PBE IPSAS 40

1. The objective of this Standard is to improve the relevance, faithful representativeness and comparability of the information that a reporting entity provides in its financial statements about a public benefit entity (PBE) combination and its effects. To accomplish that, this Standard establishes principles and requirements for how:

1. A reporting entity classifies a PBE combination as an amalgamation or an acquisition;

2. A resulting entity recognises and measures in its financial statements the assets received, the liabilities assumed and any non-controlling interest in an amalgamation;

3. A resulting entity recognises and measures components of net assets/equity and other adjustments recognised in an amalgamation;

4. An acquirer recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired operation;

5. An acquirer recognises and measures the goodwill acquired in, or the gain or loss arising from, an acquisition; and

6. A reporting entity determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a PBE combination.

1.1 This Standard applies to Tier 1 and Tier 2 public benefit entities.

1.2 A Tier 2 entity is not required to comply with the requirements in this Standard denoted with an asterisk (*). Where a Tier 2 entity elects to apply a disclosure concession it shall comply with any RDR paragraphs associated with that concession.

2. An entity that prepares and presents financial statements shall apply this Standard in accounting for PBE combinations.

3. This Standard applies to a transaction or other event that meets the definition of a PBE combination. This Standard does not apply to:

1. The accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.

2. The acquisition or receipt of an asset or a group of assets (and any related liabilities) that does not constitute an operation. In such cases an entity shall identify and recognise the individual identifiable assets acquired or received (including those assets that meet the definition of, and recognition criteria for, intangible assets in PBE IPSAS 31 Intangible Assets) and liabilities assumed. Such a transaction or event does not give rise to goodwill.

3. The assumption of a liability or a group of liabilities that does not constitute an operation. In such cases an entity shall identify and recognise the individual liabilities assumed.

4. The requirements of this Standard do not apply to the acquisition by an investment entity, as defined in PBE IPSAS 35 Consolidated Financial Statements, of an investment in a controlled entity that is required to be measured at fair value through surplus or deficit.

5. The following terms are used in this Standard with the meanings specified:

Public benefit entities are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.

A public benefit entity (PBE) combination is the bringing together of separate operations into one public benefit entity.

6. An entity shall determine whether a transaction or other event is a PBE combination by applying the definitions in this Standard, which requires that the assets and liabilities constitute an operation. If the assets and liabilities do not constitute an operation, the entity shall account for the transaction or other event in accordance with other PBE Standards. Paragraphs AG2–AG9 provide guidance on identifying a PBE combination.

7. If no party to a PBE combination gains control of one or more operations as a result of the combination, the combination shall be classified as an amalgamation. Paragraphs AG10–AG18 provide guidance on determining whether one party to a PBE combination gains control of one or more operations as a result of that combination.

8. If one party to a PBE combination gains control of one or more operations as a result of the combination, an entity shall consider the economic substance of the combination in classifying the combination as either an amalgamation or an acquisition. A combination in which one party gains control of one or more operations shall be classified as an acquisition, unless it has the economic substance of an amalgamation.

9. In determining the classification of the PBE combination, an entity considers whether the resulting accounting treatment of the combination provides information that meets the objectives of financial reporting and that satisfies the qualitative characteristics (QCs). To assess the economic substance of the combination, an entity considers the indicators relating to consideration and to the decision- making process in paragraphs 12–13. These indicators, individually or in combination, will usually provide evidence that the economic substance of the combination is that of an amalgamation. A combination does not need to satisfy both of these indicators to be classified as an amalgamation. Paragraphs AG19–AG39 provide additional guidance.

10. An analysis of the indicators relating to consideration and to the decision-making process in paragraphs 12−13 will usually produce a conclusive result and provide sufficient evidence about the economic substance of the PBE combination to determine whether the combination is an amalgamation. In such circumstances, the resulting classification and the associated accounting treatment will ensure that users have access to information that meets the objectives of financial reporting and that satisfies the QCs.

11. In exceptional circumstances, after applying the indicators in paragraphs 12–13, the results may be inconclusive or may not provide sufficient evidence about the economic substance of the PBE combination. In such circumstances, an entity also considers which classification would provide information that best meets the objectives of financial reporting and that best satisfies the QCs, having regard to paragraph 14. Paragraphs AG40–AG41 provide additional guidance.

12. The absence of consideration paid to compensate those with an entitlement to the net assets of a transferred operation for giving up that entitlement may provide evidence that the combination is an amalgamation if the reasons for the absence of consideration do not provide evidence of an acquisition (paragraphs AG26– AG30 provide additional guidance).

(a)–(c) [Not used]

13. The following indicators may provide evidence that the combination is an amalgamation:

1. A PBE combination is imposed by a third party without any party to the combination being involved in the decision-making process (paragraphs AG32–AG35 provide additional guidance);

2. A PBE combination is subject to approval by each party’s citizens through referenda (paragraph AG36 provides additional guidance); or

3. A PBE combination under common control occurs (paragraphs AG37–AG39 provide additional guidance).

14. The analysis of the indicators relating to consideration and the decision-making process may, in exceptional circumstances, produce inconclusive results or not provide sufficient evidence to determine whether the combination is an amalgamation, based on the economic substance of the PBE combination and the indicators in paragraphs 12–13. In such circumstances, an entity considers which classification and resulting accounting treatment would provide information that best meets the objectives of financial reporting. Paragraphs AG42–AG46 provide additional guidance. An entity also considers which classification and resulting accounting treatment would provide information that best satisfies the QCs of relevance, faithful representation, understandability, timeliness, comparability and verifiability. Paragraphs AG47–AG50 provide additional guidance.

15. A resulting entity shall account for each amalgamation by applying the modified pooling of interests method of accounting.

16. Applying the modified pooling of interests method of accounting requires:

1. Identifying the resulting entity;

2. Determining the amalgamation date;

3. Recognising and measuring the assets received, the liabilities assumed and any non-controlling interest in the combining operations, consistent with the requirements in PBE Standards; and

4. Recognising and measuring the components of net assets/equity and other adjustments from an amalgamation.

17. For each amalgamation, a resulting entity shall be identified.

18. Paragraph 5 defines a resulting entity as “the entity that is the result of two or more operations combining in an amalgamation.” As explained in paragraph 8, one of the parties to the amalgamation may have gained control of one or more of the combining operations. The existence or absence of control determines whether the resulting entity is a new reporting entity or a continuing reporting entity. When none of the parties to the combination that existed prior to the combination gain control over the combining operations, the resulting entity is a new reporting entity. When one of the parties to the combination that existed prior to the combination gains control of the other combining operations, the resulting entity is that continuing reporting entity.

19. The resulting entity shall identify the amalgamation date, which is the date on which it obtains control of the combining operations.

20. The date on which the resulting entity obtains control of the combining operations may be the date on which the resulting entity receives the assets and assumes the liabilities of the combining operations. It is possible that the resulting entity will not receive legal title to the assets or assume legal responsibility for the liabilities of the combining operations. In these circumstances, the resulting entity will often obtain control of the assets and liabilities of the combining operations on the date on which responsibility for the assets and liabilities is formally delegated to the resulting entity. However, the resulting entity might obtain control on a different date. A resulting entity shall consider all pertinent facts and circumstances in identifying the amalgamation date.

20.1 If, prior to the amalgamation date, all of the combining operations have previously applied PBE Standards, then the resulting entity shall apply paragraphs 21–35. If, prior to the amalgamation date, one or more of the combining operations have not previously applied PBE Standards, then the resulting entity shall apply paragraphs 21–35 and paragraphs AG50.1– AG50.2.

21. As of the amalgamation date, the resulting entity shall, in accordance with PBE Standards, recognise in the combined operation’s financial statements the assets, liabilities and any non-controlling interests of the combining operations as of the amalgamation date. Recognition of assets received and liabilities assumed is subject to the conditions specified in paragraph 22 and the exceptions specified in paragraph 31.

22. The effects of all transactions between the combining operations are eliminated in preparing the financial statements of the resulting entity (paragraphs AG51–AG52 provide related application guidance).

23. [Not used]

24. At the amalgamation date, the resulting entity shall classify or designate the assets and liabilities received in an amalgamation using the classifications or designations previously applied by the combining operations. A resulting entity shall not adopt different classifications or designations on initial recognition, unless required to do so by other PBE Standards.

25. In some situations, PBE Standards provide for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the resulting entity shall make on the basis of the classifications or designations previously applied by the combining operations include, but are not limited to:

1. Classification of particular financial assets and liabilities as measured at fair value through surplus or deficit or at amortised cost, or as a financial asset measured at fair value through other comprehensive revenue and expense in accordance with PBE IPSAS 41 Financial Instruments;²

2. Designation of a derivative instrument as a hedging instrument in accordance with PBE IPSAS 41; and

3. Assessment of whether an embedded derivative should be separated from a host contract in accordance with PBE IPSAS 41 (which is a matter of ‘classification’ as this Standard uses that term).

26. The resulting entity shall measure the assets and liabilities of the combining operations at their carrying amounts in the financial statements of the combining operations as of the amalgamation date, subject to the requirements of paragraph 27 (paragraphs AG53–AG54 provide related application guidance) and the exceptions specified in paragraph 31.

27. As of the amalgamation date, the resulting entity shall adjust the carrying amounts of the assets and liabilities of the combining operations where required to conform to the resulting entity's accounting policies.

28. The modified pooling of interests method results in a single combined resulting entity. A single uniform set of accounting policies, consistent with the requirements of PBE Standards, is adopted by that entity, and the carrying amounts of the assets and liabilities of the combining operations are adjusted, where required, to conform to those accounting policies (paragraphs AG54.1–AG54.2 provide related application guidance).

29. The resulting entity shall measure any non-controlling interests in a combining operation at their carrying amounts in the financial statements of that combining operation as of the amalgamation date, adjusted for the non-controlling interests’ proportionate share of the adjustments made in accordance with paragraph 27.

30. Paragraphs 33–35 specify the types of assets and liabilities that include items for which this Standard provides limited exceptions to the measurement principle.

31. This Standard provides limited exceptions to its recognition and measurement principles. Paragraphs 32– 35 specify both the particular items for which exceptions are provided and the nature of those exceptions. The resulting entity shall account for those items by applying the requirements in paragraphs 32–35, which will result in some items being:

1. Recognised either by applying recognition conditions in addition to those in paragraph 22 or by applying the requirements of other PBE Standards, with results that differ from applying the recognition principle and conditions.

2. Measured at an amount other than their amalgamation date carrying amounts. Exception to the Recognition Principle

32. A licence or similar right, previously granted by one combining operation to another combining operation and recognised as an intangible asset by the recipient combining operation shall be recognised by the resulting entity as an intangible asset. The licence or similar right shall not be eliminated in accordance with paragraph 22 (paragraphs AG55–AG56 provide related application guidance).

33. Amalgamations involving public sector entities may result in a tax authority forgiving amounts of tax due as part of the terms of the amalgamation. The resulting entity shall not recognise any taxation items that are forgiven as a result of the terms of the amalgamation (paragraph AG57 provides related application guidance).

34. [Not used]

35. The resulting entity shall recognise and measure a liability (or asset, if any) related to the combining operations’ employee benefit arrangements in accordance with PBE IPSAS 39 Employee Benefits.

36. An amalgamation does not give rise to goodwill (paragraphs AG59–AG60 provide related application guidance).

37. The resulting entity shall recognise within net assets/equity the aggregate of:

1. The carrying amounts of the combining operations’ assets; ³

2. The carrying amounts of the combining operations’ liabilities; and

3. The carrying amounts of the combining operations’ non-controlling interests.

38. The resulting entity shall recognise within net assets/equity the corresponding adjustments in respect of:

1. The elimination of transactions between combining operations in accordance with paragraph 22;

2. Adjustments made to the carrying amounts of the assets and liabilities of the combining operations where required to conform to the resulting entity's accounting policies, in accordance with paragraph 27; and

3. Adjustments made in respect of the exceptions to the recognition and/or measurement principles, in accordance with paragraphs 32–35.

39. The resulting entity may present the amounts recognised within net assets/equity in accordance with paragraphs 37 and 38 as either:

1. A single opening balance; or

2. As separate opening balances of components of net assets/equity, including any components of net assets/equity of the combining operations retained by the resulting entity.

40. If the initial accounting for an amalgamation is incomplete by the end of the reporting period in which the amalgamation occurs, the resulting entity shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the resulting entity shall retrospectively adjust the provisional amounts recognised at the amalgamation date to reflect new information obtained about facts and circumstances that existed as of the amalgamation date and, if known, would have affected the measurement of the amounts recognised as of that date. During the measurement period, the resulting entity shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the amalgamation date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the resulting entity receives the information it was seeking about facts and circumstances that existed as of the amalgamation date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the amalgamation date.

41. The measurement period is the period after the amalgamation date during which the resulting entity may adjust the provisional amounts recognised for an amalgamation. The measurement period provides the resulting entity with a reasonable time to obtain the information necessary to identify and measure the assets, liabilities and any non-controlling interest in the combining operations as of the amalgamation date in accordance with the requirements of this Standard. The information necessary to identify and measure the assets, liabilities and any non-controlling interest in the combining operations will generally be available at the amalgamation date. However, this may not be the case where combining operations have previously prepared their financial statements using different accounting policies.

42. The resulting entity recognises an increase (decrease) in the provisional amount recognised for an asset (liability) by adjusting components of net assets/equity recognised in accordance with paragraphs 37–38. However, new information obtained during the measurement period may sometimes result in an adjustment to the provisional amount of more than one asset or liability. For example, the resulting entity might have assumed a liability to pay damages related to an accident in one of the combining operation’s facilities, part or all of which is covered by the combining operation’s liability insurance policy. If the resulting entity obtains new information during the measurement period about the carrying amount of that liability, the adjustment to the gain or loss resulting from a change to the provisional amount recognised for the liability would be offset (in whole or in part) by a corresponding adjustment to the gain or loss resulting from a change to the provisional amount recognised for the claim receivable from the insurer.

43. During the measurement period, the resulting entity shall recognise adjustments to the provisional amounts as if the accounting for the amalgamation had been completed at the amalgamation date. Thus, the resulting entity shall revise comparative information for prior periods presented in financial statements as needed, including making any change in depreciation or amortisation recognised in completing the initial accounting.

44. After the measurement period ends, the resulting entity shall revise the accounting for an amalgamation only to correct an error in accordance with PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors.

45. Amalgamation-related costs are costs the resulting entity or combining operations incur to effect an amalgamation. Those costs include advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs; and any costs of registering and issuing debt and equity securities. The resulting entity and combining operations shall account for amalgamation-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognised in accordance with PBE IPSAS 28 Financial Instruments: Presentation, and PBE IPSAS 41.4

46. In general, a resulting entity shall subsequently measure and account for assets and liabilities received and equity instruments issued in an amalgamation in accordance with other applicable PBE Standards for those items, depending on their nature. However, this Standard provides guidance on subsequently measuring and accounting for the following assets received and liabilities assumed or incurred in an amalgamation:

1. Licenses and similar rights previously granted by one combining operation to another combining operation;

2. Transfers, concessionary loans and similar benefits received by a combining operation on the basis of criteria that change as a result of an amalgamation; and

3. Income taxes (where not included in the terms of the amalgamation).

47. A licence or similar right, previously granted by one combining operation to another combining operation and recognised as an intangible asset shall be amortised over the remaining period of the binding arrangement in which the right was granted, where the right was granted for a finite period. Where the right was granted for an indefinite period, the resulting entity shall test the right for impairment at least annually, and whenever there is an indication that the right may be impaired. A resulting entity that subsequently sells this licence or similar right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale.

48. A transfer, concessionary loan or similar benefit, previously received by a combining operation on the basis of criteria that change as a result of an amalgamation, shall be reassessed prospectively in accordance with other PBE Standards (paragraphs AG61–AG63 provide related application guidance).

49. Amalgamations involving public sector entities may result in a tax authority forgiving amounts of tax subsequent to the amalgamation. The resulting entity shall account for the tax forgiven prospectively in accordance with PBE IAS 12 Income Taxes.

50. If, following a PBE combination, the resulting entity is a new reporting entity, the resulting entity’s first set of financial statements following the amalgamation shall comprise:

1. An opening statement of financial position as of the amalgamation date;

2. A statement of financial position as at the reporting date;

3. A statement of comprehensive revenue and expense for the period from the amalgamation date to the reporting date;

4. A statement of changes in net assets/equity for the period from the amalgamation date to the reporting date;

5. A cash flow statement for the period from the amalgamation date to the reporting date;

6. When a public sector entity has published general purpose prospective financial statements for the period from the amalgamation date to the reporting date, the information specified in paragraph 148.1 of PBE IPSAS 1 Presentation of Financial Reports shall be presented on the face of the financial statements or as a separate statement. When a not-for-profit entity has published general purpose prospective financial statements for the period from the amalgamation date to the reporting date, the information specified in paragraph 148.1 of PBE IPSAS 1 shall be presented on the face of the financial statements, as a separate statement or in the notes; and

7. Notes, comprising a summary of significant accounting policies and other explanatory notes.

The resulting entity shall not present comparative information on the face of its financial statements for the periods prior to the amalgamation date. The resulting entity is permitted to disclose in the notes comparative information for the combining operations for the periods prior to the amalgamation date, in accordance with paragraph 54(g).

51. If, following a PBE combination, the resulting entity is a continuing reporting entity, the resulting entity shall disclose as of the amalgamation date:

1. The amounts recognised of each major class of assets and liabilities, and components of net assets/equity from combining operations included in the resulting entity;

2. Any adjustments made to components of net assets/equity where required to conform the accounting policies of the combining operations with those of the resulting entity; and

3. Any adjustments made to eliminate transactions between the combining operations.

The resulting entity shall present comparative financial information, in respect of the continuing reporting entity only, for the period prior to the amalgamation date on the face of the financial statements but this information shall not be restated. The resulting entity is permitted to disclose in the notes comparative financial information for the combining operations for the periods prior to the amalgamation date, in accordance with paragraph 54(g).

52. Subject to the requirements in paragraphs 54 and 56, the resulting entity is permitted but not required to present financial statements for one or more of the combining operations for periods prior to the amalgamation date (paragraphs AG64–AG65 provide related application guidance). Where a resulting entity elects to present financial statements for the combining operations for periods prior to the amalgamation date, it shall disclose the information required by paragraph 54(g). The resulting entity shall not restate the combining operations’ financial statements, but shall disclose the information on the same basis as previously used in the combining operations’ financial statements. Where a resulting entity does not elect to present financial statements for the combining operations for periods prior to the amalgamation date, it shall meet the needs of users of the financial statements in one of the ways outlined in paragraph AG64.

*53. The resulting entity shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of an amalgamation.

RDR53.1 A Tier 2 entity is required to comply with the disclosures in paragraphs 54–57 that are not asterisked (*) as RDR concessions.

54. To meet the objective in paragraph 53, the resulting entity shall disclose the following information for each amalgamation that occurs during the reporting period:

1. The name and a description of each combining operation.

2. The amalgamation date.

3. The primary reasons for the amalgamation including, where applicable, the legal basis for the amalgamation.

4. The amounts recognised as of the amalgamation date for each major class of assets and liabilities transferred.

5. The adjustments made to the carrying amounts of assets and liabilities recorded by each combining operation as of the amalgamation date:

   1. To eliminate the effect of transactions between combining operations in accordance with paragraph 22; and

   2. To conform to the resulting entity's accounting policies in accordance with paragraph 27.

6. * An analysis of net assets/equity, including any components that are presented separately, and any significant adjustments such as revaluation surpluses or deficits, recognised in accordance with paragraphs 37–38.

7. If a resulting entity elects to present financial statements for the combining operations for periods prior to the amalgamation date in accordance with paragraph 52, the resulting entity shall disclose the following information for each combining operation in the notes:

   1. A statement of financial position as at the end of the prior period(s);

   2. A statement of comprehensive revenue and expense for the prior period(s);

   3. A statement of changes in net assets/equity for the prior period(s);

   4. A cash flow statement for the prior period(s); and

   5. Notes, comprising a summary of significant accounting policies and other explanatory notes. The resulting entity shall not restate this information, but shall disclose the information on the same basis as previously used in the combining operations’ financial statements.The resulting entity shall describe the significant differences between the resulting entity’s accounting policies and the accounting policies previously applied by the combining operations. If the combining operations’ prior period financial statements are not for the reporting period immediately prior to the amalgamation date the resulting entity shall also disclose the information specified in subparagraph (h) below.

8. If, at the time the financial statements of the resulting entity are authorised for issue, the last reporting date of any of the combining operations does not immediately precede the amalgamation date, the resulting entity shall disclose the following information:

   1. The amounts of revenue and expense, and the surplus or deficit of each combining operation from the last reporting date of the combining operations until the amalgamation date. The amounts of revenue shall be analysed in a manner appropriate to the entity’s operations, in accordance with paragraph 108 of PBE IPSAS 1. The amounts of expense shall be analysed using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is faithfully representative and more relevant, in accordance with paragraph 109 of PBE IPSAS 1.

   2. The amounts reported by each combining operation immediately prior to the amalgamation date for each major class of assets and liabilities.

