CHAPTER 1

CHAPTER 15Financial Reporting: The Comprehensive Annual Financial Report and the Financial Reporting Entity

SOLUTIONS TO QUESTIONS

Question 15-1

The basic financial statements (BFS) include the government-wide financial statements and the fund financial statements (governmental funds, proprietary funds, and fiduciary funds), and notes to those statements. These statements are accompanied by Management's Discussion and Analysis and other required supplementary information. The GASB classifies Managements Discussion and Analysis as required supplementary information even though it precedes the financial statements. The financial statements are intended to present the financial position and operating results (1) of the governmental activities and business-types activities of the primary government as well as that of the primary government as a whole and its discretely presented component units and (2) of the individual major governmental funds and Enterprise Funds of the primary government.

The CAFR contains the BFS, and therefore is intended to meet all of the purposes of separately issued BFS. In addition, however, the CAFR contains combining financial statements for nonmajor funds and for certain fund types, as well as individual fund financial statements and schedules, in its financial section and also contains introductory materials and statistical data. The CAFR therefore is also intended to "present fairly" the financial position, operating results, and, where appropriate, cash flows of each individual fund of the government.

Question 15-2

The transmittal letter typically communicates:

the legal requirements for the presentation of the CAFR, the fact that the report is management's responsibility and consists of management's representations regarding the financial position and operating results of the government, and the results of the audit of the financial statements.

The letter of transmittal may also contain a profile of the government and information that readers are apt to find useful in evaluating the financial condition of the government. This may include such topics as the local economy, long-term financial planning information regarding items for which final decisions are not yet made, cash management practices, and risk management practices. Many areas that would otherwise be covered in the letter are not included because the information is included in managements discussion and analysis (MD&A) (Illustration 13-15, page 540 in the text). The transmittal letter is not to duplicate information in the MD&A, but may refer readers to the MD&A.

Question 15-2 (continued)

The nature and purposes of the transmittal letter and Management's Discussion and Analysis differ. First, the transmittal letter introduces and relates to the entire CAFR; the MD&A relates only to the basic financial statements. Also, the MD&A covers only certain GASB-specified topics and must be based only upon currently known facts, conditions, or decisions. The transmittal letter can cover other topics and discuss the implications of events that might happen or decisions that are not yet made. The possible impact of such a decision must not be included in the MD&A unless the decision has been made by the date of the auditor's report.

Question 15-3

The Basic Financial Statements include the government-wide statement of net position and the government-wide statement of activities, the governmental funds financial statements, the proprietary funds financial statements, and the fiduciary funds financial statements. The government-wide financial statements distinguish between governmental activities of the primary government, business-type activities of the primary government, the primary government as a whole, and discretely presented component units.

The governmental funds financial statements present individual fund data for major governmental funds, but aggregate data for all the other (nonmajor) governmental funds in a single column. Likewise, major Enterprise Funds are reported in separate columns in the proprietary funds financial statements but all nonmajor Enterprise Funds are aggregated in a single column. Internal Service Funds are presented by fund type in the proprietary funds financial statements. The fiduciary funds statements present fiduciary funds by fund typenot by individual funds.

Combining statements, on the other hand, are prepared to provide individual fund information on funds that are aggregated in the fund financial statements in the BFS or for fund types. Combining financial statements present information for each individual fund of a particular fund type, or for each nonmajor governmental fund included in the "Other Governmental Funds" column of the corresponding governmental funds financial statement, or for each nonmajor Enterprise Fund included in the Other Enterprise Funds" column of the corresponding proprietary funds financial statement.

Question 15-4

(a) The notes to the basic financial statements are intended to complete those statements and help the user understand them. The GASB Codification specifies certain notessome overall, such as the summary of significant accounting policies, and some that require individual fund disclosures in certain instances (e.g., fund deficits, interfund receivables and payables).

(b) The narrative explanations are in essence additional notes, beyond those in the notes to the BFS, that are considered necessary to (1) assure an understanding of the combining and individual fund financial statements and schedules and combining and individual component unit statements, and (2) demonstrate compliance with finance-related legal and contractual provisions.

Question 15-5

Schedules are used principally to (1) demonstrate finance-related legal and contractual compliance, (2) present other data management wants to present that is not required in the CAFR, such as cash receipts and disbursements data, and (3) present more detailed data than that in the combining and individual fund statements. Statements, on the other hand, are used to present data in conformity with GAAP. Schedules may also appear in the notes to the financial statements or be referenced in those notes. In these cases the schedules are considered an integral part of the financial statements.

