FAR · Financial reporting · 6 practice questions
GASB major fund 10%/5% tests and component unit blending
A fund is major only if one element meets both the 10% category test and the 5% combined test. Below: side-by-side compare of the tests, inclusion, and blending vs discrete.
Try one first
Hint
Compute the 10% thresholds by fund category and the 5% thresholds using combined governmental-plus-enterprise totals, then remember that passing any one element is enough.
Answer C. A fund is classified as major if any one element (assets and deferred outflows, liabilities and deferred inflows, revenues, or expenditures/expenses) is at least 10% of the totals for its fund category and at least 5% of the combined governmental-plus-enterprise total for that element. The capital projects fund exceeds both thresholds for assets and for expenditures; the special revenue fund exceeds both thresholds for liabilities (and for revenues). The water utility meets several enterprise 10% tests but fails the 5% combined-total test in every category, so it is not required to be reported as major.
Why not A: This distractor lures candidates who focus incorrectly on expenditures only. A fund becomes major if any single relevant element meets both percentage thresholds. The special revenue fund qualifies through liabilities (and revenues), even though it does not meet the expenditure threshold.
Why not B: Tempting because the water utility clears the 10% enterprise thresholds (assets, liabilities, revenues, and expenses), but the major-fund rule is two-tiered: the element must also be at least 5% of the corresponding combined governmental-plus-enterprise total. The water utility fails that 5% combined test for every element.
Why not D: This exploits the incorrect belief that meeting the 10% enterprise test alone is sufficient. Enterprise funds are first evaluated within their category, but the 5% combined-governmental-plus-enterprise threshold still applies. The water utility hits 10% enterprise thresholds but fails the 5% combined hurdles, while the two governmental funds meet the full requirements.
Side by side
| Major fund (10%/5%) | Component units (reporting entity) | Blending vs discrete presentation | |
|---|---|---|---|
| Scope | Applies to governmental and enterprise funds; General Fund is always major. | Legally separate organizations linked to the primary government. | How included component units are displayed in the primary government’s statements. |
| Denominators | 10% within fund category; 5% of combined governmental+enterprise for the same element. | N/A | N/A |
| Core test | A single element must meet both thresholds; equality counts. | Legally separate entities; focus on control (ability to impose will) or a specific financial benefit/burden relationship. Fiduciary component units are included in the reporting entity but are reported in fiduciary fund financial statements, not in the government-wide statements. | Blend only when indicators show the unit is substantively the same; otherwise discretely present. |
| Elements evaluated | Assets+deferred outflows, liabilities+deferred inflows, revenues, or expenditures/expenses. | Financial accountability: appointed voting majority plus ability to impose will, or a specific financial benefit/burden. | Shared governing body alone is not sufficient for blending. |
| Internal service funds | Exclude from the 10% and 5% tests. | Included in reporting entity if applicable; reported as proprietary funds; in government-wide as governmental activities. | N/A |
| Fiduciary funds | Exclude from the 10% and 5% tests. | Fiduciary component units are included in the reporting entity but reported in fiduciary fund statements; excluded from government-wide. | Not blended or discretely presented in government-wide; reported only in fiduciary statements. |
| Election/required | General Fund is always major; management may elect additional major funds. | Include component units when financially accountable. | Blend when governing bodies are substantively the same and the unit exclusively or almost exclusively serves the government or its debt is expected to be repaid by the government; otherwise discrete. |
| From bank examples | An enterprise fund can meet 10% yet fail 5% and not be major (FAR-74153). | Impose-will and benefit/burden support inclusion (FAR-48405, FAR-24087). | Lease-only to the government with debt paid from appropriations indicates blending (FAR-73007); ex officio board alone leads to discrete (FAR-74026). |
Key points
- Use the same element for both the 10% and 5% tests; equality meets the threshold.
- The General Fund is always major; management may elect to present additional funds as major.
- Apply major-fund tests only to governmental and enterprise funds; do not use internal service or fiduciary funds in the denominators.
