The concept underlying the definition of the financial reporting entity from GASB Statement No. 14 is that elected officials are accountable to their constituents for their actions. Relying upon this concept, the GASB concluded that the definition of the financial reporting entity should be based upon accountability. Consequently, the financial reporting entity now consists of (a) the primary government, (b) organizations for which the primary government is financially accountable, and (c) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. Organizations included within the last two categories are termed component units.
The foundation of a primary government is a separately elected governing body - one that is elected by the citizens in a general, popular election. A primary government is thus defined as any state government or general purpose local government (municipality or county).
It is also a special purpose government that meets all of the following criteria:
It has a separately elected governing body.
It is legally separate, and
It is fiscally independent of other state and local governments.
In contrast, all funds, organizations, institutions, agencies, departments, and offices that are not legally separate are, for financial reporting purposes, part of a primary government. If an organization is part of a primary government, its financial data should be included with the financial data of the primary government.
In most cases, component units are legally separate organizations for which the elected official of the primary government are financially accountable. The primary government is financially accountable if (1) it appoints a voting majority of the organization's governing board and (2) it is able to impose its will on that organization or there is a potential for the organization to...