Accounting Standards for Private Sector Not-for-Profit Organizations

Combinations – Initial Measurement and Related Disclosures

Summary

The Accounting Standards Board (AcSB) has approved a project to provide guidance on the initial measurement of a combination and its related disclosures.

The project will involve:

  • proposing criteria to determine whether a combination transaction is considered a merger or acquisition;
  • determining the accounting requirements for when the transaction is considered a merger, including the issues of recognition, measurement, and disclosure; and
  • considering any modifications needed to Section 1582 Business Combinations, for not-for-profit combination transactions that are considered an acquisition.

Staff Contact(s)

Mohamed Hassanali, CPA, CA

Principal, Accounting Standards Board

Project Status

  • Information gathering

    Completed prior to June 2018

  • Approving project

    The AcSB approved this project in June 2018, and refined the scope in January 2019

  • Consulting stakeholders

    Continued consultation with the Not-for-Profit Advisory Committee and key stakeholders

  • Deliberating feedback
  • Final pronouncement

Meeting & event summaries


July 30, 2019

Not-for-Profit Advisory Committee Notes – July 30, 2019

Combinations

The Committee received the field-test results on the draft proposals for the initial measurement of a combination between organizations within the scope of Part III of the CPA Canada Handbook - Accounting. The Committee also discussed staff recommendations and advised the AcSB that:

  • more clarity should be provided on the conditions to determine whether a transaction should be accounted for as a merger or an acquisition to reduce the potential for diversity;
  • illustrative examples should be included in the standard for the types of combinations that should be accounted for as mergers and those that should be accounted for as acquisitions; and
  • disclosure of the rationale for undertaking a merger or acquisition would be informative for financial statements users.

Committee members also advised on other sections of the draft proposals, the consequential amendments, and the proposed exposure draft questions.

The Committee will conduct a fatal-flaw review of the exposure draft in October 2019. The AcSB plans to issue the exposure draft in January 2020.

July 17, 2019

AcSB Decision Summary – July 17, 2019

Combinations

The AcSB continued discussing the initial measurement of a combination between organizations within the scope of Part III of the CPA Canada Handbook – Accounting. The Board tentatively agreed, subject to further deliberation, that:

  • unfavourable lease arrangements meet the definition of a liability and should be recognized for combinations that are accounted for as an acquisition;
  • transaction costs should be defined in the standard and that the definition should include severance costs; and
  • goodwill recognized from a previous not-for-profit acquisition should be expensed when a not-for-profit organization applies Part III for the first time.

The AcSB also discussed situations in which an acquiror used the size exemption for the recognition of capital assets and intangible assets prior to a combination accounted for as an acquisition. The Board decided that if the acquiror no longer met the exemption subsequent to the acquisition, the capital assets and intangible assets acquired would be recognized at fair value.

The AcSB also considered other drafting proposals to clarify the definition of a reporting entity and consequential amendments. The Board will continue its deliberations in September 2019 and plans to issue an exposure draft in January 2020.

June 18, 2019

AcSB Decision Summary – June 18, 2019

The AcSB continued its discussion on the initial measurement of a combination between organizations within the scope of Part III of the CPA Canada Handbook -- Accounting. The Board discussed the proposed exposure draft.

The AcSB tentatively agreed, subject to further deliberation that:

  • favourable lease arrangements meet the definition of an asset and should be recognized for combinations that are accounted for as an acquisition;
  • if prior to a transaction that will be accounted for as an acquisition, the acquiree or both the acquiror and acquiree used the size exemption for the recognition of capital assets and intangible assets, those assets should be remeasured at fair value using the acquisition method at the acquisition date;
  • guidance should be provided if combining not-for-profit organizations have differing year ends; and
  • not-for-profit organizations that report their controlled subsidiaries using the disclosure option in accordance with Section 4450, Reporting controlled and Related Entities need not apply the proposed recognition and measurement principles on the date of acquisition.
The AcSB also considered other drafting proposals and consequential amendments and provided feedback to staff.  The Board will continue its deliberations in July 2019 and plans to issue the exposure draft in January 2020.

May 15, 2019

AcSB Decision Summary – May 15, 2019

The AcSB continued its discussion on the initial measurement of a combination between organizations within the scope of Part III of the CPA Canada Handbook -- Accounting. The Board discussed the criteria to determine whether a transaction would be considered an acquisition or a merger and provided feedback to the staff.