   3. The amounts reported by each combining operation immediately prior to the amalgamation date in net assets/equity. The resulting entity is not required to disclose this information where it has elected to present financial statements of the combining operations for the reporting period ending immediately prior to the amalgamation date as specified in subparagraph (g) above.

*55. The resulting entity shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to amalgamations that occurred in the period or previous reporting periods.

56. To meet the objective in paragraph 55, the resulting entity shall disclose the following information:

1. * If the initial accounting for an amalgamation is incomplete (see paragraph 40) for particular assets or liabilities, and the amounts recognised in the financial statements for the amalgamation thus have been determined only provisionally:

   1. The reasons why the initial accounting for the amalgamation is incomplete;

   2. The assets or liabilities for which the initial accounting is incomplete; and

   3. The nature and amount of any measurement period adjustments recognised during the reporting period in accordance with paragraph 43.

2. If amounts of tax due are forgiven as a result of the terms of the amalgamation (see paragraph 33):

   1. The amount of tax due that was forgiven; and

   2. Where the resulting entity is the tax authority, details of the adjustment made to tax receivable.

RDR56.1 For individually immaterial amalgamations occurring during the reporting period that are material collectively, the Tier 2 resulting entity shall disclose in aggregate the information required by paragraphs 54(d) and 56(b).

*57. If the specific disclosures required by this and other PBE Standards do not meet the objectives set out in paragraphs 53 and 55, the resulting entity shall disclose whatever additional information is necessary to meet those objectives.

58. An acquirer shall account for each acquisition by applying the acquisition method of accounting.

59. Applying the acquisition method of accounting requires:

1. Identifying the acquirer;

2. Determining the acquisition date;

3. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non- controlling interest in the acquired operation; and

4. Recognising and measuring goodwill, or a gain or a loss from an acquisition.

60. For each acquisition, the party to the combination that gains control of one or more operations shall be identified as the acquirer.

61. The party to the combination that gains control of one or more operations is identified when determining the classification of the PBE combination in accordance with paragraphs 7, 8 and AG10−AG18.

62. The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquired operation.

63. The date on which the acquirer obtains control of the acquired operation is generally the date on which the acquirer legally transfers the consideration and/or acquires the assets and assumes the liabilities of the acquired operation—the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquired operation on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.

64. As of the acquisition date, the acquirer shall recognise, separately from any goodwill recognised, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired operation. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 65 and 66.

65. To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Public Benefit Entities’ Conceptual Framework at the acquisition date, and be capable of being measured in a way that achieves the qualitative characteristics and takes account of constraints on information in general purpose financial reporting. For example, costs the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquired operation or to terminate the employment of or relocate an acquired operation’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognise those costs as part of applying the acquisition method. Instead, the acquirer recognises those costs in its post-combination financial statements in accordance with other PBE Standards.

66. In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquired operation (or its former owners) exchanged in the acquisition transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 109–111 to determine which assets acquired or liabilities assumed are part of the exchange for the acquired operation and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable PBE Standards.

67. The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquired operation had not previously recognised as assets and liabilities in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as a patent or a customer relationship, that the acquired operation did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.

68. Paragraphs AG72–AG84 provide guidance on recognising operating leases and intangible assets. Paragraphs 76–82 specify the types of identifiable assets and liabilities that include items for which this Standard provides limited exceptions to the recognition principle and conditions.

69. At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to subsequently apply other PBE Standards. The acquirer shall make those classifications or designations on the basis of the terms of the binding arrangement (including contractual terms), economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.

70. In some situations, PBE Standards provide for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to:

1. Classification of particular financial assets and liabilities as measured at fair value through surplus or deficit or at amortised cost, or as a financial asset measured at fair value through other comprehensive revenue and expense in accordance with PBE IPSAS 41;⁵

2. Designation of a derivative instrument as a hedging instrument in accordance with PBE IPSAS 41; and

3. Assessment of whether an embedded derivative should be separated from a host contract in accordance with PBE IPSAS 41 (which is a matter of ‘classification’ as this Standard uses that term).

71. This Standard provides two exceptions to the principle in paragraph 69:

1. Classification of a lease arrangement as either an operating lease or a finance lease in accordance with PBE IPSAS 13 Leases; and

2. Classification of a contract as an insurance contract in accordance with PBE IFRS 4 Insurance Contracts.

The acquirer shall classify those binding arrangements on the basis of the terms and other factors at the inception of the binding arrangement (or, if the terms of the binding arrangement have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date).

72. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values.

73. For each acquisition, the acquirer shall measure at the acquisition date components of non-controlling interests in the acquired operation that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:

1. Fair value; or

2. The present ownership instruments’ proportionate share in the recognised amounts of the acquired operation’s identifiable net assets.

All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by PBE Standards.

74. Paragraphs 78–84.1 specify the types of identifiable assets and liabilities that include items for which this Standard provides limited exceptions to the measurement principle.

75. This Standard provides limited exceptions to its recognition and measurement principles. Paragraphs 76–84.1 specify both the particular items for which exceptions are provided and the nature of those exceptions. The acquirer shall account for those items by applying the requirements in paragraphs 76–84.1, which will result in some items being:

1. Recognised either by applying recognition conditions in addition to those in paragraphs 65–66 or by applying the requirements of other PBE Standards, with results that differ from applying the recognition principle and conditions.

2. Measured at an amount other than their acquisition-date fair values. Exception to the Recognition Principle

76. PBE IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets, defines a contingent liability as:

1. A possible obligation that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

2. A present obligation that arises from past events, but is not recognised because:

   1. It is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; or

   2. The amount of the obligation cannot be measured with sufficient reliability.

77. The requirements in PBE IPSAS 19 do not apply in determining which contingent liabilities to recognise as of the acquisition date. Instead, the acquirer shall recognise as of the acquisition date a contingent liability assumed in an acquisition where consideration is transferred if it is a present obligation that arises from past events and its fair value can be measured reliably.⁶ Therefore, contrary to PBE IPSAS 19, the acquirer recognises a contingent liability assumed in an acquisition where consideration is transferred at the acquisition date even if it is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation. Paragraph 115 provides guidance on the subsequent accounting for contingent liabilities.

Exceptions to Both the Recognition and Measurement Principles Income Taxes

78. Acquisitions by a public sector entity may result in a tax authority forgiving amounts of tax due as part of the terms of the acquisition. The acquirer shall not recognise any taxation items that are forgiven as a result of the terms of the acquisition (paragraphs AG85 and AG87 provide related application guidance).

79. [Not used]

79.1 The acquirer shall recognise and measure a deferred tax asset or liability arising from the assets acquired and liabilities assumed in a PBE combination in accordance with PBE IAS 12.

79.2 The acquirer shall account for the potential tax effects of temporary differences and carryforwards of the acquired operation that exist at the acquisition date or arise as a result of the acquisition in accordance with PBE IAS 12.

80. The acquirer shall recognise and measure a liability (or asset, if any) related to the acquired operation’s employee benefit arrangements in accordance with PBE IPSAS 39.

81. The seller in an acquisition may contractually indemnify the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability. For example, the seller may indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency; in other words, the seller will guarantee that the acquirer’s liability will not exceed a specified amount. As a result, the acquirer obtains an indemnification asset. The acquirer shall recognise an indemnification asset at the same time that it recognises the indemnified item measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. Therefore, if the indemnification relates to an asset or a liability that is recognised at the acquisition date and measured at its acquisition-date fair value, the acquirer shall recognise the indemnification asset at the acquisition date measured at its acquisition-date fair value. For an indemnification asset measured at fair value, the effects of uncertainty about future cash flows because of collectibility considerations are included in the fair value measure and a separate valuation allowance is not necessary (paragraph AG88 provides related application guidance).

82. In some circumstances, the indemnification may relate to an asset or a liability that is an exception to the recognition or measurement principles. For example, an indemnification may relate to a contingent liability that is not recognised at the acquisition date because its fair value is not reliably measurable at that date. Alternatively, an indemnification may relate to an asset or a liability, for example, one that results from an employee benefit, that is measured on a basis other than acquisition-date fair value. In those circumstances, the indemnification asset shall be recognised and measured using assumptions consistent with those used to measure the indemnified item, subject to management’s assessment of the collectibility of the indemnification asset and any contractual limitations on the indemnified amount. Paragraph 116 provides guidance on the subsequent accounting for an indemnification asset.

83. The acquirer shall measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining term of the related binding arrangement regardless of whether market participants would consider potential renewals of binding arrangements when measuring its fair value. Paragraphs AG79– AG80 provide related application guidance.

84. The acquirer shall measure a liability or an equity instrument related to share-based payment transactions of the acquired operation or the replacement of an acquired operation’s share-based payment transactions with share-based payment transactions of the acquirer in accordance with the relevant international or national accounting standard dealing with share-based payments.

84.1 The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with PBE IFRS 5 Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to sell in accordance with paragraphs 15–18 of that Standard.

85. The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below, subject to the requirements of paragraph 86:

1. The aggregate of:

   1. The consideration transferred measured in accordance with this Standard, which generally requires acquisition-date fair value (see paragraph 95);

   2. The amount of any non-controlling interest in the acquired operation measured in accordance with this Standard; and

   3. In an acquisition achieved in stages (see paragraphs 99–100), the acquisition-date fair value of the acquirer’s previously held equity interest in the acquired operation.

2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Standard.

86. The acquirer shall recognise goodwill only to the extent that:

1. The acquisition will result in the generation of net cash inflows; and

2. The goodwill arises from the acquisition of a cash-generating operation.

An acquirer shall recognise any further excess of (a) over (b) in paragraph 85 above as a loss in surplus or deficit. Paragraph AG93 provides related application guidance.

87. In an acquisition in which the acquirer and the acquired operation (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquired operation’s equity interests may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer shall determine the amount of goodwill by using the acquisition-date fair value of the acquired operation’s equity interests instead of the acquisition-date fair value of the equity interests transferred. To determine the amount of goodwill in an acquisition in which no consideration is transferred in those situations covered in paragraphs 101 and 102, the acquirer shall use the acquisition-date fair value of the acquirer’s interest in the acquired operation in place of the acquisition-date fair value of the consideration transferred (paragraph 85(a)(i)). Paragraphs AG94–AG97 provide related application guidance.

88. Occasionally in a PBE combination classified as an acquisition, an acquirer will make a bargain purchase, which is an acquisition in which the amount in paragraph 85(b) exceeds the aggregate of the amounts specified in paragraph 85(a). If that excess remains after applying the requirements in paragraph 90, the acquirer shall recognise the resulting gain in surplus or deficit on the acquisition date. The gain shall be attributed to the acquirer.

89. A bargain purchase might happen, for example, in an acquisition that is a forced sale in which the seller is acting under economic compulsion. However, the recognition or measurement exceptions for particular items discussed in paragraphs 76–84.1 may also result in recognising a gain (or change the amount of a recognised gain) on a bargain purchase.

90. Before recognising a gain on a bargain purchase, the acquirer shall reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed and shall recognise any additional assets or liabilities that are identified in that review. The acquirer shall then review the procedures used to measure the amounts this Standard requires to be recognised at the acquisition date for all of the following:

1. The identifiable assets acquired and liabilities assumed;

2. The non-controlling interest in the acquired operation, if any;

3. For an acquisition achieved in stages, the acquirer’s previously held equity interest in the acquired operation; and

4. The consideration transferred.

The objective of the review is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date.

91. In the public and not-for-profit sectors, an entity sometimes obtains control of an operation in a non- exchange transaction in which it transfers consideration that is not approximately equal to the fair value of the acquired operation. Such circumstances include, but are not limited to:

1. Compensated seizures of operations or entities; and

2. The transfer of an operation to the acquirer by a donor for nominal consideration.

92. Where the economic substance of the PBE combination is that of an acquisition, such non-exchange acquisitions are treated as bargain purchases and accounted for in accordance with paragraphs 88–90.

93. In the public and not-for-profit sectors, an entity sometimes obtains control of an operation in a non- exchange transaction in which it transfers no consideration. Such circumstances include, but are not limited to:

1. Uncompensated seizures of operations or entities (also known as forced nationalisations).

2. The transfer of an operation to the entity by a donor for no consideration. Such transfers may take the form of a bequest.

And

1. The transfer of an operation to the entity where the operation has net liabilities. The entity may accept the transfer of net liabilities to prevent the cessation of the operation. Such transactions are sometimes known as “bailouts”.

94. Where the economic substance of the PBE combination is that of an acquisition, the acquirer that obtains control of an acquired operation in a non-exchange transaction in which it transfers no consideration does not recognise goodwill. The acquirer recognises a gain or a loss in surplus or deficit.

95. The consideration transferred in an acquisition shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquired operation and the equity interests issued by the acquirer. (However, any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquired operation’s employees that is included in consideration transferred in the acquisition shall be measured in accordance with paragraph 84 rather than at fair value.) Examples of potential forms of consideration include cash, other assets, an operation or a controlled entity of the acquirer, contingent consideration, ordinary or preference equity instruments, options, warrants and member interests of mutual entities.

96. The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, non-monetary assets or an operation of the acquirer). If so, the acquirer shall remeasure the transferred assets or liabilities to their fair values as of the acquisition date and recognise the resulting gains or losses, if any, in surplus or deficit. However, sometimes the transferred assets or liabilities remain within the combined entity after the acquisition (for example, because the assets or liabilities were transferred to the acquired operation rather than to its former owners), and the acquirer therefore retains control of them. In that situation, the acquirer shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date and shall not recognise a gain or loss in surplus or deficit on assets or liabilities it controls both before and after the acquisition.

97. The consideration the acquirer transfers in exchange for the acquired operation includes any asset or liability resulting from a contingent consideration arrangement (see paragraph 95). The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquired operation.

98. The acquirer shall classify an obligation to pay contingent consideration that meets the definition of a financial instrument as a financial liability or as a component of net assets/equity on the basis of the definitions of an equity instrument and a financial liability in paragraph 9 of PBE IPSAS 28. The acquirer shall classify as an asset a right to the return of previously transferred consideration if specified conditions are met. Paragraph 117 provides guidance on the subsequent accounting for contingent consideration.

99. An acquirer sometimes obtains control of an acquired operation in which it held an equity interest immediately before the acquisition date. For example, on 31 December 20X1, Entity A holds a 35 per cent non-controlling equity interest in Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B, which gives it control of Entity B. This Standard refers to such a transaction as an acquisition achieved in stages, sometimes also referred to as a step acquisition.

100. In an acquisition achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquired operation at its acquisition-date fair value and recognise the resulting gain or loss, if any, in surplus or deficit or in other comprehensive revenue and expense, as appropriate. In prior reporting periods, the acquirer may have recognised changes in the value of its equity interest in the acquired operation in other comprehensive revenue and expense (for example, because the investment was classified as available for sale). If so, the amount that was recognised in other comprehensive revenue and expense shall be recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.

100A. When a party to a joint arrangement (as defined in PBE IPSAS 37 Joint Arrangements) obtains control of an operation that is a joint operation (as defined in PBE IPSAS 37), and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is an acquisition achieved in stages. The acquirer shall therefore apply the requirements for an acquisition achieved in stages, including remeasuring its previously held interest in the joint operation in the manner described in paragraph 100. In doing so, the acquirer shall remeasure its entire previously held interest in the joint operation.

101. An acquirer sometimes obtains control of an acquired operation without transferring consideration. The acquisition method of accounting for an acquisition applies to those PBE combinations. Such circumstances include:

1. The acquired operation repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control.

2. Minority veto rights lapse that previously kept the acquirer from controlling an acquired operation in which the acquirer held the majority voting rights.

3. The acquirer and acquired operation agree to combine their operations by contract alone. The acquirer transfers no consideration in exchange for control of an acquired operation and holds no equity interests in the acquired operation, either on the acquisition date or previously.

102. In an acquisition achieved by contract alone, the acquirer shall attribute to the owners of the acquired operation the amount of the acquired operation’s net assets recognised in accordance with this Standard. In other words, the equity interests in the acquired operation held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination financial statements even if the result is that all of the equity interests in the acquired operation are attributed to the non-controlling interest.

103. If the initial accounting for an acquisition is incomplete by the end of the reporting period in which the acquisition occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. During the measurement period, the acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date.

104. The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognised for an acquisition. The measurement period provides the acquirer with a

reasonable time to obtain the information necessary to identify and measure the following as of the acquisition date in accordance with the requirements of this Standard:

1. The identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired operation;

2. The consideration transferred for the acquired operation (or the other amount used in measuring goodwill);

3. In an acquisition achieved in stages, the equity interest in the acquired operation previously held by the acquirer; and

4. The resulting goodwill, loss, or gain on a bargain purchase.

105. The acquirer shall consider all pertinent factors in determining whether information obtained after the acquisition date should result in an adjustment to the provisional amounts recognised or whether that information results from events that occurred after the acquisition date. Pertinent factors include the date when additional information is obtained and whether the acquirer can identify a reason for a change to provisional amounts. Information that is obtained shortly after the acquisition date is more likely to reflect circumstances that existed at the acquisition date than is information obtained several months later. For example, unless an intervening event that changed its fair value can be identified, the sale of an asset to a third party shortly after the acquisition date for an amount that differs significantly from its provisional fair value measured at that date is likely to indicate an error in the provisional amount.

106. The acquirer recognises an increase (decrease) in the provisional amount recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill, subject to the requirements for recognition of goodwill in paragraph 86. However, new information obtained during the measurement period may sometimes result in an adjustment to the provisional amount of more than one asset or liability. For example, the acquirer might have assumed a liability to pay damages related to an accident in one of the acquired operation’s facilities, part or all of which is covered by the acquired operation’s liability insurance policy. If the acquirer obtains new information during the measurement period about the acquisition-date fair value of that liability, the adjustment to goodwill resulting from a change to the provisional amount recognised for the liability would be offset (in whole or in part) by a corresponding adjustment to goodwill resulting from a change to the provisional amount recognised for the claim receivable from the insurer.

107. During the measurement period, the acquirer shall recognise adjustments to the provisional amounts as if the accounting for the acquisition had been completed at the acquisition date. Thus, the acquirer shall revise comparative information for prior periods presented in financial statements as needed, including making any change in depreciation, amortisation or other income effects recognised in completing the initial accounting.

108. After the measurement period ends, the acquirer shall revise the accounting for an acquisition only to correct an error in accordance with PBE IPSAS 3.

109. The acquirer and the acquired operation may have a pre-existing relationship or other arrangement before negotiations for the acquisition began, or they may enter into an arrangement during the negotiations that is separate from the acquisition. In either situation, the acquirer shall identify any amounts that are not part of what the acquirer and the acquired operation (or its former owners) exchanged in the acquisition, i.e., amounts that are not part of the exchange for the acquired operation. The acquirer shall recognise as part of applying the acquisition method only the consideration transferred for the acquired operation and the assets acquired and liabilities assumed in the exchange for the acquired operation. Separate transactions shall be accounted for in accordance with the relevant PBE Standards.

110. A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquired operation (or its former owners) before the acquisition, is likely to be a separate transaction. The following are examples of separate transactions that are not to be included in applying the acquisition method:

1. A transaction that in effect settles pre-existing relationships between the acquirer and acquired operation;

2. A transaction that remunerates employees or former owners of the acquired operation for future services; and

3. A transaction that reimburses the acquired operation or its former owners for paying the acquirer’s acquisition-related costs.

Paragraphs AG99–AG106 provide related application guidance.

111. Acquisition-related costs are costs the acquirer incurs to effect an acquisition. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognised in accordance with PBE IPSAS 28 and PBE IPSAS 41.⁷

112. In general, an acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity instruments issued in an acquisition in accordance with other applicable PBE Standards for those items, depending on their nature. However, this Standard provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities assumed or incurred and equity instruments issued in an acquisition:

1. Reacquired rights;

2. Contingent liabilities recognised as of the acquisition date;

3. Indemnification assets;

4. Contingent consideration; and

5. Income taxes (where not included in the terms of the acquisition). Paragraphs AG107–AG108 provide related application guidance.

113. A reacquired right recognised as an intangible asset shall be amortised over the remaining period of the binding arrangement in which the right was granted, where the right was granted for a finite period. Where the right was granted for an indefinite period, the resulting entity shall test the right for impairment at least annually, and whenever there is an indication that the right may be impaired. An acquirer that subsequently sells a reacquired right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale.

114. A transfer, concessionary loan or similar benefit, previously received by an acquirer or an acquired operation on the basis of criteria that change as a result of an acquisition, shall be reassessed prospectively in accordance with other PBE Standards (paragraphs AG109–AG111 provide related application guidance).

115. After initial recognition and until the liability is settled, cancelled or expires, the acquirer shall measure a contingent liability recognised in an acquisition at the higher of:

1. The amount that would be recognised in accordance with PBE IPSAS 19; and

2. The amount initially recognised less, if appropriate, cumulative amortisation recognised in accordance with PBE IPSAS 9 Revenue from Exchange Transactions.

This requirement does not apply to contracts accounted for in accordance with PBE IPSAS 41.⁸

116. At the end of each subsequent reporting period, the acquirer shall measure an indemnification asset that was recognised at the acquisition date on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount and, for an indemnification asset that is not subsequently measured at its fair value, management’s assessment of the collectibility of the indemnification asset. The acquirer shall derecognise the indemnification asset only when it collects the asset, sells it or otherwise loses the right to it.

117. Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. Such changes are measurement period adjustments in accordance with paragraphs 103–107. However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:

1. Contingent consideration classified as a component of net assets/equity shall not be remeasured and its subsequent settlement shall be accounted for within net assets/equity.

2. Other contingent consideration that:

   1. Is within the scope of PBE IPSAS 41⁹ shall be measured at fair value at each reporting date and changes in fair value shall be recognised in surplus or deficit in accordance with PBE IPSAS 41.

   2. Is not within the scope of PBE IPSAS 41 shall be measured at fair value at each reporting date and changes in fair value shall be recognised in surplus or deficit.

118. Acquisitions involving public sector entities may result in a tax authority forgiving amounts of tax subsequent to the acquisition. The acquirer shall account for the tax forgiven prospectively in accordance with PBE IAS 12.

*119. The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of an acquisition that occurs either:

1. During the current reporting period; or

2. After the end of the reporting period but before the financial statements are authorised for issue.

RDR119.1 A Tier 2 entity is required to comply with the disclosures in paragraphs 120–124 that are not asterisked (*) as RDR concessions.

120. To meet the objective in paragraph 119, the acquirer shall disclose the following information for each acquisition that occurs during the reporting period:

1. The name and a description of the acquired operation.

2. The acquisition date.

3. The percentage of voting equity interests or equivalent acquired.

4. * The primary reasons for the acquisition and a description of how the acquirer obtained control of the acquired operation including, where applicable, the legal basis for the acquisition.

5. * A qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining the operations of the acquired operation and the acquirer, intangible assets that do not qualify for separate recognition or other factors.

6. The acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as:

   1. Cash;

   2. Other tangible or intangible assets, including an operation or controlled entity of the acquirer;

   3. Liabilities incurred, for example, a liability for contingent consideration; and

   4. Equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of measuring the fair value of those instruments or interests.

7. For contingent consideration arrangements and indemnification assets:

   1. The amount recognised as of the acquisition date;

   2. A description of the arrangement and the basis for determining the amount of the payment; and

   3. An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact.

8. * For acquired receivables:

   1. The fair value of the receivables;

   2. The gross amounts receivable in accordance with a binding arrangement; and

   3. The best estimate at the acquisition date of the cash flows in accordance with a binding arrangement not expected to be collected. The disclosures shall be provided by major class of receivable, such as loans, direct finance leases and any other class of receivables.

9. The amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed.

10. For each contingent liability recognised in accordance with paragraph 77, the information required in paragraph 98 of PBE IPSAS 19. If a contingent liability is not recognised because its fair value cannot be measured reliably, the acquirer shall disclose:

    1. * The information required by paragraph 100 of PBE IPSAS 19; and

    2. * The reasons why the liability cannot be measured reliably.

11. * The total amount of goodwill that is expected to be deductible for tax purposes.

12. * For transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the acquisition in accordance with paragraph 109:

    1. A description of each transaction;

    2. How the acquirer accounted for each transaction;

    3. The amounts recognised for each transaction and the line item in the financial statements in which each amount is recognised; and

    4. If the transaction is the effective settlement of a pre-existing relationship, the method used to determine the settlement amount.

13. * The disclosure of separately recognised transactions required by (l) shall include the amount of acquisition-related costs and, separately, the amount of those costs recognised as an expense and the line item or items in the statement of comprehensive revenue and expense in which those expenses are recognised. The amount of any issue costs not recognised as an expense and how they were recognised shall also be disclosed.

14. In an acquisition in which a loss is recognised in surplus or deficit (see paragraph 86):

    1. The amount of the loss recognised in accordance with paragraph 86 and the line item in the statement of comprehensive revenue and expense in which the loss is recognised; and

    2. * A description of the reasons why the transaction resulted in a loss.

15. In a bargain purchase (see paragraphs 88–90):

    1. The amount of any gain recognised in accordance with paragraph 88 and the line item in the statement of comprehensive revenue and expense in which the gain is recognised; and

    2. * A description of the reasons why the transaction resulted in a gain.

16. For each acquisition in which the acquirer holds less than 100 per cent of the equity interests or equivalent in the acquired operation at the acquisition date:

    1. The amount of the non-controlling interest in the acquired operation recognised at the acquisition date and the measurement basis for that amount; and

    2. For each non-controlling interest in an acquired operation measured at fair value, the valuation technique(s) and significant inputs used to measure that value.

17. In an acquisition achieved in stages:

    1. The acquisition-date fair value of the equity interest in the acquired operation held by the acquirer immediately before the acquisition date; and

    2. The amount of any gain or loss recognised as a result of remeasuring to fair value the equity interest in the acquired operation held by the acquirer before the acquisition (see paragraph 100) and the line item in the statement of comprehensive revenue and expense in which that gain or loss is recognised.

18. * The following information:

    1. The amounts of revenue and expense, and the surplus or deficit of the acquired operation since the acquisition date included in the consolidated statement of comprehensive revenue and expense for the reporting period; and

    2. The revenue and expense, and the surplus or deficit of the combined entity for the current reporting period as though the acquisition date for all acquisitions that occurred during the year had been as of the beginning of the annual reporting period. If disclosure of any of the information required by this subparagraph is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. This Standard uses the term ‘impracticable’ with the same meaning as in PBE IPSAS 3.

RDR120.1 A Tier 2 entity is not required to make the disclosures required by paragraph 120(j)(i) and (ii) if a contingent liability is not recognised in accordance with paragraph 77 because its fair value cannot be measured reliably.

*121. For individually immaterial acquisitions occurring during the reporting period that are material collectively, the acquirer shall disclose in aggregate the information required by paragraph 120(e)–(r).

RDR121.1 For individually immaterial acquisitions occurring during the reporting period that are material collectively, a Tier 2 acquirer shall disclose in aggregate the information required by paragraphs 120(f), 120(g), 120(i), 120(n)(i), 120(o)(i), 120(p)(i), 120(q) and the first sentence of paragraph 120(j).

*122. If the acquisition date of an acquisition is after the end of the reporting period but before the financial statements are authorised for issue, the acquirer shall disclose the information required by paragraph 120 unless the initial accounting for the acquisition is incomplete at the time the financial statements are authorised for issue. In that situation, the acquirer shall describe which disclosures could not be made and the reasons why they cannot be made.

*123. The acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to acquisitions that occurred in the period or previous reporting periods.

124. To meet the objective in paragraph 123, the acquirer shall disclose the following information for each material acquisition or in the aggregate for individually immaterial acquisitions that are material collectively:

1. * If the initial accounting for an acquisition is incomplete (see paragraph 103) for particular assets, liabilities, non-controlling interests or items of consideration and the amounts recognised in the financial statements for the acquisition thus have been determined only provisionally:

   1. The reasons why the initial accounting for the acquisition is incomplete;

   2. The assets, liabilities, equity interests (or equivalent) or items of consideration for which the initial accounting is incomplete; and

   3. The nature and amount of any measurement period adjustments recognised during the reporting period in accordance with paragraph 107.

2. * For each reporting period after the acquisition date until the entity collects, sells or otherwise loses the right to a contingent consideration asset, or until the entity settles a contingent consideration liability or the liability is cancelled or expires:

   1. Any changes in the recognised amounts, including any differences arising upon settlement;

   2. Any changes in the range of outcomes (undiscounted) and the reasons for those changes; and

   3. The valuation techniques and key model inputs used to measure contingent consideration.

3. * For contingent liabilities recognised in an acquisition, the acquirer shall disclose the information required by paragraphs 97 and 98 of PBE IPSAS 19 for each class of provision.¹⁰

4. A reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period showing separately:

   1. The gross amount and accumulated impairment losses at the beginning of the reporting period.

   2. Additional goodwill recognised during the reporting period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with PBE IFRS 5.

   3. Adjustments resulting from the subsequent recognition of amounts during the reporting period in accordance with PBE IAS 12.

   4. Goodwill included in a disposal group classified as held for sale in accordance with PBE IFRS 5 and goodwill derecognised during the reporting period without having previously been included in a disposal group classified as held for sale.

   5. Impairment losses recognised during the reporting period in accordance with PBE IPSAS 26 Impairment of Cash-Generating Assets. (PBE IPSAS 26 requires disclosure of information about the recoverable amount and impairment of goodwill in addition to this requirement.)

   6. Net exchange rate differences arising during the reporting period in accordance with PBE IPSAS 4 The Effects of Changes in Foreign Exchange Rates.

   7. Any other changes in the carrying amount during the reporting period.

   8. The gross amount and accumulated impairment losses at the end of the reporting period.

5. * The amount and an explanation of any gain or loss recognised in the current reporting period that both:

   1. Relates to the identifiable assets acquired or liabilities assumed in an acquisition that was effected in the current or previous reporting period; and

   2. Is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity’s financial statements. And

6. If amounts of tax due are forgiven as a result of the terms of the acquisition (see paragraphs 78):

   1. The amount of tax due that was forgiven; and

   2. Where the acquirer is the tax authority, details of the adjustment made to tax receivable.

RDR124.1 A Tier 2 entity is not required to disclose the reconciliation specified in paragraph 124(d) for prior periods.

*125. If the specific disclosures required by this and other PBE Standards do not meet the objectives set out in paragraphs 119 and 123, the acquirer shall disclose whatever additional information is necessary to meet those objectives.

126–126B. [Not used]

126.1 A public benefit entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2021. Earlier application is permitted. If a public benefit entity applies this Standard for a period beginning before 1 January 2021, it shall disclose that fact.

126.2 [See PBE IFRS 17 Insurance Contracts and Amendments to PBE IFRS 17]

127–134. [Not used]

134.1 Except as provided in paragraph 134.3, this Standard shall be applied prospectively to PBE combinations for which the amalgamation date or acquisition date is on or after 1 January 2021.

134.2 Except as provided in paragraph 134.3, an entity shall not restate PBE combinations that occurred from any date before the effective date in paragraph 126.1.

134.3 An entity is permitted to apply the requirements of this Standard to PBE combinations that occurred before the effective date in paragraph 126.1, provided that on first-time application of this Standard it is also a first-time adopter of PBE Standards and has adopted PBE FRS 47 First-time Adoption of PBE Standards.¹¹

134.4 This Standard supersedes PBE IFRS 3 Business Combinations (2014). PBE IFRS 3 remains applicable until PBE IPSAS 40 is applied or becomes effective, whichever is earlier.

AG1. [Not used]

AG2. Paragraph 5 defines a PBE combination as “the bringing together of separate operations into one public benefit entity.” The reference to one public benefit entity may be to a single entity or to an economic entity. Some public sector or not-for-profit sector reorganisations may involve more than one entity combination. The circumstances in which a PBE combination might occur include:

1. By mutual agreement; and

2. By compulsion (for example by legislation).

AG3. Paragraph 5 defines an operation as “an integrated set of activities and related assets and/or liabilities that is capable of being conducted and managed for the purpose of achieving an entity’s objectives, by providing goods and/or services.”

AG4. An operation consists of inputs and processes applied to those inputs that have the ability to create outputs. Although operations usually have outputs, outputs are not required for an integrated set of activities and related assets and/or liabilities to qualify as an operation. For the purposes of this standard, the three elements of an operation are defined as follows:

1. Input: Any economic resource that creates, or has the ability to create, outputs when one or more processes are applied to it. Examples include non-current assets (including intangible assets or rights to use non-current assets), intellectual property, the ability to obtain access to necessary materials or rights and employees.

2. Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates or has the ability to create outputs. Examples include strategic management processes, operational processes and resource management processes. These processes typically are documented, but an organised workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs. (Accounting, billing, payroll and other administrative systems typically are not processes used to create outputs.)

3. Output: The result of inputs and processes applied to those inputs that provide, or have the ability to provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Outputs may also be in the form of goods and services for community or social benefit.

AG5. To be capable of being conducted and managed for the purposes defined, an integrated set of activities and assets and/or liabilities requires two essential elements—inputs and processes applied to those inputs, which together are or will be used to create outputs. However, an operation need not include all of the inputs or processes that the transferor used in operating that operation if the entity that receives the operation or operations is capable of continuing to produce outputs, for example, by integrating the operation with its own inputs and processes.

AG6. The nature of the elements of an operation varies by sector and by the structure of an entity’s operations (activities), including the entity’s stage of development. Established operations often have many different types of inputs, processes and outputs, whereas new operations often have few inputs and processes and sometimes only a single output (product). Nearly all operations also have liabilities, but an operation need not have liabilities.

AG7. An integrated set of activities and assets and/or liabilities in the development stage might not have outputs. In these cases, the entity that receives the operation should consider other factors to determine whether the set is an operation. Those factors include, but are not limited to, whether the set:

1. Has begun planned principal activities;

2. Has employees, intellectual property and other inputs and processes that could be applied to those inputs;

3. Is pursuing a plan to produce outputs; and

4. Will be able to obtain access to service recipients that will receive the outputs.

Not all of those factors need to be present for a particular integrated set of activities and assets and/or liabilities in the development stage to qualify as an operation.

AG8. Determining whether a particular set of activities and assets and/or liabilities is an operation should be based on whether the integrated set is capable of being conducted and managed as an operation by another entity. Thus, in evaluating whether a particular set is an operation, it is not relevant whether a transferor operated the set as an operation or whether the acquirer intends to operate the set as an operation.

AG9. In the absence of evidence to the contrary, a particular set of activities and assets and/or liabilities in which goodwill is present shall be presumed to be an operation. However, an operation need not have goodwill.

AG10. Where a party to a PBE combination gains control of one or more operations as a result of that combination, the combination is classified as either an amalgamation or an acquisition, depending on the economic substance of the combination. If no party to the combination gains control, the combination is classified as an amalgamation. In making this assessment the first step is to determine whether one of the entities that existed prior to the PBE combination has gained control of one or more operations. Because this determination is made by reference to the entities that existed prior to the PBE combination, it differs from the assessment of control made in accordance with PBE IPSAS 35 Consolidated Financial Statements, where the assessment of control is made by reference to the entities that exist after a PBE combination has taken place.

AG11. In determining whether one party to a PBE combination gains control of one or more operations as a result of the combination, an entity applies the principles and guidance in PBE IPSAS 35. In applying the principles and guidance, references to “an entity controls” are read as “an entity gains control of” and references to “another entity” are read as “an operation”. For example, in determining whether one party to a PBE combination gains control of one or more operations as a result of the combination for the purposes of this Standard, paragraph 20 of PBE IPSAS 35 should be read as follows (amended text is shown in italics):

AG12. In applying the principles and guidance in PBE IPSAS 35, an entity has regard to paragraphs AG13– AG18.

AG13. A PBE combination effected primarily by the transfer of consideration (i.e., by transferring cash or other assets or by incurring liabilities) usually results in one entity gaining control of one or more operations.

AG14. A PBE combination effected primarily by exchanging equity interests usually results in one entity gaining control of one or more operations. Combinations involving an exchange of equity interests usually results in one entity having sufficient voting rights to gain control of one or more operations. This may occur without the entity having a majority of the voting rights where the entity has a large minority voting interest and no other owner or organised group of owners has a significant voting interest. Other pertinent facts and circumstances shall also be considered in assessing whether one entity (and, if so, which entity) has gained control of one or more operations, including:

1. The composition of the governing body of the combined operation – The entity that gains control is usually the combining operation whose owners have the ability to elect a majority of the members of the governing body of the combined operations.

2. The composition of the senior management of the combined operation – The entity that gains control is usually the combining operation whose (former) management dominates the management of the combined operations.

AG15. A PBE combination involving the issuance of equity interests may give rise to a reverse acquisition (see paragraphs AG66–AG71). An entity considers this possibility in determining whether one party to a PBE combination gains control of operations.

AG16. In a PBE combination involving more than two entities, the party to the PBE combination that initiates the combination (if any) is more likely to gain control of operations than the other parties to the combination.

AG17. In a PBE combination in which a new entity is formed to effect the combination, that new entity may gain control of operations only where the following conditions are satisfied:

1. It exists prior to the combination taking place; and

2. The combination was not effected by that new entity issuing equity interests.

Where these conditions are not satisfied, an entity considers other pertinent facts and circumstances (see paragraph AG14) in deciding whether one of the other parties to the combination that existed prior to the combination taking place gains control of operations.

AG17.1 A PBE combination in which operations not under common control voluntarily agree to combine could be classified as either an amalgamation or an acquisition. The operations could combine to improve services to their recipients or to reduce operating costs. In this type of combination, if the combining operations are uniting rather than one party gaining control of the other party, this could be classified as an amalgamation. This type of combination is more frequent in the not-for-profit sector than the public sector.

AG18. If the application of this guidance identifies one party to the combination as gaining control of one or more operations, the combination is classified as either an amalgamation or an acquisition, depending on the economic substance of the combination. An entity considers the guidance in paragraphs 9–14 and AG19–AG50 to determine whether the economic substance of the combination is that of an amalgamation. If the application of the guidance does not identify one party to the combination as gaining control of one or more operations, the combination shall be classified as an amalgamation.

AG19. If one party to a PBE combination gains control of one or more operations as a result of the combination, the combination shall be classified as either an amalgamation or an acquisition, depending on the economic substance of the combination. In assessing whether the economic substance of the combination is that of an amalgamation, an entity considers the economic substance of the PBE combination and the indicators in paragraphs 12–14. A combination that does not have the economic substance of an amalgamation shall be classified as an acquisition. In making this assessment, an entity considers the following guidance.

AG20. Usually, an analysis of the indicators in paragraphs 12–13, individually or on combination, will produce a conclusive result and provide sufficient evidence to determine whether the economic substance of the combination is that of an amalgamation. A combination does not need to satisfy both of these indicators to be classified as an amalgamation.

AG21. Where consideration of the indicators in paragraphs 12–13 produces inconclusive results or does not provide sufficient evidence to clearly determine the economic substance of the combination, an entity considers the additional matters in paragraph 14.

AG22. [Not used]

AG23. An amalgamation involves the integration of the operations that are part of the PBE combination. Generally, an amalgamation does not give rise to a controlling entity/controlled entity relationship between parties to a combination. If, following the combination, any of the operations operate as controlled entities of a party to the combination, this may provide evidence that the economic substance of the combination is that of an acquisition. However, there could be circumstances where a controlling entity/controlled entity relationship between parties to a combination remains after the combination. For example, there could be legal, tax or administrative reasons for leaving the existing operations of the combining operations within their respective existing legal entity structure, which could entail establishing a controlled entity/controlling entity structure as part of the combination, but that outcome does not necessarily mean that the economic substance of the combination is an acquisition.

AG24. An acquisition is usually a mutual agreement between two or more parties, and usually has commercial substance. However, it is possible for an acquisition to occur without mutual agreement (for example, a forced nationalisation).

AG25. [Not used]

AG26. Amalgamations usually do not involve the payment of consideration to compensate a seller for giving up its entitlement to the net assets of an operation. By contrast, acquisitions usually involve an exchange of consideration between those gaining control of the operations and those losing control of the operations.

AG27. However, there may be a number of reasons why consideration is either paid or not paid. In assessing the impact of consideration on the classification of a combination as an acquisition or an amalgamation, it is necessary to consider those reasons.

AG28. The payment of consideration to compensate those with an entitlement to the net assets of the transferred operation for giving up that entitlement provides evidence that the economic substance of the PBE combination is an acquisition. In such cases, the combination is classified as an acquisition. If consideration is paid for reasons other than to compensate the seller for giving up its entitlement to the net assets of an operation, (for example, to reimburse the seller for costs incurred in effecting the PBE combination), this may provide evidence that the economic substance of the combination is that of an amalgamation.

AG29. The absence of consideration does not in itself provide evidence of the economic substance of the PBE combination. Acquisitions may occur without an exchange of consideration. If those with an entitlement to the net assets of an operation have voluntarily given up their entitlement in order to donate the net assets of the operation to an unrelated entity (for example, an individual bequeaths an operation to a government entity) this would suggest that the combination is an acquisition. If those with an entitlement to the net assets of an operation have their entitlement extinguished through compulsion (for example, in an uncompensated seizure by a public sector entity), this would suggest that the combination is an acquisition.

AG30. In contrast, if there was no compensation paid because the combining operations are under common control and hence no compensation is necessary, this would suggest that the combination is an amalgamation. Similarly, in a combination that occurs as part of a local government reorganisation, the payment of compensation may not be necessary because the citizens served by the combining operations will continue to be served by the combined operations, which would suggest that the combination is an amalgamation.

AG31. [Not used]

AG32. An acquisition usually requires the voluntary participation of all the parties to the combination. Consequently, where a PBE combination is imposed by a third party without any party to the combination being involved in the decision-making process, this may provide evidence that the economic substance of the combination is an amalgamation.

AG33. In other circumstances, the parties to the PBE combination will be able to influence the terms of the combination to different degrees even when the combination is imposed by a third party. As the degree of influence the parties to the combination have increases, particularly the influence of the party that gains control of one or more operations, it becomes less likely that a conclusion regarding the economic substance of the combination can be drawn.

AG34. For example, the parties to the combination may be directed to combine by a regulator, but the regulator allows the parties to determine the terms of the combination. The economic substance of this PBE combination is likely to be determined by the terms of the combination agreed by the parties rather than by the decision of the regulator that the parties must combine.

