Project Pages

Equity Interest Ownership Issues

Project Description: This project will address certain issues related to the reporting of majority equity ownership in legally separate entities. The project will consider improvements to the existing guidance in Statement No. 14, The Financial Reporting Entity, on the presentation of ownership interest in a legally separate entity. The project also will consider improvements to the recognition and measurement guidance for wholly-owned legally separate entities that are presented as component units.

Status:
Redeliberations of an Exposure Draft began: March 2018

Equity Interest Ownership Issues—Project Plan


Background: Reporting requirements for equity ownership in legally separate entities largely are found in Statement 14. A governmental entity may report a majority ownership interest in a legally separate entity as a component unit or as an investment based on specific facts and circumstances. If the governmental entity owns less than a majority equity interest, it may report it as a component unit, an investment, or a joint venture (again, based on specific facts and circumstances). If the ownership is reported as a discretely presented component unit, the governmental entity should recognize an asset for its equity interest in the component unit, if certain conditions are present. Paragraph 20 of Statement 14, as amended, defines component units and states that a component unit may be a governmental, nonprofit, or for-profit entity.

If a legally separate entity is reported as a discretely presented component unit, the primary government should recognize an asset for the equity interest in that entity, if any. Paragraph 78 of Statement 14, as amended, requires that governments recognize an equity interest in a component unit in the same manner as required for joint ventures in paragraphs 73–74. Additionally, paragraph 78 emphasizes that governments that are the majority participant should follow the guidance in paragraph 55 when determining how to report an equity interest in the legally separate entity—that is, as an asset in a discretely presented component unit or only as an investment. Paragraph 64 of 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.” Paragraph 55 of Statement 14 does not specifically require an assessment of the present service capacity of the equity interest ownership in determining if a component unit should be reported as an investment; however, without that assessment, the result would conflict with the criterion that needs to be evaluated based on the definition of an investment in Statement 72.

If the government’s ownership of the majority interest in the legally separate entity meets the definition of an investment (that is, it is held primarily for income and its present service capacity is based solely on its ability to generate cash), the government’s ownership is reported as an investment and is subject to the applicable note disclosure requirements for investments. Statement 72 also does not specify if a government’s ownership in a legally separate entity meets the criteria of a “security or other asset” that is included in the definition of an investment. Majority ownership in legally separate entities that are presented as investments on the governmental entities’ financial statements often are measured at fair value, at net asset value (NAV) per share, or using the equity method.

Statement No. 69, Government Combinations and Disposals of Government Operations, was issued in January 2013 and provides accounting and financial reporting guidance for combinations of complete entities, including government acquisitions. The definition of an acquisition in Statement 69 explicitly states that an acquired entity becomes part of the acquiring government’s legally separate entity. Thus, in a government acquisition, the acquired entity ceases to exist separate from the acquiring government. That guidance on government acquisitions does not include obtaining an equity interest in another organization that remains legally separate and will be reported as a component unit of the acquiring government. Statement 14, as amended, provides the requirements for reporting the legally separate organizations that comprise a financial reporting entity. The measurement of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources of an acquired entity that becomes part of the primary government under Statement 69 is different from measurement when an acquired entity is reported as a component unit under Statement 14, as amended.

Under Statement 14, the legally separate component unit is reported at carrying value on the governmental entity’s financial statements. However, under Statement 69, assets and liabilities of the acquired entity that becomes part of the acquiring primary government are measured at acquisition value.

A variety of government types hold a majority interest ownership in a legally separate entity. The implementation of Statement 72 raised new questions about which method, component unit, investment, or another asset—is appropriate to report an equity interest in a legally separate entity.

As part of the pre-agenda research, GASB staff members completed a literature review, archival research, and interviews and surveys with preparers, auditors, and users. Several findings of the research may require standards setting, including inconsistencies in financial reporting of legally separate entities and conflicts with the prioritization in the intent of ownership when determining the appropriate presentation of legally separate entities.

Additionally, as government combinations are becoming more common, so have government acquisitions of wholly-owned legally separate entities that meet the criteria to be presented as a component unit. As stated above, existing standards require different measurement approaches for government acquisitions depending on whether legal separation is maintained. Some preparers and auditors that participated in the pre-agenda research do not believe there is a substantive difference between a government’s acquisition of an entity that remains legally separate and an entity that ceases to exist as a separate entity. Therefore, they do not believe the difference in accounting is justified.