Question 15-6

Whereas the purpose of financial statements is to present data for a year in conformity with GAAP, many of the statistical tables present data for several years, usually 10, or for other purposes. The primary purpose of the statistical section is to provide trend information in a variety of areas that cannot be derived from the financial statements themselves. There are five basic categories of statistical information financial trends information, revenue capacity information, debt capacity information, demographic and economic information, and operating information.

Question 15-7

Yes, such a discrepancy canand often doesexist under GAAP applicable to governments. Revenues are reported using different measurement focuses and bases of accounting in these two statements. Modified accrual accountingthe flow of current financial resources measurement focus and the accrual basis of accountingapplies in governmental funds financial statements. Revenues must be both legally usable to finance expenditures of the period and available, collected within not more than 60 days after year end, to be recognized. Revenues not collected by the end of the cutoff period are reported as deferred inflows in the governmental funds balance sheet. They are recognized in subsequent yearsdepending upon the timing of collection. In the government-wide financial statements, revenues of governmental activities are reported using the flow of economic resources measurement focus and the accrual basis of accounting. Failure to collect revenues during the year or within not more than 60 days thereafter does not delay revenue recognition. Indeed, the timing of collection has no impact on when revenues are recognized under the measurement focus used in the government-wide financial statements. This difference is the primary cause of the difference between tax revenues reported for governmental funds and for governmental activities and a common reconciling item between governmental funds fund balance and governmental activities net position in the government-wide financial statements.

Question 15-8

a.According to the GASB Codification, a joint venture is a legal entity or other organization that results from a contractual arrangement and that is owned, operated, or governed by two or more participants as a separate and specific activity subject to joint control, in which the participants retain (a) an ongoing financial interest or (b) an ongoing financial responsibility. For there to be joint control, no party in the joint venture can have the authority to unilaterally control the joint venture's financial or operating policies.

b.The joint venture accounting and reporting requirements apply to all of a government's joint ventures that are not part of its reporting entity. If a government has a majority equity interest in a joint venture, it should report the joint venture as a component unit.

c.A government is required to report its joint venture participation in the following manner: The explicit and measurable amount of any equity interest in a joint venture is reported as an asset. Proprietary fund joint venture investments are reported in the investing proprietary fund using the equity method. Governmental fund joint venture investments are reported as assets in the investing fund if they represent financial resources receivable (or payable) reported in the fund. Governmental fund revenues and expenditures are reported only when the governmental fund recognition criteria are met. The notes to the financial statements should describe the general nature of each joint venture, including any ongoing financial interest in or responsibility for the joint venture and information on whether the joint venture is either accumulating significant financial resources or experiencing fiscal stress and should provide information on related party transactions.

Question 15-9

A government has the ability to impose its will over another entity if it has the ability to significantly influence the types and levels of services provided by a potential component unit. This significant influence (and ability to impose will) is presumed if certain relationships exist, but may be determined to exist even if none of the presumptive relationships are present. The presumptive relationships include substantive authority to:

Remove appointed governing board members at will or Approve or require modification of the organization's budget or Approve or require modification of rate or fee changes affecting the organization's revenues or Appoint, hire, reassign, or dismiss the organization's management

If a government has the ability to impose its will on a potential component unit and meets the appointment criterion, that entity is a component unit. If a government cannot impose its will on a potential component unit, the potential component unit may meet other criteria for inclusion.

It should be noted that the second and third criteria listed above would also make the component unit fiscally dependent upon the primary government. In this case, the entity is a component unit even if there also is a financial benefit or burden relationship between the two entities.

Question 15-10

A primary government is financially accountable for another entity if the other entity is fiscally dependent on the government and there is a financial benefit or burden relationship between the entities.

If any one of three relationships exists between a primary government and a potential component unit, the potential component unit is fiscally dependent on a primary government. Those relationships include the primary government having substantive approval authority over the component unit's:

Budget Tax levy or setting of other rates or charges Issuance of bonded indebtedness

For a fiscally dependent entity to be treated as a component unit, there must also be a financial benefit or burden relationship with the primary government. A financial benefit or burden relationship is indicated by one of three criteria:

The PG has the ability to access the resources of the entity without dissolution of the entity. The PG is legally or otherwise obligated to finance the deficits of or provide financial support (other than in exchange or exchange-like transactions) to the organization. The PG is obligated in some manner for the debt of the organization.

