Illustrating the

New Face of
Government
Balance
Sheets
GASB Statements

63 and 65

Tax Tips for

Bloggers

Confidentiality
in the Cloud

Personal
Devices at
Work

C O N T E N T S
november 2013

PERSPECTIVES

16

IN FOCUS

6 Perspectives

16 In Focus

Helping Small and Midsized Businesses Succeed

in a Technology-Driven World: Four Essential IT
Risks and Recommendations

In Pursuit of Revenues:
Federal Income Tax Reform

Publishers Column: Are You the Future

of the NYSSCPA?

By Gregory L. Prescott and James R. Hardin

Accounting for Stock Options: Examining

Another Option
Book Review: Financial Statement Fraud:
Strategies for Detection and Investigation

Accountants have a duty to contribute to the current federal budget

debate in Washington in a nonpartisan manner by bringing their
financial expertise to bear on the political conversation. Most economists and the major credit rating agencies agree that the country
cannot continue to sustain the budget deficits of recent years.
Because tax reform is likely to be a substantial part of any longterm solution, it is helpful to review the income tax receipts portion
of the federal budget and look more closely at each of the major tax
expenditures (those projected to cost at least $100 billion during the
next five years) that could prove tempting to reformers.

22 Accounting & Auditing

y

Government Accounting

Government Accounting

Employee Benefit Plans

The New Face of Government Balance Sheets: Illustrating the

Changes under GASB Statements 63 and 65
By Craig D. Shoulders and Joseph P. Lakatos
The New Reporting Standard for Government Combinations:
Understanding GASB Statement 69
By Bruce W. Chase

Premium Stabilization Reserves: A Case of a Missed Liability

By Eduardo Singerman and Gary Broder
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vol. LXXXIII/no. 11

40

ESSENTIALS

TECHNOLOGY

63

63 Technology

40 Taxation
y

Federal Taxation

Tax Implications for Bloggers

By Lynn Stallworth and Susan Anderson
y

IT Management

Addressing the Challenges of the

Bring Your Own Device Opportunity
By Holly Ansaldi

State and Local Taxation

An Update on the Streamlined Sales and Use Tax Project

By Mary Ann Hofmann, Megan Y. McSwain,
and Dwayne N. McSwain

52 Finance
y

Employee Benefit Plans

Employee Plan Fix-It Programs and How to Use Them

By Carol Buckmann

55 Management
y

Litigation Support

Evaluating the Competence of a Financial Expert Witness:

Seven Factors for Consideration
By Lookman Buky Folami, Michael E. Mason,
and Stephen Perreault

58 Responsibilities & Leadership

y

Security

Cloud Computing, Social Media, and Confidentiality

By Maria Pirrone and Joseph E. Trainor

The CPA and the Computer

Linux for CPAs: Weighing the

Benefits and Challenges
By Jay Starkman
y

What to Bookmark

Website of the Month:

Cloud Computing Roundup
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74 Classified Ads
79 Economic & Market Data
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A Fresh Look at the Auditors Report

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& A U D I
government accounting

C C O U N T I N G

T I N G

The New Reporting Standard

for Government Combinations
Understanding GASB Statement 69
By Bruce W. Chase

n todays economic environment, governments are looking for ways to provide services at the lowest possible
cost; this includes combining some services
with other governments or organizations.
The accounting for different types of government combinations is governed by the
recently released GASB Statement 69,
Government Combinations and Disposal
of Government Operations (issued in
January 2013), which defines certain combinations as mergers, acquisitions, or transfers of operations.
In all three cases, the standard requires a
continuation of a substantial portion of the
services provided by the previously separate
entities. The terms and conditions of the
arrangement will often address service continuation; if they do not, professional judgment should be used to determine whether
service continuation was intended. Auditors
and accountants must understand the guidance in this standard, which differs significantly from the guidance used by private-sector organizations for business combinations.

Acquisition. When one government

acquires another entity or its operations in
exchange for significant consideration (in
relationship to the net assets acquired)
and the entity or operations become part
of the acquiring governments operations,
it is considered an acquisition.
Transfer of operations. A transfer is
defined as a combination in which opera-

sents the beginning of the new governments initial reporting period. In the latter case, the merger date is the beginning
of the reporting period in which the combination occurs, regardless of the actual
date of the merger.
For an acquisition, the date the acquiring
government obtains control of the net
assets of the acquired entity or its opera-

tions are transferred from an entity, rather

than a combination of legally separate entities, to either an existing government or to
a new government. No significant consideration is exchanged as part of a transfer.

tionsgenerally, the closing date on which

the acquiring government provides considerationbecomes the acquisition date.
For a transfer of operations, the date
the government obtains control of the
assets and becomes obligated for the liabilities of the operations transferred is the
effective transfer date. For a transfer of
operations that results in a new government, the effective transfer date marks
the start of the new governments initial
reporting period.