Accounting and Financial Reporting Issues: The project is considering the following issues:
  1. Current guidance allows governments to report a majority ownership in a legally separate entity as an investment or component unit based on the intent of ownership. However, ownership in legally separate entities may result from multiple, conflicting intents of ownership. How should a government report the majority equity ownership in a legally separate entity in the financial statements?
  2. Current guidance requires different measurement for the acquisition of an entity that ceases to exist under Statement 69, and the 100 percent acquisition of a legally separate entity that maintains legal separation and meets the criteria to be reported as a component unit. How should a government report the assets, deferred inflows of resources, liabilities, and deferred outflows of resources of a legally separate entity that meets the criteria to be reported as a component unit when the entity is wholly acquired?
Project History:
  • Pre-agenda research approved: April 2016
  • Consultative group appointed? Yes
  • Added to the current technical agenda: December 2016
  • Deliberations began:  March 2017
  • Exposure Draft of a proposed Statement approved: November 2017
  • Comment period: November 2017–January 2018
  • Redeliberations began: March 2018
Current Developments: At its March 2018 meeting the Board began to redeliberate the proposed requirements based on respondent feedback related to the scope of the project. At its April 2018 meeting, the Board considered issues related to reporting a government’s holding of a majority equity interest in a legally separate organization as an investment when that holding meets the definition of an investment. The Board also considered issues related to the measurement of a government’s holding of a majority equity interest reported as an investment.

Work Plan:
 

Board Meetings

Topics to Be Considered

July 2018: Review preballot draft of a final Statement.
August 2018: Review ballot draft and consider a final Statement for approval.
 

Equity Interest Ownership Issues—RECENT MINUTES


Minutes of Meetings, April 17 and 18, 2018

The Board continued redeliberations of the proposals in the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests. Based on feedback received from some respondents, the Board tentatively decided that the final Statement should include the definition of equity interest for the purposes of applying requirements for majority equity interests. The Board tentatively decided that the definition would be as follows:
 
An equity interest is a financial interest in a legally separate entity evidenced by the ownership of shares of an entity’s stock or by otherwise having an explicit, measurable right to the net resources of the entity that is usually based on an investment of financial or capital resources by a participating government.

The Board next tentatively decided that the requirement for a government holding a majority equity interest that meets the definition of an investment in paragraph 64 of Statement No. 72, Fair Value Measurement and Application, to report that holding as an investment should be carried forward to the final Statement. The Board then tentatively decided that the definition of an investment should not be included in the final Statement because a reference to the definition in Statement 72 is considered to be appropriate in this situation.

The Board also tentatively decided to carry forward to the final Statement the proposal that the equity method as described in paragraphs 205–209 of Statement 62 be applied to the measurement of majority equity interests reported as investments, with the exception of special-purpose governments engaged only in fiduciary activities, fiduciary funds, endowments (including permanent and term endowments) or permanent funds that should apply fair value to measure majority equity interests reported as investments.

Minutes of Meetings, March 6−8 2018

The Board began redeliberations on the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests, by discussing general feedback from respondents. The Board also considered a respondent comment to reexamine the accounting and financial reporting requirements of joint ventures. The Board tentatively decided the project scope should not be expanded to reexamine the accounting and financial reporting requirements for joint ventures.

Minutes of Meetings, October 31 - November 2, 2017

The Board tentatively decided that the holding of a majority equity interest in a legally separate organization that is reported as a component unit should be reported as an asset of the government or fund that holds the majority equity interest, subject to the measurement focus. The Board then discussed a ballot draft of the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests. During the discussion, the Board decided that the measurement of assets related to holding a majority equity interest in a component unit should be accomplished using the equity method as described in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, rather than the equity method used to measure participation in joint ventures in which there is an equity interest as described in Statement No. 14, The Financial Reporting Entity. The Board also made clarifying edits on the draft document. The Board voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meetings, September 27 and 28, 2017

The Board reviewed a preballot draft of the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests, and discussed clarifying edits. The Board tentatively decided to propose that the statement of net position elements for all component units in which a primary government acquires a 100 percent interest during the reporting period be measured at acquisition value instead of only those component units in which the entire 100 percent interest was acquired during the reporting period.

