Public Sector Combinations: An Introduction to IPSAS 40
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In this webinar, IPSASB Technical Director John Stanford and IPSASB Principal Paul Mason provide an introduction to IPSAS 40, Public Sector Combinations, including the project history, key definitions, approach to classification of combinations, and key changes since the Combinations Exposure Draft.
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Public Sector Combinations: An Introduction to IPSAS 40
- 1. Page 1 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Public Sector Combinations: An Introduction to IPSAS 40 John Stanford, Technical Director, IPSASB Paul Mason, Principal, IPSASB
- 2. Page 2 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Project History ED 41 (Exchange Only) Consultation Paper ED 60 (Basis for IPSAS 40)
- 3. Page 3 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 The bringing together of separate operations into one public sector entity Nationalizations: Purchases Seizures Bailouts Reorganizations of local or regional governments Transfers of operations from one government to another. Restructurings of central government ministries Outside Scope Transactions that do not include operations Joint arrangements Public Sector Combinations
- 4. Page 4 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 • Amalgamation or Acquisition • Control essential for acquisition, but not conclusive • Economic substance – Consideration – Decision Making Classification No Yes NoYes Does one party to the public sector combination gain control of operations? Is the economic substance of the public sector combination that of an amalgamation? Amalgamation Acquisition
- 5. Page 5 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Acquisition Amalgamation • Consideration – Other than to compensate for transfer of net assets – No consideration paid – No (former) owners • Decision Making – Under common control – Imposed by third party – Approval by referenda Assessing the Economic Substance
- 6. Page 6 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 • 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 Operation • Gives rise to a resulting entity and is either: • A public sector combination in which no party to the combination gains control of one or more operations; or • A public sector combination in which one party to the combination gains control of one or more operations, and in which there is evidence that the combination has the economic substance of an amalgamation Amalgamation • A public sector combination in which one party to the combination gains control of one or more operations, and there is evidence that the combination is not an amalgamation Acquisition Key Definitions
- 7. Page 7 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 • 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 Operation • Gives rise to a resulting entity and is either: • A public sector combination in which no party to the combination gains control of one or more operations; or • A public sector combination in which one party to the combination gains control of one or more operations, and in which there is evidence that the combination has the economic substance of an amalgamation Amalgamation • A public sector combination in which one party to the combination gains control of one or more operations, and there is evidence that the combination is not an amalgamation Acquisition Key Definitions Entity Function Geographical Area Restructures of Government ministries Combinations of Municipalities Transfers of operations between different Governments
- 8. Page 8 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Amalgamation Modified Pooling Resulting Entity Recognized by Combining Operations Carrying Amount Difference / Reserves Net Assets / Equity Acquisition Acquisition Method Acquirer Identifiable Assets and Liabilities Fair Value Difference Goodwill, Loss or Gain Accounting for Amalgamations and Acquisitions
- 9. Page 9 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Amalgamations Acquisitions Method Modified Pooling Acquisition Entity Resulting Entity Acquirer Assets and Liabilities Recognized Those recognized by combining operations Identifiable assets and liabilities Measurement Carrying Amount Fair Value Difference between consideration (if any), assets and liabilities transferred Recognized in Net Assets/Equity Components not specified Goodwill (consideration); Loss; Gain on Bargain Purchase Accounting for Amalgamations and Acquisitions
- 10. Page 10 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 • Remove reverences to “rebuttable presumption” Classification approach • No longer specify components of net assets/equity • Permit presentation of prior period information (not restated) Accounting for amalgamations Changes since ED 60, Public Sector Combinations
- 11. Page 11 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Issued • January 2017 Effective Date • Reporting periods beginning on or after January 1, 2019 (early application permitted) Application • Applied prospectively, no restatement Application of IPSAS 40
- 12. Page 12 | Proprietary and Copyrighted Information Public Sector Combinations: An Introduction to IPSAS 40 Further Information • Visit our webpage http://www.ipsasb.org/ • Or contact us by e-mail : Chair IPSASB: IanCarruthers@ipsasb.org Technical Director: johnstanford@ipsasb.org
Editor's Notes
- John: Hello. I’m John Stanford, Technical Director of the International Public Sector Accounting Standards Board, the IPSASB. With me is Paul Mason, Principal at the IPSASB. Welcome to this webinar on IPSAS 40, Public Sector Combinations. This webinar will provide an introduction to the key features of IPSAS 40. You may also find the “At a Glance” summary of IPSAS 40, which is available on the IPSASB’s web site – w. w. w. dot i. p. s. a. s. b. dot o. r. g. – helpful.