AG35. Where the party to the PBE combination that gains control of one or more operations is able to impose the combination on the other party, this does not provide evidence that the economic substance of the combination is that of an amalgamation. For example, a government may decide to nationalise a private sector entity, contrary to the wishes of the shareholders. The fact that the government (a party to the combination) is able to impose the nationalisation, for example through legislation, does not provide evidence that the economic substance of the combination is an amalgamation. Where the party to the combination that gains control of one or more operations is able to impose the combination on the other party, this provides evidence that the economic substance of the combination is that of an acquisition.

AG36. Where a PBE combination is subject to approval by each party’s citizens through referenda, this may provide evidence that the economic substance of the combination is that of an amalgamation. Such a requirement provides evidence that the parties to the combination do not have freedom to voluntarily effect the combination and that the ultimate decision as to whether the combination takes place is taken by third parties. However, it is possible for citizens to approve, through referenda, a combination whose terms are those of an acquisition.

AG37. Where a PBE combination takes place between two parties that are under common control, this may provide evidence that the economic substance of the combination is that of an amalgamation. PBE combinations under common control are often instigated by and on behalf of the controlling entity, and the controlling entity will often determine the terms of the combination. For example, a government may decide to combine two ministries for administrative or political reasons, and specify the terms of the combination. In such circumstances, the ultimate decision as to whether the combination takes place, and the terms of the combination, are determined by the controlling entity. This provides evidence that the economic substance of the combination is an amalgamation.

AG38. In some circumstances, two operations under common control may agree to combine voluntarily. However, this decision will usually be subject to the approval of the controlling entity, whether this approval is given explicitly or not. Where the approval of the controlling entity is required, this provides evidence that the ultimate decision as to whether the combination takes place, and the terms of the combination, are determined by the controlling entity. Consequently, this provides evidence that the economic substance of the combination is that of an amalgamation.

AG39. Only where there is no evidence that the controlling entity is involved in the PBE combination, either by instigating the combination, determining the terms of the combination, or approving (whether explicitly or implicitly) the combination, will there be no evidence that the economic substance of the combination is that of an amalgamation. In such circumstances, the entity considers all other factors in determining the classification of the PBE combination.

AG40. Where an analysis of the indicators relating to consideration and the decision-making process produces inconclusive results or does not provide sufficient evidence to determine whether the economic

substance of the combination is that of an amalgamation, an entity considers which classification and resulting accounting treatment would provide information that:

1. Best meets the objectives of financial reporting; and

2. Best satisfies the qualitative characteristics (QCs).

AG41. An analysis of the indicators relating to consideration and the decision-making process will usually produce a conclusive result and provide sufficient evidence to determine whether the economic substance of the combination is that of an amalgamation. This is because the indicators relating to consideration and the decision-making process will provide evidence of the economic substance of a PBE combination in all but exceptional circumstances. As a result, where it is clear that the indicators have been met, the additional matters set out in paragraph 14 are not considered in determining the classification.

AG42. Where an analysis of the indicators relating to consideration and the decision-making process provides inconclusive results or does not provide sufficient evidence to determine whether the economic substance of the combination is that of an amalgamation, an entity considers which classification would provide information that best meets the objectives of financial reporting. The determination of whether a PBE combination is classified as an acquisition or an amalgamation can significantly affect the financial reporting of the combination. Consequently, it is important to consider the information each method provides and the principal users of that information.

AG43. The modified pooling of interests method views the combination from the perspective of each of the combining operations and their owners or constituents who are uniting their interests in the resulting entity. Using the modified pooling of interests method of accounting, the combining operations measure the reported assets and liabilities at their carrying amounts in the financial statements of the combining operations as of the amalgamation date. Such information may assist users in assessing the performance of the resulting entity based upon the combined historical assets and liabilities of the combining operations at the date of the amalgamation and in comparing operating results with prior periods. However, this comparability may be reduced where adjustments to achieve consistent accounting policies are required.

AG44. The acquisition method views a combination from the perspective of the acquirer—the entity that gains control of the other operations. The acquirer purchases or otherwise gains control over net assets and recognises in its financial statements the assets acquired and liabilities assumed, including those not previously recognised by the acquired operation. Such information assists users of the financial statements in assessing the initial investments made, where paid, and the subsequent performance of those investments and comparing them with the performance of other entities based on the investment made by the acquirer. While it revalues the assets and liabilities of the acquired operation, it does not affect the valuation of assets and liabilities held by the acquirer prior to the acquisition. Further, depending on the relationship between the amounts in paragraph 85(a) and 85(b) and other factors (for example, a bargain purchase), it may result in the immediate recognition of a gain or loss through surplus or deficit.

AG45. The information provided by each approach is summarised in the following table.

AG46. Consideration of which classification would provide information that best meets the objectives of financial reporting provides evidence of the economic substance of the PBE combination where an analysis of the indicators relating to consideration and the decision-making process provides inconclusive results or does not provide sufficient evidence to determine whether the economic substance of the combination is that of an amalgamation.

AG47. Where an analysis of the indicators relating to consideration and the decision-making process provides inconclusive results or does not provide sufficient evidence to determine the classification of the combination, an entity considers which classification would provide information that best satisfies the QCs of relevance, faithful representation, understandability, timeliness, comparability and verifiability. In making this assessment, an entity also considers the constraints on information included in general purpose financial reports, which are materiality, cost-benefit and the balance between the QCs.

AG48. When considering the classification of a PBE combination, some QCs will be more significant than others. For example, timeliness will be less significant than understandability when considering whether a combination is an amalgamation or an acquisition.

AG49. An entity considers the QCs and the constraints on information from the perspective of the users of the financial statements. This will include consideration of the following questions; this list is not exhaustive.

1. Which classification most faithfully represents the economic substance of the PBE combination, which may be different from its legal form? Does that classification faithfully represent an entity’s financial performance and financial position?

2. Which classification will help users understand the nature of the PBE combination? For example, in an amalgamation, any difference between the total recognised assets and total recognised liabilities is recognised in net assets/equity, whereas in an acquisition, the acquirer recognises goodwill, or a gain or loss in the reporting period. Which approach best helps the user to understand the nature of the combination?

3. Users’ needs are best served when the information provided in respect of a transaction is comparable. How are similar PBE combinations classified?

AG50. Consideration of which classification would provide information that best meets the QCs provides evidence of the economic substance of the PBE combination where an analysis of the indicators relating to consideration and the decision-making process provides inconclusive results or does not provide sufficient evidence to determine whether the economic substance of the combination is that of an amalgamation.

AG50.1 Where the resulting entity is a continuing reporting entity and has previously applied PBE Standards prior to the amalgamation but one or more of the combining operations have not previously applied PBE Standards prior to the amalgamation, the resulting entity shall:

1. Prepare an opening statement of financial position as at the amalgamation date (this shall be the date of transition to PBE Standards) in accordance with paragraphs 10–23 of PBE FRS 47 First- time Adoption of PBE Standards for each of the combining operations that have not previously applied PBE Standards; and

2. Use the same accounting policies for those combining operations as are already being applied by the continuing reporting entity. However, the resulting entity may early adopt new or amending PBE Standards that have been issued but are not yet effective.

After preparing the combining operations’ statements of financial position the resulting entity shall then apply the requirements in paragraphs 21–35.

AG50.2 Where the resulting entity is a new reporting entity and one or more of the combining operations have not previously applied PBE Standards prior to the amalgamation, the resulting entity shall:

1. Apply XRB A1 Application of the Accounting Standards Framework to determine the appropriate tier of reporting for the resulting entity. It shall not apply the requirements for moving between tiers in XRB A1 as it was not in existence as a reporting entity prior to the amalgamation;

2. Prepare an opening statement of financial position as at the amalgamation date (this shall be the date of transition to PBE Standards) in accordance with paragraphs 10–23 of PBE FRS 47 for each of the combining operations that have not previously applied PBE Standards; and

3. Use the same accounting policies as were previously used by those combining operations that have previously applied PBE Standards. However, the resulting entity may early adopt new or amending PBE Standards that have been issued but are not yet effective.

After preparing the combining operations’ statements of financial position the resulting entity shall then apply the requirements in paragraphs 21–35.

AG51. A resulting entity eliminates the effects of all transactions between the combining operations. For many transactions, elimination will take place automatically. For example, one combining operation provided services for a fee to another combining operation prior to the amalgamation date. The revenue of the combining operation that provided the services is reflected in that combining operation’s accumulated comprehensive revenue and expense at the amalgamation date. The expense of the combining operation receiving the services is reflected in that combining operation’s accumulated comprehensive revenue and expense at the amalgamation date. The resulting entity will recognise both amounts in net assets/equity.

AG52. Elimination may not take place automatically where one combining operation has recognised an asset, and another combining operation has recognised a corresponding liability as a result of the transaction between two combining operations. The resulting entity eliminates both the asset and the liability, and recognises any difference between the asset and liability in net assets/equity.

AG53. Where a combining operation has previously been acquired in an acquisition (i.e., it was previously an acquired operation), the carrying amounts of the combining operation’s assets and liabilities in its separate financial statements may be different to the carrying amounts of those assets and liabilities in the controlling entity’s financial statements. In an acquisition, the controlling entity would measure the combining operation’s assets and liabilities at their fair value. However, where the combining operation (i.e., the previously acquired operation) continues to prepare separate financial statements, it would use its previous carrying amounts. The fair value measurements in the financial statements of the controlling entity are not pushed down to the combining operation.

AG54. To meet the requirements in paragraphs 26–27, a resulting entity measures the assets and liabilities of the combining operations at their carrying amounts in the financial statements of the combining operations as of the amalgamation date, subject to the requirement to adjust the carrying amounts to conform to the resulting entity's accounting policies. The resulting entity does not measure the assets and liabilities at the carrying amounts in the financial statements of the controlling entity (unless the controlling entity is one of the combining operations).

AG54.1 Where the resulting entity is a new reporting entity and the combining operations have applied different accounting policies for similar transactions and events, the resulting entity shall select the accounting policies that result in the financial statements providing the most relevant and faithfully representative information, subject to the requirements in paragraphs 31–35. If a resulting entity has transactions, other events or conditions that differ in substance from those previously occurring, that did not previously occur, or that were previously immaterial, it shall select or develop accounting policies in accordance with PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors.

AG54.2 Where the resulting entity is a continuing reporting entity, it shall continue to apply its previous accounting policies to transactions and events, subject to the requirements in paragraphs 31–35. There are some limited circumstances in which a resulting entity that is a continuing reporting entity may need to apply PBE IPSAS 3 in preparing its first set of financial statements following the amalgamation. These include:

1. The identification of a prior period error, in which case PBE IPSAS 3 (paragraphs 46–54) applies; or

2. The resulting entity voluntarily changes an accounting policy, including the selection of a different option permitted under PBE Standards, in which case PBE IPSAS 3 (paragraphs 17– 34) applies; or

3. The resulting entity will have transactions, other events or conditions that differ in substance from those previously occurring, that did not previously occur, or that were previously immaterial, in which case PBE IPSAS 3 (paragraphs 9–15) applies.

AG55. As part of an amalgamation, a resulting entity may receive a licence or similar right that had previously been granted by one combining operation to another combining operation to use one or more of the grantor’s recognised or unrecognised assets. Examples of such rights include a right to use the acquirer’s technology under a technology licencing agreement. The resulting entity recognises this licence or similar right as an identifiable intangible asset, and measures the intangible asset at its carrying amount in the financial statements of the combining operation as of the amalgamation date. Because the licence or similar right has previously been part of a binding arrangement, the licence satisfies both the separability and binding arrangement criteria in PBE IPSAS 31 Intangible Assets. Paragraph 47 provides guidance on the subsequent accounting for a licence or similar right previously granted by one combining operation to another combining operation.

AG56. The resulting entity assesses both the licence or similar right previously granted by one combining operation to another combining operation, and the underlying asset (where the underlying asset is a recognised asset) for impairment in accordance with PBE IPSAS 21 Impairment of Non-Cash- Generating Assets and/or PBE IPSAS 26 Impairment of Cash-Generating Assets, at the amalgamation date.

AG57. The resulting entity shall not recognise any amounts in respect of a combining operation’s tax due where these amounts have been forgiven by a tax authority as part of the terms of the amalgamation. Where tax forgiveness occurs subsequent to an amalgamation, the resulting entity applies the requirements in paragraph 49. In applying the modified pooling of interests method of accounting, the resulting entity shall treat those amounts included in the terms of the amalgamation as having been derecognised prior to the amalgamation. The resulting entity shall account for a combining operation’s tax due that has not been forgiven by a tax authority in accordance with PBE IAS 12.

AG58. [Not used]

AG59. Amalgamations do not give rise to goodwill, and consequently a resulting entity does not recognise goodwill arising from an amalgamation. Paragraphs 37–38 specify the treatment of the net assets/equity arising as a result of the amalgamation.

AG60. Where a combining operation has previously recognised goodwill as a result of a previous acquisition, the resulting entity recognises this goodwill in its opening statement of financial position.

AG61. Prior to an amalgamation taking place, a combining operation may receive a transfer from a third party, based on specified criteria. For example, a national government may provide grants to those municipalities where the average household income is below a threshold. An amalgamation of two municipalities may involve one municipality which met the criteria and received the grant, and one municipality which did not meet the criteria and which did not receive the grant. Following the amalgamation, the average household income of the new, combined municipality will either be above or below the threshold, which may cause the grantor to reassess the amount of grant given.

AG62. The resulting entity shall not account for any revisions to the grant amount as part of the amalgamation, but shall account for any revisions at the point the grantor makes its intentions known in accordance with other PBE Standards.

AG63. Similar circumstances may arise in respect of concessionary loans and other benefits. The resulting entity shall not account for any revisions to those transactions as part of the amalgamation, but shall account for any revisions at the point the grantor makes its intentions known in accordance with other PBE Standards.

AG64. To meet the requirements of paragraphs 50–52, the resulting entity is not required to present financial statements of the combining operations for periods prior to the amalgamation date, although it may elect to do so by making the disclosures specified in paragraph 54(g). Where the resulting entity does not elect to present financial statements of the combining operations for periods prior to the amalgamation date, it meets the needs of the users of its financial statements for information about the combining operations prior to the amalgamation in one of two ways:

1. Directing the users of its financial statements to the financial statements issued on behalf of each of the combining operations. This is appropriate where financial statements have been issued on behalf of the combining operations for a reporting period ending immediately prior to the amalgamation date (which may be a partial period).

2. Making the disclosures required by paragraph 54(h) in respect of each of the combining operations. This is appropriate where no financial statements have been issued on behalf of the combining operations for a reporting period ending immediately prior to the amalgamation date (which may be a partial period).

AG65. To satisfy the requirements of a regulator, it may be necessary for the combining operations and/or the resulting entity to present or disclose information in addition to that required by this Standard.

AG66. A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquired operation for accounting purposes on the basis of the guidance in paragraphs AG10– AG18. The entity whose equity interests are acquired (the legal acquired operation) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition. For example, reverse acquisitions sometimes occur when an unlisted entity wants to become a listed entity but does not want to register its equity shares. To accomplish that, the unlisted entity will arrange for a listed entity to acquire its equity interests in exchange for the equity interests of the listed entity. In this example, the listed entity is the legal acquirer because it issued its equity interests, and the unlisted entity is the legal acquired operation because its equity interests were acquired. However, application of the guidance in paragraphs AG10–AG18 results in identifying:

1. The listed entity as the acquired operation for accounting purposes (the accounting acquired operation)–i.e., the listed entity does not gain control of one or more operations; and

2. The unlisted entity as the acquirer for accounting purposes (the accounting acquirer)–i.e., the unlisted entity does gain control of one or more operations.

The accounting acquired operation must meet the definition of an operation for the transaction to be accounted for as a reverse acquisition, and all of the recognition and measurement principles in this Standard, including the requirement to recognise goodwill, apply.

AG67. In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquired operation. Instead, the accounting acquired operation usually issues its equity shares to the owners of the accounting acquirer. Accordingly, the acquisition-date fair value of the consideration transferred by the accounting acquirer for its interest in the accounting acquired operation is based on the number of equity interests the legal controlled entity would have had to issue to give the owners of the legal controlling entity the same percentage equity interest in the combined entity that results from the reverse acquisition. The fair value of the number of equity interests calculated in that way can be used as the fair value of consideration transferred in exchange for the acquired operation.

AG68. Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal controlling entity (accounting acquired operation) but described in the notes as a continuation of the financial statements of the legal controlled entity (accounting acquirer), with one adjustment, which is to adjust retroactively the accounting acquirer’s legal capital to reflect the legal

capital of the accounting acquired operation. That adjustment is required to reflect the capital of the legal controlling entity (the accounting acquired operation). Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal controlling entity (accounting acquired operation).

AG69. Because the consolidated financial statements represent the continuation of the financial statements of the legal controlled entity except for its capital structure, the consolidated financial statements reflect:

1. The assets and liabilities of the legal controlled entity (the accounting acquirer) recognised and measured at their pre-combination carrying amounts.

2. The assets and liabilities of the legal controlling entity (the accounting acquired operation) recognised and measured in accordance with this Standard.

3. The accumulated comprehensive revenue and expense and other equity balances of the legal controlled entity (accounting acquirer) before the acquisition.

4. The amount recognised as issued equity interests in the consolidated financial statements determined by adding the issued equity interest of the legal controlled entity (the accounting acquirer) outstanding immediately before the acquisition to the fair value of the legal controlling entity (accounting acquired operation). However, the equity structure (i.e., the number and type of equity interests issued) reflects the equity structure of the legal controlling entity (the accounting acquired operation), including the equity interests the legal controlling entity issued to effect the acquisition. Accordingly, the equity structure of the legal controlled entity (the accounting acquirer) is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal controlling entity (the accounting acquired operation) issued in the reverse acquisition.

5. The non-controlling interest’s proportionate share of the legal controlled entity’s (accounting acquirer’s) pre-acquisition carrying amounts of accumulated comprehensive revenue and expense and other equity interests as discussed in paragraphs AG70 and AG71.

AG70. In a reverse acquisition, some of the owners of the legal acquired operation (the accounting acquirer) might not exchange their equity interests for equity interests of the legal controlling entity (the accounting acquired operation). Those owners are treated as a non-controlling interest in the consolidated financial statements after the reverse acquisition. That is because the owners of the legal acquired operation that do not exchange their equity interests for equity interests of the legal acquirer have an interest in only the results and net assets of the legal acquired operation—not in the results and net assets of the combined entity. Conversely, even though the legal acquirer is the acquired operation for accounting purposes, the owners of the legal acquirer have an interest in the results and net assets of the combined entity.

AG71. The assets and liabilities of the legal acquired operation are measured and recognised in the consolidated financial statements at their pre-combination carrying amounts (see paragraph AG69(a)). Therefore, in a reverse acquisition the non-controlling interest reflects the non-controlling shareholders’ proportionate interest in the pre-acquisition carrying amounts of the legal acquired operation’s net assets even if the non-controlling interests in other acquisitions are measured at their fair value at the acquisition date.

AG72. The acquirer shall recognise no assets or liabilities related to an operating lease in which the acquired operation is the lessee except as required by paragraphs AG73–AG74.

AG73. The acquirer shall determine whether the terms of each operating lease in which the acquired operation is the lessee are favourable or unfavourable. The acquirer shall recognise an intangible asset if the terms of an operating lease are favourable relative to market terms and a liability if the terms are unfavourable relative to market terms. Paragraph AG89 provides guidance on measuring the acquisition-date fair value of assets subject to operating leases in which the acquired operation is the lessor.

AG74. An identifiable intangible asset may be associated with an operating lease, which may be evidenced by market participants’ willingness to pay a price for the lease even if it is at market terms. For example, a lease of gates at an airport or of retail space in a prime shopping area might provide entry into a market or other future economic benefits or service potential that qualify as identifiable intangible assets, for example, as a relationship with users of a service. In that situation, the acquirer shall recognise the associated identifiable intangible asset(s) in accordance with paragraph AG75.

AG75. The acquirer shall recognise, separately from goodwill, the identifiable intangible assets acquired in an acquisition. An intangible asset is identifiable if it meets either the separability criterion or the binding arrangement criterion.

AG76. An intangible asset that meets the binding arrangement criterion is identifiable even if the asset is not transferable or separable from the acquired operation or from other rights and obligations. For example:

1. An acquired operation leases a facility under an operating lease that has terms that are favourable relative to market terms. The lease terms explicitly prohibit transfer of the lease (through either sale or sublease). The amount by which the lease terms are favourable compared with the terms of current market transactions for the same or similar items is an intangible asset that meets the binding arrangement criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease arrangement.

2. An acquired operation owns and operates a nuclear power plant. The licence to operate that power plant is an intangible asset that meets the binding arrangement criterion for recognition separately from goodwill, even if the acquirer cannot sell or transfer it separately from the acquired power plant. An acquirer may recognise the fair value of the operating licence and the fair value of the power plant as a single asset for financial reporting purposes if the useful lives of those assets are similar.

3. An acquired operation owns a technology patent. It has licensed that patent to others for their exclusive use outside the domestic market, receiving a specified percentage of future foreign revenue in exchange. Both the technology patent and the related licence agreement meet the binding arrangement criterion for recognition separately from goodwill even if selling or exchanging the patent and the related licence agreement separately from one another would not be practical.