The AcSB tentatively proposed, subject to further deliberation:

  • that not-for-profit organizations (NFPOs) should refer to Section 1582, Business Combinations, in Part II of the Handbook to account for the acquisition of a for-profit enterprise;
  • what to include in the scope of the proposals including to not scope out combinations between entities under common control;
  • to provide guidance for mergers and acquisitions relating to the size exemption for the recognition of capital assets and intangible assets; and
  • to remove aspects of the acquisition guidance in Section 1582 that are not relevant to NFPOs.

The AcSB considered the proposed project timeline and will continue its discussions at its June 2019 meeting.

April 26, 2019

Not-for-Profit Advisory Committee Notes – April 8, 2019

The Committee provided feedback on the staff’s draft of the proposed guidance for mergers and acquisitions. The Committee recommended that:

  • not-for-profit organizations should refer to Section 1582, Business Combinations, in Part II of the Handbook to account for the acquisition of a for-profit enterprise;
  • guidance on the accounting for a combination involving not-for-profit organizations, including when the combination is accounted for as an acquisition, should be provided in Part III of the Handbook;
  • consideration be given to the combining entities when either or both entities are limiting the application of Section 4433, Tangible Capital Assets Held by Not-for-Profit Organizations, or Section 4434, Intangible Assets Held by Not-for-Profit Organizations, as average annual revenues in the current and preceding periods of the organization and any entity it controls is less than $500,000;
  • the proposals are clear as to which standard the NFPO should be applying (i.e.- the proposals refer to initial measurement.) If the combination results in an acquisition, subsequent measurement is prescribed in Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations.
  • illustrative examples be added to the proposals to help NFPOs analyze the criteria for determining whether the transaction is considered an acquisition or a merger and the mechanics of accounting for the transaction if considered a merger.

The AcSB will discuss the Committee’s input and review the timeline of the exposure draft at the May 2019 Board meeting.

March 19, 2019

Not-for-Profit Advisory Committee Notes – February 12, 201 9

At its recent meeting the Committee discussed the accounting for Combinations.

March 6, 2019

AcSB Decision Summary – March 6-7, 2019

The AcSB continued its discussion on the initial measurement of a combination between organizations within the scope of Part III of the Handbook. The Board discussed the criteria to determine whether a transaction would be considered an acquisition or a merger and provided feedback to the staff.

The AcSB tentatively agreed with the staff recommendations, subject to further deliberation:

  • The accounting requirements will not include a default position on how to account for the combination transaction;
  • The accounting requirements for transactions that will meet the criteria to be treated as a merger, including:
    • recognizing the assets, liabilities and funds of the combining organizations, as if they have always been part of the same organization from the effective date of the merger;
    • requiring disclosures of the consolidated comparative information;
    • recording the respective entities’ assets, liabilities, and funds at their carrying values, with changes only permitted to achieve uniform accounting policies; and
    • disclosing information on the transaction that will be helpful to users of the consolidated financial statements.
  • Goodwill will not be recognized when the transaction is considered an acquisition as part of the initial measurement of the combination.
  • Require prospective application for the proposed guidance.

The staff will provide the AcSB with draft guidance at its May 2019 meeting to refine the criteria for transactions to be treated as mergers, revisit whether a default position is needed and determine the timeline for issuance of the exposure draft for public comment.

January 15, 2019

AcSB Decision Summary – January 15, 2019

The AcSB continued its discussion on the scope of transactions subject to the proposed guidance.

The AcSB discussed some transactions between entities within the scope of Part III of the Handbook that would meet the criteria for accounting for the combination as a merger. The Board will discuss the accounting requirements for transactions to be considered a merger at its March 2019 meeting.

The AcSB also directed staff to consider a research project on combinations that occur between enterprises within the scope of Part II of the Handbook.

November 14, 2018

Not-for-Profit Advisory Committee Meeting Notes – November 14, 2018

The staff presented a verbal update of the AcSB’s discussion at its November 2018 meeting on the criteria for determining if a combination is considered a merger. The Committee advised on the staff’s proposed accounting requirements if a combination is accounted for as a merger. In addition, Committee members gave input on issues that may arise when accounting for the combination as an acquisition. The Board will discuss this input at its January 2019 meeting.