- John: Before we look at the details of IPSAS 40, it’s worth noting its history. The IPSASB initially considered developing two Standards on public sector combinations, covering: Firstly, entity combinations arising from exchange transactions—a limited convergence project with IFRS 3; and Secondly, entity combinations arising from non-exchange transactions. This would have been a public sector-specific project. In May 2009, the IPSASB issued Exposure Draft (ED) 41, Entity Combinations from Exchange Transactions, which was the limited convergence project with IFRS 3. Following the consultation process on ED 41, the IPSASB decided not to continue with this approach for the following reasons: IFRS 3 includes bargain purchases within its scope. It could be argued, therefore, that IFRS 3 also applies to at least some non-exchange entity combinations. The IPSASB acknowledged that it may be difficult to establish a clear demarcation between all exchange and non-exchange entity combinations. In addition, it was not clear whether combinations where no party gains control of the other parties to the combination would be classified as entity combinations arising from exchange transactions, and therefore required to be accounted for as an acquisition in accordance with ED 41. Subsequently, the IPSASB decided to develop a single standard dealing with all public sector combinations. This wider scope was included in the Consultation Paper (CP), Public Sector Combinations, issued in June 2012. Respondents to the CP supported this wider scope. The IPSASB, therefore, developed a second ED, ED 60, that included proposals for all public sector combinations, with only limited exceptions. Respondents generally supported the proposals in ED 60, and the requirements in IPSAS 40 are therefore very similar to those proposals.
- John: So let’s look at the scope of IPSAS 40 IPSAS 40 defines a public sector combination as “the bringing together of separate operations into one public sector entity.” Examples of public sector combinations include: Nationalizations, whether these are purchases, uncompensated seizures or bailouts; Restructurings of government ministries or departments; Reorganizations of local or regional governments; and Transfers of operations from one government to another, for example from central government to local government. Transactions that are outside the scope of IPSAS 40 are the acquisition of groups of assets, or the assumption of groups of liabilities, that do not include operations; and the formation of joint ventures. I’ll now hand over to Paul who will discuss the classification approach and the accounting requirements in IPSAS 40.
- Paul: Thanks John. Let’s start by discussing the classification approach in IPSAS 40. Under IPSAS 40, public sector combinations are classified as either an amalgamation or an acquisition. This differs from IFRS 3, which treats all business combinations as acquisitions. The gaining of control of operations by a party to the combination is an essential element of an acquisition, but is not sufficient in itself to determine whether a combination is an acquisition. Consequently, where one party to the combination gains control of operations, other factors – consideration and decision-making – need to be taken into account in determining the economic substance of the combination, and hence its classification. The process is summarized in this diagram: Does one party to the combination gain control of operations? If the answer is no, the combination is an amalgamation. If the answer is yes, there is a need to consider the economic substance of the combination, and whether this is that of an amalgamation If there is evidence that the economic substance of the combination is that of an amalgamation, the combination is an amalgamation. If there is evidence that the economic substance of the combination is that of an acquisition – which includes cases where there is no evidence that the economic substance of the combination is that of an amalgamation – the combination is an acquisition.
- Paul: Let’s look at the process for assessing the economic substance in more detail. As we have seen, where one party to a public sector combination gains control of operations, the economic substance of the combination needs to be considered. IPSAS 40 discusses two factors – consideration and decision-making – that will usually provide sufficient evidence to determine the economic substance of the combination. So what evidence should entities take into account? Let’s start with consideration. Here, we take into account the reason why consideration is or isn’t paid. The entity gaining control may make payments to the owners of the other operation. However, this may not be intended to compensate them for giving up their entitlement to the net assets of that operation. For example, the payment may be intended to reimburse them for costs incurred in effecting the public sector combination. This might provide evidence the combination is an amalgamation. There may be no consideration paid, for example a bequest or a donated operation. The reasons why no consideration is paid may provide evidence as to the economic substance of the combination. Finally, there may be no owners (or former owners) of the operations, for example where two municipalities are combined. Because acquisitions are transactions between owners, this provides evidence of an amalgamation Turning to decision-making, there may be evidence that the combination is an amalgamation where the parties to the combination do not control the outcome of the combination, for example where it is imposed by a third party, subject to approval by referenda, or occurs under common control (where the controlling entity can dictate the terms).
- No talking to this slide: click through immediately, discuss on next slide.
