Governmental Marriages, Adoptions and Divorces While Signing Your Life Away: GASB Statements 69 and 70, Governmental Combinations and Non-Exchange Guarantees

Government Combinations and Disposals of Government Operations GASB Statement 69 2

3 Issued January 2013 Effective for periods beginning after December 15, 2013

 Consider the financial reporting requirements for government combinations that are accomplished through mergers, acquisitions, and transfers of operations  Addresses government’s unique conditions and circumstances  Analysis of government combinations that have taken place in both the general government area (ex. city/county consolidations), and the business type activities area (ex. healthcare organizations)  Address certain spin-off issues (ex. A library district that was formerly a department in a primary government) – a transfer of operations Project Objectives 4

 Accounting Principles Board (APB) Opinion No. 16, Business Combinations  This guidance was never intended for the public sector and its application to the public sector has proven to be problematic  Addresses conditions and circumstances that are not normally encountered in government combinations  Because a government combination project was already on the GASB Board’s agenda, these were not incorporated in GASB Statement No. 62  APB 30 – Discontinued operations  FASB 141 and revision – Business combinations  FASB 164 – Not-for-profit entities, mergers, and acquisitions Existing Guidance 5

Scope includes:  Combinations in which NO consideration is provided  Government mergers  Transfers of operations  Combinations in which consideration is provided  Government acquisitions  Disposals of government operations Scope 6

Scope does not include:  Assets and liabilities comprising less than an operation  Obtaining control of another organization that remains a legally separate entity (already addressed in Statement 14)  Acquisition of equity interest (already addressed in Statement 14) Scope 7

To distinguish a combination from an acquisition of assets and related liabilities, consider:  “Operations” is defined as an integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets and liabilities  Service continuation: Obligation or responsibility (intent) to continue to provide the services that were provided by the previously separate governments, organizations, or operations Government Operations 8

 To be considered a government combination, the arrangement should result in the continuation of a substantial portion of the services provided by the previously separate entities or their operations after the transaction has occurred.  Terms of arrangement usually establish whether service continuation was intended  If not, professional judgment should be used  This distinguishes a combination from a contribution or purchase of assets and related liabilities Government Combinations 9

 The requirements distinguish between government combinations that involve significant (or lack) of financial consideration  Government merger—combinations of legally separate entities without the exchange of significant consideration  Government acquisitions—transactions in which a government acquires another entity, or its operations, in exchange for the payment of significant consideration  Combinations not involving entire legally separate entities and in which no significant consideration is exchanged (shared service arrangements, reorganizations, redistricting, annexations, arrangements where an operation is transferred to a new government created to provide those services) – transfer of operations Overall Approach 10

Government Merger  Insignificant or no consideration exchanged, and either:  Two or more separate legal entities combine to form a new entity  One or more of the prior entities cease to exist Government Acquisition  One government acquires another entity (or its operations) in exchange for significant consideration Transfer of Operations  A government combination involving operations rather than a legally separate entity  Could be a transfer to a continuing entity or creation of a new entity Types of Government Combinations 11

 Often guided by statute  Some states have passed or considered legislation to cause or encourage streamlining (too many layers)  Few successes for general purpose governments  Shared service alternative Government Mergers 12

 Government combination of legally separate entities in which insignificant or no financial consideration is exchanged and which includes one of the following:  An entirely new government is formed (A+B=C) or  2 or more governments (or one or more governments and one or more nongovernmental entities) cease to exist as legally separate entities and are combined to form one or more new governments  Merger date is the date the combination becomes effective  Initial reporting period of the new government begins on the merger date  The assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the merging entities would be recognized and measured in the statement of net position at their “carrying value” as of the merger date Government Mergers 13

 If the merging entities decide before the merger date to dispose of capital assets and the new government will use those capital assets until the disposal occurs:  Capital assets should be measured and reported at their carrying values by the new government  If the new government will not use the capital assets that have been identified for disposal or if the merging entities decide before the merger date that the manner or duration of use of capital assets will change:  Capital assets should be evaluated for impairment in accordance with provisions of Statement 42, as amended to determine if the carrying values should be adjusted Government Mergers 14

 A single continuing government remains (A+B=B+)  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  Merger date is the beginning of the reporting period in which the combination occurs, (as though the entities were already combined as of that date) regardless of the actual date of the merger  The assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the merging entities would be measured in the statement of net position at their “carrying value” as of the merger date Government Mergers 15

