The issue of which organizations should be included in the financial reporting entity of a state or local government is the first of a two-step process in addressing the financial statements of a state or local government. After determining which component units to include in the financial reporting entity of the government, the second step is to determine how the financial information of those component units (and their related disclosures) will be presented. This section addresses this second step of presenting the financial information of the component units as part of the financial statements of the reporting entity of the state or local government.

Overview of Reporting Component Units

An objective of the financial statements of the reporting entity should be to provide an overview of the entity based on financial accountability, while at the same time allowing financial statement users to distinguish among the financial information of the primary government and the financial information of the component units. As will be more fully described later in this chapter, some component units are so closely related to the primary Government that their information is blended with that of the primary government. Other component units, which generally comprise the majority of component units, should be presenteddiscretely from the primary government.
In addition, the determination of whether an organization is a component unit and whether it should be blended or discretely presented is a process independent of the considerations that governments make in reporting fiduciary funds. There may be organizations that do not meet the definition for inclusion in the
financial reporting entity. These organizations should be reported as fiduciary funds of the primary government if the primary government has a fiduciary responsibility for them. For example, pension funds or deferred compensation plans are not evaluated as component units. Rather, they are included in a
government’s reporting entity because of the government’s fiduciary role and responsibility.

Taken From : Governmental Accounting Made Easy

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