How Should School Districts Report Charter Schools?

The annual audited financial statements of state and local governments will, under certain circumstances, report the finances of not just the government itself but also one or more legally separate entities related to the government—referred to as component units. If a school district determines that a charter school is a component unit using the process described in a separate article, the question arises, “How should the charter school be incorporated into the school district’s financial statements?” Because answering that question can be complex, we’ve provided a resource that illustrates the process described below.  

How Should Charter Schools That Are Component Units Be Reported?

If it is determined that a charter school is a component unit of a school district, it will be included in the district’s financial statements either discretely from the primary government or blended within the primary government. Discrete presentation is the default approach to reporting component units. It means the charter school appears separately from the primary government in the school district’s financial statements—depending on the financial statement, either in a separate column to the right of the total primary government column or in a separate row below the total primary government row.

When a school district has multiple component units, there usually is not enough room in its financial statements to show each of them in their own columns or rows. In that case, the district will combine them into a single column or row. If there are multiple component units in the discretely presented component units column or row, school districts often will provide additional financial statements that individually show the component units’ financial information.

When Should Charter Schools That Are Component Units Be Blended?

Some charter schools are so intertwined with a school district that they are difficult to distinguish from the district despite being legally separate. School districts report such charter schools within the primary government rather than outside—an approach called blending. The following questions identify the circumstances in which a charter school (or any other component unit) should be blended.

Question A: Are the governing bodies of the school district and the charter school “substantively the same”?

This often takes the form of a school district’s board serving as the governing body of the charter school, but it does not require that the membership be identical. The answer to this question is yes if the school district has sufficient representation on the charter school’s governing body that the charter school can’t overrule decisions of the school district (e.g., the district superintendent and two school board members are three voting members of a charter school’s five-member board).

Question B: Is there a financial benefit-burden relationship between the school district and the charter school, or does the school district have operational responsibility for the charter school?

As explained in the other article, if a charter school potentially provides financial benefits to or potentially imposes financial burdens on a district, they have a financial benefit-burden relationship.

Operational responsibility means that the school district’s management manages the charter school’s activities as if it were one of its own programs or departments.

If the answers to both questions A and B are yes, the charter school should be blended with the primary government.

Question C: Does the charter school provide services entirely or almost entirely to the school district?

In this blending circumstance, a component unit provides goods or services to the school district rather than to the students or other district constituents. That would generally not be the case for a charter school.

Question D: Does the charter school exclusively or almost exclusively benefit the school district despite not providing services directly to the district?

This circumstance involves a charter school benefitting a school district by providing services indirectly, such as providing services to teachers on behalf of the district.

If the answer to question C and/or D is yes, the charter school should be blended with the primary government.

Question E: Is the charter school’s total debt outstanding, including leases, expected to be repaid entirely or almost entirely with the resources of the school district?

An example of this circumstance would be a school district that pledges or appropriates resources to repay the charter school’s debt, which is secured by those district resources.

If the answer to question E is yes, the charter school should be blended with the primary government.

Question F: Is the school district the sole corporate member of a charter school organized as a not-for-profit corporation?

This path to blending is appropriate if a charter school is (1) determined to be a component unit of a school district based on financial accountability (see questions 1 – 4 in the other article) and (2) a not-for-profit (NFP) corporation in which the district is the sole corporate member. The latter criterion would be identified in the charter school’s articles of incorporation or bylaws. This reason for blending was added to the accounting standards specifically to address a situation common in public hospitals; however, it theoretically could apply to a charter school.

If the answer to question F is yes, the charter school should be blended with the primary government.

Need Help With Component Units?

The partners in CRI’s government and public sector practice know the financial reporting entity standards backward and forward. If you need help evaluating potential component units, determining how to present them, or with other reporting entity issues or any governmental accounting and financial reporting problem, contact CRI for swift and expert assistance.