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AAG-SLV 1.01 provides a definition of "governmental organization" that must be evaluated in determining whether an organization is subject to GASB standards or FASB standards. For purposes of preparing general purpose external financial statements, an entity is "governmental" and should apply accounting standards established by the GASB if it is a public corporation or body corporate and politic (as described below):
A US state or territory. These are "de jure" government organizations.
Public instrumentality; bodies corporate and politic; municipal corporation. Although there is no generally accepted definition of the term "municipal corporation," an entity is considered to be a municipal corporation if declared by statute to be a "public corporation" or a "body corporate and politic." Legally-separate special-purpose entities designated as "bodies corporate and politic" are sometimes created by governments in order to avoid constitutional limitations placed on the general government itself, or to overcome the normal controls imposed on the general-purpose government's agencies. While the lack of controls or diminished degree of controls (e.g., appropriation, pre-audit, civil service) placed on "bodies corporate and politic" may sometimes create the impression that they are outside the realm of government, they are created by statute or ordinance as governmental organizations and are therefore de jure "governmental." Typically, these organizations are statutorily granted the typical corporate powers possessed by a chartered corporation (e.g., the typical "corporate powers" held by for-profit or not-for-profit corporations – for example, to have a name; to sue and be sued; to buy, sell, and mortgage property; and so forth). Typical statutory language might read,
"There is created a public body corporate and politic to be known as the XYZ Authority, which shall be a public corporation of the State of X and shall have a perpetual existence. This authority shall not be a state institution nor a department or agency of the state, but shall be an instrumentality of the state having distinct corporate entity. The Authority shall have all powers necessary or convenient to carry out and effectuate the purpose and provisions of this article including the power: (1) to sue and be sued in contract and in tort and to complain and defend in all courts; (2) to adopt and alter a corporate seal; (3) to acquire in its own name, use, and dispose of real property; and (4) to contract with governments and with private persons and corporations," and so forth.
Not-for-profit and for-profit corporations also can be "governmental" organizations. A corporation organized under a state's general corporation statutes or not-for-profit corporation statutes is considered "governmental" if it possessesone or more of the following characteristics of a government:
- Its officers are elected by the citizens in a general, popular election.
- A controlling majority of their governing board members are appointed by, approved by, or are capable of being appointed or approved by, governmental officials. Appointment of a controlling majority need not necessarily be made by one government; if appointees of two or more governmental units constitute a controlling majority of the board, the organization is considered governmental. Further, the appointments need not necessarily be made by elected officials; they may be made by appointed officials acting in their capacity as government officials. For purposes of this determination, approval rights imply the ability to reject appointees proposed by others.
- It has the power to enact and enforce a tax levy. The power to tax is the power to raise revenue by compulsion, which is a sovereign power. "Black's Law Dictionary" defines "sovereign power" as "that power in a state to which none other is superior or equal, and which includes all the specific powers necessary to the legitimate ends and purposes of government."
- It can be unilaterally dissolved by a government, with its net assets reverting to a government.
- It is authorized by law to directly issue tax-exempt debt. IRC Section 103(a) excludes from taxable income obligations issued by a state, territory, or possession of the US (or any political subdivision thereof), or of the District of Columbia. Unlike the other four characteristics listed above (which are definitive indicators of a government), this characteristic merely creates a rebuttable presumption that an entity is governmental. Entities possessing only this characteristic and none of the other characteristics above may rebut the presumption that they are governmental if their determination is supported by compelling, relevant evidence. Understanding the phrase "directly issue" is important in appropriately understanding this characteristic. A number of not-for-profit organizations (e.g., hospitals, institutions of higher education) use tax-exempt bonds to raise capital; however, in most cases those bonds are conduit debt issued by a governmental agency or authority on behalf of the not-for-profit organizations, not directly issued by the not-for-profit organizations themselves. In such situations, the not-for-profit organization does not possess the characteristic discussed in this bullet.
Entities are governmental or nongovernmental for accounting and financial reporting purposes basedsolely on the application of the above criteria or characteristics.Other factors are not determinative. For example, the fact that an entity is incorporated as a not-for-profit corporation and has been granted tax-exempt status under IRC Section 501 is not a criterion in determining whether an entity is governmental or nongovernmental. As discussed above, if a not-for-profit organization possesses any of the characteristics discussed in the preceding paragraph, it is a governmental organization and must follow GASB standards rather than FASB standards.
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