The Government Financial Reporting Entity
Ives, Martin, The Government Accountants Journal
The entity concept is fundamental to financial reporting. The boundaries of a financial reporting entity help to set the boundaries of accountability, of actual and potential resources and liabilities, of exposure to risk. They help to establish what information is relevant to a particular set of financial statements and what is not. This article comments on two significant pronouncements in process concerning the government financial reporting entity: a proposed statement of the Governmental Accounting Standards Board (GASB), entitled, The Financial Reporting Entity-Affiliated Organizations, and a proposed concepts statement of the Federal Accounting Standards Advisory Board a (FASAB), entitled Entity and Display.
Defining the governmental financial reporting entity is no easy matter. I believe it is more difficult than defining the private sector financial reporting entity. Some of the difficulty results from the increasing complexity of the form of government. For example, from the ability of a government to create organizations either by statute or under a state's corporation or not-for-profit corporation laws. (See author's "What Is a Government" in The Government Accountants JOURNAL Spring 1994). Part of the difficulty results from the fact that governmental "ownership" occurs through the creation and appointment process, rather than through the issuance and purchase of stock certificates. And part of it, particularly in reporting, results from the differing financial relationships between the governmental parent and its various component units.
Recognizing both the importance of the subject and the difficulty of the issues, the GASB made the reporting entity one of its first projects on the road to revamping the financial reporting model. The result was GASB Statement 14, The Financial Reporting Entity, issued in 1991 and effective in 1993. This standard, developed after extensive research and deliberation, gave effect to preparer and user experience with earlier standards developed in part by the State Government Accounting Project and issued by the National Council on Governmental Accounting.
GASB Statement 14 is based on a notion of "financial accountability." The Statement distinguishes between a primary government and its component units. The primary government is the nucleus of the reporting entity. Other organizations must be included in the reporting entity if the primary government is able either to impose its will on those organizations, or there is a potential for the organizations to provide specific financial benefits to, or impose specific financial burdens on the primary government. A primary government may also be financially accountable for government organizations that are fiscally dependent on it. Terms like "impose its will," "financial benefit/burden" and "fiscally dependent" are defined in Statement 14 and applications of the terms are illustrated both in the Statement and in an Implementation Guide published by the GASB.
When the GASB issued Statement 14, it was aware that other organizations existed that might logically be considered part of the reporting entity even if they did not fit the definition established by the Board. The reason they do not fit the definition is that the primary governments do not create them, do not appoint their governing bodies and do not have a fiscal dependency relationship as defined by Statement 14. And yet, some of these organizations play a significant role in the finances of the primary government, raising funds, making expenditures and performing other activities on their behalf. Most often, these organizations are affiliated with colleges, but some are affiliated with hospitals, museums and elementary and secondary schools. They generally carry such names as "[X College] Foundation," "Development Foundation." "Athletic Association," "Research Foundation," or "Alumni Association."
Financial reporting concerning these affiliated organizations has been in limbo for a long time, both in the public and in the private sectors. …