United States

Proposed clarifications to guidance on majority equity interests

FINANCIAL REPORTING INSIGHTS  | 

The Governmental Accounting Standards Board (GASB) recently issued an Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests – an amendment of GASB Statement No. 14, to clarify the accounting and financial reporting for a state or local government’s majority equity interest in an organization that remains legally separate after acquisition. An example of a situation the proposed guidance addresses is a public hospital acquiring a rehabilitation center that remains legally separate from the hospital after acquisition.

The Exposure Draft proposes that a government’s majority equity interest in a legally separate organization would be reported as an investment if that equity interest meets the GASB’s definition of an investment. Except in certain specific circumstances, a majority equity interest that meets the definition of an investment would be measured using the equity method. For all other holdings of a majority equity interest in a legally separate organization, a government would report the legally separate entity as a component unit, and the government or fund that holds the equity interest would report an asset related to the majority equity interest using the equity method. 

The Exposure Draft also would require that governments use acquisition value to measure the assets, deferred outflows of resources, liabilities and deferred inflows of resources at the date of acquisition of a component unit in which the primary government acquired a 100 percent equity interest. Transactions presented in the flows statements of the component unit in that circumstance would include only transactions that occurred subsequent to the acquisition.

If finalized, the requirements of the Exposure Draft would be effective for reporting periods beginning after December 15, 2018. The Exposure Draft is available for comment until January 12, 2018.