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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

The Financial Reporting Entity
Reporting Equity Interest in Legally Separate Organizations

According to GASB 90, paragraph 3, an equity interest is a financial interest in a legally separate organization evidenced by ownership of shares of the organization’s stock or by otherwise having an explicit, measurable right to the net resources of the organization that is usually based on an investment of financial or capital resources by an agency. An equity interest is explicit and measurable if the agency has a present or future claim to the net resources of the organization and the method for measuring the agency’s share of the organization’s net resources is determinable.

According to GASB 72, as amended by GASB 90, an investment is a security or other asset that:

  • An agency holds primarily for the purpose of income or profit.
  • Has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.

If the agency’s holding of the majority equity interest meets the definition of an investment the agency must:

  • Report the equity interest as an investment
    –AND–
  • Measure the equity interest using the equity method.

In this circumstance, the legally separate organization is not reported as a component unit.

If the agency’s holding of the majority equity interest does not meet the definition of an investment, the agency:

  • Is financially accountable for the majority equity interest
    –AND–
  • Must report the legally separate organization as a component unit.
  • Must also report an asset for the majority equity interest, measured using the equity method, subject to the applicable measurement focus.

An agency must not report a legally separate organization as a component unit solely because the agency owns stock for investment purposes. Conversely, a majority equity interest held to directly support the agency’s operations or service delivery may result in reporting as a component unit if it does not meet the definition of an investment.

In addition to reporting the organization as a component unit, the equity interest is also reported in the agency’s financial statements. When the component unit is discretely presented, the equity interest is reported using the same criteria as discussed in Joint Ventures in The Financial Reporting Entity.

When the component unit is blended, the purchase is reported in the reporting period of the acquisition as an outflow of the fund that provided the resources. The activities of the component unit are reported just like any other blended component unit. The asset and related net position associated with the equity interest are eliminated in the blending process.

Note: Report the legally separate organization as a joint venture rather than as a component unit if the agency owns the equity interest as part of a joint venture agreement.