Option #2: Governmental Reporting Entities

Instructions:

Provide complete answers to the following:

The Governmental Accounting Standards Board has established rules for determining when a government should include another entity in its financial statements.

Distinguish between a primary government and a component unit. Include one example of each.

GASB permits two methods of reporting component units in the financial reporting entity. Describe the two methods and indicate when each should be used.

The City of X is deciding whether or not to include a transit system in its financial report and how the transit system would be reported if a positive decision were made. The transit system is a legally separate entity, has its own governing board, not appointed by the city, has a different auditor, and issues its own financial report. The city has signed an agreement that, for the next ten years (the life of a bond issue related to transit operations), it will make up the deficit of the transit system. During the last two years, the deficit has been $10 million, approximately 50% of the amount reported as a profit of its other enterprise operations. Make recommendations to the city, including whether or not to include the transit system and, if so, how to report it.