EU Accounting Rule 20: Public Sector Combinations PDF
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2017
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Summary
This document is a set of accounting rules for public sector combinations. It outlines the objective, scope, definitions, and other aspects of these rules. The rules cover transactions, operations, and other accounting principles applicable to public sector amalgamations and acquisitions.
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Ref. Ares(2017)6265676 - 20/12/2017 EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting EUROPEAN UNION ACCOUNTING RULE 20 PUBLIC SECTOR COMBINATIONS EUROPEAN COMMISSION...
Ref. Ares(2017)6265676 - 20/12/2017 EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting EUROPEAN UNION ACCOUNTING RULE 20 PUBLIC SECTOR COMBINATIONS EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 2 of 20 Table of Contents Objective................................................................................................................................................. 3 Scope....................................................................................................................................................... 3 Definitions............................................................................................................................................... 3 Identifying a public sector combination.................................................................................................. 4 Classification of public sector combinations........................................................................................... 5 Accounting for amalgamations............................................................................................................... 6 Accounting for acquisitions................................................................................................................... 11 Effective date......................................................................................................................................... 20 Reference to other accounting rules..................................................................................................... 20 EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 3 of 20 Objective 1. The objective of this European Union Accounting Rule ("EAR") is to improve the relevance, faithful representativeness and comparability of the information reported by the European Union ("EU") in its financial statements about a public sector combination and its effects. Scope 2. This EAR applies to a transaction or other event that meets the definition of a public sector combination. This EAR does not apply to: (a) The accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself. (b) 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 the EU shall identify and recognise the individual identifiable assets acquired or received and liabilities assumed. Such a transaction or event does not give rise to goodwill. (c) The assumption of a liability or a group of liabilities that does not constitute an operation. In such cases the EU shall identify and recognise the individual liabilities assumed. 3. The requirements of this Standard do not apply to the acquisition by an investment entity, as defined in EAR 2 Consolidation and Accounting for Joint Ventures and Associates, of an investment in an entity controlled by the EU that is required to be measured at fair value through surplus or deficit. Definitions 4. The following terms are used in this EAR with the meanings specified: General definitions related to all public sector combinations A public sector combination is the bringing together of separate operations into one public sector entity. An asset is identifiable if it either: (a) Is separable, (i.e., is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related binding arrangement, identifiable asset or liability; or (b) Arises from binding arrangements (including rights from contracts or other legal rights). 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. An owner is any party with quantifiable ownership interests in an operation. A public sector combination under common control is a public sector combination in which all of the entities or operations involved are ultimately controlled by the same entity both before and after the public sector combination. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 4 of 20 Definitions related to amalgamations 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. The amalgamation date is the date on which the resulting entity obtains control of the combining operations. A combining operation is an operation that combines with one or more other operations to form the resulting entity in an amalgamation. A resulting entity is the entity that is the result of two or more operations combining in an amalgamation. Definitions relating to acquisitions An acquired operation is the operation that the acquirer gains control of in an acquisition. An acquirer is the entity that gains control of one or more operations in an acquisition. 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. The acquisition date is the date on which the acquirer gains control of the acquired operation. Goodwill is an asset representing the future economic benefits arising from other assets acquired in an acquisition that are not individually identified and separately recognised. Identifying a public sector combination 5. The EU shall determine whether a transaction or other event is a public sector combination by applying the definitions in this EAR, which requires that the assets and liabilities constitute an operation. If the assets and liabilities do not constitute an operation, the EU shall account for the transaction or other event in accordance with other EAR. 6. 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: (a) Input: Any economic resource that creates, or has the ability to create, outputs when one or more processes are applied to it. (b) Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates or has the ability to create outputs. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 5 of 20 (c) Output: The result of inputs and processes applied to those inputs that provide, or have the ability to provide, goods and/or services. 7. 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. 8. 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. Classification of public sector combinations 9. If no party to a public sector combination gains control of one or more operations as a result of the combination, the combination shall be classified as an amalgamation. 10. If one party to a public sector combination gains control of one or more operations as a result of the combination, the EU 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. 11. In determining the classification of the public sector combination, the EU considers whether the resulting accounting treatment of the combination provides information that meets the objectives of financial reporting and that satisfies the qualitative characteristics ("QC"). 