Which of the following circumstances would indicate that a potential component unit should be included as a component unit of the government financial reporting entity?

• A. Officials of the Primary Government Appoint a Majority of the PCU's Governing Board and the Primary Government Is Able to Impose Its Will on the PCU.
• B. The PCU Operates Independently with No Financial Ties.
• C. The PCU's Governing Board Is Elected by Residents with No Involvement by the Primary Government.
• D. The PCU Issues Debt Without the Primary Government's Approval and Has No Intergovernmental Relationships.

Answer: (A)

In GASB reporting, inclusion as a component unit hinges on financial accountability and control by the primary government. When officials of the primary government appoint a majority of the PCU’s governing board and the primary government has the power to impose its will on the PCU, this shows the primary government can direct the PCU’s financial and operating policies. That level of control is the key indicator that the PCU should be included as a component unit in the government’s financial reporting.

If the PCU operates independently with no financial ties, or its governing board is elected entirely by residents with no involvement by the primary government, or it can issue debt without approval and has no intergovernmental relationships, these scenarios indicate a lack of financial accountability to the primary government, so inclusion would not be appropriate.