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 14, paragraph 55 (as amended by GASB 61, paragraph 10a) if an agency owns a majority of equity interest in a legally separate organization, the agency’s intent for owning the equity interest determines whether the organization is reported as a component unit or an investment.

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.

For more information related to majority equity interests, please see GASB 90.

Report the organization as a component unit if the agency owns the majority equity interest to directly enhance its ability to provide governmental services. For example, if the agency purchases 100 percent of the stock of a concrete plant for the sole purpose of having a controlled source of concrete for its capital projects, then the concrete plant is reported as a component unit.

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 Equity.

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.

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.

Report the ownership of stock in a corporation as an investment (not as a component unit) if the agency owns the stock for investment purposes rather than to directly aid its own operations, regardless of the extent of the equity ownership.

According to GASB 90, if the agency owns a majority equity interest in a legally separate organization, the agency reports the ownership as an investment using the equity method of accounting rather than reporting it as a component unit.

For more information on reporting equity interest, users can access GASB 14 on GASB’s Governmental Accounting Research System (GARS) website or download a PDF version from the Pronouncement’s page on GASB’s website.