Question 15-11

A government is financially accountable for another entity if the other entity is fiscally dependent on the government and has a financial benefit or burden relationship with it. (See the answer to Question 15-10.)

If, there is not fiscal dependence a government is also financially accountable for another entity if both of the following conditions are met:

1.The primary government either (a) appoints (or has ex officio representation constituting) a voting majority of the potential component unit's governing body or (b) created and can unilaterally abolish the other organization.

AND

2.The primary government either (a) has the ability to impose its will on the potential component unit or (b) has the potential to receive specific financial benefits from or incur specific financial burdens because of the organization.

Question 15-12

Blending and discrete presentation are the two methods used to report component units. Discrete presentation is the typical approach that is required. Blending is permitted only if very restrictive conditions are met.

Blending incorporates the data of a component unit into the financial statements of the primary government as if the primary government and the blended component unit were a single entity. The primary government combines the data of the funds of the component unit with the data of the corresponding fund types of the primary government legal entity in its fund financial statements. (One exception is that the component unit General Fund is reported as a primary government Special Revenue Fund.) The component unit's assets, liabilities, revenues, expenses, etc., are reported as part of the primary government in the government-wide financial statement as well.

Discrete presentation presents component unit data along with, but separate from, primary government data in the government-wide financial statements. With the exception of fiduciary component units, discretely presented component units are not reported in the fund financial statements. Discretely presented component units are reported in a separate column to the right of the primary government data in the government-wide financial statements.

Question 15-13

Component units that serve or benefit only the primary government entitysuch as a component unit that provides financing only for primary government projects or purposesmust be blended. However, most component units provide services to and benefit the public or other organizations (usually other governments). Therefore, for most component units to other criteria apply. These component units are blended only if :

The component unit has substantively the same governing body as the primary government's governing body. (This means that at least a voting majority of the primary government's governing body serves on the component unit governing body by virtue of being members of the primary government governing body and those members also constitute a voting majority of the component unit's governing body.) AND Either there is a financial benefit or burden relationship between the primary government OR the day-to-day management (below the governing board) of the primary government has operational responsibility for the component unit.

Finally, there are a few primary governments that have a component unit whose total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government. These component units must be blendedand likely are simply financing vehicles of the primary government.

Question 15-14

Blended component units are reported in the fund financial statements. The data are also included in the government-wide financial statements (as part of the primary government data).

Discretely presented component units are reported in the government-wide financial statements, but are not included in the governmental fund financial statements or in the proprietary fund financial statements. If a government has a fiduciary component unit, it is reported in the related fund type column in the fiduciary fund financial statementsbut is not reported in the government-wide financial statements.

Question 15-15

According to GASB Statement No. 39, any affiliated, legally separate, tax-exempt entity whose economic resources entirely (or almost entirely) benefit directly the primary government reporting entity or its constituency is a component unit if the primary government is entitled to (or can otherwise access) the majority of the organization's resources and the amount of the accessible resources of that individual organization is significant to the primary government.

All component units included in a government's reporting entity under the guidance of GASB Statement No. 39 must be discretely presented.

Question 15-16

The parks commission provides services to the publicnot solely to the county government. For the county to blend the parks commission in preparing the county financial statements, the two entities must have substantively the same governing bodies and meet one of two additional criteria. There must either be a financial benefit or burden relationship between the county and the parks commission, or the countys management (below the county commissioners) must have operational responsibility for the parks commission. The question does not indicate that either of the latter conditions are true. Therefore, even though the county and the parks commission have substantively the same governing body (actually the same governing body in this case), blending is not permitted.

Question 15-17

The reporting requirements for component units results in two entity definitionthe in substance primary government and the reporting entity. The GASB indicates that the focal entity is the primary government but requires the broader entity to be reported as well. The notion of a dual reporting entity is based on the notion that one reporting entity is the primary government and blended component units and the second reporting entity is the primary government (including blended component units) plus discretely presented component units. Transactions between the primary government and the discretely presented transactions are classified and reported as if the discretely presented component units are external entities.

It is unique and questionable to define a reporting entity, then to identify a subset of that entity as the focus of the financial report, much less to treat transactions between portions of the reporting entity as if they were between two entities that are not part of the same reporting entity.