AG77. The separability criterion means that an acquired intangible asset is capable of being separated or divided from the acquired operation and sold, transferred, licensed, rented or exchanged, either individually or together with a related binding arrangement, identifiable asset or liability. An intangible asset that the acquirer would be able to sell, license or otherwise exchange for something else of value meets the separability criterion even if the acquirer does not intend to sell, license or otherwise exchange it. An acquired intangible asset meets the separability criterion if there is evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent and regardless of whether the acquirer is involved in them. For example, lists of users of a service are frequently licensed and thus meet the separability criterion. Even if an acquired operation believes its lists of users of a service have characteristics different from other lists of users of a service, the fact that lists of users of a service are frequently licensed generally means that the acquired list of users of a service meets the separability criterion. However, a list of users of a service acquired in an acquisition would not meet the separability criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its users of a service.

AG78. An intangible asset that is not individually separable from the acquired operation or combined entity meets the separability criterion if it is separable in combination with a related binding arrangement, identifiable asset or liability. For example, an acquired operation owns a registered trademark and documented but unpatented technical expertise used to manufacture the trademarked product. To transfer ownership of a trademark, the owner is also required to transfer everything else necessary for the new owner to produce a product or service indistinguishable from that produced by the former owner. Because the unpatented technical expertise must be separated from the acquired operation or combined entity and sold if the related trademark is sold, it meets the separability criterion.

AG79. As part of an acquisition, an acquirer may reacquire a right that it had previously granted to the acquired operation to use one or more of the acquirer’s recognised or unrecognised assets. Examples of such rights include a right to use the acquirer’s trade name under a network or partner agreement or a right to use the acquirer’s technology under a technology licensing agreement. A reacquired right is an identifiable intangible asset that the acquirer recognises separately from goodwill or a gain from a bargain purchase. Paragraph 83 provides guidance on measuring a reacquired right and paragraph 113 provides guidance on the subsequent accounting for a reacquired right.

AG80. If the terms of the binding arrangement giving rise to a reacquired right are favourable or unfavourable relative to the terms of current market transactions for the same or similar items, the acquirer shall recognise a settlement gain or loss. Paragraph AG100 provides guidance for measuring that settlement gain or loss.

AG81. The acquirer subsumes into goodwill the value of an acquired intangible asset that is not identifiable as of the acquisition date. For example, an acquirer may attribute value to the existence of an assembled workforce, which is an existing collection of employees that permits the acquirer to continue to operate an acquired operation from the acquisition date. An assembled workforce does not represent the intellectual capital of the skilled workforce—the (often specialised) knowledge and experience that employees of an acquired operation bring to their jobs. Because the assembled workforce is not an identifiable asset to be recognised separately from goodwill or a gain from a bargain purchase, any value attributed to it is subsumed into goodwill or a gain from a bargain purchase.

AG82. The acquirer also subsumes into goodwill or a gain from a bargain purchase any value attributed to items that do not qualify as assets at the acquisition date. For example, the acquirer might attribute value to potential binding arrangements the acquired operation is negotiating with prospective new customers at the acquisition date. Because those potential binding arrangements are not themselves assets at the acquisition date, the acquirer does not recognise them separately from goodwill or a gain from a bargain purchase. The acquirer should not subsequently reclassify the value of those binding arrangements from goodwill for events that occur after the acquisition date. However, the acquirer should assess the facts and circumstances surrounding events occurring shortly after the acquisition to determine whether a separately recognisable intangible asset existed at the acquisition date.

AG83. After initial recognition, an acquirer accounts for intangible assets acquired in an acquisition in accordance with the provisions of PBE IPSAS 31. However, as described in paragraph 6 of PBE IPSAS 31, the accounting for some acquired intangible assets after initial recognition is prescribed by other PBE Standards.

AG84. The identifiability criteria determine whether an intangible asset is recognised separately from goodwill. However, the criteria neither provide guidance for measuring the fair value of an intangible asset nor restrict the assumptions used in measuring the fair value of an intangible asset. For example, the acquirer would take into account the assumptions that market participants would use when pricing the intangible asset, such as expectations of future renewals of binding arrangements, in measuring fair value. It is not necessary for the renewals themselves to meet the identifiability criteria. (However, see paragraph 83, which establishes an exception to the fair value measurement principle for reacquired rights recognised in an acquisition.) Paragraphs 39D and 39E of PBE IPSAS 31 provide guidance for determining whether intangible assets should be combined into a single unit of account with other intangible or tangible assets.

AG85. The acquirer shall not recognise any amounts in respect of an acquired operation’s tax due where these amounts have been forgiven by a tax authority as part of the terms of the acquisition. Where tax forgiveness occurs subsequent to an acquisition, the resulting entity applies the requirements in paragraph 118. The acquirer shall account for an acquired operation’s tax due that has not been forgiven by a tax authority in accordance with PBE IAS 12.

AG86. [Not used]

AG87. If, as a consequence of the terms of an acquisition, a tax authority forgives an amount of the acquirer’s tax due, the acquirer shall derecognise those amounts in accordance with PBE IAS 12.

AG88. The acquirer shall not recognise a separate valuation allowance as of the acquisition date for assets acquired in an acquisition that are measured at their acquisition-date fair values because the effects of uncertainty about future cash flows are included in the fair value measure. For example, because this Standard requires the acquirer to measure acquired receivables, including loans, at their acquisition- date fair values in accounting for an acquisition, the acquirer does not recognise a separate valuation allowance for the cash flows of the binding arrangement that are deemed to be uncollectible at that date or a loss allowance for expected credit losses.¹²

AG89. In measuring the acquisition-date fair value of an asset such as a building that is subject to an operating lease in which the acquired operation is the lessor, the acquirer shall take into account the terms of the lease. In other words, the acquirer does not recognise a separate asset or liability if the terms of an operating lease are either favourable or unfavourable when compared with market terms as paragraph AG73 requires for leases in which the acquired operation is the lessee.

AG90. To protect its competitive position, or for security or other reasons, the acquirer may intend not to use an acquired non-financial asset actively, or it may not intend to use the asset according to its highest and best use. For example, that might be the case for an acquired research and development intangible asset that the acquirer plans to use defensively by preventing others from using it. Nevertheless, the acquirer shall measure the fair value of the non-financial asset assuming its highest and best use by market participants in accordance with the appropriate valuation premise, both initially and when measuring fair value less costs of disposal for subsequent impairment testing.

AG91. This Standard allows the acquirer to measure a non-controlling interest in the acquired operation at its fair value at the acquisition date. Sometimes an acquirer will be able to measure the acquisition-date fair value of a non-controlling interest on the basis of a quoted price in an active market for the equity shares (i.e., those not held by the acquirer). In other situations, however, a quoted price in an active market for the equity shares will not be available. In those situations, the acquirer would measure the fair value of the non-controlling interest using other valuation techniques.

AG92. The fair values of the acquirer’s interest in the acquired operation and the non-controlling interest on a per-share basis might differ. The main difference is likely to be the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquired operation or, conversely, the inclusion of a discount for lack of control (also referred to as a non-controlling interest discount) in the per-share fair value of the non-controlling interest if market participants would take into account such a premium or discount when pricing the non-controlling interest.

AG93. The acquirer shall recognise goodwill only to the extent that the acquirer estimates there will be favourable changes to its net cash flows, either from increased cash inflows or decreased cash outflows, and the goodwill relates to the acquisition of a cash-generating operation. An acquirer shall not recognise goodwill related to service potential other than cash flows nor goodwill related to the acquisition of a non-cash-generating operation.

AG94. In an acquisition achieved without the transfer of consideration, the acquirer must substitute the acquisition-date fair value of its interest in the acquired operation for the acquisition-date fair value of the consideration transferred to measure goodwill, a loss or a gain on a bargain purchase (see paragraphs 85–87).

AG95. When two mutual entities combine, the fair value of the equity or member interests in the acquired operation (or the fair value of the acquired operation) may be more reliably measurable than the fair value of the member interests transferred by the acquirer. In that situation, paragraph 87 requires the acquirer to determine the amount of goodwill by using the acquisition-date fair value of the acquired operation’s equity interests instead of the acquisition-date fair value of the acquirer’s equity interests transferred as consideration. In addition, the acquirer in a combination of mutual entities shall recognise the acquired operation’s net assets as a direct addition to capital or equity in its statement of financial position, not as an addition to accumulated comprehensive revenue and expense, which is consistent with the way in which other types of entities apply the acquisition method.

AG96. Although they are similar in many ways to other entities, mutual entities have distinct characteristics that arise primarily because their members are both customers and owners. Members of mutual entities generally expect to receive benefits for their membership, often in the form of reduced fees charged for goods and services or patronage dividends. The portion of patronage dividends allocated to each member is often based on the amount of business the member did with the mutual entity during the year.

AG97. A fair value measurement of a mutual entity should include the assumptions that market participants would make about future member benefits as well as any other relevant assumptions market participants would make about the mutual entity. For example, a present value technique may be used to measure the fair value of a mutual entity. The cash flows used as inputs to the model should be based on the expected cash flows of the mutual entity, which are likely to reflect reductions for member benefits, such as reduced fees charged for goods and services.

AG98. The acquirer should consider the following factors, which are neither mutually exclusive nor individually conclusive, to determine whether a transaction is part of the exchange for the acquired operation or whether the transaction is separate from the acquisition:

1. The reasons for the transaction. Understanding the reasons why the parties to the acquisition (the acquirer and the acquired operation and their owners, directors and managers—and their agents) entered into a particular transaction or arrangement may provide insight into whether it is part of the consideration transferred and the assets acquired or liabilities assumed. For example, if a transaction is arranged primarily for the benefit of the acquirer or the combined entity rather than primarily for the benefit of the acquired operation or its former owners before the combination, that portion of the transaction price paid (and any related assets or liabilities) is less likely to be part of the exchange for the acquired operation. Accordingly, the acquirer would account for that portion separately from the acquisition.

2. Who initiated the transaction. Understanding who initiated the transaction may also provide insight into whether it is part of the exchange for the acquired operation. For example, a transaction or other event that is initiated by the acquirer may be entered into for the purpose of providing future economic benefits to the acquirer or combined entity with little or no benefit received by the acquired operation or its former owners before the combination. On the other hand, a transaction or arrangement initiated by the acquired operation or its former owners is less likely to be for the benefit of the acquirer or the combined entity and more likely to be part of the acquisition transaction.

3. The timing of the transaction. The timing of the transaction may also provide insight into whether it is part of the exchange for the acquired operation. For example, a transaction between the acquirer and the acquired operation that takes place during the negotiations of the terms of an acquisition may have been entered into in contemplation of the acquisition to provide future economic benefits to the acquirer or the combined entity. If so, the acquired operation or its former owners before the acquisition are likely to receive little or no benefit from the transaction except for benefits they receive as part of the combined entity.

AG99. The acquirer and acquired operation may have a relationship that existed before they contemplated the acquisition, referred to here as a ‘pre-existing relationship’. A pre-existing relationship between the acquirer and acquired operation may arise from a binding arrangement (for example, vendor and customer or licensor and licensee) or may arise outside of a binding arrangement (for example, plaintiff and defendant).

AG100. If the acquisition in effect settles a pre-existing relationship, the acquirer recognises a gain or loss, measured as follows:

1. For a pre-existing relationship arising outside of a binding arrangement (such as a lawsuit), fair value.

2. For a pre-existing relationship arising from a binding arrangement, the lesser of (i) and (ii):

   1. The amount by which the binding arrangement is favourable or unfavourable from the perspective of the acquirer when compared with terms for current market transactions for the same or similar items. (An unfavourable binding arrangement is a binding arrangement that is unfavourable in terms of current market terms. It is not necessarily an onerous binding arrangement in which the unavoidable costs of meeting the obligations under the binding arrangement exceed the economic benefits expected to be received under it.)

   2. The amount of any stated settlement provisions in the binding arrangement available to the counterparty to whom the binding arrangement is unfavourable. If (ii) is less than (i), the difference is included as part of the acquisition accounting.

The amount of gain or loss recognised may depend in part on whether the acquirer had previously recognised a related asset or liability, and the reported gain or loss therefore may differ from the amount calculated by applying the above requirements.

AG101. A pre-existing relationship may be a binding arrangement that the acquirer recognises as a reacquired right. If the binding arrangement includes terms that are favourable or unfavourable when compared with pricing for current market transactions for the same or similar items, the acquirer recognises, separately from the acquisition, a gain or loss for the effective settlement of the binding arrangement, measured in accordance with paragraph AG100.

AG102. Whether arrangements for contingent payments to employees or selling shareholders are contingent consideration in the acquisition or are separate transactions depends on the nature of the arrangements. Understanding the reasons why the acquisition agreement includes a provision for contingent payments, who initiated the arrangement and when the parties entered into the arrangement may be helpful in assessing the nature of the arrangement.

AG103. If it is not clear whether an arrangement for payments to employees or selling shareholders is part of the exchange for the acquired operation or is a transaction separate from the acquisition, the acquirer should consider the following indicators:

1. Continuing employment. The terms of continuing employment by the selling shareholders who become key employees may be an indicator of the substance of a contingent consideration arrangement. The relevant terms of continuing employment may be included in an employment agreement, acquisition agreement or some other document. A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post-combination services. Arrangements in which the contingent payments are not affected by employment termination may indicate that the contingent payments are additional consideration rather than remuneration.

2. Duration of continuing employment. If the period of required employment coincides with or is longer than the contingent payment period, that fact may indicate that the contingent payments are, in substance, remuneration.

3. Level of remuneration. Situations in which employee remuneration other than the contingent payments is at a reasonable level in comparison with that of other key employees in the combined entity may indicate that the contingent payments are additional consideration rather than remuneration.

4. Incremental payments to employees. If selling shareholders who do not become employees receive lower contingent payments on a per-share basis than the selling shareholders who become employees of the combined entity, that fact may indicate that the incremental amount of contingent payments to the selling shareholders who become employees is remuneration.

5. Number of shares owned. The relative number of shares owned by the selling shareholders who remain as key employees may be an indicator of the substance of the contingent consideration arrangement. For example, if the selling shareholders who owned substantially all of the shares in the acquired operation continue as key employees, that fact may indicate that the arrangement is, in substance, a profit-sharing arrangement intended to provide remuneration for post- combination services. Alternatively, if selling shareholders who continue as key employees owned only a small number of shares of the acquired operation and all selling shareholders receive the same amount of contingent consideration on a per-share basis, that fact may indicate that the contingent payments are additional consideration. The pre-acquisition ownership interests held by parties related to selling shareholders who continue as key employees, such as family members, should also be considered.

6. Linkage to the valuation. If the initial consideration transferred at the acquisition date is based on the low end of a range established in the valuation of the acquired operation and the contingent formula relates to that valuation approach, that fact may suggest that the contingent payments are additional consideration. Alternatively, if the contingent payment formula is consistent with prior profit-sharing arrangements, that fact may suggest that the substance of the arrangement is to provide remuneration.

7. Formula for determining consideration. The formula used to determine the contingent payment may be helpful in assessing the substance of the arrangement. For example, if a contingent payment is determined on the basis of a multiple of earnings, that might suggest that the obligation is contingent consideration in the acquisition and that the formula is intended to establish or verify the fair value of the acquired operation. In contrast, a contingent payment that is a specified percentage of earnings might suggest that the obligation to employees is a profit- sharing arrangement to remunerate employees for services rendered.

8. Other agreements and issues. The terms of other arrangements with selling shareholders (such as agreements not to compete, executory contracts, consulting contracts and property lease agreements) and the income tax treatment of contingent payments may indicate that contingent payments are attributable to something other than consideration for the acquired operation. For example, in connection with the acquisition, the acquirer might enter into a property lease arrangement with a significant selling shareholder. If the lease payments specified in the lease arrangement are significantly below market, some or all of the contingent payments to the lessor (the selling shareholder) required by a separate arrangement for contingent payments might be, in substance, payments for the use of the leased property that the acquirer should recognise separately in its post-combination financial statements. In contrast, if the lease arrangement specifies lease payments that are consistent with market terms for the leased property, the arrangement for contingent payments to the selling shareholder may be contingent consideration in the acquisition.

AG104. An acquirer may exchange its share-based payment awards for awards held by employees of the acquired operation. The acquirer shall account for exchanges of share options or other share-based payment awards in conjunction with an acquisition in accordance with the relevant international or national accounting standard dealing with share-based payments.

AG105. In situations in which acquired operation awards would expire as a consequence of an acquisition and if the acquirer replaces those awards when it is not obliged to do so, the acquirer shall recognise any costs as remuneration cost in the post-combination financial statements in accordance with the relevant international or national accounting standard dealing with share-based payments. The cost of those awards shall not be included in measuring the consideration transferred in the acquisition.

AG106. The acquired operation may have outstanding share-based payment transactions that the acquirer does not exchange for its share-based payment transactions. If vested, those acquired operation share-based payment transactions are part of the non-controlling interest in the acquired operation. If unvested, they are measured as if the acquisition date were the grant date. Share-based payment transactions are measured in accordance with the relevant international or national accounting standard dealing with share-based payments.

AG107. Examples of other PBE Standards that provide guidance on subsequently measuring and accounting for assets acquired and liabilities assumed or incurred in an acquisition include:

1. PBE IPSAS 31 prescribes the accounting for identifiable intangible assets acquired in an acquisition. The acquirer measures goodwill at the amount recognised at the acquisition date less any accumulated impairment losses. PBE IPSAS 26 prescribes the accounting for impairment losses.

2. PBE IPSAS 35 provides guidance on accounting for changes in a controlling entity’s ownership interest in a controlled entity after control is obtained.

3. PBE IFRS 4 provides guidance on the subsequent accounting for an insurance contract acquired in an acquisition.

4. PBE IAS 12 prescribes the subsequent accounting for deferred tax assets (including unrecognised deferred tax assets) and liabilities acquired in an acquisition.

AG108. An acquirer should refer to the relevant international or national accounting standard for guidance on subsequently measuring and accounting for share-based payments.

AG109. Prior to an acquisition taking place, an acquirer or an acquired operation may receive a transfer from a third party, based on specified criteria. For example, a national government may provide grants to those municipalities where the municipality’s revenue per head of population is below a threshold. An acquisition by a municipality of a cash-generating operation may increase the revenue per head of population of the municipality so that it is above the threshold. This may cause the government to review the grant.

AG110. The acquirer shall not account for any revisions to the grant amount as part of the acquisition, but accounts for any revisions at the point the grantor makes its intentions known in accordance with other PBE Standards.

AG111. Similar circumstances may arise in respect of concessionary loans and other benefits. The acquirer shall not account for any revisions to those transactions as part of the acquisition, but accounts for any revisions at the point the grantor makes its intentions known in accordance with other PBE Standards.

AG112. The resulting entity meets the needs of the users of its financial statements for information about the acquired operations prior to the acquisition by making the disclosures in paragraph 120(r).

AG113. To satisfy the requirements of a regulator, it may be necessary for the acquirer to present or disclose information in addition to that required by this Standard.

AG114–AG115 [Not used]

BC1. This Basis for Conclusions summarises the New Zealand Accounting Standards Board’s (NZASB’s) considerations in developing PBE IPSAS 40 PBE Combinations. PBE IPSAS 40 is based on IPSAS 40 Public Sector Combinations which was issued in January 2017. The NZASB issued NZASB ED 2018-4 PBE IPSAS 40 PBE Combinations (NZASB ED 2018-4) for comments in September 2018 and PBE IPSAS 40 was finalised in July 2019.

BC2. The New Zealand Accounting Standards Board (NZASB) has modified IPSAS 40 Public Sector Combinations for application by Tier 1 and Tier 2 public benefit entities (PBEs). Where applicable, disclosure concessions have been identified for Tier 2 entities and the language generalised for use by PBEs. The NZASB considers that the requirements of IPSAS 40 are generally appropriate for application by PBEs except for the matters discussed below.

BC3. In developing the Standard the NZASB considered:

1. The differences between IPSAS 40 and IFRS 3 Business Combinations in respect of accounting for acquisitions – why the IPSASB had diverged from IFRS 3 and whether those divergences would cause any problems for New Zealand PBEs;

2. The distinction between amalgamations and acquisitions – whether this distinction is clear enough and whether the proposed approach to classification would lead to sensible answers in New Zealand; and

3. Whether there were any requirements which might be open to interpretation or could be clarified.

BC4. As a result of considering these matters the NZASB modified a number of the requirements in IPSAS 40. The significant changes to the requirements of IPSAS 40 are discussed in this Basis for Conclusions. The types of changes made by the NZASB included:

1. Changes to the requirements in IPSAS 40;

2. Clarifications to the guidance in IPSAS 40;

3. Not-for-profit (NFP) enhancements to ensure that the Standard is appropriate for application by NFP PBEs as well as public sector PBEs; and

4. Changes to ensure coherence within the suite of PBE Standards by acknowledging the existence of certain PBE Standards (for example, PBE IFRS 5 Non-current Assets Held for Sale and Discontinued Operations) for which there is no corresponding IPSAS.

