Two American Institute of CPAs (AICPA) panels recently submitted comments to the Governmental Accounting Standards Board (GASB) on its Exposure Draft (ED), Accounting and Reporting for Majority Equity Interests. The primary objective of the ED is to improve consistency of reporting a government’s majority equity interest in a legally separate organization.
The AICPA State and Local Government Expert Panel recommended in its January 29 letter that GASB delay issuance of the proposed standard until it considers comprehensive guidance on what constitutes an equity interest. While the Panel supported the Board’s conclusion to give priority to the definition of an investment when evaluating the reporting of a government’s majority equity interest in a legally separate organization, it expressed concern about the lack of clear guidance of what is or is not an equity interest and the diversity in practice that currently exists given the complexity of legal structures used to establish separate entities (e.g., not-for-profit corporations, limited liability companies, limited liability partnerships, and limited partnerships).
The AICPA Private Companies Practice Section Technical Issues Committee’s (TIC) December 22 letter noted that many tribal enterprises are majority owned by the tribe and that TIC has seen them recorded as both an investment and a component unit under current GAAP. One of the issues, especially as it relates to tribal governments, is the difficulty and subjectivity of intent of ownership. While this ED does help by stating that if it meets the definition of an investment it should be reported as one, this may cause governments that want to present as component units to look differently at the question of intent. Paragraph 55 of GASB 14, The Financial Reporting Entity, provides an example, but TIC fears that might not be enough. However, TIC did agree with an investment being the default, with the component unit only being used if it does not meet the definition of an investment.