Position Paper: Implementation of GASB 39
Purpose
GASB 39, issued in May 2002, requires institutions to report financial information on component units as defined in GASB 14 and provides guidance regarding entities to be included and presentation of required financial information. This position paper provides guidance to TBR institutions in the implementation of the requirements of GASB 39 and provides guidelines for the consistent reporting of component units in the institutions’ financial statements.
Background
GASB 14, issued in June 1991, provides guidance on the financial reporting entity. Paragraph 41 stated that “…An example of an affiliated organization that may be evaluated for inclusion is a nonprofit corporation whose purpose is to benefit a governmental university by soliciting contributions and managing those funds…The GASB is studying circumstances under which foundations, similarly affiliated organizations, and PERS might be included in the financial reporting entity. Appropriate pronouncements will be issued at a later date.” GASB 39, Determining Whether Certain Organizations Are Component Units was issued in May 2002. The effective date of this statement is for financial statement periods beginning after June 15, 2003. Therefore, all TBR institutions must implement the provisions of this statement for their FY 2004 financial statements.
Issues
Component Units to be Included
Paragraph 5 of GASB 39 requires “A legally separate, tax-exempt organization should be reported as a component unit of a reporting entity if all of the following criteria are met:
- The economic resources received or held by the separate organization are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents.
- The primary government is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the separate organization.
- The economic resources received or held by an individual organization that the specific primary government, or its component units, is entitled to, or has the ability to otherwise access, are significant to that primary government.”
Reporting Component Units
In accordance with paragraphs 125 and 126 of GASB 34 and paragraph 7 of GASB 39, major component units must be discretely presented for the Statement of Net Assets and SRECNA. Component unit information is not required on the Statement of Cash Flows. The governmental unit has the option to determine if FASB entities present statements on a separate page following the GASB statement or adapt to the GASB presentation format and present on the same page.
MD&A
Paragraph 10 of GASB 34 requires the MD&A to focus on the primary government. “Comments in MD&A should distinguish between information pertaining to the primary government and that of its component units.” Institutions must use professional judgment based on “the individual component unit’s significance to the total of all discretely presented component units and that component unit’s relationship with the primary government. When appropriate, the reporting entity’s MD&A should refer readers to the component unit’s separately issued financial statements.”
Recommendations
Component Units to be Included
Each institution is responsible for identifying the separate organizations that may meet the requirements for inclusion as a component unit. Justification for inclusion/non-inclusion based on the first two criteria above is the responsibility of the institution and must be documented. The following criteria should be used for determining if a separate organization meets the significance criteria: Regardless of any other circumstances, all institutional foundations will be considered significant. Other entities, including departmental foundations, research foundations, and other organizations, whose Total Assets or Total Revenues exceed 10% of the institution’s Total Assets or Total Revenues will be considered significant. Organizations that do not meet the above criteria may still be included if it is determined by the institution that the non-inclusion would be misleading to financial statement readers. Such determinations must be justified, documented, and reported to the TBR Central Office prior to fiscal year end.
Reporting Component Units
Each component unit that must be reported in accordance with 1 above must be presented in a separate column to the right of the institution’s information. A total column is not required and will not be presented. All component units must be reported in the GASB formats. Any component unit that is reporting under FASB must be adapted to the GASB presentation format and reported on the same page. Due to the need for the TBR to include a Statement of Cash Flows, each institution must also provide a Statement of Cash Flows under the direct method and reflecting component units as detailed above. In addition, a Statement of Activities reflecting component units will also be required. Templates will be provided by TBR with the financial statement instructions.
Note Disclosure
In accordance with Paragraph 44 of GASB 39, the following note disclosures are required for each discretely presented component unit:
- Brief description of the component unit
- Their relationship to the institution
- Discussion of criteria for including the component units
- How component units are reported
- Nature and amount of significant transactions between the institution and the component unit
- Name and address to write to get a copy of the component unit audit report
- Other disclosures required for fair presentation.
- Investments
- Debt
- Other
There is no requirement for FASB reporting component units to recast notes to GASB formats. Notes for component units will be included in one section as opposed to being included in each separate note. This will enable FASB reporting units to use a “lift and drop” approach for note disclosure. For CAFR purposes, in some instances additional information will need to be provided to permit the reader to reconcile certain amounts in the notes to the financial statements. For example, in order to reconcile back to the SNA, information will have to be added to the GASB 3 note to reflect the dollars in cash and investments that are reported under the FASB model and are not included in the note. The same approach will be followed for other GASB required notes that are not required by FASB, such as the detail in the capital assets and changes in long-term obligations notes. The TBR will provide the usual note template.
MD&A
Component unit information will be presented in the condensed financial statements. Comments relating to information presented must be distinguished between the institution and component unit. Institutions must use professional judgment that should be based on the component unit’s significance and relationship to the institution when determining if comments are warranted. The TBR will provide the usual MD&A template.
Transactions Between Institution and Component Unit
Payments made to TBR institutions by their component units will be reported as non-operating expenses of the component units and gift revenues for the institutions. Guidance provided by GASBS 24 will be followed for salaries and fringe benefits payments made by the component units on-behalf of the institutions. Each institution will analyze other on-behalf payments made by their component units to determine the true substance of those transactions. Gift revenue will be recognized when the substance of the transaction indicates the component unit in effect made a contribution to the institution, with the institution determining how and when the funds are expended. The nature and amount of significant transactions between the institutions and the component units will be disclosed in the notes to the financial statements.