Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

The Financial Reporting Entity
Joint Ventures

Joint ventures (as discussed in GASB 14, paragraphs 69–76) are legal entities that result from a contractual arrangement owned, operated or governed by two or more participants as a specific activity subject to joint control. Joint control means no single participant has the ability to unilaterally control the financial or operating policies of the joint venture.

Participants in a joint venture retain an ongoing financial interest or financial responsibility. The purpose is to pool resources and to share the costs, risks and rewards of providing goods or services.

Ongoing financial interest includes an equity interest and any other arrangement that allows the agency to have access to the joint venture’s resources. This access can occur either:

• Directly (such as payments by the joint venture to the agency)
  –OR–
• Indirectly (such as the agency having the ability to influence the joint venture to undertake a special project for the benefit of Texas residents)

Ongoing financial responsibility occurs if the:

• Agency is obligated in some manner for the debts of the joint venture
  –OR–
• Continued existence of the joint venture is dependent upon financial funding from the agency

GASB 14, paragraph 72, defines equity interest as the ownership of shares of stock or otherwise having an explicit, measurable right to net resources that is usually based on investment by a government of its financial or capital resources.

Report equity interest as an asset of the fund that has the equity interest. Since the equity interest generally represents equity primarily in capital assets, the equity is reported like other capital assets of the agency. This means the equity interest will be accounted for differently depending on whether the equity interest is reported in a governmental fund or a proprietary fund.

Equity Interest Accounting Treatment for Proprietary Funds

In proprietary funds, the equity interest is calculated in accordance with the joint venture agreement and initially reported at cost. If the agency shares in the operating results of the joint venture, the equity interest is adjusted for that share, regardless of whether any amount is actually remitted to the agency.

The agency’s share of net income is treated as an additional equity interest rather than as revenue or earnings. Any profit on transactions between the agency and the joint venture must be eliminated. Below is an illustrative example of this elimination.

1. An agency has a 50 percent equity interest in an electricity-generating joint venture accounted for in an enterprise fund.
2. Total sales were $100,000.
3. Joint venture sales to the agency were $30,000 (30 percent of total sales).
4. Net income was $10,000 (10 percent of sales).
5. The agency’s net investment of the joint venture increased by $5,000 (50 percent of net income).

The net effect on the accounts of the agency would be:

Agency’s share of the joint venture net income     $5,000
*Less profit on intra-agency transactions           1,500
Agency’s net income from joint venture             $3,500

*Total intra-agency transactions were $30,000. Profit is 10 percent of sales ($3,000), with 50 percent of that profit belonging to the agency ($1,500).

Effect on agency’s books:

Nonoperating transactions between the agency and the joint venture increase or decrease the equity interest. The equity interest is reported as a single amount on the balance sheet and the fund’s share of the joint venture’s net income or loss is reported as a single amount on the operating statement.

Equity Interest Accounting Treatment for Governmental Funds

For governmental funds, do not report the entire net amount invested in the joint venture. The equity interest is calculated in accordance with the joint venture agreement and the amount to be reported is limited to amounts reported under the current financial resources measurement focus and modified accrual basis of accounting. Generally, equity interest represents equity primarily in capital assets. The portion pertaining to capital assets is reported like any other capital asset of the agency. Amounts such as payables to or receivables from the joint venture are reported in the governmental fund balance sheet. The combination of amounts reported in the governmental funds and in the general capital assets equals the total equity interest in the net position of the joint venture. The entire equity interest is reported in the government-wide statement of net position as part of the unrestricted net position balance.

Changes in joint venture equity interest are reported on the operating statement only to the extent that amounts satisfy the revenue or expenditure recognition criteria for governmental funds.

For information on note disclosure requirements for joint ventures, see Joint Ventures in Note 19 — The Financial Reporting Entity. Also, users can access GASB 14 on GASB’s Governmental Accounting Research System (GARS) website or a PDF version may be downloaded from the Pronouncement’s page of GASB’s website.