GASB 61: Component Units

Presented by:Presented by:John Knepel, CPA,

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Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International.

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Presenter

John Knepel, CPAPartnerState and Local Government Group

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Goals for today

> Review what GASB 61 changes> Review the provisions of GASB 14 & GASB 39> Review the process for identifying and

l ti t ti l t it (PCU)evaluating potential component units (PCU)> Review the methods for reporting component

units (CU)units (CU)> Work through examples

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What are the specific terms or definitions do you need to know when evaluating a PCU?

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Terms/Definitions

>Legally Separate Organization>Financial Accountability>Fiscal Dependency

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Legally Separate Organization

Characteristics of a legally separate organization:> Capacity to have its own name> Capacity to have its own name.> Right to sue and be sued in its own name without recourse to

another government.> Right to buy sell lease and mortgage property in its own name> Right to buy, sell, lease and mortgage property in its own name.

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Legally Separate Organization

PCU’s that have any one of these characteristics are generally considered to be legally separatelegally separate.

If t l ll t th PCU h ld bIf not legally separate, the PCU should be considered part of the primary government.

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Financial Accountability

Characteristics of financial accountability:> PG appoints a majority of the PCU’s governing body> PG appoints a majority of the PCU s governing body.> PG can impose its will on the PCU.> A financial benefit/burden exists.

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Financial Accountability

PG appoints a voting majority of the PCU’s governing body.pp g j y g g y> Appointment authority should be substantive.> Appointment of a slate of candidates provided by someone other than the

PG would not be substantive.> Confirmation of appointments made by someone other than the PG

would also not be substantive.> PG is accountable for as long as continuing appointments are made.g g pp> PG is accountable if it can unilaterally abolish a PCU.

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Financial Accountability

PG is considered to be able to impose its will on the PCU if it has the ability to do one of the followingPCU if it has the ability to do one of the following.

> Remove appointed members of the PCU’s governing board at will.> Modify or approve the PCU’s budget.> Modify or approve rate or fee changes affecting revenue.> Veto, overrule or modify decisions of the PCU’s governing body.> Appoint, hire, reassign or dismiss those persons responsible for

day-to-day operations of the PCU.> Other conditions may be considered as well.

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Financial Accountability

A financial benefit/burden exists if any one of the following conditions existsfollowing conditions exists.

> The PG is legally entitled to or can otherwise access the PCU’s resources.

> The PG is legally obligated or has assumed the obligation to> The PG is legally obligated or has assumed the obligation to finance the deficits of or provide financial support to the PCU.

> The PG is obligated in some manner for the debt of the PCU.> Exchange transactions between the PG and PCU should not be> Exchange transactions between the PG and PCU should not be

considered.

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Fiscal Dependency

Characteristics of fiscal dependency.> The PG has the authority to approve and modify the budget of the> The PG has the authority to approve and modify the budget of the

PCU.> The PG approves tax levies or approves the rates charged by the

PCU.PCU.> The PG approves debt issued by the PCU.> May exist regardless of whether financial assistance is actually

received from the PG.received from the PG.

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Polling question 1

One of the characteristics of aOne of the characteristics of a legally separate organization is that it has the right to sue and be sued in its own namebe sued in its own name without recourse to another government.

A. TrueB. False

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Statement No. 61The Financial Reporting Entity: Omnibus

an amendment of GASB Statements No. 14 and No. 34Issued November 2010

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Statement No. 61

Modifies the requirements for including a CU that is req ired to be incl ded beca se it met theis required to be included because it met the fiscal dependency criteria.Modifies the manner in which an organizationModifies the manner in which an organization should be evaluated under the “Misleading to Exclude” criterion.Exclude criterion.Modifies the method in determining “major” CU’s.Modifies the criteria for “blending” a CUModifies the criteria for blending a CU.Modifies the reporting of equity interests in legally separate organizations.separate organizations.