 If the merging entities decide before the actual date of the merger to dispose of capital assets of the dissolving government but the continuing government will use those capital assets until the disposal occurs:  Capital assets should be measured and reported at their carrying values by the continuing government  If the continuing government plans to dispose of the capital assets that it will not use or if decisions are made before the actual date of the merger that the manner or duration of use of specific capital assets of the dissolving government will change:  Capital assets should be evaluated for impairment in accordance with provisions of Statement 42, as amended Government Mergers 16

 Acquisition date is the date the acquiring government obtains control of the acquired entity’s assets or becomes obligated for its liabilities or its operations (typically when consideration is paid)  Assets and liabilities normally would be recorded at their acquisition value as of the acquisition date – price that would be paid for acquiring similar assets, having similar service capacity, or discharging the liabilities assumed as of the acquisition date  Deferred outflows of resources and deferred inflows of resources should be brought forward at their carrying values Government Acquisitions 17

 Consideration Given:  If exceeds the net position acquired, the difference would be treated as a deferred outflow of resources  Attributed to future periods in a systematic and rational manner, based on professional judgment  If net position exceeds the consideration given  Considered a contribution – if the seller accepted the lower amount for the purpose of providing an economic benefit to the acquiring government  If not – the difference would be eliminated by reducing the acquisition values assigned to noncurrent assets (other than investments reported at fair value).  If the difference exceeded the acquisition value of all noncurrent assets (other than investments reported at fair value), the remainder would be treated as a special item in the flows statement. Government Acquisitions 18

 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.  Operation - an integrated set of activities with associated assets and liabilities that is conducted and managed for the purpose of providing identifiable services. Transfers of Operations 19

 Entered into for similar reasons as government mergers  Transfer date is the date the transferee government obtains control of the acquired operation’s assets or becomes obligated for its liabilities.  If the transfer of operations results in the formation of a new government – the new government’s initial reporting period begins at the effective transfer date  If the transfer of operations results in a continuing government – the continuing government should report the transfer as a transaction in the financial statements for the reporting period in which it occurs Transfers of Operations 20

 Assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the transferred operation would be incorporated at their carrying value as of the effective transfer date Transfers of Operations 21

 The disposing government would report a special item for any gain or loss on the disposal of operations in the period in which the disposal occurs, based on either:  Effective transfer date of the transfer of operations, or  The date of sale for operations that are sold Disposals of Government Operations 22

 The following disclosures are required for all government combinations:  Brief description of the combination that:  Identifies the entities involved and the primary reasons for the combination  Mentions whether the entities combined were part of the same financial reporting entity  Discloses the date of the combination  Additional disclosures for:  Mergers and transfers of operations  Acquisitions  Disposals of Operations Disclosures 23

 Carrying values recognized as of the merger date  Current, capital, and other assets  Deferred outflows of resources  Current and noncurrent liabilities  Deferred inflows of resources  Net position by component  Description of significant adjustments  Initial amounts recognized, if different from adjusted carrying values Disclosures: Mergers & Transfers 24

 Acquisitions  Brief description of consideration provided  Total amount of net position acquired  Brief description of contingent consideration arrangements  Disposals of operations  Description of the circumstances leading to the discontinuation  Operation’s revenues, expense, and non-operating items Disclosures: Acquisitions & Disposals 25

Effective for financial statements for periods beginning after December 15, 2013 Effective Date 26

Examples of combinations – GASB No. 69 Group Learning – GASB 69 27

Facts: On November 2, 2014, the citizens of Geary Township and the citizens of the surrounding Sample Village approved referendum to merge their legally separate governments into a single new government that will be incorporated as Sample City. The merger will enable the new government (Sample City) to take advantage of cost efficiencies by the elimination of redundancies in service. The referendum establishes that a governing body for Sample City will consist of four representatives from each of the merging governments and includes a plan for the merger, formally known as the Municipal Consolidation Plan (merger plan). CASE #1: Facts 28

Facts-continued: The merger is effective as of January 1, As part of the merger plan, Sample City officials agreed to sell some of the redundant capital assets as soon as possible after the merger date, and those capital assets will not be used pending their sale. Sample City officials determined these capital assets are impaired as a result of the decision to dispose of them. Sample City officials determined that the decision to sell the assets resulted in a decrease of $4 million in the capital asset account of the governmental activities related to the agreed-upon closing of the Sample Village’s public works facilities. Officials of Sample City also determined an adjustment to the carrying value of inventory is necessary to reflect a consistent method of accounting, resulting in a decrease of $80,000. CASE #1: Facts 29

Question: Does this qualify as a government combination (merger, acquisition, transfer of operations)? Answer: YES, this is a government merger. CASE #1: Question and Answer 30