SOLUTIONS TO EXERCISES

Exercise 15-1

1. b2. d3. d4. d5. d6. d7. c8. b9. a10. d

Exercise 15-2

1. d2. b3. d4. c5. c6. a7. d8. a9. d10. a

Exercise 15-3

a. The required combining financial statements in the Zaccaro County Comprehensive Annual Financial Report include: Combining Balance SheetNonmajor Governmental Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Nonmajor Governmental FundsCombining Statement of Net PositionNonmajor Enterprise FundsCombining Statement of Revenues, Expenses, and Changes in Net PositionNonmajor Enterprise FundsCombining Statement of Cash FlowsNonmajor Enterprise FundsCombining Statement of Net PositionInternal Service FundsCombining Statement of Revenues, Expenses, and Changes in Net Position--Internal Service FundsCombining Statement of Cash FlowsInternal Service Funds

Exercise 15-3 (continued)

b.For the combining statements for nonmajor governmental funds, the following columns are required: Special Revenue Fund #2 Special Revenue Fund #3 Debt Service Fund #1 Debt Service Fund #2 TotalAll Nonmajor Governmental Funds (This total ties to the Other Governmental Funds column in the corresponding fund financial statements for governmental funds in the Basic Financial Statements.)

For the combining statements for nonmajor Enterprise Funds, the following columns are required: Enterprise Fund #2 Enterprise Fund #3 Enterprise Fund #5 TotalAll Nonmajor Enterprise Funds (This total ties to the Other Enterprise Funds column in the corresponding fund financial statements for Enterprise Funds in the Basic Financial Statements.)

For the combining statements for Internal Service Funds, the following columns are required: Internal Service Fund #1 Internal Service Fund #2 Internal Service Fund #3 Total-All Internal Service Funds (This total ties to the Internal Service Funds column in the corresponding fund financial statements for proprietary funds in the Basic Financial Statements.)

Exercise 15-4

1.This component unit does not meet the substantively the same criterion. Appointing members is not equivalent to the council members or a majority of the council members serving as a majority of the board of the component unit.

2.Yes. This component unit meets the substantively the same governing body criterion. 100% of the council comprises 100% of the governing body of the component unit.

3.This component unit does not meet the criterion. The city council members do not constitute a voting majority of the component unit board.

Exercise 15-4 (continued)

4.This component unit does not meet the criterion. Although both the city council members and the other city officialsthe finance director and managerdo count as the equivalent of city appointees in applying the appointment criterion, only the city council members count as members of the city governing board. Therefore, the 5 city council members on the governing board are not a voting majority of the component unit board members, and the two boards are not substantively the same.

5.While all board members of the component unit are city council members, a majority of the council does not serve in this capacity.

Having substantively the same governing body is not enough to justify blending. The primary government also would either have to have a financial benefit or burden relationship with the component unit in number 2 or the primary governments management would have to have oversight responsibility for the component unit for blending to be required. Exercise 15-5

1.Component unitThe fiscal dependence criterion of having substantive approval authority over the setting of the component units tax rate is met. Also, since the government guarantees substantial portions of the other entitys debt, a benefit/burden relationship exists.

2.Component unitThe government appoints a voting majority of the other entitys governing body. It also guarantees some of the debt of the other entitywhich meets the financial benefit or burden criterion.

3.Component unitThe government appoints a voting majority of the other entitys governing body. It also has a pattern of providing significant financial resources in nonexchange transactions, which is a financial benefit or burden relationship.

4.Component unitAlthough the government does not appoint a voting majority of the board of the other entity, it created and can abolish the other entity. Additionally, the government is deemed to have the ability to impose its will on the other entity because it has the authority to hire and fire key management personnel.

SOLUTIONS TO PROBLEMS

Problems 15-1 and 15-2

Summary reports on these research and analysis problems should be evaluated in terms of the specific requirements. The depth of analysis and understanding should be apparent--particularly if several reports are evaluated concurrently.

Problem 15-3

The treatment of the three component units depends upon whether they meet the criteria for "blending." The school district and the airport authority must be discretely presented. The only blending criterion that apply to entities that provide public services is having substantively the same governing body and either having a financial benefit or burden relationship or the countys management having operational authority. These component units do not meet the do not meet the substantively the same criteria. Only the public employee retirement system's board meets the substantively the same governing body criterion, but it is a fiduciary component unit. Fiduciary component units are reported in the appropriate fund type column in the fiduciary fund financial statements. They are not included in the government-wide financial statements.