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Statement No. 61

Under GASB 14, a legally separate entity for hich the PG does not appoint a majorit ofwhich the PG does not appoint a majority of

the PCU’s board was a CU if it was fiscally dependent on the PGdependent on the PG.

GASB 61 now requires not only that the entityGASB 61 now requires not only that the entity be fiscally dependent but that a financial benefit or burden relationship exists.p

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Statement No. 61

GASB 61 clarifies that when management determines b its professional j dgment that adetermines by its professional judgment that a PCU should be included in the financial statements as a CU that decision should bestatements as a CU, that decision should be based on the nature and significance of the PCU’s relationship to the PG.p

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Statement No. 61

GASB 61 also clarifies the manner in which CU’s are determined to be major or nonmajor for reporting in thedetermined to be major or nonmajor for reporting in the financial statements.Major CU’s should be determined based on the nature and significance of its relationship to the PG.Previously determined using the same method used for other funds of the PGfor other funds of the PG.Factors to consider:

> Services provided to the citizenry.> Services provided to the citizenry.> Significant transactions with the PG.> Significant financial benefit or burden relationship with the PG.

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Statement No. 61

GASB 61 changes the reporting of a CU that is reported using the blended methodreported using the blended method.

> CU’s that are blended because their governing body is substantively the same as the PG’s governing body must now also have a financial benefit or burden relationship or management ofhave a financial benefit or burden relationship or management of the PG has operational responsibility for the CU.

> If not, the CU would be reported using the discrete presentation method.

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Statement No. 61

One additional criteria was added for requiring the blended method of reporting.If a CU’s total outstanding debt is expected to be repaid entirely or almost entirely with resources of the PG, then the CU should be reported using the blended methodreported using the blended method.

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Statement No. 61

Lastly, GASB 61 amended the requirements of reporting equity interests in CU’sreporting equity interests in CU s.

> Equity interests in discretely presented CU’s should be reported as an asset of the PG in the fund that has the equity interest.

> CU’s included in a financial statement that have joint venture> CU s included in a financial statement that have joint venture characteristics should report any minority equity interests as a restricted net position or nonexpendable fund balance.

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Statement No. 61

Other Standards Applicable to Identifying and Evaluating Potential Component Units

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Statement No. 14The Financial Reporting Entity

Issued June 1991

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Statement No. 14

Established the framework for what we have toda as the financial reporting entittoday as the financial reporting entity.Defines the financial reporting entity and its

tcomponents.Establishes reporting standards.Driven by financial accountability of the primary government.

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Statement No. 39Determining Whether Certain OrganizationsDetermining Whether Certain Organizations

Are Component UnitsIssued May 2002Issued May 2002

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Statement No. 39

Amendment to Statement No. 14 providing additional g idance to determine hetheradditional guidance to determine whether certain organizations for which the PG is not financially accountable should be reportedfinancially accountable should be reported as CUs.Based on the nature and significance of theBased on the nature and significance of the relationship between the PG and the organization.

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Statement No. 39

Criteria for inclusion as a CU under GASB 39:> The PCU is a tax exempt organization> The PCU is a tax-exempt organization.> The economic resources received or held by the PCU are entirely or

almost entirely for the direct benefit of the PG, its CU’s or its constituents.constituents.

> The PG or its CU’s are entitled to or have the ability to access the majority of resources received by the PCU

> The resources received or held by the PCU are significant to the PG.> The resources received or held by the PCU are significant to the PG.

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Polling question 2

GASB 61 will reduce theGASB 61 will reduce the number of entities currently reported as component

it th t d t i dunits that were determined to be component units under GASB 39.

A. TrueB. False

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Identifying and evaluating PCU’sIdentifying and evaluating PCU’s

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Identifying PCU’s

Organizations to consider:> Those created by the PG for legal financial or other reasons> Those created by the PG for legal, financial or other reasons.> Those created by someone other than the PG that support activities

of the PG.> Those to which the PG appoints board members> Those to which the PG appoints board members.> Those to which the PG provides substantial financial support.

