Majority Equity Interests
Late last year, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 90 – an amendment to Statement No. 14 and No. 16. This new statement is specifically designed to clarify the reporting requirements for those state and local government entities that have majority equity interest in an organization that remains legally separate after acquisition. In issuing this guidance, the GASB is making an effort to improve the consistency associated with reporting majority equity interest while also improving the relevance of the financial statement information for certain component units.
Statement No. 90 specifies that a majority equity interest in a legally separate organization should be reported as an investment if the holding of the interest meets the definition of an investment. Furthermore, it should be measured using the equity method, unless the government entity is a special purpose government entity engaged exclusively in fiduciary activities, a fiduciary fund, an endowment, or permanent fund. Those government entities should report the equity interest at fair value.
What Is Considered ‘Equity Interest’?
GASB defines “equity interest” as a financial interest in a legally separate organization supported through stock ownership, or by having the exclusive rights to net resources of the organization based on some type of contribution from the government (ex. cash/capital).
For other holdings, as long as the entity’s investment provides the entity with a majority equity interest, the interest should report the legally separate organization as a component unit (blended or discrete) in the financial statements. This requires the entity to report an assets related to this interest under the equity method.
Statement 90 states that ownership of a majority equity interest in a legally separate organization results in the government being financially accountable. Therefore, the entity must meet the requirement to report as a component unit. Additionally, component units in which a government entity has 100 percent interest account for its assets, liabilities, deferred inflows and outflows of resources at the acquisition value at the date the government acquired 100 percent equity interest.
GASB Statement No. 90 is effective for all entities with reporting periods beginning after December 15, 2018.
If you have any questions about your reporting requirements as a result of GASB 90, reach out to me directly at 330.661.0234 or email Rea & Associates and ask to speak to a member of our government services team.
By Morgan Helmick, CPA, LSSGB (Medina office)