How to determine legal separation (GASB No. 14, para. 15)

The PCU is generally considered to be a legally separate organization if it is a body corporate or corporate and politic, or if the answers to all three of the following questions are "YES."

1. Does The PCU have the capacity to have its own name?
2. Does the PCU have the right to sue and be sued in its own name without recourse to a state or local governmental unit?
3. Does the PCU have the right to buy, sell, lease, and mortgage property in its own name?

Note: A PCU may be legally separate even if it does not have all the corporate powers enumerated in the previous bullet. Professional judgement is required.

Additional considerations: 

• The corporate powers granted to a separate organization are described in its corporate charter or in legislation authorizing its creation.
• A PCU that is not legally separate from a PG should be considered, for financial reporting purposes, part of the PG that holds the corporate powers. Its financial data should be included with the financial data of the PG.

How to determine if the PCU qualifies as a PG (GASB No. 14, para. 14)

An entity is considered a PG if it is:

A general-purpose unit of government (states, counties, cities, towns, etc.) or

A special-purpose government that:

• Is legally separate,
• Has a separately elected governing body, and
• Is fiscally independent.

A PG cannot be treated as a CU of any other government.

GASBS No. 90, Majority Equity Interests, an amendment of GASB Statements No. 14 and No. 61, defines equity interest and the accounting for a majority equity interest both when it meets and does not meet the definition of an investment. PGs report a majority equity interest in a legally separate entity as a CU only if that interest does not meet the definition of an investment.

Definition of a majority equity interest (GASBS No. 14, para. 55, as amended by GASBS No. 61, para. 10, and GASBS No. 90. para. 7)

GASBS No. 90 defines an equity interest as an interest in a legally separate organization in which the governmental unit:

• Owns shares of the organization's stock (or equivalent in a noncorporate entity) or
• Has an explicit and measurable right to the net resources of that organization. A governmental unit typically acquires such an interest by expending financial or capital resources.

Definition of an investment as defined in GASBS No. 14, para. 55, as amended by GASB No. 72, para. 64 (GASBS No. 90, para. 5)

GASBS No. 72, para. 64, defines an investment as a security or other asset that:

1. A governmental unit holds primarily to generate income or profit and,
2. Has a present service capacity based solely on the asset's ability to generate cash or generate cash when sold.

Note: GASBS No. 90, para. 7 indicates that holding a majority equity interest in a legally separate organization that does not meet the definition of an investment results in the governmental unit being financially accountable for the organization.

(GASBS No. 14, paras. 21-24, as amended by GASBS No. 61, para. 6a)

"- In the absence of continuing appointment authority, the ability of a PG to unilaterally abolish a PCU that it created also provides the basis for ongoing accountability. In this case, check ""Yes"" for this step.
"

- PG officials serving on the governing body of the PCU as required by law (and, thus, technically not appointed by the PG) are, for purposes of this test, treated as though they were appointed by the PG.

- Appointments by the PG include appointments made by (1) any PG official(s)-whether elected or appointed, (2) anyone to whom a PG official(s) has delegated appointment authority, (3) an official(s) of a component unit of the PG, or (4) votes taken by a group of which PG and/or PG component unit officials are a majority. The appointments do not have to be appointments by the governing body of the PG nor do they have to be direct appointments by any official of the PG itself. (GASS Comprehensive Implementation Guide, Question 4.18.8 and related questions)

- If financial decisions require the approval of a simple majority, and the PG appoints a simple majority, the PG appoints a voting majority. On the other hand, if financial decisions require the approval of a two-thirds majority, the PG must appoint at least two-thirds of the voting members in order to appoint a voting majority.

- A PG's appointment authority should be substantive and not be limited by a nomination process. For instance, state statutes or local ordinances may require a PG to select its appointees from a slate of candidates provided by one or more individuals or groups other than the PG's officials or appointees. This would not be substantive appointment authority. It is also not substantive if the PG's responsibility is limited to confirming appointments made by individuals or groups other than the PG's officials or appointees. This responsibility has more to do with compliance than substantive authority.

- A PG is considered to be accountable for a PCU as long as continuing appointments are made by the PG, even if those appointments are made by a subsequent administration.

- A PG that appoints a voting majority of the governing body of a CU of another government should make the disclosures required for related organizations.

(GASBS No. 14, paras. 25-26)

The existence of any one of the situations covered by the first five bullets clearly indicates that the PG has the ability to impose its will on the PCU. Other conditions, covered by the last bullet, may also indicate a similar ability.

Can the PG remove appointed members of the PCU's governing body at will?

Does the PG have the ability to modify or approve the budget of the PCU?

