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:
Statement No. 90, Majority Equity Interests, approved: August 2018
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:
Minutes of Meetings, August 22–24, 2018
The Board reviewed and provided clarifying edits, including changing the title, on the ballot draft of the final Statement, Majority Equity Interests. The Board then voted unanimously to approve the issuance of Statement No. 90, Majority Equity Interests.
Minutes of Meetings, July 10–12, 2018
The Board reviewed a preballot draft of a final Statement, Accounting and Financial Reporting for Majority Equity Interests, and discussed clarifying edits. The Board agreed to consider a ballot draft of a final Statement, Accounting and Financial Reporting for Majority Equity Interests, at the August 2018 meeting.
Minutes of Meetings, May 29–31, 2018
The Board continued redeliberations of the proposals in the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests. After considering the feedback received from respondents, the Board tentatively decided that a government’s holding of majority equity interest in a legally separate entity that does not meet the definition of an investment in paragraph 64 of Statement No. 72, Fair Value Measurement and Application, meets the definition of financial accountability and should be reported as a component unit.
The Board also discussed feedback received from respondents regarding the measurement of an asset related to a majority equity interest in a component unit. The Board tentatively decided that the requirement to measure a government’s majority equity interest in a component unit as an asset using the equity method as described in paragraphs 205–209 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, as amended, should be carried forward.
The Board next tentatively decided that the scope of Statement No. 69, Government Combinations and Disposals of Government Operations, should not be amended for the provisions in the final Statement.
The Board also tentatively decided that the remeasurement provisions in the final Statement related to 100 percent equity interest should not be limited to acquisitions in which a government previously reported a majority equity interest.
The Board then tentatively decided that the requirement to remeasure the financial statement elements of a 100 percent equity interest in a legally separate entity that is reported as a component unit using acquisition value should be carried forward to the final Statement.
The Board tentatively decided that the proposed effective date should be for periods beginning after December 15, 2018, and that early implementation should be encouraged. The Board also tentatively decided that the transition provisions should include retroactive application by restatement of prior periods presented, if practicable, except for the provisions related to reporting a majority equity interest in a component unit, which should be applied on a prospective basis.
The Board next discussed whether the intended benefits of information to users and other stakeholders from the tentative decisions justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the proposed reporting requirements are anticipated to justify the perceived implementation and ongoing costs.
Finally, the Board discussed the characteristics of the financial information that would be provided as a result of the tentative decisions in this project. The Board tentatively agreed that the requirements 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.
The Board agreed that the project staff should present a preballot draft of a final Statement for discussion at the July 2018 meeting.
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:
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 Archive
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:
Statement No. 90, Majority Equity Interests, approved: August 2018
- Background
- Accounting and Financial Reporting Issues
- Project History
- Current Developments
- Consultative Group
- Recent Minutes
- Tentative Board Decisions to Date
- Project staff:
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 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:
- 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?
- 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?
- 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
- Exposure Draft redeliberations began: March 2018
- Statement No. 90, Majority Equity Interests, approved: August 2018
Equity Interest Ownership Issues—RECENT MINUTES
Minutes of Meetings, August 22–24, 2018
The Board reviewed and provided clarifying edits, including changing the title, on the ballot draft of the final Statement, Majority Equity Interests. The Board then voted unanimously to approve the issuance of Statement No. 90, Majority Equity Interests.
Minutes of Meetings, July 10–12, 2018
The Board reviewed a preballot draft of a final Statement, Accounting and Financial Reporting for Majority Equity Interests, and discussed clarifying edits. The Board agreed to consider a ballot draft of a final Statement, Accounting and Financial Reporting for Majority Equity Interests, at the August 2018 meeting.
Minutes of Meetings, May 29–31, 2018
The Board continued redeliberations of the proposals in the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests. After considering the feedback received from respondents, the Board tentatively decided that a government’s holding of majority equity interest in a legally separate entity that does not meet the definition of an investment in paragraph 64 of Statement No. 72, Fair Value Measurement and Application, meets the definition of financial accountability and should be reported as a component unit.
The Board also discussed feedback received from respondents regarding the measurement of an asset related to a majority equity interest in a component unit. The Board tentatively decided that the requirement to measure a government’s majority equity interest in a component unit as an asset using the equity method as described in paragraphs 205–209 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, as amended, should be carried forward.
The Board next tentatively decided that the scope of Statement No. 69, Government Combinations and Disposals of Government Operations, should not be amended for the provisions in the final Statement.
The Board also tentatively decided that the remeasurement provisions in the final Statement related to 100 percent equity interest should not be limited to acquisitions in which a government previously reported a majority equity interest.
The Board then tentatively decided that the requirement to remeasure the financial statement elements of a 100 percent equity interest in a legally separate entity that is reported as a component unit using acquisition value should be carried forward to the final Statement.
The Board tentatively decided that the proposed effective date should be for periods beginning after December 15, 2018, and that early implementation should be encouraged. The Board also tentatively decided that the transition provisions should include retroactive application by restatement of prior periods presented, if practicable, except for the provisions related to reporting a majority equity interest in a component unit, which should be applied on a prospective basis.
The Board next discussed whether the intended benefits of information to users and other stakeholders from the tentative decisions justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the proposed reporting requirements are anticipated to justify the perceived implementation and ongoing costs.
Finally, the Board discussed the characteristics of the financial information that would be provided as a result of the tentative decisions in this project. The Board tentatively agreed that the requirements 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.
The Board agreed that the project staff should present a preballot draft of a final Statement for discussion at the July 2018 meeting.
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 Archive