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Minutes Archive

Government Combinations

Minutes of Meeting, December 13-15, 2011

The Board discussed disposals of operations and recognition and financial reporting for operations that are discontinued. The Board discussed the situation in which only a particular service, operation, or activity might be “spun off” to create a separate entity, sold to another government, or merged with similar activities of another entity. The Board tentatively agreed that “spin offs” should be incorporated into the proposed standard as the transfer or sale of an operation. The Board also tentatively agreed that the definition of operations should include reference to assets and liabilities and that the transfer or sale of operations should be incorporated into the working definitions of government mergers and government acquisitions rather than described separately in the proposed guidance. The Board tentatively agreed on a working definition of the term operation as follows:

An operation is an integrated set of activities, with assets or liabilities, that is being conducted and managed for the purpose of providing identifiable services to a specific group of constituents.

The Board discussed and tentatively agreed that a service continuation principle could be applied for distinguishing between disposals of operations and contributions or acquisitions of assets. The Board also tentatively concluded that the proposed guidance should provide illustrations of various situations in which operations are combined in order to demonstrate the accounting and financial reporting differences when services are continued and when services are not continued.

Next, the Board discussed accounting and financial reporting issues related to transfers or sales of operations within the same financial reporting entity. The Board tentatively agreed that transfers or sales of operations within the same financial reporting entity should be accounted for in a manner that is consistent with the intra-entity transfers of assets guidance in Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues. Based on the Board’s tentative decision, the transferee/acquiring government would report assets and liabilities received or acquired at the carrying value reported by the transferor/selling government.

The Board then discussed transfers and sales of operations to governments outside of the financial reporting entity. The Board tentatively agreed that transfers of operations to governments outside of the financial reporting entity should be accounted for in a manner that is consistent with government mergers. The Board tentatively agreed that purchases of operations by governments outside of the financial reporting entity should be regarded as government acquisitions and should apply the similar recognition and measurement guidance.

The Board discussed disclosures for disposals of operations and tentatively agreed that the selling or transferring government should disclose (1) whether the disposal resulted in a sale or transfer within the same financial reporting entity, (2) gains or losses recognized on the disposal, (3) a general description of the net assets and operations sold, and (4) a description of the consideration received, if significant.

The Board discussed the applicability of discontinued operations to the government environment and tentatively agreed that the topic is applicable and that guidance should be included in the proposed standard for determining whether operations have been eliminated. The Board tentatively agreed that governments should recognize discontinued operations during the period in which they occur based on the effective date of the transfer or sale of an operation to another entity or the effective date when operations are abandoned. In addition, the Board considered accounting and financial reporting requirements for certain additional costs associated with eliminating operations. The Board tentatively agreed that governments should recognize as an expense, the cost of goods and services received related to the disposal of an operation up to the effective date of discontinuation. In addition, governments also should accrue any known expenses of future services related to the discontinuation of operations as of the effective date of discontinuation. The Board discussed the presentation of gains or losses and separate activities of discontinued operations and tentatively agreed that gains or losses on the disposal of discontinued operations should be reported as a special item. The Board also tentatively agreed that the results of operations that are eliminated need not be separately displayed on the face of a government’s financial statements but should be disclosed in the notes to the financial statements, if significant.

Next, the Board considered disclosure requirements for government combinations. The Board tentatively concluded that for all government combinations (mergers, acquisitions, and others), disclosures for the period in which the transaction took place should include a general description of the combination transaction, including the name of the combining entities, a description of the combination, the reasons for the combination and to whom services will go, the date of the combination, and the method of accounting that was used to recognize the effects of the transactions (for example, whether combinations are mergers or acquisitions). In addition, the Board tentatively decided that for government acquisitions, governments should disclose the purchase price of the acquired entity and the net assets acquired, and the period reported. The Board tentatively agreed that for other government combinations, such as annexations, governments should disclose the net assets received in addition to the general disclosure requirements for all government combinations.

The Board discussed the accounting implications for certain transactions such as payments resulting from prior transactions or preexisting relationships between the acquiring government and the acquired organization that might be negotiated and included in the acquisition transaction. The Board tentatively agreed that all factors, including conditions resulting from prior transactions, should be considered as includable within the negotiation of an acquisition transaction. The Board acknowledged the potential for complexity when determining settlement amounts for transactions that are separate from acquisitions.

The Board concluded its discussion with a review of a draft of the proposed Standards section and provided suggestions to the project staff for revisions.

Minutes of Meeting, November 8-10, 2011

The Board addressed several matters related to acquisition arrangements. The Board also discussed proposals for certain working definitions and revisions of terminology used in this project.