Does the PG have the ability to modify or approve rate or fee changes affecting revenues, such as water usage rate
increases?

Does the PG have the ability to veto, overrule, or modify the decisions (other than those in the two preceding bullets) of the
PCU's governing body?

Does the PG have the ability to appoint, hire, reassign, or dismiss those persons responsible for the day-to-day operations of the PCU?

Are there other conditions that indicate that the PG has the ability to impose its will on the PCU?

In determining whether imposition of will exists, a distinction should be made between substantive approvals and ministerial (or compliance) approvals. For example, budgetary approval is substantive if the PG has the authority to reduce a PCU's budget. An example of ministerial approval is a requirement for a state agency to review a local government's budget in evaluating qualifications for state funding. Only substantive approvals show imposition of will. Even though both are called approvals, compliance approval is basically a review function .

 (GASBS No. 14, para. 21 b, as amended by GASBS No. 61, para. 6b-f)

Practical Consideration:
- The PCU is fiscally dependent on the PG when the PG has substantive approval authority over any one or more of the following:
- The PCU's budget. The PG has the authority to approve or modify that budget.

- The PCU's tax levy or other rates or charges.

- The PCU's issuance of bonded debt (if the PCU has legal authority to issue bonded debt at all).

- PCU may be fiscally dependent on a PG regardless of whether it receives financial assistance from the PG.

(GASBS No. 14, paras. 21, 27, and 34-38, as amended by GASBS No. 61, para. 6; GASBS No. 84, para. 7; and GASBS No. 97, para. 5)

A PCU has a financial benefit or burden relationship with the PG if the answer to any of the following bullets is "Yes."

• Is the PG legally entitled to or can it otherwise access the PCU's resources?
  
• Is the PG legally obligated or has it otherwise assumed the obligation to finance the deficits of, or provide financial support to, the PCU?
• Is the PG obligated in some manner for the debt of the PCU?

Exchange transactions, such as the purchase or sale of goods or services, between the PCU and the PG should not be considered manifestations of a financial benefit or burden relationship.

A financial benefit or burden relationship exists if the PG is either directly or indirectly entitled to the resources of or is either directly or indirectly obligated for the deficits or debts of a PCU. An indirect benefit or burden exists if one or more of the PG's CUs is entitled to the resources or is obligated for the deficits or debts of the PCU.

Including a CU is subject to the considerations in GASBS No. 14, paragraph 38, as amended, regarding the potential for dual inclusion.

GASBS No. 84, paragraph 7, as amended by GASBS No. 97, explains that a financial burden exists for legally separate entities that administer defined benefit pension or OPEB plans that are administered through trusts and are within the scope of GASBS No. 67 or 74, if the PG is legally obligated or has otherwise assumed the obligation to make contributions defined benefit pension or to the OPEB plan.

(GASBS No. 14, para. 40a, as amended by GASBS No. 39) (See the GASBS No. 39, para. 5, criteria in the practical considerations.)

The PCU should be included in the reporting entity if all of the following criteria established by GASBS No. 39, para. 5, are met:

Is the PCU a tax-exempt organization?

Are the economic resources received or held by the PCU held entirely, or almost entirely, for the direct benefit of the PG, its CUs, or its constituents? (Direct benefit is not dependent upon an actual transfer during the period, but rather on the notion that all or almost all of their sources received or held will ultimately be used for the PG, its CUs, or its constituents. This criterion is intended to exclude organizations that benefit multiple constituent groups, such as federated fund-raising organizations. If the organization has the ability to redirect its resources at its discretion, so that all or almost all would not be used for the benefit of the PG, it would not meet this criterion.)

Is the PG, or its CUs, entitled to, or does it have the ability to otherwise access, a majority of the economic resources received
by the PCU?

Are the economic resources received or held by the PCU that the PG or its CUs is entitled to, or has the ability to otherwise access, significant to the PG?

The ability of a PG to "otherwise access" resources does not necessarily mean control. The ability to otherwise access may be demonstrated in various ways. For example:

The PG or its CUs have historically received, directly or indirectly, a majority of the economic resources of the PCU.

The PCU has previously received and honored requests from the PG for resources.

The PCU is a financially interrelated organization, as defined by FASBS No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others. [Note: GASBS No. 39, para. 5, and the related GASB Codification paragraph (GASB Cod. sec. 2100.140, footnote 8) have retained this reference to FASBS No. 136.]