- Fiduciary funds are excluded from government-wide statements; internal service funds are included in governmental activities in government-wide statements.
- Financial accountability exists with appointed voting majority plus ability to impose will, or a specific financial benefit/burden relationship.
- Blending requires more than a shared board; look for exclusive service to the primary government or debt expected to be repaid by the primary government.
How the exam traps you
- Adding elements together to pass the major-fund test instead of using one element. Test one element at a time. A fund is major if any single element meets both thresholds.
- Applying only the 10% test or only the 5% combined test. Apply both tests to the same element. Meeting either test alone is not sufficient. Equality meets the threshold.
- Discretely presenting a unit that meets clear blending indicators, or blending without those indicators. Blend only when the component unit is substantively the same as the primary government (for example, same governing body plus exclusive service to the government or debt expected to be repaid by the government). Otherwise discretely present.
- Including internal service or fiduciary funds in major‑fund test denominators. Apply the major‑fund tests only to governmental and enterprise funds. Exclude both internal service and fiduciary funds from the 10% and 5% tests. For government‑wide reporting, fiduciary funds are excluded, but internal service funds are included in governmental activities.
Question 2
Hint
For component units, focus on the reporting-entity test itself rather than on geography, funding, or mission.
Answer B. The primary reporting-entity test for a legally separate organization is whether the primary government is financially accountable for it. Financial accountability generally focuses on factors such as appointment of a voting majority, the ability to impose will, or a specific financial benefit or burden relationship. Funding source, service area, and public purpose may be relevant background facts, but they do not replace the core criterion.
Why not A: This is tempting because significant funding can suggest a close relationship. However, receiving city funding alone does not satisfy the GASB financial-accountability tests (appointment/control or a specific financial benefit/burden).
Why not C: Serving the same population or operating in the same geographic area may indicate a connection, but it is not the controlling test. The GASB focuses on whether the primary government is financially accountable, not solely on who benefits from the services.
Why not D: Legal origin or public purpose can be background evidence of a relationship, but creation by the city does not automatically make a legally separate entity a component unit. The decisive factor is financial accountability under GASB criteria.
Question 3
Hint
Board appointment is relevant but not decisive, look for what gives the county control over budgets, debt, or who bears financial gains and losses.
Answer D. Financial accountability for legally separate entities hinges on whether the government can impose its will or has a specific financial benefit/burden relationship. The county's approval rights over the Transit Authority's budget, fares, and debt demonstrate an ability to impose its will, indicating financial accountability and supporting component-unit reporting. The Sports Arena's independent budget authority and lack of county obligation for its debt point away from such accountability.
Why not A: Appointment of the voting majority can indicate control, which makes this attractive, but it fails in this scenario because the county appoints both boards. Appointment by itself is not dispositive without the ability to impose will or a financial benefit/burden relationship.
Why not B: This distractor tempts because fee-funded entities often appear operationally independent. It fails because the source of revenue alone does not determine component-unit status, what matters is whether the county has the power to control policies or shares a financial benefit/burden.
Why not C: This is tempting since legal separateness and an independent board are initial considerations. It fails here because the stem states both entities are legally separate with their own boards, so legal separateness does not explain why one is more likely a component unit.
Question 4
Hint
Focus on financial accountability: can the city impose its will (appointment/removal) or is there a financial benefit/burden (exclusive service to the city or expected debt repayment by the city)? Those factors determine blending versus discrete presentation.
Answer A. Although legally separate, the city appoints and may remove all board members (indicating the ability to impose the city's will) and the authority's operations and obligations are tied to the city (leases only to the city and debt expected to be repaid from city appropriations). GASB guidance indicates that when a component unit is, in substance, part of the primary government, for example, it serves almost exclusively the primary government or its debt will be repaid by the primary government, it should be blended. Given these facts, the authority should be reported as a blended component unit.
Why not B: This is tempting because the authority is a legally separate organization and many such entities are discretely presented. However, discrete presentation is for component units that are not so integrated with the primary government; here the appointment/removal power and the expected repayment of the authority's debt from city appropriations indicate the unit is, in substance, part of the city and meets blending criteria.
