Chapter 6 Flashcards
Which of the following considerations ultimately defines the scope of the financial reporting entity?
A. Financial interrelatedness
B. Financial oversight
C. Accountability of elected officials
D. Assumption of risks and benefits
The parameters of the financial reporting entity reflect the notion that financial accountability ultimately rests with elected officials. [Correct response = C]
Which of the following is always a primary government?
A. County
B. Municipality
C. School district
D. All of the above
E. Both A and B
Every general purpose government automatically qualifies as a primary government. [Correct response = E]
Which of the following is necessary for a special purpose government to qualify as a primary government?
A. Separate legal status
B. Separately elected governing body
C. Fiscal independence
D. All of the above
E. Both A and C
A special purpose government must meet three criteria to qualify as a primary government: (1) it must have separate legal status, (2) it must have a separately elected governing body, and (3) it must be fiscally independent. [Correct response = D]
Which of the following would potentially meet the board appointment test?
A. Appointment restricted to a pre-selected list of candidates when the list cannot be rejected
B. Appointment of simple majority (although a two-thirds majority is required for financial decisions)
C. Both A and B
D. Neither A nor B
There is no fiscal accountability if the power of board appointment is more apparent than real (a pre-selected list of candidates). Likewise, financial accountability requires that the votes of the members chosen by the primary government be sufficient, by themselves, to carry any financial decision before the board. [Correct response = D]
Which of the following is evidence of a financial benefit or burden relationship between a primary government and the appointed governing board of a potential component unit?
A. A government is obligated to make a contribution to a pension or OPEB plan that is a potential component unit.
B. The primary government is entitled to the assets of the potential component unit upon dissolution.
C. Tax-increment financing of the primary government is used to support the potential component unit.
D. All of the above
E. A & C
A residual claim to a potential component unit’s assets upon its dissolution (a practical application of the “going concern assumption”) is not considered an indication of a benefit burden relationship. Conversely, an obligation to contribute to a pension or OPEB plan is an indication of a burden, as is tax-increment financing, because it represents the commitment of the primary government’s taxing power. [Correct response = E]
Which of the following is only relevant to the determination of component unit status after board appointment has been established?
A. Ability to impose will
B. Financial benefit
C. Financial burden
D. All of the above
The ability of a government to impose its will does not come into play as a factor for inclusion in the absence of board appointment. A financial benefit or burden relationship, on the other hand, would be relevant to a potential component unit, even in the absence of board appointment, if the unit was fiscally dependent. [Correct response = A
Which of the following is evidence of fiscal dependence?
A. Another government determines that the budget of a potential component unit complies with the state’s balanced budget law.
B. The government is of a type which is precluded by state law from issuing long-term debt.
C. Another government must approve the operating budget.
D. All of the above
An organization is considered to be fiscally dependent on another government only if the latter can arbitrarily interfere in its financial management (its substantive approval is necessary for either the budget, tax levies, rates and charges, or the issuance of bonded debt). [Correct response = C
Which of the following criteria are relevant to determining whether a legally separate tax-exempt organization is a component unit?
A. Direct benefit
B. Access to resources
C. Significance
D. All of the above
E. Both A and B
Legally separate, tax-exempt organizations should be treated as component units if they meet three criteria: (1) the resources are for the direct benefit of the primary government, (2) the primary government has access to the resources, and (3) the resources of a given organization are significant to the primary government. [Correct response = D]
A primary government, as legally defined, has two special revenue funds. It also has a blended component unit with a general fund and three special revenue funds. How many special revenue funds would the primary government present in the financial report of the financial reporting entity?
A. Two
B. Three
C. Five
D. Six
2 special revenue funds (primary government) + 3 special revenue funds (component unit) + 1 general fund (component unit) reclassified as a special revenue fund for inclusion within the primary government = 6 special revenue funds. [Correct response = D]
Which of the following could qualify as a blended component unit even if its board was not substantially the same as that of the primary government?
A. Financing authority
B. Utility
C. Housing authority
D. All of the above
E. None of the above
A financing authority could provide benefit exclusively to the primary government itself rather than to its citizens, which would qualify it for blending. [Correct response = A]
In which of the following circumstances would an entity meet the board appointment test?