FASBS No. 136, para. 13, defines financially interrelated organizations as ones where the relationship between them has both of the following characteristics:

One has the ability to influence the operating and financial decisions of the other. For example: (1) they are affiliates, (2) one has considerable representation on the governing board of the other, (3) the charter or bylaws of one limits its activities to those that are beneficial to the other, and (4) an agreement between them allows one to actively participate in policymaking processes of the other, such as setting organizational priorities, budgets, and management compensation.

One has an ongoing economic interest in the net assets of the other.

An example of an affiliated organization that may be included is a nonprofit corporation whose purpose is to benefit a PG by soliciting contributions and managing the funds.

(GASBS No. 14, para. 12, as amended by GASBS No. 61, paras. 4 and 5)

GASBS No. 14, para. 39, as amended by GASBS No. 61 , para. 4, states that the inclusion decision should be based on the nature and significance of the PCU's relationship with the PG.

(GASBS No. 14, para. 19, as amended by GASBS No. 84, para. 5)

Practical Considerations:
The checklist at ALG-CX-1 .9 may be completed to determine if the CU is engaged in a fiduciary activity in accordance with GASBS No. 84.

GASBS No. 84, Fiduciary Activities, as amended by GASBS No. 97, indicates that a CU is engaged in a fiduciary activity if it is one of the following arrangements:

--- A pension or OPEB plan that is administered through a trust that meets specified criteria in GASBS No. 67 or 74.

--- Assets from entities (that are not part of the PG) are accumulated for defined benefit pensions or OPEB not administered through trusts or equivalent arrangements that meet specified criteria in GASBS No. 73 or 74.

--- The assets associated with the CU's activity have at least one of the following characteristics:

- The assets are administered through a trust committed to providing benefits to recipients. The
government is not a beneficiary of the trust, and the assets are protected from the government's creditors

- The assets are for The benefit of individuals, and The government does not have administrative or
direct financial involvement with the assets nor are the assets derived from the government
providing goods or services to those individuals.

- The assets are for The benefit of other entities (not part of the financial reporting entity) and
are not derived from the government providing goods or services to those entities.

- GASBS No. 84 indicates that in determining if a CU is a fiduciary CU, control of the CU's assets by the PG is not a factor to consider.

 (GASBS No. 14, para. 53a, as amended by GASBS No. 61, para. 8; and GASBS No. 85, para. 4)

GASBS No. 61, paragraph 8, explains that management of the PG means personnel below the level of the PG's governing body, 'such as a county executive or city manager.

Operational responsibility means that the PG manages the CU in essentially the same manner as it does for its own programs, activities, agencies, or departments.

See Practical Considerations for Step 9.

(GAS BS No. 14, para. 53a, as amended by GASBS No. 61, para. 8; and GASBS No. 85, para. 4)

- GASBS No. 61, paragraph 8, explains that management of the PG means personnel below the level of the PG's governing body, such as a county executive or city manager.

- Operational responsibility means that the PG manages the CU in essentially the same manner as it does for its own programs, activities, agencies, or departments.

(GASBS No. 14, para. 53b, as amended by GASBS No. 61 , para. 8; and GASBS No. 85, para. 4)

- Usually, the services provided by a blended CU are financing services provided solely to the PG.

- A CU that provides services to more than just the PG should be blended if the services provided to others are insignificant to the overall activities of the CU.

(GASBS No. 14, para. 53c, as amended by GASBS No. 61 , para. 8; and GASBS No. 85, para. 4)

- Repayment generally consists of the PG making a pledge or continuing appropriation to cover debt service, which the CU, in turn, pledges as the primary source or security for repayment of the debt.

(GASBS No. 80, para, 5)

- GASBS No. 80 revised Question 4.30.1 of the GASB Comprehensive Implementation Guide to clarify that organizations that meet the criteria in GASBS No. 39, para. 5, should be discretely presented, even if they also meet the criterion in GASBS No. 14, paras. 53b or 53c, as amended by GASBS No. 61 , para. 8, or GASBS No. 80, para. 5.

YES.

This is a CU that should be included in the financial reporting entity as a fiduciary CU. Fiduciary CUs (including their own fiduciary CUs) are combined with the fiduciary funds of the PG and presented in aggregate based on the classification of the fund [pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, custodial funds).

YES.

This is a CU that should be included in the financial reporting entity and presented discretely.

YES.

This is a CU that should be included in the financial reporting entity and presented as a blended entity.

NO.

The PCU is not a CU.

YES.

The PCU is part of the PG and by definition therefore part of the reporting entity. However, the PCU is not a CU. It is to be reported following the same guidance as used for all other "organizations" (i.e., funds, organizations, institutions, agencies, department, and offices) that make up the PG's legal entity. (GASBS No. 14, para. 14)