Project Pages

Blending Requirements for Certain Business-Type Activities

Project Description: The objective of this project would be to improve financial reporting by addressing issues related to inconsistent presentation of component units in financial reporting of governments engaged only in business-type activities (BTA). The stated focus of the objective would need to be balanced against the information needs of financial statement users by considering what information is deemed essential to assess accountability, comparability and transparency in these circumstances.

Currently being deliberating
Added to Research Agenda: December 2013
Added to Current Agenda: August 2014


: At a 2012 liaison meeting with interested parties from the Healthcare Financial Management Association (HFMA), financial reporting entity issues were discussed. During that discussion, HFMA representatives encouraged the Board to allow the optional single or multiple-column approach set forth in Statement 61 for blending component units to be applied to all component units of BTAs. Although some would view the introduction of such an option as a fundamental shift in the presentation of component units, others would view such a change as an enhancement of special-purpose entity reporting. This topic is an important issue to other types of BTAs as well, such as public colleges and universities.

The pre-agenda research showed that BTAs in the healthcare sector have some specific challenges in their operations because of the unique manner in which they are organized. As the primary government seeks to expand its operations, it may acquire legally separate entities to add or increase services or spin off operations to incorporate them into legally separate entities. In practice, these legally separate entities—created or acquired by the BTA—often are blended into the primary government’s financial reports, citing control as the reason for this presentation. Based on the criteria set forth in Statement 14, as amended, these entities will meet the criteria for inclusion in the reporting entity; however, they generally do not meet the criteria for blending established in Statement 61 for several reasons:
  • Holding or appointing a voting majority of the governing body or being the sole corporate member or majority shareholder is not equivalent to having substantively the same governing body (paragraph 53a, as amended).
  • The main purpose of these legally separate entities is to expand the governmental healthcare services by providing services to the general public, entities, or individuals other than the primary government and its employees (paragraph 53b, as amended).
  • While it is possible that the primary government may have some responsibility for the total outstanding debt of the acquired or spun off entities, it is generally expected that those entities will generate sufficient resources to meet their own obligations and not impose a financial burden on the primary government (paragraph 53c).
Despite these facts, one could argue that these legally separate entities are, in essence, part of the primary government, as these entities constitute large operational segments of the government and carry forward its mission. In some instances, a significant portion of the government’s services are provided by the legally separate entity.
The limited user interviews conducted highlighted the importance of including detailed information about component units in BTA reporting. Respondents explained their information needs were driven by their ability to determine the importance of intra-entity transactions or the significance of a component unit’s relationship to the primary government. The respondent feedback indicates a preference for a presentation format that includes individual component unit information as well as a consolidated total with consolidated eliminations. Finally, several respondents mentioned that condensed financial information was often too summarized for their needs.

Accounting and Financial Reporting Issues: The project will consider the following issues:
  • Which method of reporting component units—blended or discrete—best represents the reporting entity of certain BTAs?
  • Which information regarding component units (presentation or disclosure) for BTAs would best meet financial statement user needs?
  • Are the present blending criteria sufficient or are revisions necessary?
  • If revised or new blending criteria are considered, should additional information be disclosed to meet the needs of financial statement users?
Project History:
  • Pre-agenda research approved: December 2013
Board Meetings Topics to be considered
November 2014: Review relevant literature and determine scope; types of primary governments to be considered.
December 2014 (T/C): Discuss blending criteria, considering legal structures of component units.
January 2015 (T/C): Discuss blending criteria, considering the purposes and functions of the component units with relationship the primary government services.
February 2015 (T/C): Discuss financial statement display and note disclosures.
March 2015 (T/C): Review draft standards section of an Exposure Draft.
May 2015 (T/C): Review the preballot draft of an Exposure Draft.
June 2015 (T/C): Review the ballot draft and issue Exposure Draft.
July­-September 2015: Comment period.
October 2015­-January 2016: Redeliberations.
February 2016: Review the preballot draft of a final Statement.
March 2016 (T/C): Review the ballot draft of a final Statement.