November 14, 2018

Not-for-Profit Advisory Committee Meeting Notes – November 14, 2018 Combinations

The staff presented a verbal update of the AcSB’s discussion at its November 2018 meeting on the criteria for determining if a combination is considered a merger. The Committee advised on the staff’s proposed accounting requirements if a combination is accounted for as a merger. In addition, Committee members gave input on issues that may arise when accounting for the combination as an acquisition. The Board will discuss this input at its January 2019 meeting.

November 12, 2018

AcSB Decision Summary – November 12-13, 2018

The Board continued its discussion on the scope of transactions subject to the proposed guidance. The Board analyzed various transactions and assessed whether the transactions would meet the proposed criteria for accounting for the combination as a merger. Although the Board agreed with the outcome of some transactions under the proposed guidance, it questioned the outcome of other transactions.

The Board directed staff to conduct further research to determine whether additional information, such as the purpose of the entity, should be considered to determine the scope of the proposals.

September 20, 2018

AcSB Decision Summary – September 20-21, 2018

The Board continued its discussion on the scope of transactions subject to the guidance to be provided on the initial measurement of a combination. The Board directed the staff to research the nature of the transactions that could be affected by the proposed guidance.

The Board also discussed any “day-two” implications that could arise from the initial measurement of a combination. The Board confirmed that the scope of this project would be limited to the initial measurement of a combination and its related disclosures.

September 10, 2018

Not-for-Profit Advisory Committee Meeting Notes – September 10, 2018

The staff presented the Committee with, and requested input on, proposed criteria and other indicators for determining if a combination of two or more NFPOs or an NFPO with a for-profit enterprise may be accounted for as a merger.

Committee members thought that the staff’s proposed criteria and other indicators were a good starting point and made recommendations for how the criteria and other indicators may be described. Two members suggested using the notion of primary and secondary indicators rather than required criteria and other possible indicators. One member also suggested that a merger should be defined and that a basic principle describing when a combination is a merger should be provided. This would enhance consistency when applying the criteria and other indicators to determine if the combination may be accounted for as a merger.

September 10, 2018

Not-for-Profit Advisory Committee Meeting Notes – September 10, 2018 Combinations

The staff presented the Committee with, and requested input on, proposed criteria and other indicators for determining if a combination of two or more NFPOs or an NFPO with a for-profit enterprise may be accounted for as a merger.

Committee members thought that the staff’s proposed criteria and other indicators were a good starting point and made recommendations for how the criteria and other indicators may be described. Two members suggested using the notion of primary and secondary indicators rather than required criteria and other possible indicators. One member also suggested that a merger should be defined and that a basic principle describing when a combination is a merger should be provided. This would enhance consistency when applying the criteria and other indicators to determine if the combination may be accounted for as a merger.

July 5, 2018

Not-for-Profit Advisory Committee Meeting Notes – July 5, 2018

The Board decided to defer work on Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations, to focus on the Combinations project.

June 19, 2018

AcSB Decision Summary – June 19, 2018

The Board approved a project to provide guidance on the initial measurement of a combination and the relevant disclosures. The project will explore the accounting for combinations completed by: NFPOs applying Part III of the CPA Canada Handbook – Accounting; and to the extent transactions with similar characteristics exist, for-profit enterprises applying Part II of the Handbook.

The Board will consult its Not-for-Profit Advisory Committee, Private Enterprise Advisory Committee and other stakeholders that have completed combinations as part of developing the proposals. The Board tentatively plans to issue an exposure draft in the second half of 2019, pending finalization of the project’s scope.

January 18, 2018

AcSB Decision Summary - January 18, 2018

The Board considered the results of research conducted on accounting for combinations by NFPOs. It directed staff to prepare a project proposal for discussion at a future meeting, as the lack of guidance in Part III of the Handbook may be resulting in diversity in practice. The proposal will explore the similarities and differences in the characteristics of these transactions completed by NFPOs applying Part III and for-profit enterprises applying Part II.

News


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September 9, 2019 Resource
PSAB Video Transcript – Reviewing PSAB’s Approach to International Public Sector Accounting Standards

PSAB’s second consultation paper on its international strategy is out for comment until September 30, 2019. The video provides background and clarifies the four options originally presented in the first paper. Watch the video or read the transcript and have your say on Canada’s public sector accounting international strategy.

Disclaimer

This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.