Annual Financial Report & Financial Reporting Entity

Question 1

What is the Financial Reporting entity in terms of governmental accounting?

Answer 1

The financial reporting entity is made up of:

• The Primary Government (PG)
• Component Units (CU)

Question 2

What is a “Primary Government”?

Answer 2

A general purpose unit (eg. state, county, city) that has:

• its own Elected governing bodies
• separate legal entity
• fiscal independance

Question 3

What is a “Component Unit”?

Answer 3

A financially dependent and/or financially accountable to the primary government

Question 4

When does “Financial Accountability” exist from a component unit to a primary government?

Answer 4

Exists when the primary government:

1) Appoints a voting majority of the component unit’s governing body
- Created the organization
- Can abolish the organization

2) Has the ability to impose its will OR
Has the potential to receive financial benefits OR
Is subject to financial burdens because of the unit

Question 5

When does “Financial Dependence” exist?

Answer 5

If government has substantial authority to:
- establish its budget
- levy taxes or set rates or charges
- issue bonded debt
AND
the primary government has the potential to receive financial benefits or is subject to financial burden because of the unit

Question 6

What are the two ways a component unit may be included in the financials of the primary government?

Answer 6

1) Blended: treated similar to a fund of the primary government; used when:
- CU’s governing body and the PG’s governing body are substantially the same
- PG has a fiduciary responsibility to CU
- CU benefits primarily from PG
- CU provides services primarily to PG

2) Discretely Presented: a separate column in the financial statements of the primary government