GASB Clarifies Guidance on Majority Equity Interests
Norwalk, CT, September 4, 2018 — The Governmental
Accounting Standards Board (GASB) has issued guidance clarifying the
accounting and financial reporting requirements for a state or local
government's majority equity interest in an organization that remains
legally separate after acquisition.
A public hospital's acquisition of a rehabilitation center that remains
legally separate after acquisition is an example of the type of
transaction the new guidance addresses.
Under Statement No. 90, Majority Equity Interests,
a government's majority equity interest in a legally separate
organization should be reported as an investment if that equity interest
meets the GASB's definition of an investment. In many instances, a
majority equity interest that meets the definition of an investment
should be measured using the equity method.
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."
For a majority equity interest in a legally separate entity that does not
meet the definition of an investment, Statement 90 requires a
government to report the legally separate entity as a component unit.
Statement 90 also establishes guidance for remeasuring assets and
liabilities of wholly acquired governmental organizations that remain
legally separate. That guidance brings the reporting of those
acquisitions in line now with existing standards that apply to
acquisitions that do not remain legally separate.
Statement 90 is available on the GASB website, www.gasb.org.