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IPSASB - Public Sector Combinations [ED]

Comment period ended on October 31, 2012.

Proposed effective date:

N/A

Last updated:

March 2015

Overview

The objective of this Consultation Paper (CP) is to initiate discussion on the possible accounting treatment for public sector combinations (PSCs) in the general purpose financial statements (GPFSs) of an entity that uses accrual-based IPSASs. It considers matters such as the timing of recognition, and the initial measurement basis or approach that could be adopted for the wide range of combinations that may occur in the public sector.

Currently, IPSASs do not provide guidance on how to account for a PSC—instead, IPSAS 6, Consolidated and Separate Financial Statements, explains that guidance on accounting for entity combinations can be found in the relevant international or national accounting standard dealing with business combinations. This means that there may not be consistent or appropriate reporting of such combinations in the GPFSs of public sector entities. Consequently, users may not be able to obtain the information needed to evaluate the nature and financial effect of a PSC.

This CP defines a PSC as “the bringing together of separate operations into one entity, either as an acquisition or an amalgamation.” An acquisition is defined as “a transaction or other event that results in a recipient gaining control of one or more operations,” and an amalgamation is defined as “a transaction or other event where (a) two or more operations combine, (b) none of the combining operations gain control of the other operations, and (c) the transaction or other event is not the formation of a joint venture.”

For acquisitions, this CP considers separately (a) acquisitions that take place between parties that are controlled by the same ultimate controlling entity, in other words, under common control (UCC), and (b) acquisitions that take place between parties that are not controlled by the same ultimate controlling entity, i.e., not under common control (NUCC). For amalgamations, the IPSASB considers that the factors relating to the choice of accounting treatment do not differ between amalgamations NUCC and amalgamations UCC. Hence, the CP discusses the possible accounting treatment for amalgamations without distinguishing whether or not they take place UCC.

This CP considers that an acquisition NUCC should be recognized in the recipient’s GPFSs on the date the recipient gains control of the acquired operation, i.e., the acquisition date. The IPSASB is seeking respondents’ views as to whether other features of the acquisition method of accounting, such as the use of fair value as the measurement basis, are appropriate for some or all acquisitions in the public sector. The CP sets out two approaches to determining the appropriate measurement basis or approach to apply to the acquired operation’s assets and liabilities, as follows:

  • Applying fair value measurement to the identifiable assets acquired and liabilities assumed in the operation at the date of acquisition for all acquisitions (Approach A); or

  • Distinguishing between different types of acquisitions (Approach B) so that:

    • For acquisitions where no or nominal consideration is transferred, the carrying amounts of the assets and liabilities in the acquired operation’s financial statements are recognized, with amounts adjusted to align the operation’s accounting policies to those of the recipient, at the date of acquisition; and

    • For acquisitions where consideration is transferred, fair value measurement is applied to the identifiable assets acquired and liabilities assumed in the operation, at the date of acquisition.

The difference arising from an acquisition NUCC should be recognized by the recipient as (a) a gain in surplus or deficit where the recipient acquires net assets in excess of consideration transferred (if any), and (b) a loss in surplus or deficit where the recipient assumes net liabilities. The IPSASB is seeking respondents’ views as to whether the difference arising where the consideration transferred is in excess of the net assets acquired should be recognized as goodwill (in the statement of financial position), or a loss (in the statement of financial performance).

For acquisitions UCC, this CP considers that the recipient should recognize the acquisition on the date the recipient gains control of the acquired operation, and recognize the carrying amount of the assets and liabilities in the acquired operation’s financial statements, with amounts adjusted to align the operation’s accounting policies to those of the recipient. The CP considers three options for the accounting treatment of the difference arising: (a) a gain or loss recognized in surplus or deficit, (b) a contribution from owners or distribution to owners, or (c) a gain or loss recognized directly in net assets/equity. The CP briefly considers the accounting treatment for the transferor in an acquisition UCC.

For amalgamations, this CP considers that the sole definitive criterion for distinguishing an amalgamation from an acquisition is that, in an amalgamation, none of the combining operations gain control of the other operations. The CP considers that the resulting entity should apply the modified pooling of interests method of accounting. This method requires recognition of the amalgamation on the date it takes place. As a consequence, the surplus or deficit in the year of the amalgamation commences from the date of the amalgamation, and there are no comparatives for the first reporting period. The combining operations’ financial statement items are recognized without remeasurement at carrying amount, with amounts adjusted to align the accounting policies of the combining operations to those of the resulting entity. The CP also briefly considers the accounting treatment for the combining operations in the period between the announcement of the amalgamations and the date of the amalgamation.

Recent activities

March 2015

Most recently, at its meetings on December 8-11, 2014 and March 10-13, 2015, the IPSASB reviewed an Issues Paper on public sector combinations prepared by staff; and provided direction on the development of an IPSAS on public sector combinations. As part of the review, the IPSASB discussed the approach to classifying public sector combinations (reorganizations, amalgamations and (less important in the public sector) acquisitions) and the accounting treatments to be applied to these different classes of combinations.

June 2014

At its meeting on June 24-27, 2014, the IPSASB carried out an initial review of the responses to the CP and also discussed an Issues Paper.

July 2012

On July 19, 2012, the IPSASB has issued a Consultation Paper on the possible accounting treatment for public sector combinations (such as an acquisition or an amalgamation). Canadian stakeholders are encouraged to provide their views to IPSASB.

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