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Definition of the Local Government Financial Reporting Entity

Michigan Committee on Governmental Accounting and Auditing Statement No. 5 Issued by
State Treasurer
State of Michigan
November 1993


The Governmental Accounting Standards Board (GASB) issued Statement No. 14, "The Financial Reporting Entity", in June 1991. This Michigan statement is provided to define the financial reporting entity of local units of government in Michigan by applying the provisions of GASB Statement No. 14.

GASB Statement No. 14 states that the financial reporting entity 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.


A primary government is defined in GASB Statement No. 14 as:

1. A state government or a general purpose local government (municipality or county);

2. A special purpose government which meets all of the following criteria:

a. It has a separately elected governing body;

b. It is legally separate--It has corporate powers to have a name, the right to sue and be sued and the right to buy, sell, lease and mortgage property in its own name; and

c. It is fiscally independent of other state and local governments--It must have substantive authority to do all three of the following:

i. Determine its own budget without another government's having the authority to approve and modify that budget;
ii. Levy taxes or set rates or charges without approval by another government; and
iii. Issue bonded debt without approval by another government.


As defined in GASB Statement No. 14, component units are legally separate organizations for which the elected officials of the primary government are financially accountable. They may be a governmental organization (except those that meet the definition of a primary government), a nonprofit corporation, or a for-profit corporation.

Financial Accountability

A primary government is financially accountable if:

1. The primary government appoints a voting majority of the organization's governing body; and

2. The primary government:

a. Is able to impose its will on that organization--The existence of any ONE of the following conditions clearly indicates the ability to impose its will:

i. Ability to remove appointed board members;
ii. Ability to modify or approve the budget;
iii. Ability to modify or approve rate or fee charges;
iv. Ability to veto, overrule, or modify board's decisions;
v. Ability to appoint, hire, reassign, or dismiss management; or

b. There is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government--A financial benefit or burden relationship exists if any ONE of these conditions exist. The primary government:

i. Is legally entitled to or can access the organizations resources;
ii. Is legally obligated or has assumed the obligation to finance deficits or provide financial support to the organization; or
iii. Is obligated in some manner for the debt of the organization.


The reporting entity's notes to the financial statements should:

1. Include a brief description of the component units and their relationship to the primary government;

2. Include a discussion of the criteria for including the component units and how they are reported;

3. Include information about how the separate financial statements for the individual component units may be obtained; and

4. Distinguish between information pertaining to the primary government and that of its discretely presented component units.


Primary government officials may appoint some, or all, governing board members of organizations that are not included as component units. These organizations are:

1. Related organizations--The primary government is accountable because they appoint a voting majority of the board, but is not financially accountable.

a. The primary government should disclose in their notes the nature of its accountability for related organizations;

b. The notes of the related organization should disclose the primary government that is accountable for it and describe its relationship; and

c. Other information required by Codification Section 2300.105f.

2. Joint Venture:

a. A legal entity or other organization that results from a contractual arrangement and that is owned, operated or governed by two or more participants as a separate and specific activity subject to joint control. The participants retain:

i. Ongoing financial interest; and
ii. Ongoing financial responsibility.

b. Equity Interest:

i. Proprietary Fund--Report the participating government's equity interest calculated in accordance with the agreement;
ii. Governmental Fund--Report all or a portion of the equity interest in the GFAAG. Part of the equity interest may be in a governmental fund as an amount payable to, or receivable from the joint venture. The combination of the two amounts will be the total equity interest.

c. Note Disclosures:

i. A description of the ongoing financial interest and ongoing financial responsibility;
ii. Information about availability of separate financial statements of the joint venture; and
iii. Other information required by Codification Section 2300.105f.

3. Jointly governed organizations are similar to joint ventures but there is no ongoing financial interest or responsibility. Only note disclosure in accordance with Codification Section 2300. 105f is required.

4. Component units and related organizations with joint venture characteristics are organizations with several participants with one which appoints a voting majority. The organization is either a component unit or a related organization of the majority government and should be reported as such in that unit. The other (minority) units should report their participation as a joint venture or a jointly governed organization.


This statement applies to local units of government financial statements for periods ending on and after December 31, 1993.


This section analyzes certain agencies, boards, commissions, authorities and other governmental organizations that operate in Michigan with respect to the provisions of GASB Statement No. 14. A conclusion as to whether or not the agency should be included in the local government financial report.

The entities analyzed in this section do not include all possible government agencies that exist in Michigan.


(1) Separately elected governing body
(2) Legally separate
(3) Fiscally independent
(4) Appoint a voting majority of governing body
(5) Ability to impose its will
(6) Potential for benefit or burden
(7) Misleading to exclude
I-B Include--Blend
I-D Include--Discrete Presentation
E Exclude

If the answers for items (1), (2) and (3) are all yes, a potential component unit is probably a primary government. However, yes answers to items (4) and (5) or (6) would indicate that the potential component unit is a component unit of the primary government. Further, exclusion of an organization may cause the financial statements to be misleading or incomplete. If so, the answer to item (7) would be yes and the potential component unit should be included.