Question: What is the merger date (the initial reporting period)? Answer: The date the merger becomes effective, 01/01/15 CASE #1: Question and Answer 31

CASE #1: Initial Balances 32

Question: Are there any adjustments needed and if so for what categories? Answer: YES, adjustments are needed for the impairment of capital assets and to reflect a consistent method of accounting for inventory. CASE #1: Question and Answer 33

CASE #1: Adjustments 34

CASE #1: Final Initial Balances 35

Footnote Disclosure: Note X: Government Merger Sample City began operations January 1, 2015, and was formed from the merger of the Geary Township and Sample Village to take advantage of the cost efficiencies based on the elimination of redundant services pursuant to the citizens’ approval of referendum , including the Municipal Consolidation Plan. The initial opening balances of Sample City’s assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position, as of the beginning of the period, were determined on the basis of the carrying values reported in the separate financial statements of Geary Township and Sample Village as of December 31, 2014 as follows: CASE #1: Disclosures 36

CASE #1: Disclosures 37

Facts: On September 30, 2014, the City of Ammon Creek (City) acquires the operations of Bridgens Golf, Inc., a privately owned golf course (Barkas Ridge), including water rights, in exchange for $3 million to obtain the course for public use. The water rights were obtained to maintain the course. At the date of acquisition, the corporation is dissolved and the City will account for the operations of a municipal golf course in a newly established enterprise fund. As of September 30, 2014 the financial position of Bridgens Golf Inc. was comprised of the following assets and liabilities: CASE #2a: Facts 38

CASE #2a: Facts 39

Question: Does this qualify as a government combination (merger, acquisition, transfer of operations)? Answer: YES, this is a government acquisition. CASE #1: Question and Answer 40

Facts: The City identifies the assets acquired and liabilities assumed from its purchase of Bridgens Golf Inc. as of September 30, In addition, the City identifies an intangible asset for water rights of $250,000 that meets the recognition criteria described in Statement No. 51, Accounting and Financial Reporting for Intangible Assets. (Note: The water rights were not previously required to be reported by Bridgens Golf Inc.) CASE #2a: Additional Facts 41

Facts: 2. The City determines the acquisition values of the assets acquired and liabilities assumed as of the acquisition date, as indicated below. The City renegotiated the financing from the local institution that held the note payable. The amount required to discharge Bridgen’s liability with the local institution was $6,720,970. Inventories$95,000 Land$5,000,000 Buildings and equipment$4,250,000 Water Rights$250,000 CASE #2a: Additional Facts 42

CASE #2a: Comparison 43

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CASE #2a: Comparison 51

Facts: After assigning the acquisition values to the assets acquired and the liabilities assumed the City determined that the consideration provided ($3 million) exceeded the acquisition value of the net position acquired ($2.9 million) by $100,000. The City recognized a deferred outflow of resources for the excess consideration provided and establishes an attribution period for the deferred outflow of resources over future reporting periods. Because a substantial portion of operations acquired consists of capital assets, the City determines that it will attribute the excess amount of consideration provided over the next 15 years based upon its estimate of the remaining service lives of the capital assets the City has acquired. CASE #2a: Additional Facts 52

CASE #2a: Initial Financials 53

Footnote Disclosure: Note X: Government Acquisition On September 30, 2014 the City of Ammon Creek (City) acquired Bridgens Golf Inc., which owned the Barkas Ridge golf course and substantial water rights that attach to the golf course property in exchange for $3 million. The City will operate and maintain the golf course as a municipal golf course for public use and account for its operations in an enterprise fund. The acquisition included all of the assets of Bridgens Golf Inc., consisting of 160 acres of land; water rights; golf facilities; driving range; and inventories. In addition, the City assumed the liability for the accounts payable and accrued expenses of Bridgens Golf Inc. and renegotiated the terms and conditions of a bank note payable. The acquisition value of the net position acquired as of the acquisition date was determined to be $2.9 million. CASE #2a: Disclosures 54

Facts: The basic facts of the preceding case study are the same except that the City gives less consideration and receives net assets in excess of the consideration provided. In this case, the City purchased Bridgens Golf Inc. for $2.5 million. CASE #2b: Facts & Question 55

CASE #2b: Comparison 56

Facts: In this case study, because the net assets received exceed the consideration the City provided by $400,000, the City allocates this excess to the acquisition values of noncurrent assets, other than financial assets. The City allocates the excess based upon a proportionate share of the acquisition value assigned to each noncurrent asset. CASE #2b: Additional Facts 57

