Magazine article Government Finance Review

GASB Issues Exposure Draft on Majority Interests

Magazine article Government Finance Review

GASB Issues Exposure Draft on Majority Interests

Article excerpt

A state-sponsored public employee retirement system buys a majority interest in a real estate development partnership as a longterm holding to meet its investment return target and to support development in an economically challenged region of the state. A municipality buys 75 percent of the outstanding voting stock in a corporation that owns a nearby landfill to assure its continued, safe operation as a site to dispose of residential waste and to share in the profit earned on commercial landfill tipping fees. A public hospital buys a nearby dialysis center to serve its patients and produce surplus revenue that can be used to support other operations. In each of these cases, a government has acquired a majority equity interest in a legally separate entity.

BACKGROUND

Over the years, the Governmental Accounting Standards Bureau (GASB) has looked at how governments should account for and report majority equity interests from two different vantage points without precisely integrating the two. GASB Statement No. 14, The Financial Reporting Entity, and subsequent amendments (Cod. Sec. 2100.119-144), view the matter through the lens of accountability, leading to the requirement to include some enterprises as component units (CUs) within the primary governments' reporting. GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, and now GASB Statement No. 72, Fair Value Measurement and Application (Cod. Sec. 150), view the matter from an investment perspective, resulting in rules on the reporting of assets within the primary government itself.

These approaches have resulted in differences between the way governments account for and report legally separate entities in which they hold majority equity interests, with some reported as investments, some as CUs, and some as both. To address the inconsistencies, on November 1, 2017, GASB issued an Exposure Draft (ED), Accounting and Financial Reporting for Majority Equity Interests, for public comment.

THE PROPOSED GUIDANCE

The ED's proposed guidance would require governments to distinguish between majority equity interests that are investments and those that are not. An investment is 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.1

For equity interests that qualify as investments, the accounting and reporting is dependent on the nature of the government or fund that holds it. If the investment is held by a special-purpose government engaged only in fiduciary activities, such as a pension or other postemployment benefit plan, or by a fiduciary fund, an endowment, or a permanent fund, the investment should generally be reported at fair value. If the investment is held by another type of government or fund, the ED proposes that it should be accounted for using the equity method.2 In these cases, the entity in which the majority equity investment is held should not also be reported as a CU, even if it would otherwise qualify.

For the majority equity interests that do not meet the definition of an investment, the entity in which the majority interest is held should be reported as a CU of the government or fund that holds the majority interest, and the government should also report an asset using the equity method. …

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