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Identifying PCU’s

Organizations to consider: (continued)> Housing authorities> Housing authorities> Sanitary districts> Fire districts

C i d l h i i> Community development authorities> Foundations> Booster clubs> Museums> Business improvement districts.

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Evaluating PCU’s

GASB has developed a flowchart that can be sed as a tool in o r e al ationused as a tool in your evaluation.

References included in the flow chart are to th C difi ti f G t l A tithe Codification of Governmental Accounting and Financial Reporting Standards (2012-2013 Edition)2013 Edition)

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Evaluating PCU’s

Although considered to be nonauthoritative, it is a very useful tool.Other tools exist, such as Thomson Reuters ,PPC checklist, Evaluating Potential Component Units’ Inclusion in Reporting Entity under GASB

G SNo 14 as amended by GASB No. 61.Each PCU must be evaluated using the specific circumstances of its relationship to the PG.

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GASB Flowchart

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ReportingReporting

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Reporting

There are 2 methods of reporting CUs.> Blending Financial data is reported as part of the PG in both the> Blending - Financial data is reported as part of the PG in both the

fund financial statements and the government-wide financial statements.

> Discrete presentation - Financial data is reported in separate> Discrete presentation Financial data is reported in separate columns and rows apart from the financial data of the PG. Only the government-wide financial statements report the data of the CU.

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Blending method

Use the blended method if any of the following exists:> The PG and CU boards are substantively the same and a financial> The PG and CU boards are substantively the same and a financial

benefit/burden exists or management of the PG has operational responsibility for the CU.

> The CU provides services entirely or almost entirely, to the PG or> The CU provides services entirely or almost entirely, to the PG or otherwise exclusively, or almost exclusively, benefits the PG. These services can be either directly or indirectly provided.

> The CU’s total debt outstanding is expected to be repaid entirely or almost entirely with resources of the PG

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Discrete presentation method

A CU should be reported using the discreteA CU should be reported using the discrete presentation method if it does not meet any of the requirements for the blending method.q g

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Polling question 3

A t it h ld bA component unit should be reported using the blended method when the governing boards of the PG and the CU are substantially the same.

A. TrueB. False

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E lExamples

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Examples

Housing authority (HA)> Organized under Wisconsin Statute Chapter 66 1201> Organized under Wisconsin Statute Chapter 66.1201.> The chief executive officer of the PG appoints the members of the

HA board> HA makes a payment in lieu of taxes to the PG but it is not material> HA makes a payment in lieu of taxes to the PG but it is not material

to the PG.> The PG cannot impose its will on the HA.> The financial statements of the HA are material to the PG> The financial statements of the HA are material to the PG.

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Housing authority

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Housing authority

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Housing authority

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Housing authority

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Examples

Community development authority (CDA)> Organized under Wisconsin Statute Chapter 66 1335> Organized under Wisconsin Statute Chapter 66.1335.> The CDA was created solely for the purpose of issuing lease

revenue bonds to finance projects within the PG’s TIF district.> The financial statements of the CDA are material to the PG> The financial statements of the CDA are material to the PG.

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Community development authority

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Community development authority

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Community development authority

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Community development authority

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Community development authority

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Examples

Library foundation> Organized under IRC 501(c)(3)> Organized under IRC 501(c)(3).> The foundation annually provides indirect financial support to the

local library (a special revenue fund of the municipality) which amounts to approximately 10% of the library’s operating budget.amounts to approximately 10% of the library s operating budget.

> The total net assets held by foundation are not significant to the PG.

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Library foundation

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Library foundation

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Library foundation

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Library foundation

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Library foundation

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Questions? / Contact

John A Knepel CPAJohn A. Knepel, CPAPartner414 777 5359414 777 5359john.knepel@bakertilly.com

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Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The information provided here is of a general nature and is not intended to address theprovided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. © 2013 Baker Tilly Virchow Krause, LLP

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© 2013 Baker Tilly Virchow Krause, LLP