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COUNTY OF HAWAlf Notes to the Basic Financial Statements June 30,2006 The accounting policies of the County of Hawaii(the County)conform to U.S.generally accepted accounting principles(GAAP)as applicable to local governmental units. The following notes to the basic financial statements are an integral part of the County's Comprehensive Annual Financial Report. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Financial Reporting Entity The County has implemented Governmental Accounting Standards Board Statement No.14, The Financial Reporting Entity(GASB Statement No. 14). All organizations,activities or functions that meet the criteria in GASB Statement No. 14 for inclusion in the reporting entity are included from the County's basic financial statements. Primary Government The County operates under the Mayor-Council form of government under a charter that became effective on January 2, 1969,and was amended in 1979, 1982, 1990 and 2000. The County's operations are organized by the following functions: general government;public safety;highways and streets;sanitation;health,education and welfare; culture and recreation;pension and retirement contributions;health fund;miscellaneous; capital outlay;and debt service. The State of Hawaii(the State)assumes full responsibility for several major functions usually performed by local governments,including education, welfare,health and judicial functions. There are no separate city,county or township governments nor any school districts,special districts,authorities or public corporations with overlapping authority. GASB Statement No. 14 defines component units as legally separate organizations for which the elected officials of the primary government are financially accountable. "Financial accountability" is the level of accountability that exists if a primary government appoints a voting majority of an organization's governing board and is either able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to,or impose specific financial burdens on,the primary government. A primary government has the ability to impose its will on an organization if it can significantly influence the programs,projects,activities or level of services performed or provided by the organization. An organization has a financial benefit or burden relationship with the primary government if any one of three conditions exist: (1)The primary government is legally entitled to or can otherwise access the organization's resources;(2)The primary government is legally obligated or has otherwise assumed the obligation to finance the deficits of,or provide financial support to,the organization;or(3)The primary government is obligated in some manner for the debt of the organization. As required by GAAP as set forth in GASB Statement No. 14,these basic financial statements present the County of Hawaii(the primary government)and its component unit, -44 -