How should the relationship between a component unit and its primary government be disclosed?

The appropriate way to disclose the relationship between a component unit and its primary government is in both the notes to the financial statements and potentially on the cover of the report. Component units are legally separate organizations for which the elected officials of the primary government are financially accountable. Therefore, transparent communication about this relationship is crucial for stakeholders and users of the financial statements.

Including this information in the notes to the financial statements provides detailed narrative context and allows for a thorough understanding of how the component unit is related to the primary government. This ensures that users can assess the impact and risks associated with that relationship.

Additionally, placing such information on the cover of the report aids visibility and emphasizes its importance, facilitating immediate recognition and conveying the significance of the relationship at a glance. This dual approach reinforces the commitment to transparency and accountability, ensuring that all stakeholders have access to essential information regarding governance and financial operations.