The Board discussed whether explicit measurement guidance for specific assets and liabilities acquired in government acquisition should be included in the proposed standard. First, the Board discussed possible measurement methods for receivables, bonds, notes payable, capital assets, intangible assets, and infrastructure and tentatively concluded that explicit descriptions about measurements for these items is not necessary to include in the proposed accounting guidance. The Board tentatively concluded that liabilities for employee benefits, municipal solid waste landfill closure/post-closure care liabilities and pollution remediation obligations should be determined using existing GAAP when accounting for government acquisitions.

Next, the Board discussed and tentatively agreed that loss contingencies should continue to be evaluated using the guidance provided in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and explicit guidance is not necessary to include in the proposed standard.

The Board then considered the topic of indemnification assets and tentatively agreed that explicit guidance for recognition of indemnification assets is not necessary to include in the proposed guidance.

The Board considered “goodwill” that an acquired organization may have previously recognized and tentatively agreed that previously recognized goodwill should be assigned no value and be excluded from recognition and measurement by the acquiring government.

Attribution periods for deferred outflows of resources resulting from differences between the financial consideration paid or given and the net assets acquired were then discussed by the Board. The Board tentatively agreed to propose that deferred outflows of resources in this situation should be attributed to future periods in a systematic and rational manner based on the relevant circumstances of the acquisition and determined by professional judgment. The Board also tentatively concluded to propose that the proposed guidance should require the subsequent review and revision of estimates used for amortization periods.

The Board discussed acquisitions that are achieved in stages and tentatively agreed that such acquisitions should not be addressed in this proposed standard because the financial reporting consequences of changes in control are within the scope of Statement No. 14, The Financial Reporting Entity, as amended.

Next, the Board considered several topics relating to working definitions of terms used in this project. The Board tentatively agreed to propose that the term government consolidation, previously defined in this project, should be replaced with the term government merger.

The Board tentatively agreed that a working definition for acquisitions should be developed and tentatively agreed on a working definition for the term government acquisitions as follows:

Government acquisitions are transactions in which a government acquires another entity in exchange for significant financial consideration.
 
The Board also tentatively agreed that a definition for government combinations should be developed and tentatively agreed on the following working definition for the term government combinations as follows:

Government combinations include government mergers, government acquisitions and other combinations. Other combinations include (a) reorganizations or annexations that include transfers of assets and liabilities between two or more legally separate governments that will continue to exist, and (b) shared service arrangements in circumstances that governments jointly agree to provide services and transfer resources to either new or existing legally separate entities in order to provide those services.
 
The Board considered several topics related to the description of financial consideration. First, the Board tentatively agreed that the proposed guidance should explicitly state that combinations not be regarded as government acquisitions for situations in which the only form of consideration is the assumption of liabilities. Next, the Board tentatively agreed on use of the phrase significant financial consideration as a qualitative characteristic of financial consideration that is necessary for the application of acquisition accounting.

Minutes of Meeting, October 3-5, 2011

The Board considered topics related to measurements and financial reporting for combination arrangements in which a government acquires another organization in exchange for financial consideration (acquisitions).

First, the Board discussed whether the proposed standard should require guidance for determining the acquiring government. In the nongovernmental setting, identification of the acquiring entity is meant to determine which of the combining entities the continuing reporting entity is. The acquirer is the entity that gains control of another entity. However, the usefulness of that determination is diminished in the governmental setting because the equivalent notion of control for governments has already been addressed in Statement No. 14, The Financial Reporting Entity, as amended, within the context of financial accountability. The Board tentatively agreed that the proposed standard need not explicitly address the determination of the acquiring government because in a government acquisition arrangement, the acquirer is likely to be the entity that exchanges its resources to acquire another organization.

The Board discussed and tentatively agreed that the acquisition date should be specified for government acquisition arrangements for accounting measurements and financial reporting purposes. The Board discussed the acquisition date as the date on which a government acquires assets and assumes liabilities.

Next, the Board considered whether guidance was necessary for distinguishing between government acquisition activities and asset purchases. The Board considered whether similar guidance would be useful for distinguishing government combination arrangements without financial consideration (mergers) from contributions of assets during its May 2011 meeting and tentatively agreed that the distinction should be based upon whether a combined government will continue to provide services formerly provided by the dissolved government to its constituents. The Board tentatively agreed that if an acquiring government will continue to provide services that were formerly provided by the acquired government a determination should be made as to whether transactions constitute government acquisition combinations or the acquisition of assets. The Board noted that additional criteria may be necessary to assist in this determination as the project progresses. In addition, the Board discussed the need to clarify the terms used to describe the various government combination arrangements in this project to date.