Why not C: This distractor appeals to those who stop at legal separateness and think disclosure suffices. Disclosure-only treatment applies where the primary government lacks financial accountability; here the city exercises financial accountability (ability to impose will and a clear financial benefit/burden relationship), so the authority is a component unit that must be included rather than only disclosed.
Why not D: This confuses reporting-entity inclusion with fund-type classification. A legally separate entity is not simply reclassified as an internal enterprise fund; component-unit guidance governs whether the entity is included. Even if blended, the unit's transactions are presented according to applicable fund and government-wide guidance, but the facts here support blending rather than treating the authority as an enterprise fund of the city.
Question 5
Hint
Apply the major‑fund revenue tests in two steps, category (10%) then combined (5%), and be mindful which fund categories the tests cover.
Answer B. Major‑fund status uses the same element (revenues here) in two tests: (1) at least 10% of the total for the fund's category (governmental or enterprise), and (2) at least 5% of combined governmental‑plus‑enterprise funds. The Transit Enterprise Fund's $11.0 million exceeds 10% of enterprise fund revenues (10% × $40.0M = $4.0M) and equals the 5% combined threshold (5% × $220.0M = $11.0M). Equality meets the 'at least' requirement, so the Transit Enterprise Fund must be reported as a major fund.
Why not A: This distractor appeals to those who apply only the combined 5% test because $17.9M > $11.0M. However, as a governmental fund it must also meet the 10% governmental‑category test (10% of $180.0M = $18.0M); at $17.9M it falls just short and therefore does not satisfy both required tests.
Why not C: This choice tempts candidates who focus on the combined threshold since $12.0M > $11.0M. It fails the category test: $12.0M is only 6.7% of governmental fund revenues ($180.0M), below the 10% cutoff, so it does not qualify as a major governmental fund.
Why not D: Although $15.0M exceeds the combined 5% threshold, internal service funds are proprietary funds generally presented in aggregate and are not evaluated as enterprise funds when applying the major‑fund revenue tests (the tests apply to governmental and enterprise funds). Thus the Central Garage internal service amount does not, by the stated rules, trigger required major‑fund presentation.
Question 6
Hint
First accept the stem's statement that the authority is a material component unit; then apply GASB blending criteria, a common governing board alone typically does not force blending.
Answer B. Although the county commissioners serve ex officio on the authority's governing board, GASB does not require blending solely on that basis. Blending is appropriate only when one or more additional indicators are present (for example, a financial benefit/burden relationship such as the primary government expected to finance deficits or have access to the component unit's resources, the primary government having operational responsibility for the component unit, or the component unit providing services almost exclusively to the primary government). Those additional indicators are not present here, so the authority should be presented discretely.
Why not A: This is tempting because a shared governing board is a recognized indicator, but many candidates overgeneralize, having the same board alone is not sufficient under GASB; at least one additional blending criterion must be met.
Why not C: Charging users is a characteristic of business-type activities, but for a legally separate component unit blending into enterprise funds requires the additional GASB blending indicators. Financing by charges alone does not convert a discrete component unit into an internal fund of the primary government.
Why not D: This is tempting if one focuses only on debt responsibility, but the stem specifies the authority is a material component unit of the county. Exclusion is not an option when an entity is determined to be a material component unit; the question is how it is presented (blended versus discrete).
Common questions
How do I apply GASB’s 10% and 5% major-fund tests?
Pick one element and test it twice: at least 10% of the totals for its fund category, and at least 5% of the combined governmental-plus-enterprise total for that element. Equality meets the threshold.
Are internal service and fiduciary funds part of major-fund testing or government-wide statements?
Exclude both from the 10% and 5% major-fund tests. In government-wide statements, fiduciary funds are excluded, but internal service funds are included in governmental activities.
When do I blend a component unit instead of discrete presentation?
Blend only when the unit is substantively the same as the primary government, such as sharing the governing body and serving almost exclusively the primary government or when its debt is expected to be repaid by the primary government. Otherwise discretely present.
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