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. Indicators that may provide evidence that the combination is an amalgamation Indicators relating to consideration 12. The following indicators may provide evidence that the combination is an amalgamation: (a) Consideration is paid for reasons other than to compensate those with an entitlement to the net assets of a transferred operation for giving up that entitlement; (b) Consideration is not paid to those with an entitlement to the net assets of a transferred operation; or (c) Consideration is not paid because there is no-one (whether an individual or an entity) with an entitlement to the net assets of a transferred entity. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 6 of 20 Indicators relating to the decision-making process 13. The following indicators may provide evidence that the combination is an amalgamation: (a) A public sector combination is imposed by a third party without any party to the combination being involved in the decision-making process; (b) A public sector combination is subject to approval by each party’s citizens through referenda; or (c) A public sector combination under common control occurs. Accounting for amalgamations 14. A resulting entity shall account for each amalgamation by applying the modified pooling of interests method of accounting. 15. Applying the modified pooling of interests method of accounting requires: (a) Identifying the resulting entity; (b) Determining the amalgamation date; (c) Recognising and measuring the identifiable assets received, the liabilities assumed and any non-controlling interest ("NCI") in the combining operations; and (d) Recognising and measuring the components of net assets/equity and other adjustments from an amalgamation. Identifying the resulting entity 16. For each amalgamation, a resulting entity shall be identified. 17. Paragraph 4 of this proposed accounting rule defines a resulting entity as “the entity that is the result of two or more operations combining in an amalgamation.” The resulting entity shall thereafter be identified as the entity that obtains control of the combining operations as a result of the amalgamation. Determining the amalgamation date 18. The resulting entity shall identify the amalgamation date, which is the date on which it obtains control of the combining operations. 19. 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. Recognising and measuring the identifiable assets, liabilities assumed and any NCI in the combining operations Recognition principle 20. As of the amalgamation date, the resulting entity shall recognise the identifiable assets, liabilities and any NCI that are recognised in the financial statements of the combining operations as of the amalgamation date. Recognition of identifiable assets and liabilities received is subject to the conditions specified in paragraphs 21–22. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 7 of 20 Recognition conditions 21. The effects of all transactions between the combining operations are eliminated in preparing the financial statements of the resulting entity. 22. The identifiable assets and liabilities must meet the definitions of assets and liabilities as described in the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities used in International Public Sector Accounting Standard ("IPSAS"), issued by the International Federation of Accountants ("IFAC"). at the amalgamation date. Classifying or designating assets and liabilities in an amalgamation 23. 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, even if this is permitted by other EARs. Measurement principle 24. The resulting entity shall measure the identifiable assets and liabilities of the combining operations at their carrying amounts in the financial statements of the combining operations as of the amalgamation date. The resulting entity shall adjust the carrying amounts where required to conform to the resulting entity's accounting policies. 25. 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 EARs, is adopted by that entity, and the carrying amounts of the identifiable assets and liabilities of the combining operations are adjusted, where required, to conform to those accounting policies. Exceptions to the recognition or measurement principles 26. This accounting rule provides limited exceptions to its recognition and measurement principles as stipulated in paragraphs 27-28. Income taxes (where included in the terms of the amalgamation) 27. The resulting entity shall recognise and measure any remaining revenue from taxation included in or arising from an amalgamation in accordance with EAR 17 Revenue from Non-Exchange Transactions (Taxes and Transfers). Employee benefits 28. The resulting entity shall recognise and measure a liability (or asset, if any) related to the combining operation’s employee benefit arrangements in accordance with EAR 12 Employee Benefits. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 8 of 20 Recognising and measuring components of net assets/equity arising as a result of an amalgamation 29. An amalgamation does not give rise to goodwill. 30. The resulting entity shall recognise within net assets/equity amounts equal and opposite to the following items: (a) The carrying amounts of the combining operations’ assets; (b) The carrying amounts of the combining operations’ liabilities; and (c) The carrying amounts of the combining operations’ NCI. 31. The resulting entity shall recognise within net assets/equity the corresponding adjustments in respect of: (a) The elimination of transactions between combining entities in accordance with paragraph 21; (b) Adjustments made to the carrying amounts of the identifiable assets and liabilities of the combining operations where required to conform to the resulting entity's accounting policies, in accordance with paragraph 24; and (c) Adjustments made in respect of the exceptions to the recognition and/or measurement principles, in accordance with paragraphs 26–28. 32. The resulting entity may present the amounts recognised within net assets/equity in accordance with paragraphs 30 and 31 as either: (i) A single opening balance; or (ii) As separate components of net assets/equity. Measurement period 33. 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. 34. 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. 35. The measurement period is the period after the amalgamation date during which the resulting entity may adjust the provisional amounts recognized for an amalgamation. The measurement period provides the resulting entity with a reasonable time to obtain the information necessary to identify and measure the identifiable assets, EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 9 of 20 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 identifiable 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. 36. The resulting entity recognizes an increase (decrease) in the provisional amount recognized for an identifiable asset (liability) by adjusting components of net assets/equity. 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. 