The Board considered a requirement for identification of the assets acquired and liabilities assumed in acquisition arrangements. The Board tentatively agreed that in order to qualify for recognition as a government acquisition combination, the assets acquired and liabilities assumed should meet the definitions of assets and liabilities in Concepts Statement No. 4, Elements of Financial Statements, and the proposed guidance should explicitly require the acquiring government to identify the assets acquired and the liabilities assumed. The Board also discussed that the application of an identification determination also could result in recognition of items that an acquired government had not previously reported because it was not required to do so. For example, certain intangible assets might be acquired and Statement No. 51, Accounting and Financial Reporting for Intangible Assets, does not require the retroactive reporting of intangible assets for all governments.

The Board discussed whether the proposed guidance also should consider the acquisition of governments with reported deferred outflows of resources and deferred inflows of resources and tentatively agreed that the proposed guidance should require the identification of deferred outflows or resources and deferred inflows of resources of acquired governments. The reporting differences between deferred items such as hedging derivative instruments and service concession arrangements were discussed, and the Board noted that certain deferred items might require modification depending on their nature. The Board concluded that additional information about the accounting and financial reporting of deferred outflows and inflows of resources for government acquisition arrangements would be necessary to consider further in this project.

Next, the Board considered measurements for assets acquired and liabilities assumed by a government’s acquisition of another organization. The Board tentatively agreed that measurements of identified assets acquired and liabilities assumed should be at their fair value, to the extent that fair value is appropriate; however, explicit guidance also would need to be provided for assets and liabilities that, by their nature, require the application of different measurement methods as described in existing standards, to the extent that other methods are appropriate.

The Board tentatively agreed that a description of “financial consideration” is necessary to clarify items that constitute consideration for government acquisition arrangements. The Board tentatively agreed that explicit guidance about financial consideration is important to establish the types of resources and items that should be included when establishing a purchase price for accounting and financial reporting purposes. The Board also tentatively agreed that financial consideration transferred could be measured as the sum of the acquisition-date fair values of the assets transferred and liabilities incurred to the former owners of the acquired organization. The Board noted that the assumption of significant liabilities of another organization also could be regarded as a form of financial consideration (providing relief from debt); however, in that situation, the application of acquisition accounting guidance may not be appropriate. The Board agreed to further review the accounting and financial reporting issues related to financial consideration as the project continues.

In its discussion about financial consideration, the Board tentatively agreed that contingent consideration arrangements should be recognized in conformity with provisions in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, essentially retaining the substance of the current approach that recognizes contingent consideration when settled (with disclosure of contingent consideration arrangements).

The Board discussed recognition and measurement of differences between the purchase price and net assets acquired in a government acquisition arrangement. There was tentative agreement that the purchase price should be allocated to the assigned values of the net assets acquired and to the net carrying amounts of the deferred outflows of resources and deferred inflows of resources.

The Board tentatively agreed that for circumstances in which the purchase price exceeds the net assets acquired (and the net carrying amounts of deferred outflows and inflows of resources), the acquiring government would recognize the difference as a deferred outflow of resources and that difference would be attributed to future periods in a systematic and rational manner. The Board agreed that further deliberation is necessary about the length of the attribution period.

Alternatively, for circumstances in which the purchase price is less than the net assets acquired (and the net carrying amounts of deferred outflows and inflows of resources as appropriate), the Board tentatively agreed that the acquiring government would recognize the difference as an inflow of resources in the period of acquisition.

Finally, the Board discussed and tentatively agreed that acquisition-related costs should be recognized as an outflow of resources in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt securities would still be recognized in conformity with other application of GAAP. (The Reporting Items Previously Classified as Assets or Liabilities Exposure Draft proposes to expense debt issuance costs, except for prepaid bond insurance.

Minutes of Meeting, August 17-19, 2011


The Board continued to discuss several matters intended to define further how governments might apply a carryover approach in measuring government combinations that do not include financial consideration.

The Board discussed the presumption of GAAP reporting by the combining governments and tentatively agreed that the proposed guidance should contain an explicit requirement that the financial information that will be included in combined government financial statements be presented in conformity with GAAP as of the combination date.

The Board considered the initial reporting period for the combined government and discussed whether presentation should be based on a single approach or whether different approaches should be adopted to address various combination arrangements. The Board tentatively agreed that for combinations in which the combined government is substantively a new separate entity, the proposed presentation would be based upon the effective date of the combination. The Board discussed that qualitative guidance would be necessary to include in the proposed standard for determining the conditions for when a substantively new separate entity exists. The Board also tentatively agreed that for combinations in which a substantively new separate entity is not created, presentation should be based upon existing guidance for combinations that requires restating the financial statements as of the beginning of the reporting period.