Potential Component Unit (1) (2) (3) (4) (5) (6) (7) I-B I-D E Notes
Port Authority N Y N Y Y Y Y   X   1,2
Mass Transportation 
N Y Y Y N Y Y   X or X 2,3
Housing Commission N Y Y Y Y Y Y       4,5
Planning Commission N N N Y Y Y Y X     2
City/Village Charter or 
  N     Y   Y       6
Act 230 of 1987 N Y N Y Y Y Y   X    
Joint Municipal Hospital N Y N N N N N     X 2
Hospital Finance Authority N Y Y Y N N N     X 7
Building Authority N Y N Y Y Y Y X     8
Economic Development
N Y N Y Y Y Y   X    
District Court Bond and
      Trust Account
              X     9
Library Board N N N Y Y Y Y   X   10
Library Board Y N N N N N Y   X   10
Nonprofit Corporation                     11
Park/Recreation Fund                     2,12


MCL 120.101-130


Joint operations would be included (discrete presentation) in the financial statements of the local government in which the monies are deposited with the treasurer and would be disclosed in the notes to the financial statements of the other member units. The notes in all participating units must include a description of the ongoing financial interest and ongoing financial responsibility and information about the availability of separate financial statements. This disclosure must also include information to allow the reader to evaluate whether the organization is accumulating significant financial resources or is experiencing fiscal stress that may cause an additional financial benefit to or burden on the participating government in the future. Also, other information as required by GASB Codification Section 2300.105f, related party transactions.

A joint operation which has its own treasurer will be reported in the notes to the financial statements in all participating units as described in the previous paragraph.


MCL 124.351-359


MCL 125.651-709e


The Michigan Department of Treasury recommends that this governmental organization be included in the financial statements of the primary government. However, if the primary government does not include the organization in its financial statements, the following note disclosures are required:

1. The reason for not including the organization in the primary government's financial statements.

2. The nature and function or purpose of the organization.

3. Condensed or summary financial information, including:

a. Most recent financial statement date;

b. Assets, liabilities and equity; and

c. Total revenues, expenditures/expenses, other financing sources (uses), and net increase (decrease) in fund balance/retained earnings.

The summary information may be either audited or unaudited information. In the latter instance, the information should be labeled as "unaudited financial information."


Cities and Villages--Article 7, Section 23 of the 1963 Michigan Constitution
Cities--MCL 117.4e, 117.4f
Village--MCL 67.5, 73.1


This organization is a related organization and should be disclosed in the local unit's notes to the financial statements as discussed in the narrative of this statement.


Under MCGAA Statement No. 2, a local unit's building authority's financial statements are to be consolidated with the local unit's financial statements. A separate financial report on the building authority is typically prepared in an enterprise fund format. Upon consolidation, the accounts of the authority would be "blended" with the general fund, debt service fund, capital project fund, long-term debt account group and general fixed assets account group of the local unit. In the case of a building authority for an enterprise fund, such as a hospital, the building authority would be reported within the enterprise fund. Joint building authorities should be accounted for and reported in accordance with the requirements for a joint venture.


Current accounting procedures do not provide for the deposit of district court bonds and other court trust money with the local unit treasurer. These accounts are maintained by local unit court personnel in their official capacity as local unit court employees and the accounts should be reflected in the local unit financial statements as an agency fund of the local unit.


MCL 397.201-210 and MCL 397.210a-212--These libraries are to be included in the local unit financial reporting entity because:

Township library board directors are township officers (AGO 5182, 1977)

A township library is not a local unit . . . (AGO 3607, 1961)

A township may submit to its voters the question of a tax. (AGO 3607, 1961)

Moneys received shall be deposited in the local unit treasury to the credit of the library fund. (MCL 397.205)

The tax shall be levied and collected in the same manner as other general taxes of the township or village. (MCL 397.210)


Other organizations should be evaluated as potential component units if they are closely related to the primary government. A component unit may be a governmental organization, a nonprofit corporation or a for-profit corporation.


These are funds of the local unit and are to be reported in the appropriate fund type on the combined financial statements. Statutory references are:

City--MCL 87.22, 100.1, 100.3, 110.3, 117.4e, 123.51 et al.
Village--Article 7, Section 23 of the 1963 Michigan Constitution, MCL 64.18,
67.4, 67.6, 123.51 et al.
Township--MCL 41.421 et al., 42.14, 123.51 et al.

This statement was adopted by Douglas B. Roberts, State Treasurer, State of Michigan, following submission to the members of the Michigan Committee on Government Accounting and Auditing.

Walter M. Wisniewski, Chairperson
Terrence Adams
Richard L. Baldermann
Robert C. Bendzinski
Donald R. Breadon
Diane M. Block
Stratton S. Brown
Darrell Burks
Robert J. Daddow
Gerald J. Desloover
Milton I. Firestone
Michael T. Gaffney
Joseph C. Heffernan
Peggy Jury
Janet Lazar
Neil J. Loney
Richard McNally
Richard McGraw
Gary P. Murphy
Brad Niergarth
Thomas W. Ott
Daniel L. Popoff
Joseph L. Ruth
Michael Styczenski
Barry Vallee
Douglas J. Williams
John Wolenberg