Journal Entries

This recurring website feature highlights articles from The GASB Report, the GASB’s monthly newsletter. The current article appeared in the March 2012 issue.

GASB Issues Exposure Draft on Government Combinations and Disposals of Government Operations

At the March meeting, the GASB approved for issuance an Exposure Draft of a proposed Statement, Government Combinations and Disposals of Government Operations. The proposal addresses accounting and financial reporting topics related to government combinations, commonly referred to as mergers and acquisitions. In addition, the proposed Statement would provide accounting and financial reporting for disposals of government operations that have been transferred or sold.

Governments currently account for mergers, acquisitions, and other similar combinations by analogizing to accounting and financial reporting intended for the business environment. As a consequence, the guidance being applied addresses conditions and circumstances that are not normally encountered in government combinations. The proposed Statement would provide accounting and financial reporting guidance specifically intended for the government environment to address its unique conditions and circumstances.

The proposed Statement would provide guidance for identifying types of government combinations to assist governments in applying the accounting and financial reporting requirements in a consistent manner. For the purposes of the proposal, the term government combinations refers to three types of government combinations: government mergers, government acquisitions, and transfers of operations.

Government Mergers

The proposal defines a government merger as a government combination of legally separate entities in which insignificant or no financial consideration is exchanged and which includes one of the following:

• Two or more governments, or a government(s) and a nongovernmental entity, cease to exist as legally separate entities and are combined to form one or more new governments
   
• One or more legally separate governments or nongovernmental entities cease to exist and their operations are absorbed into, and provided by, one or more continuing governments.

As described in the proposed definition of a government merger, mergers may result in the formation of a new government or the continuation of an existing government. For a new government that results from such a merger, the proposed merger date is the date at which the combination becomes effective. It is also the date at which the initial reporting period begins. The combined assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the merging entities would be included in the statement of net position at the beginning of that initial reporting period.

For a continuing government, the proposed merger date is the beginning of the reporting period in which the merger occurs, regardless of the actual date of the merger. Continuing governments would report the combined assets, deferred outflows of resources, liabilities, and deferred inflows of resources and the results of operations of the merging entities for the reporting period in which the combination occurs as though the entities had been combined at the beginning of the continuing government’s reporting period.

Both new and continuing governments would measure the assets, deferred outflows of resources, liabilities, and deferred inflows of resources as of the merger date at the carrying values as reported in the separate financial statements of the merging entities. The beginning net position of the merged government results from combining the carrying values of assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the separate entities. However, governments may elect to adjust some carrying values to bring the accounting principles of the merging entities into alignment. Governments also may be required to adjust certain carrying values of capital assets for impairment as a result of the merger.

Government Acquisitions

The proposal defines a government acquisition as a government combination in which a government acquires another entity, or the operations of another entity, in exchange for the payment of significant consideration. The acquired entity or operation becomes part of the acquiring government’s legally separate entity.

The date on which the acquiring government obtains control of the assets and becomes obligated for the liabilities of an acquired entity or its operations in exchange for significant consideration is the acquisition date. The acquiring government would measure the acquired assets, deferred outflows of resources, liabilities, and deferred inflows of resources—with certain exceptions—at acquisition value as of the acquisition date. For purposes of the proposed Statement, acquisition value is a market-based entry price.

The consideration provided by the acquiring government would be measured at the acquisition date as the sum of the acquisition values of the assets remitted or liabilities incurred to the former owners of an acquired entity. Negative net position of an entity recognized in a government merger or a transfer of operations that does not include the exchange of significant consideration (a net liability assumed by the combined government) would not constitute consideration given for purposes of the proposed Statement.

For circumstances in which the consideration provided exceeds the net position acquired, the acquiring government would report the difference as a deferred outflow of resources. This deferred outflow would be attributed to future periods in a systematic and rational manner. Alternatively, for circumstances in which the consideration provided is less than the net position acquired, the acquiring government would eliminate the excess net position acquired by reducing the acquisition values assigned to the noncurrent assets unless the conditions of the acquisition arrangement indicate that a contribution should be recognized by the acquiring government.

Transfers of Operations

The proposed Statement also would provide accounting and financial reporting guidance for combinations that occur in the government environment that do not involve combinations of legally separate entities and in which no significant consideration is provided. These arrangements are combinations that include transfers of operations to continuing governments or that form the basis of new governments.

The proposal defines a transfer of operations as a government combination involving the operations of a government or nongovernmental entity, rather than a combination of legally separate entities, and in which no significant consideration is exchanged. An operation is proposed to be defined as an integrated set of activities with associated assets and liabilities that is conducted and managed for the purpose of providing identifiable services.

Because transfers of operations are entered into by governments for similar reasons as government mergers, similar measurements, that is, carrying values, would be applied for these arrangements.

Disposals of Governmental Operations

The proposed Statement would provide guidance for disposals of government operations that have been transferred or sold.

Upon the disposal of operations, governments would recognize a gain or loss, which would be reported as a special item in the period in which the disposal occurs. In the period in which the operations are transferred or sold, a government would provide a brief description of the facts and circumstances leading to the disposal of those operations. The government also would identify and disclose information regarding the disposed government operation’s total expenses, revenues, and nonoperating revenues and expenses of the period, if this information is not presented separately in the government’s financial statements.

Disclosures

For each government combination, governments would include in the notes to financial statements in the period in which a combination occurs a brief description of the government combination, the date of the combination, and the primary reasons for the combination.

Government Mergers and Transfers of Operations

New governments or continuing governments would disclose the amounts recognized as of the merger date or the effective transfer date for total assets, total deferred outflows of resources, total liabilities, total deferred inflows of resources, and total net position by component. These governments also would disclose a brief description of the nature and amount of significant adjustments made to bring into alignment the individual accounting policies or to adjust for impairment of capital assets resulting from the merger or transfer.

Government Acquisitions

In the period in which an acquisition occurs, an acquiring government would disclose a brief description of the consideration provided, the total amount of net position acquired as of the date of acquisition, and a brief description of contingent consideration arrangements, including the basis for determining the amount of payments that are contingent.

Proposed Effective Date

The requirements of the proposed Statement would be effective for periods beginning after December 15, 2013, and would be applied on a prospective basis. Early application would be encouraged.

How to Obtain Copies of the Exposure Draft

Copies of the Exposure Draft may be downloaded free of charge from www.gasb.org. The comment deadline is June 15. Additional details on how to provide comments to the GASB on the proposal are available in the front of the Exposure Draft.