Government Combination Types

The Exhibit provides an overview of the

three types of government combinations
covered under GASB Statement 69: merger, acquisition, and transfer of operations.
Merger. A government merger is
defined as a combination of legally separate entities in which no significant consideration is exchanged and either
n two or more entities (at least one being
a government) cease to exist as legally separate entities and combine to form one or
more new governments, or
n 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.

32

Recognition of Combinations

Mergers can result in the formation of

a new government or the continuation of
an existing government. In the former case,
the merger date reflects when the combination becomes effective, and this repre-

NOVEMBER 2013 / THE CPA JOURNAL

Carrying Values Used for Mergers and

Transfers of Operations

In a government merger or transfer of

operations, assets, deferred outflows of
resources, liabilities, and deferred inflows
of resources are generally reported at
their carrying values as of the merger
date or transfer date. The carrying values
are the amounts reported in the separate
financial statements of the entities involved
in the combination. If financial statements
are not available as of the merger date or
transfer date, the values can be based upon
the most recent financial statements.
Sometimes, organizations involved in
a merger or transfer of operations use an
accounting method not in conformity with
authoritative guidance for state and
local governments or not consistent with
the accounting method used by the new
or continuing government. Adjustments
to the carrying values are allowed in
order to bring reporting into conformity
with such guidance or to reflect a consistent method of accounting. The new or
continuing government should not recognize additional assets, deferred outflows of resources, liabilities, and
deferred inflows that authoritative guidance for state and local government
does not require or permit.
Capital assets will sometimes be disposed
of as part of a merger or transfer of operations. If a decision is made to dispose of an
asset prior to the merger date (the effective
transfer date for a transfer of operations or
the effective merger date for a continuing
government), the asset should be measured
at its carrying value if the government will
use the asset until disposal occurs. If the new
or continuing government will not use the
asset, it should be tested for impairment
under GASB Statement 42, Accounting
and Financial Reporting for Impairment of
Capital Assets and for Insurance Recoveries.
A similar evaluation should be made for a
change in the manner or duration of use related to a capital asset.
In the case of a merger, the new or continuing government will record beginning
net positions from the combined carrying
values of the assets, deferred outflows of
resources, liabilities, and deferred inflows of
resources of the merging entities. In the case
of the transfer of operations to a continuing
government, that government should report
the net position received or assumed from

NOVEMBER 2013 / THE CPA JOURNAL

the transfer as a special item. In the case of

the transfer of operations to a new government, that government should report the
net position received or assumed at the
beginning of its initial reporting period.
The reporting of a merger or transfer of
operations in a governmental fund will follow the financial reporting requirements for
governmental funds (flow of financial
resources). For mergers, the beginning fund
balance should be adjusted for the net fund
balance obtained. For a transfer of operations to a continuing government, a special item should be reported for the net
fund balance obtained.

position. The acquiring government should

not recognize this amount.
As stated earlier, significant consideration
is exchanged in an acquisition. The amount
of consideration is usually measured by the
values of the assets acquired or the liabilities incurred by the former owners; however, an acquisition may also include a potential future transfer of cash or other assets
upon specified future events (i.e., contingent
consideration). A government should recognize contingent consideration if, prior to the
issuance of the financial statements, it is
probable that this liability has been incurred
and the amount can be reasonably estimat-

Acquisition Value Used for Acquisitions

Assets, deferred outflows of resources,

liabilities, and deferred inflows of resources
are generally reported at acquisition value
in a government acquisition. Acquisition
value is defined as a market-based entry
price; it is further defined in GASB
Statement 69 as follows:
An entry price is assumed to be based
on an orderly transaction entered into on
the acquisition date. Acquisition value represents the price that would be paid for
acquiring similar assets, having similar service capacity, or discharging the liabilities
assumed as of the acquisition date.
Sometimes, an acquired organization
uses an accounting method not in conformity with authoritative guidance for state
and local governments. The acquiring government should make adjustments to report
items in conformity with authoritative guidance and, in some cases, should recognize
assets, deferred outflows of resources, liabilities, and deferred inflows of resources
not reported by the acquired organization.
Certain items should not be reported at
acquisition value; instead, they should be
reported using the relevant accounting
and financial reporting requirements for
state and local governments. These include
items related to compensative absences;
pensions; other postemployment benefits;
termination benefits; landfill closure and
postclosure costs; pollution remediation;
investment, including derivatives; and
effective hedging arrangements.
Sometimes, an acquired organization
will have recognized a deferred outflow of
resources (or goodwill) from a previous
acquisition transaction, one in which the
consideration provided exceeded the net