BC5. The NZASB reflected on the types of PBE combinations that it has observed in New Zealand and the role of consideration in those combinations. The NZASB noted that the absence of consideration is a common feature of PBE combinations, and was of the view that the absence of consideration, in itself, does not provide evidence that the combination is an amalgamation. The NZASB was concerned that application of the guidance in IPSAS 40 about consideration, without any changes, could lead to some PBE combinations, particularly some involving NFP entities, being inappropriately classified as amalgamations. For example, the NZASB considered that a transaction involving a donated operation could be an acquisition. This led the NZASB to modify the sections of IPSAS 40 dealing with consideration and the classification of combinations.

BC6. Paragraph 12 of IPSAS 40 sets out indictors supporting the classification of a combination as an amalgamation. Paragraph 12 of IPSAS 40 read as follows:

BC7. The NZASB combined the indicators in paragraphs 12(a) and 12(b) and removed the indicator in paragraph 12(c). The NZASB combined paragraphs 12(a) and 12(b) because of its view that, on its own, the indicator in paragraph 12(a) is not a helpful indicator of an amalgamation. The NZASB was of the view that, when classifying combinations, it is necessary to consider the reasons why no consideration has been paid to compensate those with an entitlement to the net assets of a transferred operation.

BC8. Consistent with its view that the absence of consideration does not in itself provide evidence that a PBE combination is an amalgamation, and the broader view of equity interests and owners by PBEs in New Zealand, the NZASB removed paragraph 12(c). In the New Zealand public sector and NFP sector the concept of equity interests is not limited to equity participants with an equity instrument, and the use of the term owners is not limited to owners with a quantifiable ownership interest.

BC9. The changes to the indicators in paragraph 12 led to a number of other changes throughout the Standard including:

1. The reordering of the guidance in paragraphs AG27–AG30;

2. The replacement of the examples in paragraph AG30;

3. The removal of paragraph AG31 which contained guidance on paragraph 12(c);

4. The removal of the reference to the indicator in paragraph 12(c) in the illustrative examples (scenario 2 variation, scenario 3 and scenario 14);

5. The updating of the analysis in the illustrative examples; and

6. The reclassification of scenario 6 in the illustrative examples from an amalgamation to an acquisition.

BC10. The NZASB modified the definitions of equity interests and owners in IPSAS 40 to broadly align the definitions with those used in PBE IFRS 3 Business Combinations. The NZASB was of the view that these definitions should be broad enough to capture the different types of PBEs and different types of residual interests in PBEs in New Zealand.

BC11. As a result of changing these definitions the NZASB also replaced the phrase “quantifiable ownership interests” with “equity interests” where appropriate.

BC12. The NZASB considered that the meaning of the term “new entity” in IPSAS 40 is unclear because IPSAS 40 uses the same term to refer to both new legal entities and new economic entities (paragraphs AG17 and AG22 of IPSAS 40 as shown below).

BC13. IPSAS 40 also uses the term “new entity” inconsistently. For example, paragraphs AG1 (as shown below) and AG22 take the view that an amalgamation creates a new entity but there are different presentation requirements for amalgamations in IPSAS 40 depending upon whether the amalgamation results in a new entity or a continuing entity (see paragraphs 50 and 51 of IPSAS 40 as shown below).

 BC14. These inconsistencies and lack of clarity caused the NZASB to review the use of the term “new entity” and “continuing entity”. Providing clarity is important because it affects presentation, disclosure and how to apply the modified pooling of interests method. The NZASB thought the best way to clarify these terms was to specify when an amalgamation gives rise to a new reporting entity or a continuing reporting entity.

BC15. When considering how best to provide that clarity, the NZASB noted that IPSAS 40 contains requirements for two types of amalgamations, which could be used to differentiate between a new reporting entity and a continuing reporting entity. These two types of amalgamations are as follows.

1. Amalgamations in which no party to an amalgamation gains control of one or more operations as a result of an amalgamation (see paragraph 7 of the Standard).

2. Amalgamations in which one party to the combination gains control of one or more operations but the entity determines that the combination has the substance of an amalgamation rather than an acquisition (see paragraphs 8 to 14 of the Standard).

BC16. The NZASB added guidance in paragraph 18 of the Standard to specify that in the first type of amalgamation, the resulting entity is a new reporting entity, and in the second type of amalgamation, the resulting entity is a continuing reporting entity.

BC17. The NZASB decided not to base the requirements in the Standard on whether or not an entity is a new legal entity, because any new entities established as part of a PBE combination would not necessarily be separate legal entities.

BC18. The clarification of these terms led to a number of other changes throughout the Standard including:

1. Clarifying that the resulting entity is a new reporting entity in paragraph 50;

2. Clarifying that the resulting entity is a continuing reporting entity in paragraph 51;

3. The removal of paragraphs AG1 and AG22; and

4. Replacing the diagram in paragraph IG2.

BC19. The NZASB noted that the Standard might be applied to PBE combinations (in which the resulting entity could be either a continuing reporting entity or new reporting entity) where the combining operations have reported in accordance with different suites of standards. The NZASB thought that it was important for the Standard to be clear about was is required if (i) one of the combining entities had previously recognised assets and liabilities that did not meet the recognition and measurement requirements in PBE Standards; and/or (ii) one of the combining entities had failed to recognise assets and liabilities that should be recognised in accordance with PBE Standards. The NZASB also thought that the Standard needed to be clear about the circumstances in which the resulting entity would be expected to go through a first-time adoption process.

BC20. The NZASB was of the view that IPSAS 40 does not contain sufficient guidance about these issues for New Zealand PBEs. For example, IPSAS 40 does not establish requirements about when the first-time adoption standard would be applied; this has been left to the judgement of the reporting entity. This guidance is particularly important in New Zealand because of our tiered Accounting Standards Framework. The NZASB also considered scenarios where the amalgamation involves combining operations that have been reporting under the Tier 3 or Tier 4 PBE Accounting Requirements. The NZASB therefore added guidance to address these situations (see paragraphs 20.1, AG50.1, AG50.2 of the Standard and paragraphs B6 to B9 of PBE FRS 47 First-time Adoption of PBE Standards).13

BC21. IPSAS 40 does not permit the recognition of previously unrecognised assets/liabilities of the combining operations because the IPSASB considered it would be costly for entities to identify, measure and recognise such assets and liabilities. However, the NZASB has previously established requirements for first-time adoption of PBE Standards and, as a consequence, the prohibition in IPSAS 40 on the recognition of previously unrecognised assets and liabilities would conflict with the requirements in PBE FRS 47. Application of PBE FRS 47 could result in the recognition of assets and liabilities as at the date of amalgamation that were not previously recognised by the first-time adopter. The NZASB therefore proposed to change paragraph 21, omit paragraph 23 and add paragraphs B6 to B9 to PBE FRS 47.

BC22. A respondent to NZASB ED 2018-4 queried the omission of paragraph 23 of IPSAS 40. The NZASB noted that it could have dealt with the interaction between PBE IPSAS 40 and first-time adoption standards in a number of ways but concluded that the simplest approach was to omit paragraph 23. The NZASB noted that PBE Standards determine which assets and liabilities an entity recognises and only in rare circumstances would an entity make recognition decisions based solely on the definitions of assets and liabilities in the Public Benefit Entities’ Conceptual Framework. The NZASB remained of the view that paragraph 23 would be unnecessary and potentially confusing, as it would direct the resulting entity to the Conceptual Framework, rather than the more specific requirements in PBE Standards. The NZASB therefore reconfirmed its original decision to omit paragraph 23 from the Standard.

BC23. IPSAS 40 permits but does not require the resulting entity to present the combining operations’ comparatives in the first set of financial statements following an amalgamation.

BC24. The NZASB is of the view that the continuing reporting entity’s comparatives are useful to readers and that a requirement to present such comparatives would not be onerous because the information would have already been prepared. The NZASB has therefore required that the continuing reporting entity present comparative information (see paragraph 51). The comparative information is not restated for the combining operations. This requirement has been clarified in paragraphs 51 and 52.

BC25. The NZASB considered permitting pro-forma comparative information (as if the two combining operations had been one combined operation in the prior period) to be presented but was concerned that this would imply that the combining operations have always been combined. Because the NZASB wanted to avoid any doubt about when the combination occurred the Standard does not permit a new reporting entity to present comparatives. However, it does permit the combining operations’ prior period information to be provided in the notes (see paragraph 50).

BC26. The NZASB considered what information should be presented in respect of amalgamations that occur part way through a reporting period. Generally, disestablished or newly established public sector entities are required to prepare financial statements following an amalgamation in accordance with legislative requirements (which are intended to ensure that users receive appropriate financial information up to, and following, the amalgamation). Other PBEs such as registered charities are not generally subject to equivalent legislative requirements. To address the potential information gap that could occur, the NZASB clarified that PBEs are required to provide historical information up to the date of the amalgamation (see paragraphs 52, 54(g) and 54(h)).

BC27. IPSAS 40 amended IPSAS 26 Impairment of Cash-Generating Assets to include requirements on impairment testing for goodwill acquired in an acquisition of a non-cash-generating operation. The amendments to IPSAS 26 required that, where goodwill is acquired in an acquisition of a non-cash- generating operation that results in a reduction in the net cash outflows of the acquirer, the acquirer (i.e. the entire reporting entity) is treated as a cash-generating unit for the purposes of impairment testing of goodwill. Paragraphs 90A and 90B of IPSAS 26 read as follows (emphasis added).

BC28. The NZASB was of the view that, although goodwill could arise in an acquisition of a non-cash- generating operation, it is not appropriate to treat the acquirer as the cash-generating unit. This is because of concerns about the practical workability of the requirements for impairment testing the goodwill in accordance with IPSAS 26 when applied to the entire entity. These concerns include challenges with estimating fair value and value in use for the entire entity under IPSAS 26 – neither of these values take into account service potential of assets, which can be significant for PBEs.

BC29. To address these concerns, the NZASB considered that a practical solution would be to require that goodwill arising on the acquisition of a non-cash-generating operation be expensed in surplus or deficit at the acquisition date. The NZASB therefore omitted the IPSASB’s requirements in relation to goodwill arising from a non-cash-generating operation (from paragraphs 90A and 90B of PBE IPSAS 26) and amended paragraphs 86 and AG93 of PBE IPSAS 40 to require the recognition of the resulting loss in surplus or deficit if goodwill arises from the acquisition of a non-cash-generating

operation. These changes led to further changes in paragraph 20A of PBE IPSAS 21 Impairment of Non-Cash-Generating Assets and paragraph 18A of PBE IPSAS 26.

BC30. The NZASB noted that guidance from IFRS 3 (and PBE IFRS 3) on identifying an acquirer in a reverse acquisition was omitted from IPSAS 40 (see paragraphs B14–B18 of PBE IFRS 3). The IPSASB may have omitted this guidance from IPSAS 40 on the grounds that the exchange of equity instruments in the public sector is uncommon and is likely to occur only if there is a corporation involved. The NZASB acknowledged that PBE combinations are unlikely to involve reverse acquisitions and that guidance on identifying the acquirer in this situation is not required. However, the NZASB was of the view that it would be helpful to add guidance on whether one entity (and, if so, which entity) has gained control of another entity. The NZASB therefore added guidance based on PBE IFRS 3 paragraphs B15(c) and (d) and B18 in paragraphs AG14 and AG17.

BC31. More specifically, the NZASB noted that paragraph B18 of IFRS 3 (and PBE IFRS 3) precludes a new entity formed to effect a combination by way of issuing equity interests from being identified as the acquirer. In such cases IFRS 3 requires that one of the combining entities that existed before the combination be identified as the acquirer. The IASB’s rationale for this requirement is explained in the Basis for Conclusions on IFRS 3 (paragraphs BC98 to BC101). The IASB noted that the combination would be accounted for differently if the new entity, rather than one of the combining entities that existed before the combination, were identified as the acquirer. The IASB also noted that the new entity may have no economic substance and the transaction may, in substance, be no different from a transaction in which one of the combining entities directly acquires the other. The IASB considered the relative merits of the information provided to users if the newly formed entity were permitted, or not permitted, to be the acquirer and concluded that users receive more useful information about a combination when that information faithfully represents the transaction it purports to represent.

BC32. The NZASB acknowledged that PBE combinations are unlikely to be effected by a new entity formed to issue equity interests but considered that, where such transactions occur, they should be accounted for consistently with PBE IFRS 3. PBE IPSAS 40 states that, in an acquisition, the acquirer is the party to the combination gains control of one or more operations – as identified when determining the classification of the combination as an amalgamation or an acquisition. The NZASB therefore decided to preclude a new entity issuing equity interests to effect a PBE combination from the assessment of which party to the combination gains control of one or more operations.

BC33. IPSAS 40 requires prospective application. However, when providing guidance for first-time adopters of PBE Standards, the NZASB decided to permit retrospective application for prior amalgamations, consistent with the existing requirements in PBE FRS 47 for prior acquisitions, where retrospective application is permitted. Hence, the NZASB modified the transitional provisions to provide an exception for first-time adopters of PBE Standards — these are entities not previously applying New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).

BC34. The NZASB has therefore:

1. Retained the approach in IPSAS 40 of mandating prospective application, except for first-time adopters of PBE Standards to which PBE FRS 47 applies (see paragraph 134.1 of the Standard);

2. Provided additional requirements in paragraph 134.2 to clarify that, as a consequence of mandating prospective application (except for first-time adopters of PBE Standards to which PBE FRS 47 applies), restatement of combinations that occurred before the effective date of the Standard is prohibited;

3. Provided an exception for first-time adopters of PBE Standards to which PBE FRS 47 applies in paragraph 134.3 and guidance for first-time adopters of PBE Standards in PBE FRS 47;

4. Prohibited retrospective application for first-time adopters of PBE Standards to which PBE FRS 46 First-time Adoption of PBE Standards by Entities Previously Applying NZ IFRS14 applies. This is consistent with the general principle in PBE FRS 46 which restricts an entity changing its accounting policies previously used under NZ IFRS on first-time adoption of PBE Standards (see paragraph 29.1 of PBE FRS 46); and

5. Retained the approach in IPSAS 40 of permitting early application.

BC35. IPSAS 40 does not provide guidance for voluntary combinations not under common control. These combinations are more common in the NFP sector than the public sector. The NZASB thought it would be helpful to add guidance and a related illustrative example for such combinations (see paragraph AG17.1 and scenario 15 in the illustrative examples).

BC36. The NZASB was of the view that New Zealand PBEs required clear guidance on the selection of accounting policies by the resulting entity and the interaction between the Standard and PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors. The NZASB clarified the requirements in IPSAS 40, including making it clear that a continuing reporting entity would retain its prior accounting policies. The NZASB therefore added paragraphs AG54.1 and AG54.2 to provide guidance on the section of accounting policies by a new reporting entity and a continuing reporting entity.

BC37. IPSAS 40 includes requirements on the recognition and measurement of income taxes following acquisitions and amalgamations and how to account for taxes forgiven as a result of a combination. Paragraphs 34, 79, AG58 and AG86 of IPSAS 40 read as follows.

34. The resulting entity shall recognize and measure any remaining taxation items included in or arising from an amalgamation in accordance with the relevant international or national accounting standard dealing with income taxes. The resulting entity shall recognize and measure any remaining revenue from taxation included in or arising from an amalgamation in accordance with IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers).

79. The acquirer shall recognize and measure any remaining taxation items included in or arising from an acquisition in accordance with the relevant international or national accounting standard dealing with income taxes. The acquirer entity shall recognize and measure any remaining revenue from taxation included in or arising from an acquisition in accordance with IPSAS 23.

AG58. Where, as a result of the amalgamation, the resulting entity becomes the tax authority, it shall derecognize any tax receivable relating to the combining operation’s tax due that has been forgiven in accordance with IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers).

AG86. If the acquirer is itself the tax authority, it shall derecognize any tax receivable relating to the acquired operation’s tax due that has been forgiven in accordance with IPSAS 23.

BC38. The NZASB was of the view that some of these requirements were not necessary and could create confusion. The NZASB therefore omitted paragraphs 34 and 79 and the related paragraphs AG58 and AG86.

BC39. In an amalgamation where the combining operations have previously been part of an acquisition, IPSAS 40 requires that the resulting entity use the carrying amounts of the combining operations in the combining operations’ financial statements, rather than the amounts in the highest parent’s consolidated financial statements. The NZASB noted that this requirement would represent a change in practice in New Zealand; previous practice had been to use amounts from the highest parent’s consolidated financial statements, even where the controlling entity or ultimate controlling entity was not one of the combining operations.

BC40. Given that the NZASB’s approach to developing the Standard was to make changes only where needed for consistency, clarity or for New Zealand-specific factors, the NZASB considered that the fact that adoption of IPSAS 40’s requirements would mean a change in practice was not sufficient reason to modify the requirements in IPSAS 40. The NZASB noted that the existing practice in New Zealand was not unique to New Zealand, so it was not a New Zealand-specific factor. However, the NZASB considered that that clarification was needed for situations in which the controlling entity is one of the combining operations. The NZASB modified paragraph AG54 to clarify this last point. The NZASB also added illustrative examples to illustrate the requirements of paragraphs AG53 and AG54 (see paragraphs IE278.1 to IE278.5).

BC41. The modified pooling of interests method of accounting for amalgamations in IPSAS 40 refers to “identifiable” assets. Identifiable is a defined term that is specifically linked to the recognition of intangible assets. Although references to identifiable assets are appropriate under acquisition accounting which requires the separation of identifiable intangible assets, the NZASB did not consider that it was necessary when discussing amalgamations for the following reasons.

1. If the combining operations have previously applied PBE Standards, the previously recognised assets and liabilities are combined.

2. If one or more of the combining operations have not previously applied PBE Standards, then the first-time adoption process under PBE FRS 47 would involve recognising assets and liabilities in accordance with the PBE Standards.

In both of these cases, PBE Standards determine what assets and liabilities should be recognised so there is no need for the resulting entity to consider whether or not particular assets are identifiable.

BC42. The NZASB therefore removed references to identifiable assets; the affected paragraphs were paragraphs 16(c), 21, 26, 28, 30, 41, 42, AG54, IE166, IE173 and IE174.

IG1. The purpose of this Implementation Guidance is to illustrate certain aspects of the requirements of PBE IPSAS 40.

IG2. The diagram below summarises the process established by PBE IPSAS 40 for classifying PBE combinations.

IE1. The following scenarios illustrate the process for classifying PBE combinations. These scenarios portray hypothetical situations. Although some aspects of the scenarios may be present in actual fact patterns, all facts and circumstances of a particular fact pattern would need to be evaluated when applying PBE IPSAS 40.

IE2. Each scenario is illustrated by a diagram. Where a PBE combination involves operations which form part of an economic entity, but not the whole economic entity, the operations that are involved in the combination, and the entity that is formed by the combination, are shaded in the diagram. Where more than one reporting entity is included in an economic entity, the boundary of the economic entity is shown by a dotted line.

IE3. The following diagram illustrates the creation of a new municipality by combining some operations from two existing municipalities.

IE4. In this scenario, the territorial boundaries of two existing municipalities, Municipality A and Municipality B, are redrawn by Parliament through legislation; neither Parliament nor Central Government controls Municipality A or Municipality B. Responsibility for part of each municipality’s former territory is transferred to a new municipality, Municipality C. Operations in respect of the transferred territory are combined to form Municipality C. A PBE combination occurs.

IE5. Municipality A and Municipality B remain otherwise unchanged and retain their governing bodies. A new governing body (unrelated to the governing bodies of Municipality A and Municipality B) is elected for Municipality C to manage the operations that are transferred from the other municipalities.

IE6. The creation of Municipality C is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question to consider is whether one of the parties to the combination has gained control of operations as a result of the combination.

IE7. Municipality C has a newly elected governing body, unrelated to the governing bodies of Municipality A and Municipality B. Neither Municipality A nor Municipality B has power over the Municipality C. Neither do they have exposure, or rights, to variable benefits from any involvement with Municipality C.

IE8. Neither Municipality A nor Municipality B have gained control over Municipality C as a result of the PBE combination. Consequently the combination is classified as an amalgamation.

IE9. The following diagram illustrates the creation of a new municipality by combining all of the operations of two existing municipalities into a new legal entity.

IE10. In this scenario, a PBE combination occurs in which Municipality F is formed to combine the operations (and the related assets, liabilities and components of net assets/equity) of Municipality D and City E. Prior to the combination, Municipality D and City E are not under common control. The combination is imposed by the provincial government (a third party) through legislation. The provincial government has the legal power to direct the two entities to combine, through legislation, even though it does not control them.

IE11. The legislation that creates Municipality F provides for the formation of a new governing body with no links to Municipality D or City E. Municipality D and City E have no role in determining the terms of the combination. After the combination, Municipality D and City E cease to exist.

IE12. The creation of Municipality F is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question to consider is whether one of the parties to the combination has gained control of operations as a result of the combination.

IE13. Municipality F has a newly formed governing body, unrelated to the governing bodies of Municipality D and City E. Neither Municipality D nor City E has power over Municipality F. Neither do they have exposure, or rights, to variable benefits from any involvement with Municipality F.

IE14. Neither Municipality D nor City E have gained control over Municipality F as a result of the PBE combination. Consequently the combination is classified as an amalgamation.

