Government mergers occur when:

• Governments (or governments and non-governmental entities) cease to exist as legally separate entities and are combined to form one or more new governments.
  –OR–
• Legally separate government(s) or non-governmental entities cease to exist and their operations are absorbed into one or more continuing governments.

There is no significant consideration exchanged in government mergers.

New Governments

In a government merger that results in a new government (new state agency), the new state agency recognizes the combined assets, deferred outflows of resources, liabilities and deferred inflows of resources of the merging entities as of the merger date (the date the combination becomes effective). These financial statement elements are based on the carrying amounts reported in the separate financial statements of the merging entities.

The new state agency may need to adjust some carrying amounts to bring the accounting principles of the merging entities into alignment. Do not adjust financial data based on accounting estimates.

Continuing Governments

In a government merger that results in a continuing government (state agency), the state agency recognizes the combined assets, deferred outflows of resources, liabilities, deferred inflows of resources, results of operations and cash flows of the merging entities in the period of combination as if the entities had been combined at the beginning of the state agency’s fiscal year. Measure financial statement elements of the merging entities’ separate financial statements at the carrying amounts as of the merger date.

The state agency adjusts carrying amounts to bring the accounting principles of the merging entities into alignment where applicable. The adjustments are applied to the beginning balances carried forward into the state agency’s financial statements with an explanation for these adjustments included in the applicable notes to the financial statements. Do not adjust financial data based on accounting estimates.

Capital Asset Treatment

Capital assets identified for disposal by the merging entities (prior to the merger date) are measured based on use:

• If the state agency (new or continuing) will use the capital assets until the disposal occurs, use the carrying amounts as of the merger date to measure the capital assets.
• If the state agency (new or continuing) will not use the capital assets, evaluate the capital assets for impairment based on GASB 42 requirements to determine if the carrying amounts need adjustments. If necessary, make adjustments and disclose the explanation of the adjustments in all applicable notes to the financial statements.

Other Treatments

Eliminate receivables and payables between the merging entities before the government combination. Do not eliminate interfund services provided and used between functions.

Government acquisitions occur when a government (state agency) acquires another entity, or the operations of another entity in exchange for significant consideration. The acquired entity or its operation becomes part of the acquiring state agency’s legally separate entity.

Recognition and Measurement

The acquisition date is the date the acquiring state agency obtains control of the assets and becomes obligated for the liabilities of the acquired entity or its operation.

The acquiring state agency measures the assets, deferred outflows of resources, liabilities and deferred inflows of resources of the acquired entity at the acquisition value (which is the market-based price) on the acquisition date. The exceptions are:

• Employment benefit arrangements (such as compensatory leave, pensions, other postemployment benefits or termination benefits) that are carried over to the extent that the obligation for those benefits will be honored by the combined government (state agency). The recognition and measurement of these employee benefit arrangements are covered under GASB 16, GASB 45, GASB 47 and GASB 68.
• Solid waste landfill closure, post-closure costs or obligations for pollution remediation are measured and recognized in conformity with existing financial reporting requirements. The most relevant measures are based on an evaluation of the:
  • Facts and circumstances relating to each liability
    –AND–
  • Current costs that are estimated to be necessary to satisfy those obligations
• Investments (including derivative instruments) are reported on the financial statements at fair value.
• Deferred outflows of resources and deferred inflows of resources (except those relating to effective hedging arrangements in GASB 53, paragraph 20) are recognized at the carrying amount previously reported by the acquired entity.
  • Adjust deferred outflows of resources and deferred inflows of resources related to effective hedging arrangements in GASB 53, paragraph 20, to reflect the difference between the acquisition value and the carrying value of acquired hedged items.
  • Recognize a deferred outflow of resources or a deferred inflow of resources attributable to an effective hedge of an expected transaction in GASB 53, paragraph 29, at its carrying value.
  • Account for any remaining deferred outflows of resources or deferred inflows of resources associated with derivative instruments by the acquiring state agency in conformity with GASB 53, paragraph 23 (related to termination of hedge accounting).