The Board tentatively decided that the comment period for the Exposure Draft should be 60 days.

Minutes of Meetings, August 10 and 11, 2017

The Board considered the reporting of the effects of applying acquisition value by component units in which the primary government acquired a 100 percent equity interest during the reporting period. The Board tentatively decided to propose that such governments report the effects of applying acquisition value by adopting a fresh-start accounting approach as a new financial reporting entity. The Board reviewed a draft of the Standards section of a proposed Exposure Draft and discussed clarifying edits.

The Board also discussed the effective date and transition requirements for the proposed Statement. The Board tentatively proposed that the standard be effective for reporting periods beginning after December 15, 2018, with the provisions applying to financial statements for all periods presented, and that earlier application of the proposed requirements be encouraged. The Board also tentatively decided to propose that the standard be required to be applied retroactively, except for the provisions to measure assets, deferred outflows of resources, liabilities, and deferred inflows of resources of a component unit in which the primary government acquired a 100 percent equity interest during the reporting period by applying acquisition value, which should be applied prospectively.

The Board also discussed whether the intended benefits of information to users and other stakeholders from the tentative decisions to be proposed in the Exposure Draft justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the proposed reporting requirements justify the perceived implementation and ongoing costs.

The Board also discussed the characteristics of the financial information that would be provided as a result of the requirements to be proposed in the Exposure Draft. The Board tentatively agreed that the accounting and financial reporting requirements to be proposed in the Exposure Draft would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, June 28–29, 2017

The Board continued deliberations related to the reporting of assets, deferred outflows of resources, liabilities, and deferred inflows of resources (statement of net position elements) of a legally separate organization that meets the criteria to be reported as a component unit when the organization is acquired by a primary government. The Board tentatively decided to propose limiting the scope of the project to circumstances in which an organization is 100 percent acquired by a primary government.

The Board then discussed the reporting for statement of net position elements of 100 percent acquired component units of a primary government. The Board tentatively decided to propose that primary governments report the statement of net position elements of such organizations at acquisition value, with the same measurement exceptions that are provided for government acquisitions in paragraphs 31 and 33–36 of Statement No. 69, Government Combinations and Disposals of Government Operations. The Board also tentatively decided to propose that in the stand-alone financial statements of 100 percent acquired component units, the statement of net position elements be reported at acquisition value, with the same measurement exceptions that are provided for government acquisitions in paragraphs 31 and 33–36 of Statement 69.

Minutes of Teleconference, May 1, 2017

The Board continued deliberations on the reporting of majority ownership interests held by governments. The Board tentatively decided to propose that a government report a majority ownership interest in a legally separate entity as an investment in all circumstances in which the ownership interest meets the definition of an investment, even if that interest also meets the definition of a component unit.

The Board also discussed measurement issues for majority ownership interests in legally separate entities. The Board tentatively decided to propose that the majority ownership interest in a legally separate organization meeting the definition of an investment be measured using the equity method, except for interests held by special-purpose governments engaged in fiduciary activities, fiduciary funds, or endowments (including permanent and term endowments) and permanent funds. For those activities, the Board tentatively decided to propose that the equity interest be measured using fair value.

Minutes Archive

Equity Interest Ownership Issues—Tentative Board Decisions to Date


The Exposure Draft of a proposed Statement, Accounting and Financial Reporting for Majority Equity Interests, was approved in November 2017.

In developing a final Statement, the Board tentatively decided that:
  • The project scope should not be expanded to reexamine the accounting and financial reporting requirements for joint ventures.
  • The definition of equity interest for the purposes of applying requirements for majority equity interests should be included as follows:
An equity interest is a financial interest in a legally separate entity
evidenced by the ownership of shares of an entity’s stock or by
otherwise having an explicit, measurable right to the net resources
of the entity that is usually based on an investment of financial or
capital resources by a participating government.
  • The requirement for a government holding a majority equity interest that meets the definition of an investment in paragraph 64 of Statement 72 to report that holding as an investment should be carried forward.
  • The equity method as described in paragraphs 205–209 of Statement 62 should be applied to the measurement of majority equity interests reported as investments, with the exception of special-purpose governments engaged only in fiduciary activities, fiduciary funds, or endowments (including permanent and term endowments) or permanent funds that should apply fair value to measure majority equity interests reported as investments.