The nonfiduciary component units that are to be discretely presented would not be reported in the countys fund financial statements. These component units government-wide reporting entity total information would be used. The information for the two component units most likely would be aggregated and reported in a single separate column(s) (or rows) in the appropriate government-wide financial statements though individual columns are permitted. Nonmajor discretely presented component units also are reported in combining nonmajor component unit financial statements.

The chart below indicates the Maynor County fund types that would be used to report the various funds of the school district and authority if blending had been required. It is not required by the question.

Maynor County Funds

Component Units Funds SRFCPFDSFAFEFISFPTF

Puryear Corner School District

General FundX

Gymnasium Construction FundX

Educational Buildings Improvement FundX

Gymnasium Debt Service FundX

Payroll Withholding FundX

Food Services Enterprise FundX

Central Printing Services FundX

Dalen-Fricke-Maynor Tri-County Airport Authority (EF)X

Maynor Public Employee Retirement SystemX

Problem 15-4PotentialComponent Unita.EntityDecisionb.Discrete Presentation (DP)or Blending (B)c.More Detail

Mensah City Recreation CenterCUAppointment authority and financial benefit/burden criteria are metDPSubstantively the same governing body criterion is not met and the CU does not provide services solely to the county government or benefit solely the county government. The county is not expected to repay the total debt of the component unit.No

District Home BoardNot a CUNot fiscally dependent on the county and the appointment criterion is not met. The county does not have a majority equity interest.No

Northern Region Health Center CommissionIs a CU if it can abolish the commission--which is doubtful. Its authority to establish operating policies would be viewed by some to constitute ability to impose willDP, if a CUSubstantively the same governing body criterion is not met and the CU does not provide services solely to the county government or benefit solely the county government. The county is not expected to repay the total debt of the component unit.No

Maysami Regional Special Education ProgramThere is nothing to indicate that it should be a component unit. No

Adult Detention Center (ADC)CUCounty appoints majority of board and has the ability to impose its will on the center because it hires management as well as establishing operating policiesDPSubstantively the same governing body criterion is not met and the CU does not provide services solely to the county government or benefit solely the county government. The county is not expected to repay the total debt of the component unit.Yes*

Park AuthorityCUAppointment criterion and financial benefit or burden criteria are metBlendThe entities have substantively the same governing bodies and a financial benefit or burden relationship.No

County Parkway DistrictCUAppointment criterion and financial benefit/burden criteria are met.DPThe CU does not have substantively the same governing body as the county nor does it provide services solely to or benefit solely the county government. The county is not expected to repay the total debt of the component unit.No

Harrington County School BoardNot a CUAlthough fiscally dependent because of the countys budget approval, there is not a financial benefit or burden relationship.No

*Basic financial statements must be included in a CAFR for each component unit that does not have its own separately issued financial statements.

Problem 15-5

1.(a)No, the Duncanville School District is not a component unit of the city of Duncanville. The School District is fiscally dependent upon the city because the city must approve the Districts tax rate. However, no financial benefit or burden relationship exists. Therefore, the School District is not a CU.

(b)N/A

(c)N/A

2.(a)Yes, the Greater Duncanville Natural Gas Cooperative is a component unit of the city of Duncanville. The Cooperative is fiscally dependent on the city, which must approve its budget and rates, and has a financial benefit or burden relationship with the city. Even if this were not the case, the city is financially accountable for the Cooperative because it appoints a voting majority of the Cooperatives board and has the ability to impose its will on the Cooperative.

(b)The Greater Duncanville Natural Gas Cooperative will be reported as a discrete component unit in the government-wide financial statements of the city of Duncanville. The governing board of the Cooperative is not substantively the same as that of the City, nor does the Cooperative solely provide services to or solely benefit the City government itself. The city is not expected to repay the total debt of the cooperative. Therefore, the blending criteria are not met.

(c)The Greater Duncanville Natural Gas Cooperative will not be reported in the fund financial statements of the city of Duncanville. Only blended component units and fiduciary component units are reported in the fund financial statements.

3.(a)Yes, the Duncanville Library District is a component unit of the city of Duncanville. Specifically, the city is financially accountable for the Library District because it appoints the Library Districts board and has financial benefit or burden criteria with city because the city guarantees some of the debt of the Library District.

(b)The Duncanville Library District will be reported as a blended component unit because the governing board of the city and the governing board of the Library District are the same, and the two entities have a financial benefit or burden relationshipthe debt guarantee. Thus, it will be reported as part of governmental activities in the government-wide financial statements. The Districts general capital assets and general long-term liabilities will be included in these statements as well.