CASE #2b: Allocation 58

CASE #2b: Initial Financials 59

Footnote Disclosure: Note X: Government Acquisition On September 30, 2014 the City of Ammon Creek (City) acquired Bridgens Golf Inc., which owned the Barkas Ridge golf course and substantial water rights that attach to the golf course property in exchange for $2.5 million. The City will operate and maintain the golf course as a municipal golf course for public use and account for its operations in an enterprise fund. The acquisition included all of the assets of Bridgens Golf Inc., consisting of 160 acres of land; water rights; golf facilities; driving range; and inventories. In addition, the City assumed the liability for the accounts payable and accrued expenses of Bridgens Golf Inc. and renegotiated the terms and conditions of a bank note payable. The acquisition value of the net position acquired was determined to be $2.9 million. The acquisition values of the land, buildings, equipment, and water rights were reduced to eliminate the $400,000 excess net position received. CASE #2b: Disclosures 60

Facts: Mountain Region Fire Authority (MRFA) is a separate municipal corporation, organized as a regional fire protection service authority. Under an intergovernmental agreement between the City of Price River (City) and the MRFA, the City will combine its fire protection operations with the MRFA for the purpose of providing services to the City’s citizens. On March 15, 2015, the City transferred the assets and liabilities comprising its fire service operations to the MRFA. The City transferred an administrative building, fire stations, engines, trucks, and various other equipment having a carrying value of $6.3 million. The MRFA will also assume $3.4 million of the City long-term debt related to fire service operations. There are no deferred outflows of resources or deferred inflows of resources associated with the City’s fire service operations. CASE #3: Facts 61

Facts: The assets and liabilities transferred to the MRFA represent an integrated set of assets and liabilities managed for the purpose of providing fire services, thus meeting the definition of an operation. In addition, service continuation is presumed because the assets used by the City to provide fire services will be used in a similar manner by the MRFA to provide a similar service. There is no consideration given in the transaction. CASE #3: Facts 62

Question: Does this qualify as a government combination (merger, acquisition, transfer of operations)? Answer: YES, this is a transfer of operations. CASE #3: Question and Answer 63

The MRFA recognizes the carrying values of assets and liabilities of the City’s fire service operations as of March 15, 2015, and a special item of $2.9 million representing the inflow of resources for the net position received. The MRFA determines that adjustments to the carrying values of assets related to the City’s fire service operations are not necessary to reflect a consistent method of accounting or to reflect the impairment of capital assets. The MRFA discloses the transfer of operations in the notes to its financial statements. CASE #3: Accounting for MRFA 64

Footnote Disclosure: Note X: Transfer of Operations Under an intergovernmental agreement between the City of Price River (City) and the MRFA, the City agreed to combine its fire protection services with the MRFA for the purpose of enhancing the provision of those services to the City’s citizens. On March 15, 2015, the City transferred the assets and liabilities comprising its fire service operations to the MRFA. As a result of the transfer, the MRFA recognized the following assets, liabilities, and net position: CASE #3: Disclosures for MRFA 65

CASE #3: Disclosures for MRFA 66

The City derecognizes the assets and liabilities related to its fire service operations as of March 15, 2015, and recognizes $2.9 million (plus any costs directly associated with the disposal) as a special item representing the loss on disposal of operations. The City discloses the disposal of operations in the notes to its financial statements. None of the assets or liabilities disposed of were recognized in the City’s governmental funds. Expenditures directly associated with the disposal, if any, would be reported as a special item. CASE #3: Accounting for City 67

Footnote Disclosure: Note X: Disposal of Operations On March 15, 2015, the City transferred the assets and liabilities comprising its fire service operations to the Mountain Region Fire Authority (MRFA) for the purpose of enhancing emergency fire services. As a result of the transfer, the City recognized a loss of $2.9 million on the disposal of its fire service operations as a special item. The City’s 2015 expense related to its fire service operations totaled approximately $11.2 million revenues associated with the City’s fire service operations, consisting of both program and general revenues, totaled approximately $9.6 million. Expenditures and revenues of the fire service operations reported in the general fund were $10.9 million and $9.7 million, respectively. CASE #3: Disclosures for City 68

 Accounting and Financial Reporting for Nonexchange Financial Guarantees GASB Statement 70 69

Issued April 2013 Effective for periods beginning after December 15,

 To improve the recognition, measurement, and disclosure guidance for state and local governments that have extended or received financial guarantees that are nonexchange transactions. Project Objective 71

 LIMITED TO NONEXCHANGE TRANSACTIONS  Some governments extend financial guarantees for the obligations of another government, a not-for-profit entity, or a private entity without directly receiving consideration in exchange (a nonexchange transaction).  As part of this nonexchange financial guarantee, a government commits to indemnify the holder of the obligation if the entity that issued the obligation does not fulfill its payment requirement.  Some governments issue obligations that are guaranteed by other entities in a nonexchange transaction. Scope of the Project 72

