New guidance issued by the Governmental Accounting Standards Board (GASB) on Feb. 11 explains how certain component units incorporated as not-for-profit corporations should be presented in the financial statements of a state or local government.
GASB Statement No. 80, Blending Requirements for Certain Component Units, is intended to clarify the display requirements in GASB Statement No. 14, The Financial Reporting Entity.
Many legally separate entities, like a not-for-profit organization that was acquired by a government healthcare entity, that are reported as component units have governing bodies that are representative of the community, and the primary government is the sole corporate member, according to the exposure draft on Statement No. 80, which was released last June.
Under the new standard, these component units will be treated in a manner similar to a department or activity of the primary government through a financial presentation method known as “blending.”
“The board believes that being a sole corporate member of a not-for-profit corporation establishes a unique relationship, from the standpoint of financial accountability, between the primary government and the component unit,” the exposure draft states. “This relationship is established through articles of incorporation and bylaws, and is not found in other traditional component-unit relationships in which the primary government appoints the component unit’s governing body. Based on this unique relationship, the board concluded that the appropriate presentation of a component unit that is a not-for-profit corporation, of which the primary government is the sole corporate member, is the blended presentation.”
While it applies to a limited number of governmental units, such as public hospitals, GASB Statement No. 80 is meant to enhance the comparability of financial statements among those units and improve the value of this information for users of state and local government financial statements, according to the GASB.
The standard goes into effect for reporting periods beginning after June 15, 2016. Earlier application is encouraged.