IE15. In scenario 2, the legislation that creates Municipality F provides for the formation of a new governing body with no links to Municipality D or City E. In this variation, the legislation that creates Municipality F provides for the governing body of Municipality D to become the governing body of Municipality F.

IE16. This suggests that as part of the PBE combination that creates Municipality F, Municipality D is gaining control of the operations of City E. However, the assessment as to whether Municipality D is gaining control is based on the substance of the combination, not its legal form. In preparing its first financial statements, Municipality F considers the guidance in paragraphs 7–8 and AG10–AG18 of PBE IPSAS 40.

IE17. In this variation, it is assumed that the legislation that provides for the governing body of Municipality D to become the governing body of Municipality F results in Municipality D gaining:

1. Power over the operations of City E;

2. Exposure, or rights, to variable benefits from its involvement with those operations; and

3. The ability to use its power over those operations to affect the nature or amount of the benefits from its involvement with those operations.

IE18. Municipality F concludes that, as a result of the PBE combination, Municipality D has gained control of City E. Municipality F considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE19. [Not used]

IE20. In considering the indicator relating to consideration, Municipality F notes that the PBE combination does not include the payment of consideration and the reasons for the absence of consideration do not provide evidence of an acquisition. This suggests that the economic substance of the combination is that of an amalgamation.

IE21. In considering the indicators relating to the decision-making process, Municipality F notes that the PBE combination was imposed by the provincial government (a third party) and that Municipality D and City E had no role in determining the terms of the combination. This may suggest that the economic substance of the combination is that of an amalgamation.

IE22. On balance these factors suggest that the PBE combination should be classified as an amalgamation.

IE23. The following diagram illustrates the combining of all of the operations of two existing municipalities into an existing legal entity.

IE24. In this scenario, a PBE combination occurs in which the operations of Municipality G and Municipality H (and their related assets, liabilities and components of net assets/equity) are combined into the legal entity of Municipality G. Prior to the combination, Municipality G and Municipality H are not under common control. The combination is imposed by Central Government (a third party) through legislation. Central Government has the legal power to direct the two entities to combine, through legislation, even though it does not control them.

IE25. The legislation that effects the combination provides for the governing body of Municipality G to continue as the governing body of the combined entity. Municipality G and Municipality H have no role in determining the terms of the combination. After the PBE combination, Municipality H ceases to exist.

IE26. These facts suggest that as part of the PBE combination, Municipality G is gaining control of the operations of Municipality H. However, the assessment as to whether Municipality G is gaining control is based on the substance of the combination, not its legal form. Municipality G considers the guidance in paragraphs 7–8 and AG10–AG18 of PBE IPSAS 40 in determining whether to classify the combination as an amalgamation or an acquisition.

IE27. In this scenario, it is assumed that the legislation that provides for the governing body of Municipality G to continue as the governing body of combined entity results in Municipality G gaining:

1. Power over the operations of Municipality H;

2. Exposure, or rights, to variable benefits from its involvement with those operations; and

3. The ability to use its power over those operations to affect the nature or amount of the benefits from its involvement with those operations.

IE28. Municipality G concludes that, as a result of the PBE combination, it has gained control of Municipality H. Municipality G considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE29. [Not used]

IE30. In considering the indicator relating to consideration, Municipality G notes that the PBE combination does not include the payment of consideration and the reasons for the absence of consideration do not provide evidence of an acquisition. This suggests that the economic substance of the combination is that of an amalgamation.

IE31. In considering the indicators relating to the decision-making process, Municipality G notes that the combination was imposed by Central Government (a third party) and that Municipality G and Municipality H had no role in determining the terms of the combination. This may suggest that the economic substance of the combination is that of an amalgamation.

IE32. On balance these factors suggest that the PBE combination should be classified as an amalgamation.

IE33. In scenario 3, the legislation provides for the governing body of Municipality G to become the governing body of the combined entity. In this variation, the legislation provides for a new governing body to be formed that has no links to Municipality G or Municipality H.

IE34. In determining whether this PBE combination should be classified as an amalgamation or an acquisition, the first question to consider is whether one of the parties to the combination has gained control of operations as a result of the combination.

IE35. Despite its legal form continuing, Municipality G has a newly formed governing body, unrelated to its previous governing body or that of Municipality H. Consequently, the previous Municipality G does not gain power over Municipality H. Neither does it have exposure, or rights, to variable benefits from any involvement with Municipality H.

IE36. Municipality G has not gained control over Municipality H as a result of the PBE combination. Consequently the combination is classified as an amalgamation.

IE37. The following diagram illustrates the reorganisation of Central Government ministries by combining the Trade and Development Ministry and the Industry Ministry into the newly formed Trade and Industry Ministry.

IE38. In this scenario, a PBE combination occurs in which the Trade and Industry Ministry is formed to combine the operations (and the related assets, liabilities and components of net assets/equity) of the Trade and Development Ministry and the Industry Ministry. All the ministries, both prior to and after the combination, are controlled by Central Government. The combination is imposed by Central Government using this control. The Trade and Development Ministry and the Industry Ministry have no role in determining the terms of the combination.

IE39. In effecting the combination, Central Government gives responsibility for the new Trade and Industry Ministry to the Minister of Industry and the governing body of the Industry Ministry. After the combination, the Trade and Development Ministry and the Industry Ministry cease to exist.

IE40. As Central Government controls the same operations both before and after the PBE combination, Central Government does not report a combination in its consolidated financial statements. The combination is reported by the Trade and Industry Ministry.

IE41. The creation of the Trade and Industry Ministry is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question to consider is whether one of the parties to the combination has gained control of operations as a result of the combination.

IE42. Central Government gives responsibility for the new Trade and Industry Ministry to the Minister of Industry and the governing body of the Industry Ministry. This suggests that as part of the PBE combination that creates the new Trade and Industry Ministry, the Industry Ministry is gaining control of the operations of the Trade and Development Ministry. However, the assessment as to whether the Industry Ministry is gaining control is based on the substance of the combination, not its form. In determining whether the combination should be classified as an amalgamation or an acquisition, the Trade and Industry Ministry considers the guidance in paragraphs 7–8 and AG10–AG18 of PBE IPSAS 40.

IE43. In this scenario, it is assumed that the decision of Central Government to give responsibility for the new Trade and Industry Ministry to the Minister of Industry and the governing body of the Industry Ministry results in the Industry Ministry gaining:

1. Power over the operations of the Trade and Development Ministry;

2. Exposure, or rights, to variable benefits from its involvement with those operations; and

3. The ability to use its power over those operations to affect the nature or amount of the benefits from its involvement with those operations.

IE44. The Trade and Industry Ministry concludes that, as a result of the PBE combination, the Industry Ministry has gained control of the Trade and Development Ministry. The Trade and Industry Ministry considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE45. [Not used]

IE46. In considering the indicator relating to consideration, the Trade and Industry Ministry notes that the PBE combination does not include the payment of consideration because the combination took place under common control, and Central Government, the controlling entity, did not specify any consideration in the terms of the combination. Although the absence of consideration (and the reasons for the absence of consideration) may suggest that the economic substance of the combination is that of an amalgamation, this is not of itself conclusive and other factors also need to be taken into account.

IE47. In considering the indicators relating to the decision-making process, the Trade and Industry Ministry notes that the PBE combination takes place under common control. The combination was directed by Central Government and the Trade and Development Ministry and the Industry Ministry had no role in determining the terms of the combination. This provides evidence that the ultimate decision as to whether the combination took place, and the terms of the combination, are determined by the Central Government, the controlling entity. This provides evidence that the economic substance of the combination is that of an amalgamation.

IE48. On balance these factors suggest that the PBE combination should be classified as an amalgamation. In coming to this decision, the fact that the PBE combination takes place under common control is considered to be the most significant factor in determining the economic substance of the combination.

IE49. In scenario 4, Central Government gives responsibility for the new Trade and Industry Ministry to the Minister of Industry and the governing body of the Industry Ministry. In this variation, Central Government appoints a new Minister and governing body.

IE50. The creation of the Trade and Industry Ministry is a PBE combination under common control. In determining whether this should be classified as an amalgamation or an acquisition, the first question to consider is whether one of the parties to the combination has gained control of operations as a result of the combination.

IE51. The Trade and Industry Ministry has a new Minister and a newly formed governing body, unrelated to the governing bodies of the Trade and Development Ministry and the Industry Ministry. Neither the Trade and Development Ministry or the Industry Ministry has gained power over the operations of the other ministry. Neither do they have exposure, or rights, to variable benefits from any involvement with the operations of the other ministry.

IE52. Neither of the Trade and Development Ministry nor the Industry Ministry has gained control over the Trade and Industry Ministry as a result of the PBE combination. Consequently the combination is classified as an amalgamation.

IE53. The following diagram illustrates the transfer of operations between two public sector entities that are under common control.

IE54. In this scenario, a PBE combination occurs in which the Primary School Nutrition operation is transferred from the Provincial Government’s Department of Health to its Department of Education. Both departments are controlled by the Provincial Government prior to and after the combination.

IE55. As the Provincial Government controls the same operations both before and after the PBE combination, the Provincial Government does not report a combination in its consolidated financial statements. The combination is reported by the Department of Education.

IE56. The transfer of the Primary School Nutrition operation is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question the Department of Education considers is whether one of the parties to the combination has gained control of operations as a result of the combination.

IE57. In this scenario, the Department of Education gains:

1. Power over the Primary School Nutrition operation;

2. Exposure, or rights, to variable benefits from its involvement with that operation; and

3. The ability to use its power over that operation to affect the nature or amount of the benefits from its involvement with that operation.

IE58. The Department of Education concludes that, as a result of the PBE combination, it has gained control of the Primary School Nutrition operation. The Department of Education considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE59. [Not used]

IE60. In considering the indicator relating to consideration, the Department of Education notes that the PBE combination does not include the payment of consideration because the combination took place under common control, and the Provincial Government, the controlling entity, did not specify any consideration in the terms of the combination. Although the absence of consideration (and the reasons for the absence of consideration) may suggest that the economic substance of the combination is that of an amalgamation, this is not of itself conclusive and other factors also need to be taken into account.

IE61. In considering the indicators relating to the decision-making process, the Department of Education notes that the PBE combination takes place under common control. The combination was directed by the Provincial Government. This provides evidence that the ultimate decision as to whether the combination took place, and the terms of the combination, are determined by the Provincial Government, the controlling entity. This provides evidence that the economic substance of the combination is that of an amalgamation.

IE62. On balance these factors suggest that the PBE combination should be classified as an amalgamation. In coming to this decision, the fact that the PBE combination takes place under common control is considered to be the most significant factor in determining the economic substance of the combination.

IE63. The following diagram illustrates the combination of a public sector entity with a not-for-profit organisation providing similar services.

IE64. In this scenario, a PBE combination occurs in which Not-for-Profit Organisation I, a charity which provides paramedic services, voluntarily agrees to combine with the Department of Health in order to improve the delivery of services to the public. The operations of Not-for-Profit Organisation I are integrated with similar operations provided by the Department of Health. Prior to the combination, the Department of Health has provided funding for Not-for-Profit Organisation I. The Department of Health meets the cost of transferring the title to the assets and liabilities of Not-for-Profit Organisation I incurred by the trustees of the charity.

IE65. The combination of the Department of Health and Not-for-Profit Organisation I is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question the Department of Health considers is whether it has gained control of operations as a result of the combination.

IE66. In this scenario, the Department of Health gains:

1. Power over Not-for-Profit Organisation I and its operations;

2. Exposure, or rights, to variable benefits from its involvement with those operations; and

3. The ability to use its power over those operations to affect the nature or amount of the benefits from its involvement with those operations.

IE67. The Department of Health concludes that, as a result of the PBE combination, it has gained control of Not-for-Profit Organisation I. The Department of Health considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE68. [Not used]

IE69. In considering the indicator relating to consideration, the Department of Health notes that the PBE combination does not include the payment of consideration that is intended to compensate Not-for- Profit Organisation I for giving up its entitlement to its net assets. Although the Department of Health makes a payment to Not-for-Profit Organisation I, the payment is to compensate Not-for-Profit Organisation I for costs incurred in effecting the combination. Not-for-Profit Organisation I has voluntarily given up the rights to its net assets and donated them to the Department of Health because the Department of Health will provide an improved delivery of services to the public. This suggests that the economic substance of the combination is that of an acquisition.

IE70. In considering the indicators relating to the decision-making process, the Department of Health notes that the PBE combination was a voluntary combination. Consequently, these indicators do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE71. On balance these factors suggest that the PBE combination should be classified as an acquisition.

IE72. The following diagram illustrates the transfer of an operation between levels of government.

IE73. In this scenario, Central Government adopts a policy of devolving responsibility for some social services to the Provincial Government. Consequently, it proposes transferring Operation J, which provides residential care services, from Central Government’s Department of Social Services to the Provincial Government’s Department of Social Services. The Provincial Government supports the policy and agrees to accept Operation J. Operation J has net assets of CU1,000.¹⁵ There is no transfer of consideration by the Provincial Government to the Central Government. However, the transfer agreement imposes an obligation on the Provincial Government to continue to provide the residential care services for a minimum of 10 years. Operation J does not recover all its costs from charges; the Provincial Government therefore assumes the responsibility for providing resources to meet the shortfall. Following the transfer, the Provincial Government operates Operation J as a stand-alone entity (i.e., there is a controlling entity/controlled entity relationship between the Provincial Government and Operation J), although it plans to integrate the operation with its other operations at a later date, which would remove the controlling entity/controlled entity relationship.

IE74. The transfer of Operation J is a PBE combination that will need to be reported in both the Provincial Government’s financial statements and those of the Provincial Government’s Department of Social Services. As the analysis required will be the same for both entities, this example uses the term Provincial Government to refer to both entities.

IE75. In determining whether this should be classified as an amalgamation or an acquisition, the first question the Provincial Government considers is whether it has gained control of operations as a result of the combination.

IE76. In this scenario, the Provincial Government gains:

1. Power over Operation J;

2. Exposure, or rights, to variable benefits from its involvement with Operation J; and

3. The ability to use its power over Operation J to affect the nature or amount of the benefits from its involvement with the operation.

IE77. The Provincial Government concludes that, as a result of the PBE combination, it has gained control of Operation J. The Provincial Government considers the guidance in paragraphs 9–14 and AG19– AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE78. In considering the economic substance of the PBE combination, the Provincial Government notes that the combination results in a controlling entity/controlled entity relationship between the Provincial Government and Operation J. This is inconsistent with the economic substance of an amalgamation.

IE79. In considering the indicator relating to consideration, the Provincial Government notes that the PBE combination does not include the payment of consideration that is intended to compensate Central Government for giving up its entitlement to the net assets of an operation. However, the transfer agreement requires the Provincial Government to continue to provide the services. As Operation J does not recover all its costs from charges, the Provincial Government will need to provide the necessary resources to cover the shortfall. The Provincial Government considers that the cost of providing services for the agreed 10 year period is likely to be approximately equal to the value of the net assets received. It therefore considers that a market participant would estimate the fair value of Operation J (with the obligation to provide services for 10 years) to be zero. Although no consideration is transferred, this reflects the fair value of the combination. The Provincial Government concludes that, in this case the absence of consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE80. In considering the indicators relating to the decision-making process, the Provincial Government notes that the PBE combination is a voluntary combination. Consequently, these indicators do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE81. Taking these factors together, the Provincial Government concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE82. In scenario 7, the Provincial Government considers that a market participant would estimate the fair value of Operation J (with the obligation to provide services for 10 years) to be zero. This is the reason that no consideration is paid. In this variation, Operation J is assumed to cover its costs from charges. Consequently, a market participant would estimate the fair value of Operation J (with the obligation to provide services for 10 years) to be greater than zero.

IE83. In these circumstances, the fact that the combination does not include the payment of consideration that is intended to compensate Central Government for giving up its entitlement to the net assets of an operation may provide evidence that the economic substance of the combination is that of an amalgamation. However, the reasons for the absence of consideration need to be considered. There is nothing specific in the fact pattern about the reasons for the absence of consideration to support the classification as an amalgamation or an acquisition.

IE84. In determining the classification of the PBE combination, the Provincial Government considers which factor or factors are the most significant. The Provincial Government considers the fact that it has gained control of Operation J and the fact that the combination does not involve the integration of its operations and those of Operation J to be the most significant factors in determining the economic substance of the combination. This suggests that the combination should be classified as an acquisition. The indicators relating to the decision-making process also support the classification as an acquisition. The Provincial Government therefore classifies the combination as an acquisition.

IE85. The following diagram illustrates the transfer of a commercial entity between levels of government.

IE86. In this scenario, the Federal Government agrees to transfer Commercial Entity L to Provincial Government K. Provincial Government K pays consideration to the Federal Government in respect of the transfer. Following the combination, Provincial Government K operates Commercial Entity L as an arms-length, stand-alone entity.

IE87. The transfer of Commercial Entity L is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question Provincial Government K considers is whether it has gained control of operations as a result of the combination.

IE88. In this scenario, Provincial Government K gains:

1. Power over Commercial Entity L and its operations;

2. Exposure, or rights, to variable benefits from its involvement with those operations; and

3. The ability to use its power over those operations to affect the nature or amount of the benefits from its involvement with those operations.

IE89. Provincial Government K concludes that, as a result of the PBE combination, it has gained control of Commercial Entity L. Provincial Government K considers the guidance in paragraphs 9–14 and AG19– AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE90. In considering the economic substance of the PBE combination, Provincial Government K notes that the combination results in a controlling entity/controlled entity relationship between the Provincial Government and Commercial Entity L. This is inconsistent with the economic substance of an amalgamation. Provincial Government K also notes that the combination has commercial substance, which is suggestive of an acquisition.

IE91. In considering the indicator relating to consideration, Provincial Government K notes that the PBE combination includes the payment of consideration that is intended to compensate the seller for giving up its entitlement to the net assets of an operation. Provincial Government K concludes that the indicator relating to consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE92. In considering the indicators relating to the decision-making process, Provincial Government K notes that the PBE combination is a voluntary combination. Consequently, these indicators do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE93. Taking these factors together, Provincial Government K concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE94. The following diagram illustrates the purchase of a private sector operation by a public sector entity.

IE95. In this scenario, Central Government purchases Operation N from Company M. Central Government pays the market value of Operation N, and Company M acts voluntarily. Following the purchase, Operation N is managed as an arms-length, stand-alone entity.

IE96. The purchase of Operation N is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question Central Government considers is whether it has gained control of operations as a result of the combination.

IE97. In this scenario, Central Government gains:

1. Power over Operation N;

2. Exposure, or rights, to variable benefits from its involvement with Operation N; and

3. The ability to use its power over Operation N to affect the nature or amount of the benefits from its involvement with that operation.

IE98. Central Government concludes that, as a result of the PBE combination, it has gained control of Operation N. Central Government considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE99. In considering the economic substance of the PBE combination, Central Government notes that the combination results in a controlling entity/controlled entity relationship between Central Government and Operation N. This is inconsistent with the economic substance of an amalgamation. Central Government also notes that the combination has commercial substance, which is suggestive of an acquisition.

IE100. In considering the indicator relating to consideration, Central Government notes that the PBE combination includes the payment of consideration that is intended to compensate the seller for giving up its entitlement to the net assets of an operation. Central Government concludes that the indicator relating to consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE101. In considering the indicators relating to the decision-making process, Central Government notes that the PBE combination is a voluntary combination. Consequently, these indicators do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE102. Taking these factors together, Central Government concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE103. In scenario 9, Company M enters into the transaction voluntarily. In this variation, Central Government nationalises Operation N through a compulsory purchase. The purchase is still effected at the market value of Operation N.

IE104. The change from a voluntary transaction to a compulsory purchase does not affect the assessments of control or the indicator related to consideration.

IE105. In considering the indicators relating to the decision-making process, Central Government notes that Company M does not act voluntarily. The fact that Central Government (a party to the combination) is able to impose the PBE combination on Company M provides evidence that the economic substance of the combination is that of an acquisition.

IE106. Consequently, Central Government classifies the PBE combination as an acquisition.

IE107. The following diagram illustrates a bargain purchase by a public sector entity.

IE108. In this scenario, Municipality O purchases Operation Q from Company P in a bargain purchase. Company P is seeking to sell Operation Q quickly to release cash for its other operations, and is willing to accept a price below the market value of Operation Q for an early sale. In entering into the bargain purchase, Company P acts voluntarily. Following the purchase, Operation Q is managed as an arms- length, stand-alone entity by Municipality O.

IE109. The bargain purchase of Operation Q is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question Municipality O considers is whether it has gained control of operations as a result of the combination.

IE110. In this scenario, Municipality O gains:

1. Power over Operation Q;

2. Exposure, or rights, to variable benefits from its involvement with Operation Q; and

3. The ability to use its power over Operation Q to affect the nature or amount of the benefits from its involvement with that operation.

IE111. Municipality O concludes that, as a result of the PBE combination, it has gained control of Operation Q. Municipality O considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE112. In considering the economic substance of the PBE combination, Municipality O notes that the combination results in a controlling entity/controlled entity relationship between Municipality O and Operation Q. This is inconsistent with the economic substance of an amalgamation. Municipality O also notes that the combination has commercial substance (even though the price paid was below the market price of Operation Q), which is suggestive of an acquisition.

