Combinations – Initial Measurement and Related Disclosures

The AcSB completed its deliberations on stakeholder comments on the Exposure Draft “Combinations – Initial Measurements and Related Disclosures.” The Board considered the Not-for-Profit Advisory Committee’s advice, and tentatively decided:

• that for acquisitions, the difference between consideration transferred and the net assets acquired is recognized in the statement of net assets instead of the statement of operations; and
• to clarify aspects of the illustrative examples.

The AcSB also finalized the transition provisions.

The AcSB approved the issuance of the final standard, subject to final drafting and a written ballot. The Board plans to issue the final standard in March 2021.

The Committee continued discussing stakeholder feedback on the Exposure Draft, “Combinations – Initial Measurements and Related Disclosures.” The Committee advised the AcSB:

• that the difference between the consideration transferred and net assets acquired should be accounted for in net assets instead of the statement of operations; and
• the standard should apply on a prospective basis with an option to apply it to combinations that occurred in previous periods.

The Committee also provided the AcSB staff with comments to clarify the standard.

The Committee discussed stakeholder feedback on the Exposure Draft, “Combinations – Initial Measurements and Related Disclosures.” The Committee advised the AcSB to:

• add a reference to Section 1582, Business Combinations, to account for a for-profit enterprise contributed to a NFPO and to clarify if goodwill is recorded;
• provide an exception from the acquisition method when NFPOs under common control combine; and
• require measurement of deferred contributions and deferred capital contributions at fair value for an acquired NFPO.

The Committee also recommended the AcSB revise the criteria to distinguish a merger from an acquisition and the related illustrative examples by amending:

• criterion (b) to include that all parties have meaningful participation in negotiations;
• criterion (e) to reflect that if all parties have a significant decline or planned significant decline in client communities served, the combination can still be accounted for as a merger;
• Illustrative Example 2 to demonstrate that internal communications are relevant in assessing if either party to a combination is characterized as the acquirer or acquiree; and
  Illustrative Example 3 to demonstrate how consideration can flow to a third party.

The AcSB will consider the Committee’s comments at the Board meeting on September 9, 2020.

Further to its decision on April 15, 2020, to retain the extended comment deadline of May 15, 2020, the AcSB assessed the sufficiency of stakeholder feedback on its Exposure Draft, “Combinations – Initial Measurements and Related Disclosures.” The Board considered the extent of feedback on the Exposure Draft from its Not-for-Profit Advisory Committee, field-testing, roundtables, targeted outreach activities, and comment letters. The Board concluded that sufficient feedback has been received from a wide range of stakeholders, including practitioners, preparers, users, and academics. The Board will begin deliberations on the comments received in July 2020.

Further to its decision in early April to extend the comment period deadline from April 14, 2020, to May 15, 2020, the AcSB considered whether an additional extension was required. The Board considers this project a high priority for not-for-profit stakeholders and decided to retain the extended comment deadline of May 15, 2020. This will enable the project to be completed according to the original timeline. The Board will assess if it has received sufficient stakeholder feedback closer to the May 15, 2020, comment deadline and decide whether an additional extension is required.

The AcSB approved a plan to consult its stakeholders on the upcoming exposure draft related to not-for-profit combinations. The Board expects to issue the exposure draft in January 2020. It will undertake outreach on this exposure draft in the first quarter of 2020 as well as other consultation activities with preparers and industry associations.

The AcSB discussed the results of the Not-for-Profit Advisory Committee’s fatal-flaw review of the exposure draft. The Board decided not to include guidance in the exposure draft on measuring the acquisition date fair value of deferred contributions and deferred capital contributions. The Board will provide an explanation of its discussions in the basis for conclusions and will seek feedback from stakeholders in this area through exposure draft questions.

The AcSB plans to issue the exposure draft in January 2020.

The AcSB considered the field-test results and feedback from its Not-for-Profit Advisory Committee 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 AcSB decided to:

• refine the criteria to determine whether a transaction should be accounted for as a merger or an acquisition to reduce the potential for diversity;
• require the disclosure of the rationale for undertaking a merger or acquisition;
• add illustrative examples on the application of the criterion; and
• add an illustrative example on the application of the disclosure requirements for combinations accounted for as a merger.

The AcSB reconfirmed that the scope of the standard will include combinations under common control. It also provided comments on the proposed Handbook text and the draft Basis for Conclusions. The Board approved the issuance of an exposure raft subject to final drafting changes and a written ballot.

The AcSB plans to issue the Exposure Draft in January 2020 with a 90-day comment period.

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.

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.

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 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.

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.

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

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.