The Board discussed whether modifications to conform accounting principles should be allowed (but not required) when applying a carryover approach in a government combination. The Board tentatively agreed that the proposal would provide that balances of combining entities be carried over as previously reported and that the proposed standard be permissive with regard to changes to conform disparate accounting principles. The Board tentatively decided that for any such changes, the opening balances should be proposed to be adjusted by use of a two-step process that first carries forward previously reported amounts, followed by adjustments to conform accounting principles (based on the use of professional judgment) within the context of a restatement note disclosure.

The Board also considered how changes in accounting estimates should be addressed in government combinations. The Board tentatively concluded that any changes to conform or modify accounting estimates should be proposed to be made on a post-combination basis.

Next, the Board considered the effects of pre-combination intra-entity transactions. The Board tentatively decided that the proposed guidance need not require the elimination of the effects of pre-combination intra-entity activities and balances. Pre-combination intra-entity transactions and balances between the combining governments could be considered for elimination based on the eliminations guidance provided in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as amended.

The Board discussed how capital asset impairment could be recognized when government combination decisions contribute to the impairment. The Board tentatively agreed that if the circumstances of a government combination plan contemplate decisions to dispose of capital assets and the government will continue to use those assets as originally intended until a future sale occurs, then the proposed guidance should provide that the combined government should recognize those capital assets at their carrying amounts.

The Board also tentatively agreed that if intent to sell capital assets is considered by the combination plan and those capital assets will no longer be used by the combined government, the Board will propose that the capital assets identified be evaluated for impairment and adjusted by use of a two-step process that first carries forward previously reported amounts, followed by adjustments within the context of a restatement note disclosure. Similarly, if a government combination plan includes decisions about the manner or duration of use of specific capital assets, then those assets also should be evaluated for impairment and adjusted in a similar manner.

Finally, the Board discussed how the financial reporting entity and component units would be addressed in a government combination. The Board tentatively agreed that a discussion in the proposed guidance for evaluation of component units and other relationships is unnecessary because the requirements of Statement No.14, The Financial Reporting Entity, as amended, are sufficient for making determinations about reporting entities.

Minutes of Meeting, June 27-29, 2011

The Board discussed other government combination arrangements, without the presence of financial consideration, including annexations, “redistricting” of school districts, and shared service arrangements. The Board considered a variety of circumstances for each of these arrangements and tentatively decided that the following transactions are included within the scope of the project:

  • Annexations that include transfers of assets and liabilities between two or more legally separate governments
     
  • School district reorganizations that result in the consolidation of two or more legally separate entities or that include transfers of assets and liabilities between two or more legally separate entities
     
  • Shared service arrangements in circumstances in which governments jointly agree to provide discontinued services and create new legally separate entities or contribute resources to existing legally separate entities in order to provide those services.
The Board also discussed measurement approaches for each of the circumstances described above. The Board tentatively agreed to use the same measurement method that was determined for government consolidations in this project. That method is based upon the use of existing carrying values of assets and liabilities.

Minutes of Meeting, March 23-25, 2011


The Board considered several types of government combination arrangements without the presence of financial consideration and tentatively decided on a proposed definition for the term government consolidations. A government consolidation is the combination of (a) two or more legally separate governments that cease to exist as legally separate entities and are combined to form one or more new governments or (b) one or more legally separate governments that are dissolved and their service activities are absorbed into one or more existing governments. Further consideration is necessary to identify specific circumstances when government combinations accounting would apply to other government combination activities such as annexations, redistricting, shared service arrangements, and service “spin-off” arrangements not included in the definition of government consolidations. These items will be discussed at the June Board meeting.

The Board discussed whether a definition or specified criteria were necessary to distinguish government combination transactions from acquisitions or contributions of assets and liabilities. The Board tentatively agreed to propose that the basic principle that should guide the combination versus contribution or acquisition decision is whether governments will continue to provide services to their constituents that were provided formerly by predecessor governments.

The Board tentatively agreed to propose the use of a “carryover” method as a potential basis for measuring and reporting government consolidations. The Board tentatively decided that modifications to the carryover method may be necessary because it may be applied differently for governments. A different term may be used to describe the eventual method in order to avoid confusion about how the carryover method is applied by entities that follow FASB standards, such as in mergers of not-for-profit entities.

Minutes of Meeting, March 1-3, 2011


The Board discussed the existing accounting and financial reporting guidance related to government combinations. The Board considered the proposed scope of the project and tentatively agreed to the types of transactions that would be initially considered. Transactions that were discussed in the proposed scope include acquisitions of one government by another government, mergers of two or more governments, spin-offs, annexations, re-districting, dissolutions, and shared service arrangements. The Board also tentatively agreed to an overall approach to the project that is intended to consider government combinations based on the presence of consideration.