Majority Equity Interest Reporting, the GASB Provides Clarity
If your government holds majority equity interest (MEI) in another organization, have a look at the Governmental Accounting Standards Board Statement (GASB) Statement No. 90, Majority Equity Interest. Issued in August 2018, the goal of GASB Statement 90 is to achieve consistency and comparability in reporting through clarifying the proper classification of an MEI, and by providing measurement guidance.
What’s Equity Interest?
The definition of equity interest hasn’t changed since GASB Statement 61, it’s a financial interest in a legally separate organization, and the ownership rights must be explicit and measurable (shares of stock, for example). GASB Statement 90 clarifies that residual interest in the other entity’s assets alone does not qualify as an equity interest, the government must have a determinable claim to the other entity’s present or future net resources.
Is the MEI an Investment?
GASB Statement 90 is clear; if the MEI qualifies as an investment, report it as such. Per GASB Statement 72, an equity interest qualifies as an investment if it’s (a) held for the primary purpose of income or profit, and (b) has a present service capacity based solely on its ability to generate cash or to be sold as cash.
Following GASB Statement 72, an MEI that qualifies as an investment should be reported using the equity method. However, for special-purpose governments engaged in only fiduciary activities, fiduciary funds, endowments or permanent funds, an MEI held as an investment should be reported at fair value. If the MEI meets the definition of an investment, it should not be recorded as a component unit.
If Not an Investment, It’s a Component Unit
GASB Statement 90 also makes clear that holding a non-investment MEI makes the holding government financially accountable for the other entity: report the MEI as a component unit (usually the equity method, see GASB Statement 62).
To illustrate, consider Government A owns an 80% interest in Partnership P, which was formed to acquire, redevelop and manage real estate. Government A’s MEI in Partnership P is likely considered an investment. In contrast, imagine Government A owns 80% of the outstanding shares in Company C, with Government B owning the remaining 20%. Company C was formed with the sole purpose of acquiring and holding title to the building that Governments A and B occupy. Government A’s MEI in Company C is not an investment.
If 100% equity interest is obtained, GASB Statement 90 requires governments to account for the entity’s assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value as of the date 100% interest was acquired, consistent with GASB Statement 69.
Effective Date and Transition
GASB Statement 90 is effective for reporting periods beginning after December 15, 2018. Early adoption is encouraged. Most of this new guidance should be applied retroactively by restating the financial statements (a practicality option does exist). The provisions over component unit reporting and 100% equity interest should be applied prospectively.