Project Pages

Blending Requirements for Certain Component Units

Project Description: The objective of this project is to improve financial reporting by addressing issues related to inconsistent presentation of certain component units in financial reporting of governments. 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.

Status:
Exposure Draft approved in June 2015
Added to Research Agenda: December 2013
Added to Current Agenda: August 2014

Blending Requirements for Certain Component Units—PROJECT PLAN

Background:

At a 2012 liaison meeting with 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 it 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. Based on the criteria set forth in Statement No. 14, The Financial Reporting Entity, 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).
Despite these facts, one could argue that these legally separate entities are, in essence, part of the primary government, as these entities constitute large operational segments of the government and carry forward its mission. In some instances, a significant portion of the government’s services are provided by the legally separate entity.

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 component units?
  • Which information regarding these component units (presentation or disclosure) 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?
Project History:
  • Pre-agenda research approved: December 2013
  • Added to current technical agenda: August 2014
  • Task force appointed? No
  • Deliberations began: November 2014
  • Exposure Draft issued: June 2015
  • Comment period: July–October 2015
  • Redeliberations began: October 2015
Current Developments: The Board began redeliberations in October 2015 and concluded redeliberations in November. The Board redeliberated the topics of the scope of the blending requirement, guidance for blending entities that report under different standards, and the definition of sole corporate member.

Board Meetings Topics to be considered
January 2016: Review preballot draft of a final Statement.
January 2016 (T/C): Review ballot draft and issue final Statement.

Blending Requirements for Certain Component Units—RECENT MINUTES


Minutes of Meetings, January 5-6, 2016

The Board reviewed a preballot draft of a final Statement, Blending Requirements for Certain Component Units, and provided clarifying edits on the draft document.

Minutes of Meetings, November 18-20, 2015

The Board continued redeliberations on the Exposure Draft, Blending Requirements for Certain Component Units, by discussing whether the final Statement should include a definition for the term sole corporate member. The Board tentatively decided that a definition should not be included in the final Statement.

The Board continued redeliberations by considering requests of respondents to provide blending guidance for other corporate structures and tentatively decided not to expand the scope of the project.

Finally, the Board concluded redeliberations by tentatively reaffirming that no additional note disclosures should be required for the final Statement.

Minutes of Teleconference, October 26, 2015

The Board began redeliberations on the Exposure Draft, Blending Requirements for Certain Component Units, by discussing blending guidance for limited liability companies. The Board tentatively decided that implementation guidance for limited liability companies would be considered in the future.

The Board continued redeliberations by considering requests of respondents to provide guidance for blending component units reporting following FASB standards. The Board tentatively decided not to provide specific blending guidance in the final Statement for these entities.

Finally, the Board redeliberated the scope exception proposed for component units included in the financial reports of a reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units. The Board tentatively decided to carry forward the scope exception to the final Statement.

Minutes of Teleconference, June 22, 2015

The Board began deliberations by discussing scope of authority. The Board tentatively agreed that the proposed accounting and financial reporting requirements included in the Exposure Draft, Blending Requirements for Certain Component Units, meet all the characteristics in Group 1.

The Board then reviewed the ballot draft of the Exposure Draft, Blending Requirements for Certain Component Units. The Board provided clarifying edits related to the proposed guidance. The Board voted unanimously to issue the Exposure Draft.

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 Archive

Blending Requirements for Certain Component Units—TENTATIVE BOARD DECISIONS TO DATE


The comment period for the Exposure Draft, Blending Requirements for Certain Component Units, ended on October 2, 2015.

The board has made the following tentative decisions following the close of the comment period:
  • Implementation guidance for limited liability companies would be considered at a later time.
  • Blending guidance for component units that report following FASB standards should not be included in the final Statement.
  • The scope exclusion proposed for component units included in the reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units, should be carried forward to the final Statement.
  • A definition for the term sole corporate member should not be included in the final Statement, but additional language should be included in the blending criterion.
  • Guidance for other corporate structures is outside the scope of this project and should not be included in the final Statement.
  • No additional note disclosure requirements should be included in the final Statement.