The acquiring state agency must not recognize deferred outflows of resources (or goodwill for a non-governmental entity) from a previous acquisition transaction in which the acquired entity gave more consideration for the value of the net position acquired.

Consideration

Consideration is the sum (as of the acquisition date) of the assets remitted or the liabilities incurred to the former owners of the acquired entity and may include financial and non-financial assets and obligations (such as cash, investments, capital assets and note payables).

Contingent Consideration

Consideration provided is contingent upon specified events in the future. Follow GASB 62 for contingency accounting when reporting contingent considerations.

Consideration Provided Exceeds the Net Position Acquired

When consideration provided exceeds the net position acquired, report the difference as deferred outflows of resources and amortize it over the future periods in a systematic and rational manner, per GASB 69. If goodwill existed at the GASB 69 implementation date of fiscal 2015 and was not reclassified to deferred outflows of resources, implementation of GASB 85 requires this reclassification if a positive balance exists. If a negative balance exists, it is eliminated as a restatement of net position.

Periodically review and revise the estimate of the amortization period. The amortization period may be determined (for example) by considering the estimated remaining service life of the capital assets or technology acquired if the acquisition is largely based on the expected use of the capital assets or expected efficiencies of the technology or the expected contract period.

The following USAS entries are designed to address an acquisition reported in funds held outside the state treasury. For additional guidance on state agency acquisitions in funds held in the state treasury, contact your financial reporting analyst.

Accounting effect of above entries:

To Record Amortization Expense for the Current Year

Accounting effect of above entries:

Consideration Provided Less Than the Net Position Acquired

When consideration provided is less than the net position acquired, reduce the acquisition values assigned to non-financial, non-current assets for the excess of net position acquired over consideration given.

If the seller intends to accept a lower price in order to provide economic aid to the acquiring state agency without receiving equal value in return, the acquiring state agency recognizes a contribution from the acquired entity.

Acquisition Costs

Acquisition costs are the costs the acquiring state agency incurs to effect an acquisition (such as fees for accounting and legal services, valuation and other professional or consulting services).

Report acquisition costs as an expense/expenditure in the period the services are received and the costs incurred.

Intra-Entity Government Acquisitions

The acquiring state agency recognizes the assets, deferred outflows of resources, liabilities and deferred inflows of resources at the carrying amount of the acquired blended or discrete component unit.

The acquiring state agency reports the excess of the acquisition price over the carrying amount of the acquired entity as a special item on its separately issued AFR. In the ACFR, this item is reclassified as:

• Transfers (if the acquired entity is a blended component unit of the acquiring state agency)
• Expenditure/Expense (if the acquired entity is a discrete component unit of the acquiring state agency)

Reporting Government Acquisition on a Provisional Basis

If the measurement of assets, deferred outflows of resources, liabilities and deferred inflows of resources is not finalized by the end of the fiscal year in which the acquisition occurs, the acquiring state agency recognizes the estimated amounts for the items not finalized and prospectively updates the estimated amount previously reported when new and more accurate information becomes available.

Transfers of operations occur when operations of a governmental entity or non-governmental entity (transferor) are transferred to another existing state agency or a new state agency (transferee) with no significant consideration exchanged. An operation is an integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets or liabilities.

The effective transfer date is the date the state agency receiving the transfer (transferee) obtains control of the assets and becomes obligated for the liabilities of the transferred operations.

The transferee recognizes the carrying amounts of assets, deferred outflows of resources, liabilities and the deferred inflows of resources of the transferred operations as of the effective transfer date.

The transferee may need to adjust carrying amounts to reflect a consistent accounting method if a different accounting method was used by the transferor. Apply the adjustments to the beginning balances carried forward into the transferee state agency’s financial statements and explain the adjustments in the applicable notes to the financial statements. Do not adjust balances based on accounting estimates.