- Paul: The classification approach – including the rebuttable presumption – is reflected in key definitions in ED 60: An operation is 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. Examples of possible operations include entities, functions, and geographical areas. An amalgamation gives rise to a resulting entity and is either: (a) A public sector combination in which no party to the combination gains control of one or more operations; or (b) A public sector combination in which one party to the combination gains control of one or more operations, and in which there is evidence that the combination has the economic substance of an amalgamation. Typical examples of amalgamations are likely to include restructuring of Government ministries (which are under common control) and combinations of municipalities (where there are no former owners to whom consideration could be paid). An acquisition is a public sector combination in which one party to the combination gains control of one or more operations, and there is evidence that the combination is not an amalgamation. A typical example of an acquisition that occurs in the public sector is the transfer of an operation between different Governments, for example between a central Government and a provincial Government.
- Paul: Turning now to the accounting requirements, amalgamations and acquisitions are accounted for differently. Amalgamations are accounted for using the Modified Pooling of Interests method; acquisitions are accounted for using the acquisition method. An amalgamation gives rise to a resulting entity – which, in substance, will often be a new entity – whereas an acquisition involves an acquirer. In an amalgamation, the resulting entity recognizes the assets and liabilities previously recognized by the combining operations. In an acquisition, the acquirer recognizes the identifiable assets and liabilities of the acquired operation, regardless of whether these had previously been recognized. In an amalgamation, assets and liabilities are measured at their previous carrying amounts; in an acquisition, the acquirer measures the acquired operation’s assets and liabilities at fair value. In a combination, there may be a difference between the consideration (if any), and the assets and liabilities transferred. In an amalgamation, this difference, and any reserves that are transferred, are recognized as one or more components of net assets/equity. Unlike ED 60, IPSAS 40 does not specify which components of net assets/equity should be recognized. In an acquisition, this difference may be recognized as goodwill, as a loss, or as a gain on a bargain purchase.
- Paul: The accounting requirements are summarized on this slide. I’ll now hand back to John, who will talk about the changes the IPSASB has made since ED 60 was issued, and about the key dates for implementing IPSAS 40.
- John: Thanks Paul As I mentioned at the start of this webinar, respondents generally supported the proposals in ED 60, and the requirements in IPSAS 40 are therefore very similar to those proposals. However, respondents did identify areas where the proposals could be improved. The first change relates to the classification approach. ED 60 included a rebuttable presumption. Respondents commented that it was confusing to have a rebuttable presumption where the presumption was expected to be rebutted in most cases. Some respondents thought that having a rebuttable presumption would deter some preparers from classifying combinations as amalgamations, even when this was appropriate. Consequently, the IPSASB agreed to change the way the classification approach is described. IPSAS 40 does not refer to a rebuttable presumption, but requires preparers to consider the economic substance of the combination. However, the factors to be considered are the same, and, where one party to the combination has gained control of operations, a combination will be classified as an acquisition if there is no evidence that it is an amalgamation. The IPSASB made these changes to make the approach easier to understand, but did not expect the changes to result in different classification decisions. Other changes relate to the accounting for amalgamations. ED 60 proposed that a single “residual amount” be recognized in net assets/equity. Some respondents were concerned that this would have adverse effects in terms of revaluation reserves, and commented that this requirement would require hedging reserves and legally restricted reserves to be combined into a single residual amount. The IPSASB accepted these comments and agreed that IPSAS 40 should not specify which components of net assets/equity should be recognized. Preparers are now able to recognize the most appropriate components of net assets/equity for the circumstances of a particular amalgamation. Finally, while respondents supported the use of the modified pooling of interests method, which does not require comparative information to be presented, some respondents were of the view that information about previous periods would be useful for users in some circumstances. The IPSASB accepted these comments, and IPSAS 40 permits – but does not require – prior period information to be presented. However, this information is not restated, as the IPSASB considered it important for consistency that the effect of the amalgamation is always recognized at the amalgamation date, not in a prior period.
- John: So what are the key dates for implementing IPSAS 40? The IPSASB issued IPSAS 40 in January 2017. Entities must apply IPSAS 40 for reporting periods beginning on or after January 1, 2019, although they may apply IPSAS 40 earlier if they so choose. IPSAS 40 is applied prospectively. Consequently, public sector combinations that occur prior to an entity applying IPSAS 40 are not restated.
- John: Thank you for viewing this webinar. For further information, please visit our web page – w. w. w. dot i. p. s. a. s. b. dot o. r. g. – or contact us by email. From myself and Paul, goodbye.