A. If all of the board members of a primary government serve automatically as the full board of another entity
B. If some of the members of a primary government automatically serve as members of the board of another entity, and represent a voting majority of the other entity’s board
C. If the primary government appoints a majority of the board of another entity but must select from a list of candidates provided by a group outside of the primary government
D. Both A and B
E. All of the above
Board appointment is understood to include situations where officials of the primary government serve on a potential component unit’s governing body as required by law (ex officio service or situations where the governing body of the primary government also serves, de jure, as the governing body of a legally separate organization). The extent to which the primary government’s board is the same as that of the component unit is a consideration when determining if a component unit should be reported via blending or discrete presentation: only the substantive appointment of a voting majority of the other entity’s board by the primary government is required to meet the board appointment requirement. The requirement to select from among a limited number of candidates when making a board appointment means that the appointment authority is not substantive. [Correct response = D]
Which of the following is a false statement about a component unit?
A. A single potential component unit may meet the criteria for being a component unit of more than one primary government.
B. A single potential component unit may be reported as a component unit of more than one primary government.
C. A blended component unit may issue stand-alone financial statements.
D. A discretely presented component unit may issue stand-alone financial statements.
A given organization may qualify as a component unit of more than one government, even though ultimately it can be reported as such by only one of them. A government that is a component unit of another government always has the option to issue stand-alone financial statements. [Correct response = B]
A majority equity interest may be reported as any of the following, based on the circumstances, EXCEPT:
A. An investment, using the equity method
B. An investment, using fair value
C. A noninvestment asset, using fair value
D. A noninvestment asset, using the equity method
E. A majority equity interest may be reported as any of the above, based on the circumstances
A majority equity interest that qualifies as an investment is reported using the equity method unless it is held by a special purpose government engaged only in fiduciary activities, a fiduciary fund, or a term or permanent endowment. If it does not meet the definition of an investment, it is reported as a noninvestment asset using the equity method. A noninvestment majority equity interest would never be reported at fair value. [Correct response = C]
Which of the following is a true statement about a primary government’s requirement to present information for nonmajor discretely presented component units?
A. A primary government may meet its requirement by reporting each discretely presented component unit in its government-wide financial statements.
B. A primary government may meet its requirement by reporting a single column for all nonmajor discretely presented component units in aggregate.
C. A primary government may meet its requirement by reporting a single column for all discretely presented component units in aggregate.
D. A primary government may meet its requirement by reporting combining statements of nonmajor component units outside the basic financial statements, elsewhere within the financial section of the CAFR.
E. Both A and B
F. All of the above
There is no specific minimum requirement for reporting nonmajor discretely presented component units in the basic financial statements, thus any of the three acceptable presentations for discretely presented component units (a single column for all discretely presented component units in total, a single column for all nonmajor discretely presented component units in total, or separate columns for each discretely presented component unit) is acceptable if a government issues only basic financial statements. However, if a government issues a CAFR and has not chosen to include individual fund statements for nonmajor component units in the basic financial statements, then combining statements for the nonmajor discretely presented component units would need to be included elsewhere in the financial section of the CAFR. [Correct response = F
A primary government has a discretely presented component unit that is a stand-alone business-type activity. When preparing combining financial statements for its discretely presented component units, it:
A. Must always reformat the BTA’s statement of revenues, expenses, and changes in net position to match the primary government’s government-wide statement of activities when preparing combining financial statements.
B. Must sometimes reformat the BTA’s statement of revenues, expenses, and changes in net position to match the primary government’s government-wide statement of activities when preparing combining financial statements.
C. Always has the option to present the combining financial statements using the format of the BTA’s stand-alone statement of revenues, expenses, and changes in net position.
D. May omit combining financial statements
To be included in a primary government’s government-wide financial statements, the individual or combined activities of component units must be formatted to match those of the primary government’s financial statements. If all of the component units included in combining statements are BTAs, the combining statements may be reported using the format of the BTAs’ statements of revenues, expenses, and changes in net position, and the totals will then be reformatted when included in the Statement of Activities. However, reformatting will need to be done in the preparation of combining financial statements if both BTAs and governmental component units are combined. This method is always an option and has the advantage of articulating directly to the component unit column(s) in the statement of activities. [Correct response = B]
