GASB issues standard on majority equity interests

GASB logo at headquarters in Norwalk, Connecticut
GASB headquarters in Norwalk, Connecticut

The Governmental Accounting Standards Board released guidance Tuesday to clarify how to account for a state or local government’s majority equity interest in an organization that stays legally separate after it’s acquired.

For example, the guidance can be applied to a transaction in which a public hospital acquires a rehabilitation center, but the rehab center remains a separate legal entity.

In Statement No. 90, Majority Equity Interests, GASB said that a government’s majority equity interest in a legally separate organization should be reported as an investment if the equity interest meets GASB’s definition of an investment. In many cases, a majority equity interest that meets the definition of an investment should be measured using the equity method, according to the newly clarified guidance.

An earlier GASB standard, Statement No. 72, Fair Value Measurement and Application, defines an investment as “a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.”

Thus, for a majority equity interest in a legally separate entity that doesn’t meet the definition of an investment, Statement 90 requires a government to report the legally separate entity as a component unit. The new standard also offers guidance on re-measuring assets and liabilities of wholly acquired governmental organizations that stay legally separate, bringing the reporting of those acquisitions in line with earlier standards that apply to acquisitions that don’t remain legally separate.

The requirements of the standard take effect for reporting periods starting after Dec. 15, 2018, but GASB is encouraging government accountants to apply it even earlier. The new requirements should be applied retroactively, except for the provisions in the standard related to reporting a majority equity interest in a component unit and reporting a component unit if the government acquires a 100 percent equity interest. Those provisions should be applied on a prospective basis, according to GASB.

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