The Governmental Accounting Standards Board proposed guidance Thursday to clarify how to account for a state or local government’s majority equity interest in organizations that stay legally separate after the acquisition, such as a public hospital buying a rehabilitation center that remains legally separate.

GASB issued an exposure draft of the proposed guidance, Accounting and Financial Reporting for Majority Equity Interests, saying the majority equity interest would be reported as an investment if it meets GASB’s definition of an investment. Except under specific circumstances, a majority equity interest that meets the definition of an investment would be measured using the equity method.

For all other majority equity interests in a legally separate entity—those that don’t meet the definition of an investment—a government would report the entity as a component unit.

The exposure draft also proposes guidance for remeasuring assets and liabilities of an acquired entity that stays legally separate to be consistent with existing standards that apply to acquisitions that don’t remain legally separate.

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

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