When is a legally separate entity listed as a component unit of a primary government?

A legally separate entity is identified as a component unit of a primary government when there is a significant relationship that affects the financial accountability of that separate entity. Specifically, the critical aspect is the connection through the appointment of the board, which indicates that the primary government has the authority to appoint a majority of the board members of the entity, allowing for oversight and influence over its operations and financial decisions. This relationship is essential for demonstrating the potential financial benefit or burden that the primary government may experience due to its link with the separate entity.

The concept of board appointments is crucial in determining whether the separate entity serves the interests of the primary government and whether its financial data should be reported together with the primary government's financial statements. This ensures transparency and provides a clear picture of the resources available to the primary government due to its relationship with the component unit.

In contrast, simply being non-funding, having non-voting board members, or demonstrating fiscal independence does not inherently establish a necessary connection for it to be considered a component unit. Fiscal independence may actually indicate a lack of reliance or accountability to the primary government, thus not justifying the inclusion of the entity in the financial reporting of that government.