IE113. In considering the indicator relating to consideration, Municipality O notes that the PBE combination includes the payment of consideration that is intended to compensate the seller for giving up its entitlement to the net assets of an operation, even though that price was below market value. Company P voluntarily accepted a lower price for a quick sale, and the purpose of the consideration paid was to provide Company P with the level of compensation for giving up its entitlement to the net assets of Operation Q that it was willing to accept. Municipality O concludes that the indicator relating to consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE114. In considering the indicators relating to the decision-making process, Municipality O notes that the PBE combination is a voluntary combination. Consequently, these indicators do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE115. Taking these factors together, Municipality O concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE116. In scenario 10, Company P enters into the transaction voluntarily. In this variation, Municipality O seizes Operation Q through a compulsory purchase. The purchase is still effected at a price below the market value of Operation Q. Company P would not have sold Operation Q for a price below market value voluntarily.

IE117. The change from a voluntary transaction to a compulsory purchase does not affect the assessment of control.

IE118. In considering the indicator relating to consideration, Municipality O notes that the PBE combination includes consideration that is intended to compensate the seller for giving up its entitlement to the net assets of an operation. However, the level of compensation is less than Company P would have accepted voluntarily. Consequently, this indicator provides only weak evidence that the economic substance of the combination is that of an acquisition, and greater reliance is placed on other factors.

IE119. In considering the indicators relating to the decision-making process, Municipality O notes that Company P does not act voluntarily. The fact that Municipality O (a party to the combination) is able to impose the PBE combination on Company P provides evidence that the economic substance of the combination is that of an acquisition.

IE120. Taking all the factors into account, Municipality O classifies the PBE combination as an acquisition.

IE121. The following diagram illustrates the receipt of a donated operation by a public sector entity.

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IE122. In this scenario, Not-for-Profit Organisation R, a charity providing education services, voluntarily transfers Operation S, a school, to the Ministry of Education at no cost. Not-for-Profit Organisation R

does this because it considers that this will result in improved services to the public, and enable it to meet its objectives.

IE123. The donation of Operation S is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question the Ministry of Education considers is whether it has gained control of operations as a result of the combination.

IE124. In this scenario, the Ministry of Education gains:

1. Power over Operation S;

2. Exposure, or rights, to variable benefits from its involvement with Operation S; and

3. The ability to use its power over Operation S to affect the nature or amount of the benefits from its involvement with that operation.

IE125. The Ministry of Education concludes that, as a result of the PBE combination, it has gained control of Operation S. The Ministry of Education considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE126. In considering the economic substance of the PBE combination, the Ministry of Education notes that the combination has commercial substance (even though no price was paid for Operation S), which is suggestive of an acquisition.

IE127. In considering the indicator relating to consideration, the Ministry of Education notes that the PBE combination does not include the payment of consideration that is intended to compensate Not-for- Profit Organisation R for giving up its entitlement to its net assets. However, the reason for this is that Not-for-Profit Organisation R voluntarily surrendered those rights. The situation is similar to that of a bargain purchase. In a bargain purchase, a seller may be willing to accept a price below market value where this meets its needs, for example in enabling a quick sale. With a donated operation, the former owner is willing to transfer the operation for no consideration to its preferred counterparty. In this scenario, Not-for-Profit Organisation R is willing to transfer Operation S to the Ministry of Education because this will provide improved services to the public. Consequently, the Ministry of Education concludes that the indicator of consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE128. In considering the indicators relating to the decision-making process, the Ministry of Education notes that the PBE combination is a voluntary combination. Consequently, these indicators do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE129. Taking these factors together, the Ministry of Education concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE130. The following diagram illustrates the nationalisation of a private sector entity by a public sector entity by means of a forced seizure.

IE131. In this scenario, Central Government nationalises Company T through legislation. Central Government does not pay any consideration to the shareholders of Company T. Following the purchase, Company T is managed as an arms-length, stand-alone entity.

IE132. The nationalisation of Company T is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question Central Government considers is whether it has gained control of operations as a result of the combination.

IE133. In this scenario, Central Government gains:

1. Power over Company T;

2. Exposure, or rights, to variable benefits from its involvement with Company T; and

3. The ability to use its power over Company T to affect the nature or amount of the benefits from its involvement with Company T.

IE134. Central Government concludes that, as a result of the PBE combination, it has gained control of Company T. Central Government considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE135. In considering the economic substance of the PBE combination, Central Government notes that the combination results in a controlling entity/controlled entity relationship between Central Government and Company T. This is inconsistent with the economic substance of an amalgamation. Central Government also notes that, by depriving the former shareholders of their rights to Company T, the combination has commercial substance, which is suggestive of an acquisition.

IE136. In considering the indicator relating to consideration, Central Government notes that the PBE combination does not include the payment of consideration that is intended to compensate the former shareholders of Company T for giving up their entitlements to the net assets of an operation. However, the former shareholders of Company T have had their entitlements extinguished through compulsion, which provides evidence that the economic substance of the combination is that of an acquisition. Central Government concludes that the indicator relating to consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE137. In considering the indicators relating to the decision-making process, Central Government notes that Company T does not act voluntarily. The fact that Central Government (a party to the combination) is able to impose the combination on Company T provides evidence that the economic substance of the combination is that of an acquisition.

IE138. Taking these factors together, Central Government concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE139. The following diagram illustrates the nationalisation of a private sector entity by a public sector entity by means of a bailout.

IE140. In this scenario, Provincial Government U nationalises Company V through legislation as a result of a bailout. Prior to the nationalisation, Company V was in financial distress. Provincial Government U does not pay any consideration to the shareholders of Company V but does assume Company V’s net liabilities. Following the purchase, Company V is managed as an arms-length, stand-alone entity.

IE141. The nationalisation of Company V is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question Provincial Government U considers is whether it has gained control of operations as a result of the combination.

IE142. In this scenario, Provincial Government U gains:

1. Power over Company V;

2. Exposure, or rights, to variable benefits from its involvement with Company V; and

3. The ability to use its power over Company V to affect the nature or amount of the benefits from its involvement with Company V.

IE143. Provincial Government U concludes that, as a result of the PBE combination, it has gained control of Company V. Provincial Government U considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE144. In considering the economic substance of the PBE combination, Provincial Government U notes that the combination results in a controlling entity/controlled entity relationship between Provincial Government U and Company V. This is inconsistent with the economic substance of an amalgamation. Provincial Government U also notes that, by assuming the net liabilities of Company V, the combination has commercial substance, which is suggestive of an acquisition.

IE145. In considering the indicator relating to consideration, Provincial Government U notes that the PBE combination does not include the payment of consideration. However, Company V has net liabilities that are assumed by Provincial Government U as part of the combination. The lack of consideration reflects the fair value of Company V rather than suggesting that the economic substance of the combination is that of an amalgamation. Provincial Government U concludes that the indicator relating to consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE146. In considering the indicators relating to the decision-making process, Provincial Government U notes that Company V does not act voluntarily. The fact that Provincial Government U (a party to the combination) is able to impose the PBE combination on Company V provides evidence that the economic substance of the combination is that of an acquisition.

IE147. Taking these factors together, Provincial Government U concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE148. The following diagram illustrates the nationalisation of a not-for-profit organisation by a public sector entity by means of a bailout.

IE149. In this scenario, City W nationalises Not-for-Profit Organisation X (a charity) as a result of a voluntary bailout. Prior to the nationalisation, Not-for-Profit Organisation X was in financial distress and approached City W for support. City W assumes Not-for-Profit Organisation X’s net liabilities. Following the purchase, Not-for-Profit Organisation X is managed as an arms-length, stand-alone entity.

IE150. The nationalisation of Not-for-Profit Organisation X is a PBE combination. In determining whether this should be classified as an amalgamation or an acquisition, the first question City W considers is whether it has gained control of operations as a result of the combination.

IE151. In this scenario, City W gains:

1. Power over Not-for-Profit Organisation X;

2. Exposure, or rights, to variable benefits from its involvement with Not-for-Profit Organisation X; and

3. The ability to use its power over Not-for-Profit Organisation X to affect the nature or amount of the benefits from its involvement with Not-for-Profit Organisation X.

IE152. City W concludes that, as a result of the PBE combination, it has gained control of Not-for-Profit Organisation X. City W considers the guidance in paragraphs 9–14 and AG19–AG50 of PBE IPSAS 40 in determining whether the economic substance of the combination is that of an amalgamation.

IE153. In considering the economic substance of the PBE combination, City W notes that the combination results in a controlling entity/controlled entity relationship between City W and Not-for-Profit Organisation X. This is inconsistent with the economic substance of an amalgamation. City W also notes that, by assuming the net liabilities of Not-for-Profit Organisation X, the combination has commercial substance, which is suggestive of an acquisition.

IE154. In considering the indicator relating to consideration, City W notes that the PBE combination does not include the payment of consideration. This would usually provide evidence that the economic substance of the combination is that of an amalgamation. However, in this scenario Not-for-Profit Organisation X has net liabilities that are assumed by City W as part of the combination. By assuming the net liabilities, City W relieves the trustees of Not-for-Profit Organisation X of the responsibility for settling the liabilities, therefore no payment of consideration by City W is necessary. City W concludes, therefore, that the indicator relating to consideration does not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE155. In considering the indicators relating to the decision-making process, City W notes that Not-for-Profit Organisation X voluntarily initiated the combination. City W concludes that the indicators relating to decision-making do not provide any evidence to suggest that the economic substance of the combination is that of an amalgamation.

IE156. Taking these factors together, City W concludes that there is no evidence that the economic substance of the combination is that of an amalgamation, and that the PBE combination should, therefore, be classified as an acquisition.

IE156.1 The following diagram illustrates the combination of three charities providing similar services in different parts of the country.

IE156.2 Charity A covers the South Island, Charity B covers the lower North Island and Charity C covers the upper North Island. To gain operational efficiencies and make it easier to obtain grants, donations and other funding, the three charities decide to unite their resources and activities by forming a new national registered charity, National Charity. They establish National Charity at the time of the combination.

IE156.3 The governing body of National Charity is formed through the appointment of trustees from the governing bodies of charities A, B and C. The former trustees of any one of the three charities do not constitute a majority of the governing body of the National Charity.

IE156.4 All of the resources and activities of charities A, B and C are transferred to National Charity for nil consideration, whereupon charities A, B and C are wound up.

IE156.5 In determining whether the combination of charities A, B and C should be classified as an amalgamation or an acquisition, the first question to consider is whether one of the parties has gained control of operations as a result of the combination. National Charity is a newly formed entity that did not exist prior to the combination taking place. None of the existing charities (A, B and C) gained control of the other charities, nor do they have exposure, or rights, to variable benefits from their involvement with National Charity.

IE156.6 Taking these factors together, National Charity concludes that the PBE combination should be classified as an amalgamation because no party to the combination has gained control of the other parties.

IE157. The following example illustrates the process for eliminating a loan between two combining operations not under common control.

IE158. On 30 June 20X5 Resulting Entity (RE) is formed by an amalgamation of two municipalities, Combining Operation A (COA) and Combining Operation B (COB). Four years previously, COA had provided COB with a ten year, fixed interest rate loan of CU250. Interest on the loan is payable annually, with the principal repayable on maturity.

IE159. COB has recently experienced financial difficulties, and at the amalgamation date was in arrears on making the interest payments. The carrying amount of the financial liability (the amortised cost of the loan) in its financial statements at the amalgamation date is CU260.

IE160. Because of the arrears and the fact that COB was experiencing financial difficulties, COA had impaired the loan. The carrying amount of the financial asset (the loan) in its financial statements at the amalgamation date is CU200.

IE161. At the amalgamation date, RE eliminates the financial asset received from COA and the financial liability assumed from COB and credits components of net assets/equity with CU60, the difference between the carrying amounts of the financial asset and the financial liability associated with the loan.

IE162. The following example illustrates the process for eliminating a transfer between two combining operations not under common control.

IE163. On 30 June 20X9, RE is formed by an amalgamation of two government agencies, COA and COB. On 1 January 20X9, COA had provided COB with a grant of CU700 to be used in the provision of an agreed number of training courses.

IE164. The grant was subject to a condition that the grant would be returned proportionately to the number of training courses not delivered. At the amalgamation date, COB had delivered half of the agreed number of courses, and recognised a liability of CU350 in respect of its performance obligation, in accordance with PBE IPSAS 23 Revenue from Non-Exchange Transactions. Based on past experience, COA considered that COB was more likely than not to deliver the training courses. It was therefore not probable that there would be a flow of resources to COA, and COA did not recognise an asset in respect of the grant, but accounted for the full CU700 as an expense.

IE165. At the amalgamation date, the transaction is eliminated. There is no longer an obligation to an external party. The resulting entity does not recognise a liability for the CU350, but instead recognises this amount in net assets/equity.

Adjusting the Carrying Amounts of the Assets and Liabilities of the Combining Operations to Conform to the Resulting Entity's Accounting Policies in an Amalgamation

IE166. The following example illustrates the process for adjusting the carrying amounts of the assets and liabilities of the combining operations to conform to the resulting entity's accounting policies in an amalgamation under common control.

IE167. On 1 October 20X5 RE is formed by an amalgamation of two government departments, COA and COB. COA has previously adopted an accounting policy of measuring property, plant and equipment using the cost model in PBE IPSAS 17 Property, Plant and Equipment. COB has previously adopted an accounting policy of measuring property, plant and equipment using the revaluation model in PBE IPSAS 17.

IE168. RE adopts an accounting policy of measuring property, plant and equipment using the revaluation model. RE seeks an independent valuation for the items of property, plant and equipment previously controlled by COA.

IE169. On receiving the independent valuation for the items of property, plant and equipment previously controlled by COA, RE adjusts the carrying amounts of the items of property, plant and equipment as follows, with the corresponding entry being made to components of net assets/equity:

IE170. RE also reviews the carrying amounts of the items of property, plant and equipment previously controlled by COB to ensure the amounts are up to date as at 1 October 20X5. The review confirms the carrying amounts of the items of property, plant and equipment previously controlled by COB are up to date and that no adjustment is required.

IE171. RE recognises the items of property, plant and equipment previously controlled by COB at their carrying amounts. In accordance with paragraph 67 of PBE IPSAS 17, RE will review the residual values and useful lives of the plant and equipment previously controlled by both COA and COB at least at each annual reporting date. If expectations differ from previous estimates, RE will account for these changes as changes in accounting estimates, in accordance with PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors.

IE172. The following example illustrates the accounting for an amalgamation not under common control in which the resulting entity’s tax liability is forgiven as part of the terms of the amalgamation.

IE173. On 1 January 20X6 RE is formed by an amalgamation of two public sector entities, COA and COB. The amalgamation is directed by the national government. RE, COA and COB have the same accounting policies; no adjustment to the carrying amounts of the assets and liabilities of COA and COB to conform to the resulting entity's accounting policies is required. At the date of the amalgamation, there are no amounts outstanding between COA and COB.

IE174. In its statement of financial position as at 1 January 20X6, RE recognises and measures the assets and liabilities of COA and COB at their carrying amounts in their respective financial statements as of the amalgamation date:

IE175. Suppose that the terms of the amalgamation include the Ministry of Finance (MF) (the tax authority) forgiving RE’s tax liability. RE would derecognise the tax liability and make the adjustment to net assets/equity. The statement of financial position as at 1 January 20X6 for RE would be as follows:

IE176. MF would recognise an adjustment for the tax forgiven, and account for the remaining tax receivable in accordance with PBE IPSAS 23.

IE177. The following example illustrates the accounting for recognising and measuring components of net assets/equity in an amalgamation.

IE178. On 1 June 20X4, a new municipality RE is formed by the amalgamation of operations COA and COB relating to two geographical areas of other municipalities, not previously under common control.

IE179. COB has previously performed services for COA for which it was to be paid CU750. Payment was outstanding at the amalgamation date. This transaction formed part of the carrying amount of financial liabilities for COA and part of the carrying amount of financial assets for COB.

IE180. COA has previously adopted an accounting policy of measuring property, plant and equipment using the cost model. COB has previously adopted an accounting policy of measuring property, plant and equipment using the revaluation model. RE has adopted an accounting policy of measuring property, plant and equipment using the revaluation model. RE obtains an independent valuation for the items of property, plant and equipment previously controlled by COA. As a result, it increases its carrying

amount for those items of the property, plant and equipment by CU5,750 and makes the corresponding adjustment to components of net assets/equity.

IE181. The carrying amounts of the assets, liabilities and components of net assets/equity transferred are summarised below. Adjustments to eliminate transactions between COA and COB (see paragraph 22), and to conform the carrying amounts to the resulting entity's accounting policies are also shown.

IE182. In accordance with paragraphs 37–39 of PBE IPSAS 40, RE may present net assets/equity as either a single opening balance of CU14,533 or as the separate components shown above.

IE183. The other municipalities that, prior to the amalgamation, controlled COA and COB would derecognise the assets, liabilities and components of net assets/equity transferred to RE in accordance with other PBE Standards.

IE184. If the initial accounting for an amalgamation is not complete at the end of the financial reporting period in which the amalgamation occurs, paragraph 40 of PBE IPSAS 40 requires the resulting entity to recognise in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the resulting entity recognises adjustments to the provisional amounts needed to reflect new information obtained about facts and circumstances that existed as of the amalgamation date and, if known, would have affected the measurement of the amounts recognised as of that date. Paragraph 43 of PBE IPSAS 40 requires the resulting entity to recognise such adjustments as if the accounting for the amalgamation had been completed at the amalgamation date. Measurement period adjustments are not included in surplus or deficit.

IE185. Suppose that RE is formed by the amalgamation of COA and COB (two municipalities that were not under common control prior to the amalgamation) on 30 November 20X3. Prior to the amalgamation, COA had an accounting policy of using the revaluation model for measuring land and buildings, whereas COB’s accounting policy was to measure land and buildings using the cost model. RE adopts an accounting policy of measuring land and buildings using the revaluation model, and seeks an independent valuation for the land and buildings previously controlled by COB. This valuation was not complete by the time RE authorised for issue its financial statements for the year ended 31 December 20X3. In its 20X3 annual financial statements, RE recognised provisional values for the land and buildings of CU150,000 and CU275,000 respectively. At the amalgamation date, the buildings had a remaining useful life of fifteen years. The land had an indefinite life. Four months after the amalgamation date, RE received the independent valuation, which estimated the amalgamation-date value of the land as CU160,000 and the amalgamation-date value of the buildings as CU365,000.

IE186. In its financial statements for the year ended 31 December 20X4, RE retrospectively adjusts the 20X3 prior year information as follows:

1. The carrying amount of the land as of 31 December 20X3 is increased by CU10,000. As the land has an indefinite life, no depreciation is charged.

2. The carrying amount of the buildings as of 31 December 20X3 is increased by CU89,500. That adjustment is measured as the valuation adjustment at the amalgamation date of CU90,000 less the additional depreciation that would have been recognised if the asset’s value at the amalgamation date had been recognised from that date (CU500 for one months’ depreciation).

3. An adjustment of CU100,000 is recognised in net assets/equity as of 31 December 20X3.

4. Depreciation expense for 20X3 is increased by CU500. IE187. In accordance with paragraph 56 of PBE IPSAS 40, RE discloses:

5. In its 20X3 financial statements, that the initial accounting for the amalgamation has not been completed because the valuation of land and buildings previously controlled by COB has not yet been received.

6. In its 20X4 financial statements, the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, RE discloses that the 20X3 comparative information is adjusted retrospectively to increase the value of the land and buildings by CU99,500 (CU100,000 at the amalgamation date), an increase in depreciation expense of CU500 and an increase in net assets/equity of CU100,000.

IE188. The following example illustrates the subsequent accounting for a transfer received by a combining operation on the basis of criteria that may change as a result of an amalgamation.

IE189. On 1 January 20X3, a national government provides an annual grant to those municipalities where the average household income is below a threshold. On 1 June 20X3, RE, a new municipality, is formed by the amalgamation of two existing municipalities, COA and COB. COA had previously received a grant of CU1,000, based on its average household income. COB has received no grant as its average household income was above the threshold.

IE190. Following the amalgamation on 1 June 20X3, the average household income of RE is above the threshold that the government had set when allocating grants.

IE191. On 1 July 20X3, the national government requires RE to repay a portion (CU200) of the grant previously paid to COA. RE recognises a liability and an expense of CU200 on 1 July 20X3.

IE192. The following example illustrates some of the disclosure requirements relating to amalgamations of PBE IPSAS 40; it is not based on an actual transaction. The example assumes that RE is a newly created municipality formed by amalgamating the former municipalities COA and COB. The illustration presents the disclosures in a tabular format that refers to the specific disclosure requirements illustrated.

In considering the disclosures related to an amalgamation, an entity may find it helpful to refer to the discussion of materiality in PBE IPSAS 1 Presentation of Financial Reports.

IE193. This example illustrates the accounting for a reverse acquisition in which Entity B, the legal controlled entity, acquires Entity A, the entity issuing equity instruments and therefore the legal controlling entity, in a reverse acquisition on 30 September 20X6. This example ignores the accounting for any income tax effects.

IE194. The statements of financial position of Entity A and Entity B immediately before the acquisition are: