The User's Perspective

Winter 2012-13

Government Combinations: What They Are and What the GASB Is Doing with Them

            The GASB recently approved new accounting and financial reporting standards for government combinations in early 2013. This article examines what government combinations are, why they are important in the governmental environment, and what the GASB is doing related to them.

What Are Government Combinations?

            Government combinations are commonly referred to as mergers and acquisitions. In January 2013, the GASB approved new accounting and financial reporting standards for such transactions in Statement No. 69, Government Combinations and Disposals of Government Operations. In addition to addressing government combinations themselves (such as the merger of neighboring school districts, or a public university’s acquisition of a hospital), Statement 69 also addresses how a government should account for disposals of government operations that it has transferred or sold. An example of this type of transaction might involve a local water or sewer district that is sold to be combined with a larger, regional authority.

Why Are Government Combinations Important?

            Governments have found themselves in a challenging economic and fiscal environment for the past several years. This has caused some government decision makers to seek other ways to continue to provide essential government services in an atmosphere of resource reductions and shrinking budgets. Combinations among governments have been increasingly considered as ways to achieve reduced costs while, at the same time, maintaining necessary service levels. A village might combine its police department, for example, with the department of a larger neighboring town, with which the village would then contract for public safety services.

            A number of states have encouraged local governments to combine operations in order to eliminate layers of government, as well as the service and staffing redundancies that may go along with them. For example, in some communities small fire companies might be combined into a county-wide fire protection district. In this way, governments can continue to provide essential services while meeting the objectives of streamlining government and reducing related costs.

What Guidance Is Currently Followed?

            Governments currently account for mergers, acquisitions, and other similar combinations by applying guidance that was originally developed for the business environment decades ago. That guidance addresses transactions and concepts that can arise when dealing with combinations among public companies, such as exchanges of stock, the purchase of one company by another, and the presentation of stockholders’ equity. While common in the business arena, these situations do not typically occur in the government environment.

            During deliberations that led to GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, the Board decided not to bring forward guidance addressing combinations in the business environment. The GASB instead decided to consider guidance for combinations with the inherent characteristics and circumstances found in the government environment.

What Will the New Statement Require?

            Statement 69 provides guidance that is specifically intended for state and local governmental entities. It addresses:

  • Government acquisitions, in which a government acquires another government or the operations of another entity in exchange for significant financial consideration (for example, a cash payment)
  • Government mergers, in which two or more governments combine without any exchange of significant consideration (in other words, one government does not make a payment to the other, as in an acquisition)
  • Transfers of operations, which are similar to mergers but relate to specific individual services rather than an entire governmental entity
  • Disposals of governmental operations that have been transferred or sold.  

Government Mergers

            Many of the combinations that take place among governments are transactions in which payments do not change hands and the separate governments combine on a largely equal footing. These are called government mergers. Statement 69 defines a government merger as a government combination of legally separate entities in which only nominal payment—or no payment—is exchanged and in which one of the following is included:

  • 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.
            Generally speaking, government mergers are relatively easy combinations to account for because the assets and liabilities and other items are simply combined at their carrying—or “book”—value. Both new and continuing governments that result from a government combination would measure financial statement elements as of the merger date at the carrying values as reported in the separate financial statements of the merging entities. The initial net position of the merged government results from combining the carrying values of the financial statement elements of the separate entities. The Board took this position because the basic services have not changed; therefore, the Board concluded that the cost of services reported should remain on the same basis.

Government Acquisitions

            Statement 69 defines a government acquisition as a government combination in which a government acquires another entity, or the operations of another entity, in exchange for significant financial consideration. The acquired entity or operation then becomes part of the acquiring government’s legally separate entity.

            Under a government acquisition, the purchase price is allocated among the assets and liabilities acquired based upon some relative notion that is similar to fair value—or, what it would cost to acquire (that is, acquisition value) similar service potential. Acquisitions are rare among general governments, but not uncommon in the business-type activities sector, which could include transactions involving hospitals, physician practices, or golf courses for example.

            The acquisition date is the date on which the acquiring government obtains control of the assets or becomes obligated for the liabilities of the acquired entity or operations. The new Statement will specify that the acquiring government measure the acquired financial statement elements—with certain exceptions—at acquisition value as of the acquisition date. Payment provided by the acquiring government are measured at the acquisition date as the sum of the acquisition values of the assets remitted or liabilities incurred to the former owners of an acquired entity or its creditors.

Transfers of Operations

            Statement 69 also provides guidance for combinations that do not involve entire entities and in which no significant financial consideration is provided. These arrangements are combinations that include transfers of operations to continuing governments or that form the basis of new governments. An operation is defined as 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 are similar to mergers, although on a lesser scale—these transactions involve just a portion of the government rather than the entire entity. For example, if a county transfers its public safety function to a regional government or to another county, the original county still exists; it has simply divested itself of that function.

            Because the reasons behind transfers of operations are similar to those behind government mergers, the use of carrying values to report the financial statement elements of the transferred operation is also applied for these arrangements.

Disposals of Governmental Operations

            Statement 69 provides guidance for disposals of government operations that have been transferred or sold. Disposals of government operations are much like transfers of operations as viewed from the perspective of the transferor. Upon the disposal of operations, governments recognize a gain or loss, which generally is reported as a special item in the period in which the disposal occurs.


            The central aim of the disclosures that will be required by Statement 69 is to provide users with the information they need about the separate governments prior to the combination. For each government combination, the new or continuing governments will include a brief description of the combination, the date of the combination, and the primary reasons for the combination.

Government Mergers and Transfers of Operations

            New governments or continuing governments will disclose the amounts recognized as of the merger date or the effective transfer date for the financial statement elements and total net position by component. These governments also will disclose a brief description of the nature and amount of significant adjustments, if any, made to bring into alignment the individual accounting policies or to adjust for impairment of capital assets resulting from the merger or transfer.

Government Acquisitions

            An acquiring government will briefly describe the financial consideration provided, the total amount of net position acquired as of the date of acquisition, and any contingent consideration arrangements (consideration that will be provided if certain events occur in the future), including the basis for determining the amount of contingent payments.


            A government will briefly describe the facts and circumstances leading to the disposal of its operations. The government also will identify and disclose the disposed operation’s total expenses, revenues, and nonoperating revenues and expenses of the period, if this information is not presented separately in the government’s financial statements.


            Statement 69 provides governments with clear and consistent guidance for identifying and accounting for types of government combinations—guidance that has been created specifically for governments. In addition, the accompanying disclosures should equip users of government financial statements with the information they need to make informed decisions about these kinds of transactions and the financial impact on the governments involved.

Further Reading