A & A Alert - February 2013

The Governmental Accounting Standards Board (GASB) recently issued Statement No. 69 to provide guidance to state and local governments for combinations and disposals of government operations. This Statement will enable governments to determine if a combination is a government acquisition, a government merger, or a transfer of operations. 

Governments have historically accounted for mergers, acquisitions, and other similar combinations by relying on guidance established for the private sector; however, Statement No. 69 provides accounting and financial reporting guidance to address the unique conditions and circumstances of governments.

Statement No. 69 establishes three types of government combinations: government mergers, government acquisitions, and transfers of operations.

The Statement defines a government merger as a situation where:

• 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.

In a merger, 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.

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.

The Statement 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 acquiring government would measure the acquired assets, deferred outflows of resources, liabilities, and deferred inflows of resources—with certain exceptions—at a market-based entry price. 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.

Finally, the Statement 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. 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.

The Statement also provides 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.

Statement No. 69 is effective for periods beginning after December 15, 2013 and should be applied on a prospective basis. Early application is encouraged by the GASB.

The full text of Statement No. 69 is available by clicking here.

Readers should not act upon information presented without individual professional consultation.

The FASB has issued for public comment a proposal intended to improve financial reporting about expected credit losses on loans and other financial assets held by banks, financial institutions, and other public and private organizations.

The proposed ASU, Financial Instruments - Credit Losses (Subtopic 825-15), includes a new accounting model intended to require more timely recognition of credit losses, while also providing additional transparency about credit risk. Trade receivables, loans, debt securities, lease receivables and any other receivables that represent the contractual right to receive cash would generally be affected by the proposed ASU.

The FASB’s proposal calls for an entity to recognize an allowance for credit losses based on its current estimate of contractual cash flows not expected to be collected.

Many believe that the global economic crisis exposed weaknesses in the "incurred loss" model currently used to account for credit losses on financial instruments. Under the "incurred loss" model, losses are not recorded until it is probable that a loss event has occurred. This model has been criticized as having too high of a threshold to recognize a credit loss such that losses are recorded too late in the credit cycle.

The FASB’s proposed model eliminates any threshold required to record a credit loss and allows entities to consider a broader information set when establishing their allowance for loan losses. In addition, the model aims to simplify current practice by replacing today’s multiple impairment models with one model that applies to all debt instruments.

Comments in response to the proposal are due April 30, 2013. The full text of the proposal can be found by clicking here.

Readers should not act upon information presented without individual professional consultation.

The Financial Accounting Standards Board (FASB) has issued for public comment a proposed Accounting Standards Update (ASU) related to fair value disclosure requirements.

The proposed ASU is intended to clarify the scope and applicability of a disclosure exemption that is specific to nonpublic entities that resulted from the issuance of ASU No. 2011-04. 

The proposed amendment would clarify that the requirement to disclose “the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)” does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed.

The full text of the proposed ASU can be found by clicking here.

Readers should not act upon information presented without individual professional consultation.