Project Pages

Reporting Unit Presentations/Statement 14 Reexamination—Project Plan

Project Description: First, this project will consider developing requirements that could constitute generally accepted accounting principles (GAAP) for separately issued financial statements for reporting units that comprise less than a separate legal entity. That is, it will address all reporting units that are not legally separate entities, as defined in Statement No. 14, The Financial Reporting Entity. Second, this project will reexamine the requirements of Statement 14, as amended, to determine the effectiveness of the current standards, including its provisions for reporting fiduciary activities. That is, it will determine whether financial statement users, preparers, and attesters believe that reporting entities applying that standard are including all appropriate related organizations and excluding organizations that should not be included. The reexamination also will raise the question of whether the financial information of the included organizations is displayed and disclosed in the most appropriate and useful manner.

Background:

Reporting Units: Governments have issued separate statements for funds, departments, and agencies for many years and have characterized those statements as being in accordance with GAAP, even though there has never been a set of principles established for that particular reporting purpose. Government preparers and their auditors currently use professional judgment to apply existing standards to the extent they believe those standards are logical and appropriate in that reduced-scope reporting situation. The 2007 edition of the American Institute of Certified Public Accountants' audit guide for state and local governments addresses individual fund, departmental, and agency reporting in five paragraphs (which were not cleared by the GASB). The key point in that guidance is:

     Although GASB standards do not address the accounting and financial reporting for separately issued [generally accepted accounting principles (GAAP)]-based financial statements [for a department or for one or more individual funds], in meeting their reporting obligations, auditors should consider long-established practice dictating that those presentations should apply all relevant GAAP. Thus in developing an opinion on the separately issued GAAP-based financial statements [for a department or for one or more individual funds], the auditor considers whether the financial statements include all relevant GAAP financial statements, note disclosures, [management's discussion and analysis (MD&A)] topics, and other [required supplementary information (RSI)].

Questions periodically come to the staff about what should be included in fund/departmental financial statements that are "required" to be reported in accordance with GAAP.

Statement 14 Reexamination: The GASB's strategic plan calls for a periodic reexamination of its standards. Because Statement 14 affects so many governments and because the structures and relationships of component units vary so much from government to government, many questions have arisen about Statement 14 that could be addressed during its reexamination.

Paragraph 19 of Statement 14 requires that governments include fiduciary activities (for example, employee benefit plans) as trust funds "if the primary government has a fiduciary responsibility for them," whether or not the organizations that administer them (for example, public employee retirement systems) would meet the criteria for inclusion if analyzed as potential component units. However, existing standards provide no guidance regarding characteristics that should be considered in deciding whether an employer has fiduciary responsibility, such that the employer should report a particular employee benefit plan in that way.

The staff has received numerous technical inquiries as to whether an employer should report specific pension plans as pension trust funds and is aware that, in the absence of authoritative guidance, preparers and auditors have tended to interpret employer fiduciary responsibility in a variety of ways ranging from very broad or abstract, to more narrow or concrete (for example, focusing on custody of the trust assets).

In March 2008, this project was reviewed by the Governmental Accounting Standards Advisory Council (GASAC). The GASAC members rated this project as a high priority for the current agenda.

Accounting and Financial Reporting Issues:

Reporting Units: There is widespread uncertainty about the extent to which the government-wide reporting standards in Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysisfor—State and Local Governments, should be applied to departmental or agency financial statements. Questions this project will address include:

• Does the external financial report of an activity that constitutes less than a legal entity rise to the level of a general purpose external financial report?
• If so, is there a minimum requirement of what constitutes a reporting unit for the purpose of issuing a general purpose external financial report? For example can a government issue a separate financial report for a portion of its general fund and appropriately call it a general purpose external financial report?
• Should there be agency- or department-wide financial statements to accompany the financial statements that present the funds comprising the agency or department?
• Should the Board prescribe specific guidance for the allocation of specific assets, liabilities, revenues, and expenditures/expenses (including noncurrent assets and liabilities and government-wide obligations) to a department or agency, or should guidance be more principles-based? If specific guidance for allocations is set, what should that guidance be?
• By what criteria should those assignments and allocations be evaluated to ascertain whether they "fairly present?"

Other areas where there is currently diversity in practice with fund/department/agency financial statements include what constitutes a complete set of basic financial statements and which disclosures should be required:

• Whether MD&A should be considered required supplementary information (RSI)
• Whether component units should be included in the "reporting entity" (that is, should college enterprise fund statements include foundation component units)
• Classification of intra-entity transactions (that is, appropriations, transfers from other funds within the primary government)
• Applicability of disclosures and other RSI that are normally presented for the primary government as a whole (that is, budgets, pensions, other postemployment benefits, self-insurance, deposit and investment risks).

Statement 14 Reexamination:

This project will reexamine all the major provisions of the existing standard, as amended, with additional emphasis on areas that have become recurring topics for technical inquiries. For example, the most regularly debated provision of Statement 14 is the criteria for inclusion. Some would argue that more component units should be blended; others would eliminate blending as a method of inclusion. Many have expressed concerns over the broad sweep of financial accountability—that is, they question the usefulness of presenting/aggregating component units that have significantly different relationships with the primary government. For example, a component unit that is included only because the primary government approves its capital budget is presented in exactly the same manner as a component unit with debt and operating deficits backed by the primary government. Should component units with such disparate characteristics be combined for financial statement presentation? Also, should additional guidance be provided for determining when and how to include fiduciary activities?

The project also will address reporting entity issues that have arisen since the issuance of Statement 14, including any that may have come up with the implementation of Statement 34 and subsequent standards. For example:

• Should the blending criteria be reexamined in light of concerns that arose in connection with certain tobacco settlement authorities? An exception to the blending criteria has already been introduced into the standards through Statement No. 39, Determining Whether Certain Organizations Are Component Units.
• How should blending be accomplished in a single-column business-type activity reporting entity?

Project History: At the January 2006 meeting, the Board decided to combine the Reporting Unit and Statement 14 Reexamination projects and add them to the research agenda.

Reporting Units: To understand the needs of the users of these separately issued financial statements staff conducted research into the following:

• What entities are issuing reporting unit financial statements?
• Who is requiring these reports?
• Why do these reports need to be presented in accordance with GAAP? (Are the reports special purpose or general purpose?)

Questionnaires that address these reporting unit issues were distributed to state and local governments and responses have been analyzed. The staff also completed a survey to determine user needs regarding stand-alone reports of units that are not legally separate from the primary government. Based on the results of this research, the Board will consider whether to address the accounting and financial reporting issues identified earlier in this paper.

Statement 14 Reexamination: Dr. Craig Shoulders received a GASB research grant to conduct research designed to provide the GASB with the information necessary to assess the current state of Statement 14 reporting by the 50 states and a representative sample of cities and counties. That research was completed in February 2007. It provides information about the number of component units that are reported by governments, with a breakdown between blended and discretely presented component units. The research identifies the reasons that the components are included in the reporting entity and whether governments display or disclose information about discretely presented component units. Based on Dr. Shoulders' research and prior GASB research, the staff conducted a survey to further determine user needs regarding component unit reporting.

Current Developments: The staff presented summaries of the research in August and December 2007. The final research papers, together with staff recommendations regarding the project, are to be presented at the April Board meeting.

Work Plan: