GASB releases Statement 90, Majority Equity Interests
In August 2018, GASB released Statement No. 90, Majority Equity Interests, an amendment of GASB Statements No. 14 and No. 61. The GASB issued this statement to help clarify situations in which a government’s purpose for holding a majority equity interest met both the definition of an investment and the criteria to be reported as a component unit. Prior to this standard, there were many challenges with applying the existing guidance when reporting a majority equity interest in a legally separate organization; as a result, there’ve been inconsistencies with how governments reported these interests in the past.
This standard addresses accounting and financial reporting guidance for:
- A government’s majority equity interest in an organization that remains legally separate after acquisition
- Reporting component units in which the government acquires a 100 percent equity interest
What is an equity interest?
GASB defines an equity interest as a financial interest in a legally separate organization evidenced through stock ownership or by otherwise having the explicit right to net resources of an organization based on a cash/capital resource contribution by the government.
First test: Does the majority equity interest meet the definition of an investment under GASB 72?
If the government’s holding of an equity interest meets the definition of an investment under GASB 72*, the equity interest should be reported as an investment and measured using the equity method. There’s an exception if the government holding this investment is a special-purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment/permanent fund; in those cases, the majority equity interest investment should be recorded at fair value.
*GASB 72 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.
If the government’s holding of an equity interest meets GASB 72’s definition of an investment, it should be reported as an investment and measured using the equity method.
If not an investment, then what?
For all other majority equity interests (those not meeting the definition of an investment), because GASB believes that the holding of that majority interest results in financial accountability for that legally separate organization, a government should (1) report the organization as a component unit and (2) report the interest as an asset of the fund that holds the equity interest using the equity method. If the component unit is blended, the asset and net position associated with the equity interest held by the fund should be eliminated in the blending process. If the component unit is discretely presented, this presentation would result in the reporting entity’s financial statements, including both the net position of the discretely presented component unit and the government’s equity interest in that component unit. In these cases, if the optional total column for the reporting entity is presented, the equity interest would also be eliminated.
What about situations where the government acquires a 100 percent equity interest?
If that legally separate organization in which the government has a majority equity interest is reported as a component unit, and the government acquires a 100 percent equity interest in it, there are specific requirements for how the component unit should be reported. At the date of acquisition, the component unit should account for its beginning balance sheet in accordance with the accounting for government acquisitions found in GASB Statement 69. The flow statement of the component unit would only include transactions occurring subsequent to the acquisition.
When is it effective?
The new standard is effective for reporting periods beginning after Dec. 15, 2018. Early application is encouraged. The requirements should be applied retroactively by restating financial statements for all periods presented. These retroactive provisions do not apply to either:
- The recording of an asset within the fund that holds the equity interest, as those assets previously were required to be recorded differently, and the GASB believes information may not be available to make the adjustments to measure them retroactively based on the equity method.
- To the acquisition accounting for 100 percent equity interest ownership.
For the above two exceptions, this statement would be applied prospectively.
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