37. After the measurement period ends, the resulting entity shall revise the accounting for an amalgamation only to correct an error in accordance with EAR 14 Accounting Policies, Changes in Accounting Estimates and Errors. Amalgamation-related costs 38. 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 EAR 11 Financial Instruments. Subsequent measurement and accounting 39. 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 EARs for those items, depending on their nature. Presentation of financial statements 40. Except where a resulting entity is not a new entity following a public sector combination, the resulting entity’s first set of financial statements following the amalgamation shall comprise: (a) An opening statement of financial position as of the amalgamation date; (b) A statement of financial position as at the reporting date; (c) A statement of financial performance for the period from the amalgamation date to the reporting date; EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 10 of 20 (d) A statement of changes in net assets/equity for the period from the amalgamation date to the reporting date; (e) A cash flow statement for the period from the amalgamation date to the reporting date; (f) If the entity makes publicly available its approved budget, a comparison of budget and actual amounts for the period from the amalgamation date to the reporting date, either as a separate additional financial statement or as a budget column in the financial statements; and (g) Notes, comprising a summary of significant accounting policies and other explanatory notes. 41. Where a resulting entity is not a new entity following a public sector combination, the resulting entity shall disclose: (a) 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; (b) 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 (c) Any adjustments made to eliminate transactions between the combining operations. 42. The resulting entity does not have to present financial statements for periods prior to the amalgamation date. Disclosures 43. The resulting entity shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of an amalgamation. 44. To meet the objective in paragraph 43, the resulting entity shall disclose the following information for each amalgamation that occurs during the reporting period: (a) The name and a description of each combining operation. (b) The amalgamation date. (c) The primary reasons for the amalgamation including, where applicable, the legal basis for the amalgamation. (d) The amounts recognised as of the amalgamation date for each major class of assets and liabilities transferred. (e) The adjustments made to the carrying amounts of assets and liabilities recorded by each combining operation as of the amalgamation date: (i) To eliminate the effect of transactions between combining operations in accordance with paragraph 21; and (ii) To conform to the resulting entity's accounting policies in accordance with paragraph 24. (f) 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 30–31. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 11 of 20 (g) If, at the time the financial statements of the resulting entity are authorized 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: (i) 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. (ii) The amounts reported by each combining operation immediately prior to the amalgamation date for each major class of assets and liabilities. (iii) The amounts reported by each combining operation immediately prior to the amalgamation date in net assets/equity. 45. 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. 46. To meet the objective in paragraph 45, the resulting entity shall disclose the following information: (a) If the initial accounting for an amalgamation is incomplete (see paragraph 33) for particular assets or liabilities, and the amounts recognised in the financial statements for the amalgamation thus have been determined only provisionally: (i) The reasons why the initial accounting for the amalgamation is incomplete; (ii) The assets or liabilities for which the initial accounting is incomplete; and (iii) The nature and amount of any measurement period adjustments recognised during the reporting period in accordance with paragraph 36. 47. If the specific disclosures required by this and other EARs do not meet the objectives set out in paragraphs 43 and 45, the resulting entity shall disclose whatever additional information is necessary to meet those objectives. Accounting for acquisitions 48. An acquirer shall account for each acquisition by applying the acquisition method of accounting. 49. Applying the acquisition method of accounting requires: (a) Identifying the acquirer; (b) Determining the acquisition date; (c) Recognising and measuring the identifiable assets acquired, the liabilities assumed and any NCI in the acquired operation; and (d) Recognising and measuring goodwill, a gain or a loss from an acquisition. Identifying the acquirer 50. For each acquisition, the party to the combination that gains control1 of one or more operations shall be identified as the acquirer. 1 Subject to definition of control included in EAR 2. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 12 of 20 Determining the acquisition date 51. The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquired operation. 52. 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. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any NCI in the acquired operation Recognition principle 53. As of the acquisition date, the acquirer shall recognise, separately from any goodwill recognised, the identifiable assets acquired, the liabilities assumed and any NCI in the acquired operation. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 54 and 55. Recognition conditions 54. 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 Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities used in IPSAS, issued by the IFAC at the acquisition date. 55. 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. Classifying or designating identifiable assets acquired and liabilities assumed in an acquisition 56. At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to subsequently apply other EARs. 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. Measurement principle 57. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 13 of 20 58. For each acquisition, the acquirer shall measure at the acquisition date components of NCI 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 its recognised amounts of the acquired operation’s identifiable net assets. Exceptions to the recognition or measurement principles 59. This accounting rule provides limited exceptions to its recognition and measurement principles as stipulated in paragraphs 60-63. Contingent liabilities 60. EAR 10 Provisions, Contingent Liabilities and Contingent Assets, defines a contingent liability as: (a) 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 (b) A present obligation that arises from past events, but is not recognised because: (i) It is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; or (ii) The amount of the obligation cannot be measured with sufficient reliability. 