Capital Asset Treatment

Capital assets identified for disposal by the transferor entity (prior to the transfer date) are measured based on use:

• If the transferee will use them until the disposal occurs, use the carrying amounts as of the transfer date to measure the capital assets.
• If the transferee will not use them, evaluate the capital assets for impairment based on GASB 42 requirements to determine if the carrying amounts need adjustments. If necessary, make adjustments and disclose the explanation of the adjustments in the applicable notes to the financial statements.

Reporting Transfers of Operations in Governmental and Proprietary Funds

The transferee in a governmental fund recognizes the net fund balance of the operations it receives as a special item on its operating statement.

The existing transferee in a proprietary fund recognizes the net position of the operations it receives as a special item in its operating statement.

Disposals of government operations are the removal of specific activities of a state agency.

A state agency disposing operations recognizes a gain or loss on the disposal by:

• Reporting a special item on the operating statement in the period of the disposal
• Recognizing only costs directly associated with the disposal of the operations

  Examples: Benefit costs provided to state employees for involuntary terminations (GASB 47) and contract termination costs (GASB 62, paragraphs 96-112) related to the disposal of operations.

• Measuring the special item:
  • Based on the effective transfer date or the date of sale of the operations in a proprietary fund
  • Equal to the net fund balance of the operation, net of consideration (if any), if held in a governmental fund

Since government combinations rarely occur in state government, there is not a separate note to disclose. If a state agency is involved in a government combination that is related to deferred outflows of resources or deferred inflows of resources, disclose the government combination(s) in Note 28.

For all government combinations, the state agency must disclose the following in an additional (supplemental) note in the period the combination occurs:

• A brief description of the government combination. Identify the entities involved and indicate whether the participating entities were within the same financial reporting entity.
• Date of the combination
• Primary reason(s) for the combination

Government Mergers and Transfers of Operations

The new or continuing state agency that results from a merger or transfer of operations must disclose:

• Amounts recognized as of the merger date or the effective transfer date, such as:
  • Total assets (distinguish between current assets, capital assets and other assets)
  • Total deferred outflows of resources
  • Total liabilities (distinguish between current and noncurrent amounts)
  • Total deferred inflows of resources
  • Total net position by component
• A brief description of the nature and amount of significant adjustments made for the purpose of:
  • Bringing the individual accounting policies of the state agencies involved into conformity
  • Adjusting for impairment of capital assets resulting from the merger or transfer
• If the initial amounts are different from the final amounts, the new or continuing state agency discloses the initial amounts before the significant adjustments above to reach the final amounts recognized as of the merger or transfer above.

Government Acquisitions

In the period of acquisition, the acquiring state agency discloses:

• A brief description of the consideration provided
• The total amount of the net position acquired as of the acquisition date
• A brief description of contingent consideration arrangements (including the basis for determining the contingent payments)

Disposals of Government Operations

The disposing state agency discloses:

• Identification of the operations and description of the facts and circumstances leading to the disposal of the operations
• The following amounts if these amounts are not presented separately in the financial statements:
  • Total proprietary fund revenues and expenses – distinguish between operating and non-operating (if applicable)
  • Total governmental fund revenues and expenditures (if applicable)

Sample

Sample University finalized the acquisition of a private ABC University Law School in Texas on Aug. 1, 20XX for the purpose of enhancing the academic ranking of the Sample University by having a law school. ABC University Law School is not part of the financial reporting entity of the state.

As of the Aug. 1, 20XX acquisition date, the net position of ABC University Law School acquired by Sample University was $15,000,000.00. Sample University provided $25,000,000.00 consideration to ABC University Law School for the purchase. No contingent consideration arrangements were made. The excess of the consideration provided over the net position acquired of ABC University Law School is reported by Sample University as deferred outflows of resources and amortized over a ten-year contract period. The outstanding deferred outflows of resources as of Aug. 31, 20XX was $9,916,666.67. The amortization expense for fiscal 20XX was $83,333.33.

For a sample of deferred outflows of resources and deferred inflows of resources, see Note 28.