 Does not apply to  guarantees related to special assessment debt within the scope of Statement 6  Exchange transactions  Exchange-like transactions Scope Exclusions 73

 A school district that receives a financial guarantee from the state government for the district’s debt service payments on construction bonds it has issued. Financial Guarantees-Example 74

A nonexchange financial guarantee is a guarantee of an obligation of a legally separate entity, including a blended or discretely presented component unit, which requires that guarantor to indemnify a third- party obligation holder, under specified conditions. -Pledges of future revenues are not financial guarantees as they are contingent upon the collection of future revenues. What is a Nonexchange Financial Guarantee 75

 A government should recognize a liability and expense - when qualitative factors or historical data indicate that it is more likely than not that the government will be required to make a payment related to the nonexchange financial guarantees it extended for liabilities of other entities or individuals.  Initiation of the process of entering into bankruptcy or financial reorganization  Breach of a debt contract in relation to the guaranteed obligation, such as failure to meet rate covenants or coverage ratios, or default or delinquency in interest or principal payments  Indicators of significant financial difficulty, such as failure to transfer deposits from debt service funds to paying agents or trustees on a timely basis or drawing on a debt service reserve fund to make debt service payments.  A government that has historical data on the default frequency of a group of guarantees Liability Measurement – Economic Resources Measurement 76

 The amount of the liability recognized should be:  The best estimate of the discounted future outflows related to the guarantee expected to be incurred, or  If there is no best estimate but a range of estimated future outflows can be established—  Discounted present value of the minimum amount within the range.  Expenses related to nonexchange financial guarantees should be classified in the same manner as grants or financial assistance payments to other entities or individuals. Liability Measurement – Economic Resources Measurement 77

 A government should recognize a fund liability and an expenditure to the extent the liability is normally expected to be liquidated with expendable available resources (when payments are due and payable on the guaranteed obligation) - when qualitative factors or historical data indicates that it is more likely than not that the government will be required to make a payment as a result of nonexchange financial guarantees it extended on liabilities of other entities or individuals  Expenses related to nonexchange financial guarantees should be classified in the same manner as grants or financial assistance payments to other entities or individuals. Liability Measurement – Current Financial Resources Measurement 78

 Under both the economic resources measurement focus and the current financial resources measurement focus  If a government is required to repay a guarantor for nonexchange financial guarantee payments made on the government’s obligations, the government should reclassify that portion of its previously recognized liability for the guaranteed obligation as a liability to the guarantor.  The government that issued the guaranteed obligation should continue to report its liability until that portion of the liability is legally released, such as when a plan of adjustment is confirmed by the court.  When a government is legally released as an obligor from the obligation and from any liability to the guarantor, the government should recognize a revenue to the extent of the reduction of its guaranteed liabilities. Governments Issuing a Guaranteed Obligation 79

 Any government that extends nonexchange financial guarantees should disclosure the following by type of guarantee:  Description of the nonexchange financial guarantee:  Legal authority and limits for extending the guarantees and types of obligations guaranteed.  The relationship to the entity or entities issuing the obligations that are guaranteed  Arrangements for recovering payments from the issuers of the obligations that are guaranteed  Length of time of the guarantees  The total amount of all guarantees extended that are outstanding Disclosures 80

 A government that recognizes a nonexchange financial guarantee liability or has made payments during the reporting period on the guarantees extended:  Brief description of the timing of recognition and measurement of the liabilities and a table presenting the changes in recognized guarantee liabilities including:  Beginning of year balances  Increases, including initial recognition and adjustments increasing estimates  Guarantee payments made and adjustments decreasing estimates  End of year balances  Cumulative amounts of indemnification payments that have been made on guarantees extended that are outstanding  Amounts expected to be recovered from indemnification payments that have been made Disclosures 81

 Governments that have outstanding obligations that have been guaranteed by another entity as part of a nonexchange transaction should disclose the following information about the guarantees by type of guarantee:  Name of the entity providing the guarantee  The amount of the guarantee  Length of time of the guarantee  Amount paid, if any, by the entity extending the guarantee on obligations of the government during the current reporting period  The cumulative amount paid by the entity extending the guarantee on outstanding obligations of the government  Description of requirements to repay the entity extending the guarantee  The outstanding amounts, if any, required to repay the entity providing the guarantee Disclosures 82

 Effective for periods beginning after June 15, 2013  Earlier application would be encouraged Effective Date 83