(c)The Duncanville Library District will also be reported in the fund financial statements as it is a blended component unit. Its General Fund will be reported as a separate city Special Revenue Fund, as will its other Special Revenue Fund. The Permanent Fund will be reported as separate Permanent Fund.

Problem 15-5 (continued)

4.(a)Yes, the Duncanville Financing Authority is a component unit of the city of Duncanville. The appointment criterion is met, and there is a financial benefit or burden relationship The city has the ability to impose its will as the authoritys ability to engage in a project is subject to the willingness of the city to enter into a lease agreement to support the debt.

(b)The Duncanville Financing Authority will be reported as a blended component unit as it provides services entirely for the city of Duncanville governmental entity. As it provides financing for the Citys water and wastewater projects, it would be included in business-type activities in the government-wide financial statements. Recognize that the lease transactions become a governments transactions with itself and must be eliminated.

(c) The Duncanville Financing Authority also will be reported in the fund financial statements as a blended component unit. The appropriate approach is to include the authority in the Water and Wastewater Enterprise Fund. The lease transactions will be eliminated, leaving the debt issued by the authority as debt of the fund and the assets acquired as fund assets. Note that students may reasonably respond, based on the chapter, that the authority should be reported as a blended component unit which is to be reported as an additional Enterprise Fund. This problem illustrates the necessity of considering the substance of transactions in practice. First, once the authority is viewed as a part of the city primary government, the best reporting is to eliminate the lease transactions. Even if one were to argue that it should be reported as a separate fund, it could not properly be viewed as an Enterprise Fund because as part of the blended entity, its only customer is an internal onemaking Enterprise Fund reporting inappropriate.

Problem 15-6

(a)Discretely presented component units are reported only in the government-wide financial statements. Discretely presented component units are reported in a column(s) separate from the primary government.

Assuming that the discrete component units are a utility operation, a hospital, and a school district, there are three specific reporting options. First, the three component units could be aggregated and reported together in a single column. (This option is most common in practice.) Second, the discrete component units could each be reported separately in its own column. Finally, there could be two discrete reporting columnsone for governmental activities type discrete component units and one for business-type activities component units. The school district would be reported in the governmental activities type column and the utility operation and the hospital would be combined in the business-type activities column. Problem 15-6 (continued)

The note disclosure requirements for discrete component units include:

identification of each component unit and how it is reported, the specific reasons that it is a component unit, and how to obtain separate financial statements of the component unit.

If the reporting entity chooses to combine discrete component units into columns at the government-wide level, they have the option to use the note disclosures to provide condensed financial statements for each major or significant component unit.

Finally, if the major discrete component units do not publish separate external financial statements, then more detailed disclosures about the component unit(s) may also be necessary (e.g., cash and investment disclosures, capital assets, long-term liabilities).

(b)Blended component units are considered to be an integral part of the primary government and as such their financial information is blended into the fund structure of the primary government. Blending is required when one of three criteria is met:

There must be a benefit/burden relationship between the primary government and the component unit or management of the primary government has operational responsibility for the component unit. The component unit serves only the primary government or the component unit benefits the primary government exclusively or almost exclusively (even though it does not provide services to the primary government). The component units total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government.

Blended component units are reported as part of the fund structure of the primary government and are thus included in the fund financial statements. Accordingly, they become part of the government-wide financial statements, either as part of governmental activities or business-type activities. Fiduciary component unit information is combined with the corresponding fiduciary fund type information in the fiduciary fund financial statements.

The note disclosure requirements for blended component units are basically the same as the basic disclosures required for discretely presented component units: identification of each component unit and how it is reported, the specific reasons that each component unit is treated as a component unit, and how to obtain separate financial statements of the component unit.

Problem 15-7

SComputation of legal debt marginIOrganization chartFRequired supplementary informationILetter of transmittalSList of principal taxpayersFIndependent auditors reportIGFOA Certificate of Achievement for Excellence in Financial ReportingFManagements Discussion and AnalysisFCombining financial statementsFReporting entity note disclosuresSFund balance for the past 10 yearsFBudget-to-actual information for an Enterprise Fund

Problem 15-8

GWStatement of ActivitiesFFBalance SheetNDReporting entity descriptionGW & FFStatement of Net PositionFFStatement of Revenues, Expenditures, and Changes in Fund BalanceNDSubsequent events informationFFStatement of Cash FlowsGWDiscrete component unit financial informationNDDescription of compliance violationsFFStatement of Revenues, Expenses, and Changes in Net Position

Problems 15-9 and 15-10

Summary reports on these research and analysis problems should be evaluated in terms of the specific requirements. The depth of analysis and understanding should be apparent.

