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Letter of Comment No. 18
File Reference: 3-17E
Date Received: 6/15/12
WASHINGTON SOCIETY OF
CERTIFIED PUBLIC ACCOUNTANTS
June 14, 2012
David R. Bean, Director of Research and Technical Activities
Governmental Accounting Standards Board
Project No. 3-17
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
Re: Exposure Draft-Government Combinations and Disposals of Government
Operations, Project No. 3-17
Dear Mr. Bean:
The following is the response of the Government Accounting and Auditing Committee of
the Washington Society of Certified Public Accountants (WSCPA). The views expressed
are the views of the Committee and not necessarily the views of the individual members
or the WSCPA as a whole. We are pleased to have the opportunity to respond to the
Governmental Accounting Standards Board’s (GASB) Exposure Draft (ED) Government
Combinations and Disposals of Government Operations.
We support the mission of GASB, to establish and improve standards of state and local
governmental accounting and financial reporting.
Overview of Our Response:
We support this ED because it is consistent with private sector accounting
principles, yet makes appropriate adjustments for differences between the private
and public sectors regarding the nature of combinations and disposals of operations.
We also agree that carrying values should be used to measure assets and liabilities
in most cases.
In addition to its consistency with private sector guidance, we appreciate that this ED is
principles-based as opposed to rules-based as professional judgment is an important
aspect of proper financial reporting. However in practice, there may be some hybrids of
the categories discussed in this ED and some discussion of potential hybrid situations and
suggested guidance is welcome. In some cases combinations and disposals may be
directed or influenced by external forces such as litigation (or avoidance thereof), public
initiatives or tax codes. These situations suggest that the transaction may not an “armslength” transaction between two unaffiliated entities. As such, the guidance in this ED
Letter of Comment No. 18
File Reference: 3-17E
Date Received: 6/15/12
David R. Bean
June 14, 2012
Page 2 of 4
regarding measuring assets and liabilities using acquisition values may not be appropriate
or complete.
We believe that the acquiring entity should be allowed to record an asset (or
deferred outflow) for costs to organize the new entity and cost involved in acquiring
the operations (legal fees, asset inventories, etc.) as opposed to this ED’s
requirement to expense such costs that benefit future periods.
Specific ED Comments:
We agree with the service continuation requirement (paragraph 9) of an operation as
defined in paragraph 4. We also agree with the definitions of the three types of
combinations (paragraphs 10-12). However, we believe there are certain circumstances
in which these definitions can become blurred. While we understand that no standard can
cover all potential situations, we offer two examples to illustrate our concern about the
completeness of these definitions or whether additional guidance to address transactions
that may have attributes of several different defined categories is warranted.
Example 1: A “transfer of operations” occurs between two entities, in which either one
or both entities are an unwilling partner (forced by litigation, law or other such external
force). All assets and certain liabilities (and continuing operations) are obtained by the
new entity. The agreement requires the new entity to issue new bonds in the new entity’s
name and make “significant consideration” (paragraph 11) to the previous operator in the
amount of the “old” bonds outstanding. In this case, we expect that using carrying values
(transfers of operations) versus acquisition values (government acquisitions) would not
be significantly different because it shouldn’t make a difference whether a liability is
assumed by the new government or paid to the prior government. However, we expect
that this transaction might be construed as an acquisition given the current ED wording,
when acquisition accounting is not appropriate.
Let’s assume, for the purpose of this illustration, that the settlement requires additional
“significant consideration” to be paid for committed future revenues over a several year
period. While deposits on these future revenues are recorded as liabilities (or perhaps
unearned revenue) there is no asset recognition for this future stream of revenues
according to current GAAP (the revenue has not yet been earned). As such, a payment
has been made for an asset that cannot be recognized. While the ED paragraph 39 allows
for recording a deferred outflow, we believe that this transaction should qualify as a
transfer of operations and not as an acquisition because it more closely represents the
underlying economics of the transaction (regardless of current GAAP limitations on asset
recognition). Paragraph 32 states that the acquisition value is a “market-based” entry
price based on an orderly transaction. However, this example is not orderly or market
based and not currently addressed by this ED.
Letter of Comment No. 18
File Reference: 3-17E
Date Received: 6/15/12
David R. Bean
June 14, 2012
Page 3 of 4
Example 2: A special purpose government enters into a Low-Income Housing Tax
Credit Partnership (LIHTCP) with a private entity (or several) that is/are the limited
partner(s) (LP). The LIHTCP is a component unit of the government because it is the
general partner and controls the partnership. The LP(s) makes an initial contribution in
exchange for the tax credit and future tax preference items (such as their share of
depreciation, etc.). At the end of the tax compliance period, the LP surrenders its equity
to the government general partner (which might be considered as “significant
consideration”). At the time that the LP interest is surrendered, the legal entity
automatically changes because it is no longer a limited partnership. While this ED’s
paragraph 7 states that this ED does not address transactions for the purposes of changes
in control under GASB Statement number 14, this example does not result in a change of
control because the government already controls both the old entity and the new entity.
The value to the LP(s) is in the tax credit and tax preference items, which is not recorded
in the partnership. The value (tax preferences) received by the LP(s) that is not recorded
in the LIHRCP books is in excess of the partnership interest the PL is “gifting” to the
government. The entire operation of the low-income housing project is transferred from
one legally separate entity to another in connection with a significant (negative)
consideration. However, from an underlying economic transaction standpoint, very little
has changed. We see this situation as having attributes of a merger, acquisition, transfer
and disposal of operations and we suggest that this situation is common.
In either of these examples, we believe paragraph 41 is incomplete. Contributions should
not be limited to recognizing in an agreement that “economic aid is intended” as the
contribution may be reflective of avoidance of future harm to the old entity or an
economic value has already been obtained by the old entity (that is not recorded). This
paragraph should be replicated in other transaction type sections as appropriate.
Finally, as previously stated, we believe that the acquiring entity should be allowed to
record an asset (or deferred outflow) for costs to organize the new entity and cost
involved in acquiring the operations (legal fees, asset inventories, etc.) as opposed to this
ED’s requirement to expense such costs that benefit future periods.
Summary of Specific ED Comments:
We agree with this ED and believe it improves accounting and financial reporting for
state and local governments. We believe this ED can be improved by providing
principled guidance to assist preparers, auditors and users in addressing hybrid situations
that do not fit neatly into this ED’s definitions. We also believe that costs involved in
organizing a new entity and the costs involved in accomplishing a merger, acquisition,
transfer or disposal of operations should be recorded as an asset or a deferred outflow of
resources instead of requiring immediate expense recognition.
Letter of Comment No. 18
File Reference: 3-17E
Date Received: 6/15/12
David R. Bean
June 14, 2012
Page 4 of 4
Thank you for the opportunity to respond. If you have any questions or need additional
information regarding this response, please contact Steve Miller at (206) 281-0281.
Sincerely,
SENT VIA E-MAIL to [email protected]
Lisa Lam, CPA, Chair
Government Accounting and Auditing Committee
Washington Society of Certified Public Accountants