The definition of an acquisition is the dividing line in state and local governments' accounting for the majority equity interest in an organization that remains legally separate after acquisition, according to clarifying guidance issued recently by GASB.
Statement No. 90, Majority Equity Interests, explains that a government's majority equity interest in a legally separate organization should be reported as an investment if that equity interest meets GASB's definition of an investment.
If the majority equity interest in a legally separated entity does not meet the definition of an investment, Statement 90 requires a government to report the legally separate entity as a component unit.
In Statement No. 72, Fair Value Measurement and Application, GASB defines an investment as a security or other asset that:
- A government holds primarily for the purpose of income or profit, and
- Has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.
In many instances, a majority equity interest that meets the definition of an investment should be measured using the equity method, according to GASB.
Statement 90 also establishes guidance for remeasuring assets and liabilities of wholly acquired governmental organizations that remain legally separate. That guidance makes reporting of those acquisitions consistent with existing standards that apply to acquisitions that do not remain legally separate.
The statement's effective date is for reporting periods beginning after Dec. 15, and earlier application is encouraged.