SOLUTIONS TO CASES

Case 15-1

1.The Myrtle Beach Public Facilities Corporation would qualify to be reported as a blended component unit. It is a legally separate entity, the Myrtle Beach City Council appoints the board members, and its purpose is to provide a service to the government of the city of Myrtle Beach. GAAP requires component units that provide a service exclusively or almost exclusively to the governmental entity to be blended.

Case 15-1 (continued)

2.The Myrtle Beach Downtown Redevelopment Corporation and the Myrtle Beach Convention Center Hotel Corporation both meet the criteria to be component units. They are each legally separate, the Myrtle Beach City Council appoints the majority of the board members for each entity, and the city of Myrtle Beach imposes its will on the boards of the respective corporations. Each of these component units should be discretely presented. They do not benefit exclusively or provide services exclusively to the city of Myrtle Beach government, and neither component unit has substantively the same governing board as the city. These are the only criteria for blending a component unit.

Case 15-2

1.The St. Louis Municipal Finance Corporation should be reported as a blended component unit (a). It is a legally separate entity, the board membership is comprised of city officials. Therefore, the appointment criterion is met. Further, because the council could remove the city officials, they can effectively remove the component unit governing board members at will, which gives the city the ability to impose its will over the Corporation. As the Corporations sole purpose is to provide financing for the city, blending is required.

The St. Louis Development Corporation should be reported as a discretely presented component unit (b). It is a legally separate entity, the governing board is appointed by the City Council, and the city imposes its will on the activities of the entity through its budget approval authority.

The Development Corporation is discretely presented because it does not have substantively the same governing body as the City and does not meet any other blending criteria.

The St. Louis Housing Authority should be reported as a related organization (d). The City Council does appoint a voting majority of the board members of the Authority, and it is a legally separate entity. However, there is no imposition of will or financial benefit or burden relationship noted between the Authority and the City. Further, there is no indication that the city has a majority equity interest in the authority. Therefore, it is not required to be reported as a component unit.

The St. Louis Public Library should be reported as a related organization (d). The City Council does appoint a voting majority of the board members of the Library and it is a separate legal entity. However, there is no imposition of will or financial benefit or burden relationship noted between the Library and the City. The city does not have a majority equity interest in the library. Therefore, the library is not required to be included as a component unit.

Case 15-2 (continued)

The St. Louis Regional Convention and Sports Complex Authority should be reported as a joint venture (c). The Authority is a separate legal entity, but its operations are jointly-controlled by three separate governmental entities the city, the county, and the State. Furthermore, there is an on-going financial relationship between the joint venture and the three participating governmental entities. Because the component unit criteria are not met for any of the three primary governments and none has a majority equity interest, each participating entity would report the Authority as a joint venture.

The Harry S. Truman Restorative Center should be reported as a discretely presented component unit (b). It is a legally separate entity, the city appoints a voting majority of the Centers board, and the city imposes its will on the board of the Center. The imposition of will criterion that is met is budget approval authority. The Center does not have substantively the same governing body as the city nor does it meet the other criteria for blending.

The Public Facilities Protection Corporation should be reported as a blended component unit (a). It is a legally separate entity, the board members are comprised of city officials, and it exists to provide services exclusively for the city of St. Louis.

2a.A blended component unit is reported directly in the fund financial statements. The fund structure of the blended component unit is blended into the fund structure of the primary governments funds. Ultimately, the blended component unit is reported at the government-wide level within either the governmental or business-type activities column. The note disclosures identify the blended component units and briefly describe the criteria they met to be considered a blended component unit.

2b.A discretely presented component unit is only reported in the government-wide financial statements. It is reported separately from the governmental or business-type activities columns. The note disclosures identify the discretely presented component units and briefly describes the criteria they met to be considered a discretely presented component unit.

2c.A joint venture is identified in the note disclosures. Furthermore, if the primary government has an equity interest in the joint venture, that interest would be reported in the government-wide financial statements, as well as the fund financial statements.

2d.Related organizations are simply identified in the note disclosures. They do not affect the government-wide or fund financial statements.

19