed information about component units in BTA reporting. Respondents explained their information needs were driven by their ability to determine the importance of intra-entity transactions or the significance of a component unit’s relationship to the primary government. The respondent feedback indicates a preference for a presentation format that includes individual component unit information as well as a consolidated total with consolidated eliminations. Finally, several respondents mentioned that condensed financial information was often too summarized for their needs.
Accounting and Financial Reporting Issues: The project will consider the following issues:
- Which method of reporting component units—blended or discrete—best represents the reporting entity of certain BTAs?
- Which information regarding component units (presentation or disclosure) for BTAs would best meet financial statement user needs?
- Are the present blending criteria sufficient or are revisions necessary?
- If revised or new blending criteria are considered, should additional information be disclosed to meet the needs of financial statement users?
- Pre-agenda research approved: December 2013
- Added to current technical agenda: August 2014
- Task force appointed? No
- Deliberations began: November 2014
|Board Meetings||Topics to be considered|
|June 2015 (T/C):||Review ballot draft and issue Exposure Draft.|
|July-September 2015:||Comment period.|
|October 2015 (T/C) -
December 2015 (T/C):
|Redeliberate issues based on respondent feedback.|
|January 2016:||Review preballot draft of a final Statement.|
|January 2016 (T/C):||Review ballot draft and issue final Statement.|
BLENDING REQUIREMENTS FOR CERTAIN BUSINESS-TYPE ACTIVITIES—RECENT MINUTES
Minutes of Teleconference, May 11, 2015
The Board reviewed the preballot draft of the Exposure Draft, Blending Requirements for Certain Business-Type Activities. The Board tentatively agreed to continue to limit the scope of the proposed blending criterion to certain component units, while changing the applicability of the proposed Statement to all governments.
The Board also provided clarifying comments and edits on the preballot draft of the Exposure Draft.
Minutes of Teleconference, March 30, 2015
The Board began deliberations on blending requirements by discussing due process issues related to the project. The Board tentatively agreed that the Exposure Draft should propose transition provisions similar to the guidance provided in other reporting entity-related Statements. That is, in the first period that the proposed Statement is applied, financial statements presented for prior periods should be restated to reflect changes made to comply with the proposed Statement. The Board also tentatively agreed to incorporate a practicality exception for the proposed transition requirements.
The Board then tentatively agreed that a 90-day comment period should be used for the Exposure Draft. The Board tentatively decided that the Exposure Draft should propose an effective date for periods beginning after June 15, 2016. The Board also tentatively decided that the proposed effective date provisions should encourage early implementation.
The Board then discussed whether the expected benefits of information to users and other stakeholders from the blending requirement proposals exceed the anticipated costs to preparers and other stakeholders. The Board tentatively agreed that the expected benefits associated with the proposed requirements outweigh the anticipated implementation and ongoing costs.
The Board concluded deliberations by reviewing and providing clarifying comments on the proposed text of the Standards section of the Exposure Draft.
Minutes of Teleconference, February 17, 2015
The Board began deliberations by considering the development of proposed blending guidance for limited liability partnerships (LLPs). The Board tentatively agreed that blending clarifying guidance not be developed for LLP component units.
The Board continued deliberations by considering the applicability of the proposed blending criterion to specific governments. The Board tentatively agreed that an exception-based blending criterion, applicable only to business-type activities, should be included in a proposed Statement (Exposure Draft) as follows: a component unit that is incorporated as a not-for-profit corporation, in which the primary government is the sole corporate member, should be included in the reporting entity financial statements using the blended method (clarifying the proposed blending criterion that the Board tentatively approved at the January 2015 teleconference). The Board also tentatively agreed that the clarifying guidance for sole membership in an LLC, proposed at the December 2014 teleconference, should be considered for inclusion in the 2016 Comprehensive Implementation Guide. Finally, the Board discussed disclosure requirements and tentatively agreed that additional disclosure requirements should not be proposed in this project.
Minutes of Teleconference, January 5, 2015
The Board began deliberations by considering the development of new blending criteria. The Board tentatively agreed that a component unit that is incorporated as a not-for-profit corporation, in which the sole intent for owning this equity interest is to directly enhance its ability to provide governmental services, should be included in the reporting entity financial statements using the blending method if the government is the sole corporate member, and the government reserved the ability to impose its will (as defined by paragraph 26 of Statement No. 14, The Reporting Entity) over the component unit.
The Board tentatively agreed to not expand the scope of the project to develop blending criteria for equity interest in entities with less than 100 percent ownership. The Board also tentatively agreed that the proposed blending criteria should not be applicable to component units included under the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units.
Minutes of Teleconference, December 1, 2014
The Board began deliberations by considering the development of clarifying guidance for existing blending criteria. The Board tentatively agreed to propose clarifying guidance that directs governments to assume that being the sole corporate member of an LLC, in which there is not a separate governing board, is equivalent to having substantively the same board. The Board also tentatively agreed to propose that similar guidance not be developed for not-for-profit corporations, at this time, pending the outcome of future deliberations.
Minutes of Meetings, November 11-13, 2014
The Board began deliberations of the Blending Requirements for Certain Business-Type Activities project by considering the proposed scope of the project. The Board tentatively agreed that the project would consider whether clarification of the blending criteria is needed or whether an additional blending criterion should be established and additional disclosures should be required in these circumstances.
BLENDING REQUIREMENTS FOR CERTAIN BUSINESS-TYPE ACTIVITIES—TENTATIVE BOARD DECISIONS TO DATE
These tentative decisions have been made since the inclusion of the project as a part of the current technical agenda. The Board tentatively agreed to the following:
- To consider developing clarifying guidance in the 2016 Comprehensive Implementation Guide that directs governments to assume that being the sole corporate member of an LLC, in which there is not a separate governing board, is equivalent to having substantively the same board.
- The Board tentatively agreed to propose the following:
- An additional exception-based blending criterion, applicable to all governments, as follows:
- A component unit should be included in the reporting entity financial statements using the blended method when the component unit is organized as a not-for-profit corporation in which the primary government is the sole corporate member,
- Transition guidance as follows:
- In the first period that the proposed Statement is applied, financial statements presented for prior periods should be restated to reflect changes made to comply with the proposed Statement.
- Guidance for a practicality exception to the transition provisions.
- An effective date for periods beginning after June 15, 2016, with provisions that encourage early implementation.
- An additional exception-based blending criterion, applicable to all governments, as follows: