GASB 69: Government Combinations

GASB 69: Government Combinations

Table of Contents EXECUTIVE SUMMARY... 3 BACKGROUND... 3 KEY PROVISIONS... 3 OVERVIEW & SCOPE... 3 MERGER & TRANSFER OF OPERATIONS... 4 Mergers... 4 Transfers of Operations... 5 Recognition & Measurement... 5 GOVERNMENT COMBINATION BY ACQUISITION... 6 DISPOSALS OF GOVERNMENT OPERATIONS... 7 DISCLOSURE REQUIREMENTS... 8 Mergers & Transfers of Operations... 8 Acquisitions... 8 Disposals of Government Operations... 8 PRACTICAL COMBINATION CONSIDERATIONS... 8 CONCLUSION... 8 APPENDICES... 9 CONTRIBUTOR... 16 2

Executive Summary The Government Accounting Standards Board (GASB) issued financial reporting guidance for combinations and disposals of operations in the governmental environment. Statement No. 69, Government Combinations and Disposals of Government Operations, satisfies the need for guidance specific to governmental combinations and disposals. Contained within the standard are long-awaited criteria for identifying government combinations, as well as criteria for distinguishing between different types of government combinations (merger versus acquisition versus transfer of operations). In general, carrying value is used to measure assets and liabilities in merger and transfer of operations transactions, while acquisition values are used to measure assets and liabilities in government acquisitions. Disclosure requirements are comprehensive. The accounting and financial reporting guidance is effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15, 2013, applied on a prospective basis. Early adoption is encouraged. Background The timing is right. Throughout the U.S., government combination discussions are prevalent caused by the increasing cost of core operations and the need to gain economies of scale. When cutting costs isn t enough, mergers, acquisitions, spinoffs or transfers become attractive options for governments striving to serve their constituents. The primary objective of Statement No. 69 is to develop financial reporting requirements for government combinations accomplished through mergers and acquisitions. Prior to the release of the statement in January 2013, governments involved in merger and acquisition transactions often looked to the purchase and pooling of interest methods applied to government combinations, the guidance in Accounting Practice Bulletin (APB) Opinion No. 16, Business Combinations. Key Provisions Overview & Scope Statement No. 69 addresses the needs of government constituents through enhancement of the accounting, measurement and reporting, display and disclosures of combined financial statement elements. It requires disclosures about government combinations and disposals of government operations in sufficient detail to provide users with the information needed to evaluate the nature and financial effects of those transactions. GASB No. 69 does not replace or amend any existing standard but adds to the framework s depth of guidance. The scope of the standard includes government combinations that occur in general governmental activities, businesstype activities and fiduciary activities. The statement does not address combinations in which a government acquires another organization that continues to exist as a separate entity or equity interests in organizations that remain legally separate. Forms of government combination arrangements included under the scope of Statement No. 69 include annexations, reorganizations and shared services agreements meeting certain criteria. The statement also addresses disposals of operations from the disposing government s perspective when the disposing government transfers or sells operations. The appropriate method of combination accounting and reporting is determined in two phases. First, entities evaluate the transaction to determine whether it qualifies as a combination. To qualify as a government combination, an arrangement results in the continuation of a substantial portion of the services provided by the previously separate entities or their operations after the transaction has occurred. Service continuation means the new or continuing government intends to provide services similar to the formerly separate governments, organizations or operations, e.g., when a city and county join together to form a consolidated government and the same services continue. 3

A government combination assumes the continuation of a substantial portion of the services to the precombination constituents after the transaction has occurred. Service continuation is an important distinction, as accounting and reporting is significantly different from accounting and reporting of an acquisition of assets. After meeting the criteria for a government combination, the entity classifies the combination in one of three categories as a merger, acquisition or transfer of operations, based on the significance of consideration given and the post-government structure. The appropriate accounting and financial reporting for government combinations is based on whether consideration is transferred. For the purposes of distinguishing between government mergers and government acquisitions, the defining factor is the transfer of significant consideration in relation to the assets and liabilities acquired. Merger & Transfer of Operations Mergers A merger is defined as a combination of legally separate entities that does not entail the exchange of significant consideration. Some merging entities will cease to exist as legally separate entities, and a new government will be created. In other mergers, a legally separate entity may be dissolved and its operations absorbed into one or more existing governments without the creation of a new entity. An existing entity continues to exist in an altered state. The initial presentation of a merged government s financial statements will depend on whether or not a new government entity is created as the result of the merger. When a new legally separate government is created as a result of the merger arrangement, the merger date is the date on which the combination becomes effective. When a new legally separate entity is not created as a result of the merger arrangement, the financial statements of the continuing government are prepared as if the merger had taken place at the beginning of the reporting period, regardless of the date of the actual merger. Regardless of whether the merger results in a new government, assets, deferred outflows, liabilities and deferred inflows of the combining entities are measured at carrying value. GASB made this decision considering that the same assets will be used to provide essentially the same services before and after the government merger. In addition, since the entities do not exchange significant consideration, there is no basis for financial position revaluation. EXHIBIT 1 Post-Merger Initial Reporting GASB 69 Recognition & Measurement Post-Merger Structure New government entity is created Existing government continues to exist Initial Reporting The merger effective date, or the date the merging governments are combined, becomes the date the financial statement elements are measured and financial reporting period begins. The merger date is the beginning of the reporting period in which the combination occurs, regardless of the actual date of the merger. Basing the presentation of financial statements on the merger date (for mergers where a new government is created) may result in short-year presentations of the merged government s initial reporting period. The board noted that, in practice, government mergers generally are designed to become effective on the first day of the merged government s fiscal year. 4

Transfers of Operations Transfers of operations are combinations without the transfer of an entire legally separate entity or exchange of significant consideration. The effective date of the transfer is the date the government obtains control of the assets and becomes obligated for the liabilities of the operation transferred. If a transfer of operations results in a new government, the new government s initial reporting period would begin at the effective date of the transfer. Operations are defined with some subjectivity and include many ways in which governments deliver services to their constituents. By definition, they are an integrated set of activities that comprise less than a legally separate entity. Operations are conducted and managed for the purpose of providing an identifiable service, function or activity with associated assets and liabilities. Therefore, the transfer of operations involves only the assets and liabilities previously used by an entity to provide those specific services. Caution should be used in identifying operations based solely on fund accounting, as a single fund may contain multiple activities or, conversely, a single activity may be allocated across multiple funds. The definition of a transfer of operations is pivotal in determining whether the service continuation provision has been met or whether a government has merely acquired a group of assets and related liabilities (a noncombination activity). The determining question is: Will the merged or acquiring government continue to provide services similar to those formerly provided by the individual governments or organizations? Professional judgment is required to determine whether the scope of services to be provided and the manner in which those are provided constitutes a similar service. GASB clearly distinguished government merger transactions from acquisitions or contributions of assets and liabilities. Upon classification as a combination, the distinction between a government merger and a government acquisition is based on whether an exchange of significant consideration is present. Transfers of operations are generally entered into for substantially the same reasons as mergers, and both are executed without significant, if any, financial consideration. Consequently, both types of combinations maintain a predominately historical cost perspective (carryforward method) for measuring financial statement elements and have similar accounting and financial reporting requirements. Recognition & Measurement Entities will use a three-step process to measure the carrying values of a merged government s or a transfer of operations financial statement elements. The first step is to identify and bring forward the carrying values. The second step is to adjust the carrying values of one or more of the entities for conformity with authoritative guidance, e.g., generally accepted accounting principles (GAAP). Lastly, adjust the carrying values of one or more of the entities as desired to bring into alignment the accounting principles to be used by the new or continuing combined government. In an instance where different accounting policies are in effect for the combining governments, the combining government is allowed to change its accounting policies to conform differences in accounting principles. The differences due to the change in accounting principles should be reflected in the opening balances of the merged government s financial statements. Changes to conform or modify accounting estimates should be made on a post-combination basis and recognized in the merged government s flows statement. However, the new government is not precluded from having multiple accounting policies, as long as they are in conformity with authoritative guidance for state and local governments. Capital asset impairment should be evaluated as of the merger date for capital assets of the dissolving government in accordance with GASB Statement 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. 5

Elimination of Transactions Governments should consider the elimination of transactions between the merging governments that occurred before the combination that would be included in the flows statement of the continuing government. Governments would identify these transactions during the process of aggregating interfund services provided and used in accordance with the provisions of Statement 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. Receivables and payables between the merging entities also should be eliminated in accordance with Statement No. 34. Transfer of operations includes (a) reorganizations or annexations (in which operations are combined through jurisdictional changes in boundaries) 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 where governments jointly agree to provide services and transfer resources to new or existing legally separate entities in order to provide those services. Government Combination by Acquisition Acquisition transactions are those where a government acquires another entity or its operations in exchange for significant consideration. The acquiring government measures assets in acquisition transactions at acquisition value. In order to qualify for classification as a government acquisition, the consideration would be required to contain characteristics of significant consideration in relation to the assets and liabilities acquired. Consideration is defined as the assets transferred or liabilities incurred to the former owners of the acquired organization. The assets and liabilities of a government acquired through financial consideration must be specifically identified and measured at acquisition value. Acquisition value equates to a market-based entry price as of the date the government acquires assets and assumes liabilities. Exceptions to the use of acquisition value include: Measurement of the acquired entity's employment benefit arrangements Deferred outflows of resources and deferred inflows of resources (except those relating to certain effective hedging arrangements) Investments including derivatives required to be reported at fair value Certain solid waste and pollution remediation obligations (and assets, if any) where the value would be determined using existing GAAP In addition, goodwill (or deferred outflows of resources from previous acquisition transactions for a governmental entity) has no carryover value and is excluded from recognition and measurement for government acquisitions. Special requirements apply to contingent consideration and to intraentity government acquisitions where the assets are transferred between components of the same financial reporting entity. In general, consideration contingent on future events should be recognized as a component of consideration when the payment of consideration is probable and the amount is reasonably estimable in conformity with GASB Statement 62. The assets transferred between components of the same financial reporting entity would not be revalued but instead would be recorded and measured using existing carrying values. Consideration given in excess of the acquiring government s net assets is recorded as a deferred outflow of resources attributable to future periods recognized in a systematic and rational manner using professional judgment considering the acquisition circumstances. Consideration given less than the net assets acquired is recognized in the period of acquisition as a reduction to the acquisition values assigned to the noncurrent assets. An exception occurs when there is evidence that the seller s intent is to accept a lower price in order to provide economic benefit without directly receiving equal value 6

in exchange. In the latter situation, the acquiring government would recognize a contribution equal to the excess net position received. Entities will account for acquisition-related costs separately as an outflow of resources in the period the costs are incurred, with special requirements for costs to issue debt securities. Combinations in which a government combines with another organization and simply assumes the negative net position of the acquired entity should not be treated as a government acquisition. In this situation, the exchange of substantial consideration is missing. Arrangements that involve the transfer of assets and liabilities in exchange for a nominal amount more closely resemble a government merger than the acquisition of another organization. In situations where the acquiring government is unable to measure specific assets or liabilities at the reporting date, the acquiring government would record the assets at estimated provisional amounts. Measurement adjustments would be made on a prospective basis in the period in which they occur, similar to the reporting requirements for changes in accounting estimates. Transfer or sales of operations within the same financial reporting entity should be accounted for in accordance with the guidance contained in GASB No. 48, Sales and Pledges of Receivables and Future Revenues and Intra- Entity Transfers of Assets and Future Revenues. EXHIBIT 2 Government Combinations Measurement Basis Significant Consideration Combination Type Acquired Unit* Exchanged Measurement Basis Government acquisition Separate legal entity or its operation Yes Acquisition value Government merger Separate legal entity No Carrying value ** Transfer of operations Operations of separate legal entity No Carrying value** *The scope of Statement No. 69 applies to government combinations where a governmental entity combines with a not-for-profit or a for-profit entity as long as the new or continuing organization is a government. **Also termed carryforward method Disposals of Government Operations Disposals of a government s operations result in the removal of specific activities of a government through transfer or sale resulting from a government combination. Disposal transactions are required to be recognized as of the effective date at which operations are transferred or sold. A disposing government would recognize a gain or loss on the disposal of operations, based on the effective transfer date of a transfer of operations or the date of sale for operations that are sold. Operating activities up to the measurement date are not included in the calculation of gain or loss only the costs directly associated with the disposal should be included. Computation of the gain or loss includes only those costs directly attributable to the disposal transaction. Examples include costs associated with employees and professional services fees. 7

The disposal of operations should be reported as a special item in the flows statement in the period in which the disposal occurs. Disposal of an operation is measured as the difference between the net position of the disposed operation and any consideration received, less any expenditure directly associated with the disposal. Expenditures directly associated with the disposal of operations include involuntary termination benefits, costs of terminating long-term contracts early and professional costs such as legal or accounting fees directly associated with the transfer or sale. Expected costs should be estimated and included in the gain or loss related to the transfer or sale of an operation as of the effective date of the disposal if it is probable a liability will be incurred and the obligation can be estimated. Professional services expenditures directly associated with the disposal of government operations may be similar to an acquirer s acquisition costs. The acquisition agreement will dictate which entity absorbs the costs. Disclosure Requirements Due to the complexity and variety of combination arrangements, notes are an integral part of the required disclosures. Disclosure requirements include information such as the type of government combination, the effective combination date, the entities involved, the purpose of the combination, disclosure of the nature of and reasons for changes in accounting principles and the nature of modifications to transferred balances. Disclosures about disposals of government operations will help users assess the effects of the disposal in relation to the government s activities as a whole. (Refer to Appendix 5 for note disclosure requirements.) Mergers & Transfers of Operations To explain pertinent details of government mergers and transfers of operations, the notes must present the carrying values of assets, deferred outflows of resources, liabilities, deferred inflows of resources of the combining entities and the adjustments (to reflect the consistent application of accounting principles and capital asset impairment) to arrive at the merged or transferred balances. Acquisitions Regarding acquisitions, the acquiring government should disclose the net position of the entity or operation that is acquired and a brief description of the nature of consideration transferred, including terms of financing arrangements, as applicable, and its acquisition value. Disposals of Government Operations The disposing government would disclose a detailed description of the revenues and expenditures/expenses of the operations transferred or sold. Practical Combination Considerations The carryforward method of combining assets requires congruent financial statements. Therefore, separate financial statements of each combined government are required to be reported in conformity with GAAP as of the combination date. Government combinations may result in the creation of new legally separate entities. At the time of combination, the structure of the new financial reporting entity will require evaluation to determine whether relationships such as joint ventures, jointly governed organizations and related organizations of the combining governments still exist. The definition of these relationships will often affect and define the structure of the new governing board. Conclusion The guidance in GASB 69 involves comprehensive disclosures and many time-sensitive, subjective computations. New standards bring new risks to material financial reporting misstatements, and GASB 69 is no exception. Efforts to mitigate those risks generally translate into significant advance planning for financial statement preparers. Governments should assess their existing resources, policies and procedures and the impact of this evaluation on their financial reporting compliance requirements. 8

Appendices APPENDIX 1 MERGERS, NEW GOVERNMENTS Recognition, Measurement & Disclosure Merger Accounting New Governments Accounting Topic GASB 69 Guidance Note Disclosure Financial Statement Element Measurement Date Financial statement elements 1 are measured as of the date on which the merger becomes effective. Presentation of the financial statements begins as of the merger date. Financial Statement Element Recognition General Measurement Adjustments for Conformity with Authoritative Guidance Measurement Adjustments for Accounting Principles Alignment New government recognizes financial statement elements based on accounting principles applied in the dissolved entity s most recent financial statements, with special considerations for adjustment for accounting principles alignment, capital asset impairment and adjustments for conformity with authoritative guidance. Regarding governmental fund financial statements, individual financial elements reported in governmental funds would be recognized pursuant to the financial reporting requirements for governmental funds. The new government should adjust the carrying values of one or more of the merging entities to bring the financial statement elements into conformity with authoritative guidance for state and local governments. Adjustments would be made to the opening balances carried forward into the new government financial statements. 2 The new government has the option to adjust the carrying values of the dissolved entity to bring inconsistent accounting principles into alignment. Adjustment would be made to the opening balances carried forward into the new government's financial statements. Adjustments Measurement Adjustments for Capital Asset Impairment Capital assets identified for disposal either are (a) measured and reported at carrying value if the new government will use those assets or (b) evaluated for impairment (i) if the new government will not use them or (ii) if the new government will use the capital asset in a changed manner or duration. 3 Based on Accounting Estimates Financial statement elements based on accounting estimates should be carried forward into the opening balances of a new government without modification. Changes in accounting estimates would be recognized prospectively as period costs in the new merged government s flows statement. (1) For purposes of this schedule, financial statement elements refers to assets, deferred outflows of resources, liabilities or deferred inflows of resources. (2) The new government should not recognize financial statement elements that authoritative guidance for state and local governments does not require or permit the merging governments to recognize, e.g., intangible assets that were not required to be reported. (3) In accordance with the provisions of Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, as amended 9

APPENDIX 2 MERGERS, CONTINUING GOVERNMENTS Recognition, Measurement & Disclosure Merger Accounting Continuing Governments Accounting Topic GASB 69 Guidance Note Disclosure Financial Statement Element Measurement Date Financial Statement Element Recognition General Measurement Adjustments for Conformity with Authoritative Guidance Measurement Adjustments for Accounting Principles Alignment Measurement Adjustments for Capital Asset Impairment Based on Accounting Estimates Eliminations The continuing government measures the financial statement elements 1 as of the merger date at the carrying values reported in the separate financial statements of the merging entities. Regardless of the actual date of merger, the merger date for financial reporting purposes is the beginning of 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. The continuing government recognizes dissolved entity based on accounting principles applied in the dissolved entity s most recent financial statements, with special considerations for adjustment for accounting principles alignment, capital asset impairment and adjustments for conformity with authoritative guidance. Regarding governmental fund financial statements, individual financial elements reported in governmental funds would be recognized pursuant to the financial reporting requirements for governmental funds. The continuing government should adjust the carrying values of one or more of the merging entities to bring the financial statement elements into conformity with authoritative guidance for state and local governments. 2 Adjustments would be made before the continuing government combines financial statement elements. The continuing government has the option to adjust the carrying values of the merging entities to bring inconsistent accounting principles into alignment. Adjustment would be made to the opening balances carried forward into the merged government's financial statements. Capital assets identified for disposal either are (a) measured and reported at carrying value if the continuing government will use those assets or (b) evaluated for impairment (i) if the continuing government will not use them or (ii) if the continuing government will use the capital asset in a changed manner or duration. 3 Financial statement elements based on accounting estimates should be carried forward into the opening balances of a merged government without modification; accounting estimate changes would be recognized prospectively as period costs in the flows statement of the continuing government. Transactions (and payables and receivables balances) between the merging entities that occur before the combination that would be included in the flows statement of the continuing government should be considered for elimination in the combination process; special considerations are provided for interfund services provided and used. Adjustments Adjustments in the context of a restatement disclosure Adjustments (1) For purposes of this schedule, financial statement elements refers to assets, deferred outflows of resources, liabilities or deferred inflows of resources. (2) The continuing government should not recognize financial statement elements that authoritative guidance for state and local governments does not require or permit the merging governments to recognize, e.g., intangible assets that were not required to be reported. (3) In accordance with the provisions of Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, as amended 10

APPENDIX 3 MERGERS, TRANSFER OF OPERATIONS Recognition, Measurement & Disclosure Transfer of Operations Accounting Topic GASB 69 Guidance Note Disclosure Financial Statement Element Measurement Date and Amounts Financial Statement Element Recognition General A continuing government would report a governmental or nongovernmental entity transfer of operations as a transaction in its financial statements as of the effective transfer date, measuring the transferor financial statement elements 1 at carrying value. If a transfer results in the formation of a new government, the new government s reporting period begins at the effective transfer date. The effective transfer date is the date the transferee government obtains control of the assets and becomes obligated for the liabilities of an acquired entity or its operations. The net position received or assumed by a continuing transferee government should be reported as a special item. Financial statement elements of an operation received when establishing a new government should be included in the statement of net position at the beginning of its initial reporting period. Regarding government fund financial statements, individual financial elements reported in governmental funds would be recognized pursuant to the financial reporting requirements for governmental funds. The transferee government would recognize the net fund balance acquired as a special item in the statement of revenues, expenditures and changes in fund balances in the period in which the transfer occurs. The acquiring government would not recognize deferred outflows of resources of the transferor, e.g., goodwill by a nongovernmental entity. Measurement Adjustments for Conformity with Authoritative Guidance Measurement Adjustments for Accounting Principles Alignment Measurement Adjustments for Capital Asset Impairment Based on Accounting Estimates The continuing government should adjust the carrying values of one or more of the transferor s operations to bring the financial statement elements into conformity with authoritative guidance for state and local governments. 2 The transferee government would make adjustments before the transferee government recognizes the transferor s financial statement elements. The transferee government has the option to adjust the carrying values of the transferor s financial statement elements to bring inconsistent but acceptable accounting principles into alignment. 2 The transferee government would make adjustments to the balances carried forward into its financial statements. Capital assets identified before the effective transfer date for disposal either are (a) measured and reported at carrying value, if the transferee government will use those assets, or (b) evaluated for impairment (i) if the transferee government will not use them or (ii) if the transferee government will use the capital asset in a changed manner or duration. 3 The transferor s financial statement elements based on accounting estimates should be carried forward into the opening balances of the transferee government's financial statements without modification. If changes in accounting estimates are made, they would be recognized prospectively as period costs in the flows statement of the continuing government. Adjustments Adjustments Adjustments 11

(1) For purposes of this schedule, financial statement elements refers to assets, deferred outflows of resources, liabilities or deferred inflows of resources. (2) The transferee government should not recognize financial statement elements that authoritative guidance for state and local governments does not require or permit the merging governments to recognize, e.g., intangible assets that were not required to be reported. (3) In accordance with the provisions of Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, as amended 12

APPENDIX 4 ACQUISITIONS Recognition, Measurement & Disclosure Acquisitions Accounting Topic GASB 69 Guidance Note Disclosure Financial Statement Element Measurement Date and Amounts Recognition Deferred Outflows of Resources and Deferred Inflows of Resources Acquirer s Acquisition Costs The acquiring government would measure the financial statement elements 1 acquired at acquisition value 2 as of the acquisition date. The acquisition date is the date the acquiring government obtains control of the assets and becomes obligated for the liabilities of an acquiree entity or its operations. In general, the acquisition date coincides with the closing date the date the acquiring government provides consideration. Deferred outflows of resources and deferred inflows of resources are measured at their carrying values, with the exception of those related to certain effective hedging arrangements. The acquiring government would not recognize deferred outflows of resources from previous acquisition transactions in which consideration provided exceeded the net position acquired (or goodwill by a nongovernmental entity) on the books of the acquired entity. Acquisition costs are the costs the acquiring organization incurs to effect a government transaction, such as fees for legal, accounting, valuation, professional or consulting services. The acquiring government should recognize acquisition costs as an expense/expenditure in the periods in which the costs are incurred and the services received. Costs to issue debt are not considered acquisition costs. Financial Statement Element Recognition General Governmental Fund Reporting Financial Statement Recognition Consideration 3 Provided Exceeds the Net Position Acquired The acquiring government should evaluate the financial statement elements acquired or assumed in accordance with authoritative guidance for state and local governments. The acquiring government should recognize significant items not previously booked by the acquired entity (because it was not required to do so). Regarding government fund financial statements, individual financial elements reported in governmental funds would be recognized pursuant to the financial reporting requirements for governmental funds. The acquiring government would recognize the net fund balance acquired as a special item in the statement of revenues, expenditures and changes in fund balances in the period of acquisition. The difference between consideration amounts given in excess of the net position acquired is recorded as a deferred outflow of resources. The deferred outflow of resources would be attributed to future periods in a systematic and rational manner, based on professional judgment, considering the relevant circumstances of the acquisition. The acquiring government should review and consider revision of the estimate of the attribution period in subsequent reporting periods. Consideration Provided 13

Financial Statement Recognition Consideration Is Less than the Net Position Acquired When consideration is less than the net position acquired, the excess net position acquired and consideration provided would be eliminated through the reduction of the acquisition values assigned to the noncurrent assets, other than financial assets, that are acquired. Special provisions apply when the noncurrent assets have been reduced to zero. An exception occurs when the acquisition arrangement indicates the excess consideration should be recognized as a contribution, such as when the seller intends to accept a lower price in order to provide economic aid to the acquiring government. Consideration Provided Measurement Adjustments for Conformity with Authoritative Guidance Measurement Adjustments when Measurements Are not Finalized The continuing government should adjust the carrying values of one or more of the transferor s operations to bring the financial statement elements into conformity with authoritative guidance for state and local governments. 2 The transferee government would make adjustments before the transferee government recognizes the transferor's financial statement elements. When the initial measurement of the assets is not finalized by the end of the reporting period in which the government acquisition occurs, the acquiring government would estimate recorded amounts. The acquiring government then would prospectively update the estimated amounts to reflect new information obtained about facts and circumstances that, if known at the acquisition date, would have affected the measurement of amounts recognized as of that date. Adjustments Based on Accounting Estimates Financial statement elements based on accounting estimates should be carried forward into the opening balances of a merged government without modification. (1) For purposes of this schedule, financial statement elements refers to assets, deferred outflows of resources, liabilities or deferred inflows of resources. (2) For purposes of this statement, acquisition value is based on a market-based exchange; market value represents the price that would be paid for acquiring similar assets, having similar service capacity, or for discharging the liabilities assumed in an orderly transaction. (3) Consideration is measured as the sum of the values of the assets remitted or liabilities incurred to the former owners of the acquired entity. Consideration may include financial and nonfinancial assets, e.g., cash, investments or capital assets. A liability incurred may represent an obligation to provide consideration to the former owners of the acquired entity. The negative net position acquired does not, in and of itself, constitute consideration given. 14

APPENDIX 5 Government Combinations Note Requirements Note Requirements in the Period in which a Combination or Disposal Occurs Note Disclosure Mergers Transfer of Operations Acquisitions In the period in which the combination occurs: (1) A brief description of the government combination, including identification of the entities involved and whether the participating entities were included within the same financial reporting entity (2) The date of the combination (3) A brief description of the primary reasons for the combination The amounts recognized as of the merger date or the effective transfer date, as follows: Disposals x x x (1) Total assets distinguishing between current, capital and other assets (2) Total deferred outflows of resources (3) Total liabilities distinguishing between current and long-term liabilities (4) Total deferred inflows of resources x x (5) Total net position by component A brief description of the nature and amount of significant adjustment made to bring into conformity the individual accounting policies or to adjust for impairment of capital assets resulting from the merger or transfer The initial amounts recognized by the new or continuing government, if different from the recognized amounts before consideration of adjustments due to alignment of accounting policies or impairment of capital assets x x x x In the period in which the combination occurs: (1) A brief description of the consideration provided (2) The total amount of net position acquired as of the date of acquisition x (3) A brief description of contingent consideration arrangements, including the basis for determining the amount of contingent payments 15

In the period in which the operations are transferred or sold: A brief description of the facts and circumstances leading to the disposal of the operations, and the following additional items, if not separately presented in its financial statements: a. Total expenses distinguishing between operating and nonoperating, if applicable b. Total revenues distinguishing between operating and nonoperating, if applicable n/a n/a n/a x c. Total governmental fund revenues and expenditures, if applicable Contributor Connie Spinelli Director 303.861.4545 cspinelli@bkd.com 16