Assets, deferred outflows

of resources, liabilities,
and deferred inflows of
resources are generally
reported at their carrying
values as of the merger
date or transfer date.
ed. (See GASB Statement 62, Codification
of Accounting and Financial Reporting
Guidance Contained in PreNovember 30,
1989, FASB and AICPA Pronouncements,
on contingencies.)
In some cases, the consideration will
exceed the amount of the net position
acquired (measured as described above).
The acquiring government should report
the excess as a deferred outflow of
resources, much like goodwill for a business. The deferred outflow of resources
should be attributed to future periods in a
systematic and rational manner. GASB
Statement 69 provides some factors to consider in determining the length of the
attribution period, but it does not set any
maximum length. In addition, a government should periodically review and revise
the attribution period as conditions change.
In other cases, the consideration will be
less than the amount of the net position

33

acquired (measured as described above).

Sometimes, the seller will accept a lower
price in order to provide economic aid to the
acquiring government. The agreement would
generally indicate if economic aid is
intended. In this situation, the government
would recognize a contribution.
For other acquisitions in which the
consideration is less than the amount of net
position acquired, the excess net position
should be eliminated by reducing the
noncurrent assets (other than financial
assets) that are acquired. If the allocation
reduces noncurrent assets to zero, the
remaining amount should be recognized as
a special item in the government-wide
statement of activities. (If the acquisition
is done through an enterprise fund, the special item would be reported in the state-

ment of revenues, expenses, and changes

in net position.)
Acquisition costs are generally recorded
as an expense/expenditure in the period in
which the costs are incurred and services rendered; these costs typically include legal,
accounting, valuation, professional, and consulting services. The reporting of an acquisition in a governmental fund will follow the
financial reporting requirements for governmental funds (i.e., the flow of financial
resources). The net fund balance acquired
should be reported as a special item.

include normal operating costs incurred

prior to the measurement date, only the
costs directly associated with the disposal
of operations. For example, benefits provided to government employees for involuntary terminations, contract termination
costs, and professional fees are costs that
may be associated with the disposal of
operations. A disposal of an operation in
a governmental fund should be reported as
a special item. The amount reported should
equal the fund balance of the disposed
operation, net of any consideration.

Disposals of Government Operations

Application

A government should recognize any gain

or loss on the disposal of operations as a
special item in the period in which the disposal occurs. The gain or loss should not

EXHIBIT
Types of Government Combinations

Is there a continuation of a substantial portion of

service provided by the previous entity or entities?

GASB Statement 69
Nonot part of

Yes

Was there significant

consideration paid?

Yes

No

Was the combination of

legally separate entities?

Acquisition

Yes
Merger

NoTransfer of
operations

34

Reported at carrying value

Reported at
acquisition value

GASB Statement 69 provides new and

different reporting requirements for mergers, acquisitions, and transfers of operations. GASB Chairman Robert H. Attmore
stated the following in a recent GASB
news release:
This Statement will improve accounting
for mergers and acquisitions among state
and local governments by providing guidance specific to the situations and circumstances encountered within the governmental environment. Historically, governments have accounted for their mergers and acquisitions by analogizing to
guidance intended for the private-sector
business environment, which proved problematic because those standards focus on
stock arrangements and ownership interests not present in the governmental setting. (GASB Improves Reporting for
Government Combinations and Disposals
of Government Operations, Jan. 8, 2013)
Auditors and accountants should familiarize themselves with this guidance for
government combinations. The effective
date is for reporting periods beginning after
December 15, 2013, and it should only be
applied on a prospective basis. It is
important to note that this standard does
not cover situations in which a government
acquires another organization that continues to exist as a separate entity. It also does
not address the acquisition of equity interest in organizations that remain legally separate. GASB Statement 14, The Financial
Reporting Entity (as amended), provides
guidance for these situations.
q

Bruce W. Chase, CPA, PhD, is a professor of accounting at Radford University,

Radford, Va.
NOVEMBER 2013 / THE CPA JOURNAL