61. The requirements in EAR 10 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 reliably2. Therefore, contrary to EAR 10, 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 82 provides guidance on the subsequent accounting for contingent liabilities. Income taxes (where included in the terms of the acquisition) 62. The acquirer entity shall recognise and measure any remaining revenue from taxation included in or arising from an acquisition in accordance with EAR 17. Employee benefits 63. The acquirer shall recognise and measure a liability (or asset, if any) related to the acquired operation’s employee benefit arrangements in accordance with EAR 12. 2 Information that is reliable is free from material error and bias, and can be depended on by users to faithfully represent that which it purports to represent or could reasonably be expected to represent. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 14 of 20 Recognising and measuring goodwill or a gain from a bargain purchase 64. 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 65: (a) The aggregate of: (i) The consideration transferred measured in accordance with this accounting rule, which generally requires acquisition-date fair value; and (ii) The amount of any NCI in the acquired operation measured in accordance with this accounting rule. (b) The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this accounting rule. 65. The acquirer shall recognise goodwill only to the extent that the acquisition will result in: (c) The generation of cash inflows (such as the acquisition of a cash-generating operation); and/or (d) A reduction in the net cash outflows of the acquirer. An acquirer shall recognise any further excess of (a) over (b) in paragraph 64 above as a loss in surplus or deficit. 66. 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, 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. Bargain purchases 67. Occasionally in a public sector combination classified as an acquisition, an acquirer will make a bargain purchase, which is an acquisition in which the amount in paragraph 64(b) exceeds the aggregate of the amounts specified in paragraph 64(a). If that excess remains after applying the requirements in paragraph 68, the acquirer shall recognize the resulting gain in surplus or deficit on the acquisition date. The gain shall be attributed to the acquirer. 68. 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 objective of the review is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 15 of 20 69. In the public sector, 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: (a) Compensated seizures of operations or entities; and (b) The transfer of an operation to the acquirer by a donor for nominal consideration. 70. Where the economic substance of the public sector combination is that of an acquisition, such non-exchange acquisitions are treated as bargain purchases and accounted for in accordance with paragraphs 67–68. A non-exchange acquisition without the transfer of consideration 71. In the public sector, an entity sometimes obtains control of an operation in a non- exchange transaction in which it transfers no consideration. 72. Where the economic substance of the public sector 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 in accordance with paragraph 65. Consideration transferred 73. 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. 74. 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 recognize 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 recognize a gain or loss in surplus or deficit on assets or liabilities it controls both before and after the acquisition. Measurement period 75. 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 EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 16 of 20 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. 76. 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. 77. 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 accounting rule: (a) The identifiable assets acquired, liabilities assumed and any NCI in the acquired operation; (b) The consideration transferred for the acquired operation (or the other amount used in measuring goodwill); (c) In an acquisition achieved in stages, the equity interest in the acquired operation previously held by the acquirer; and (d) The resulting goodwill, loss, or gain on a bargain purchase. 78. The acquirer recognizes an increase (decrease) in the provisional amount recognized for an identifiable asset (liability) by means of a decrease (increase) in goodwill. 79. 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. 80. After the measurement period ends, the acquirer shall revise the accounting for an acquisition only to correct an error in accordance with EAR 14. Acquisition-related costs 81. 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 EAR 11. EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 17 of 20 Subsequent measurement and accounting 82. 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 EARs for those items, depending on their nature. However, this accounting rule provides guidance on subsequently measuring and accounting for contingent liabilities recognised as of the acquisition date. 83. Examples of other EARs that provide guidance on subsequently measuring and accounting for assets acquired and liabilities assumed or incurred in an acquisition include: (a) EAR 6 Intangible Assets prescribes the accounting for identifiable intangible assets acquired in an acquisition. The acquirer measures goodwill at the amount recognized at the acquisition date less any accumulated impairment losses. EAR 18 Impairment of Assets prescribes the accounting for impairment losses. (b) EAR 2 provides guidance on accounting for changes in a controlling entity’s ownership interest in a controlled entity after control is obtained. Contingent liabilities 84. 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: (a) The amount that would be recognised in accordance with EAR 10; and (b) The amount initially recognised less, if appropriate, cumulative amortisation recognised in accordance with EAR 4 Revenue from Exchange Transactions. This requirement does not apply to contracts accounted for in accordance with EAR 11. Disclosures 85. 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: (a) During the current reporting period; or (b) After the end of the reporting period but before the financial statements are authorized for issue. 86. To meet the objective in paragraph 85, the acquirer shall disclose the following information for each acquisition that occurs during the reporting period: (a) The name and a description of the acquired operation. (b) The acquisition date. (c) The percentage of voting equity interests or equivalent acquired. (d) 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. (e) A qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining the operations of the acquired EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 18 of 20 operation and the acquirer, intangible assets that do not qualify for separate recognition or other factors. (f) The acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as: (i) Cash; (ii) Other tangible or intangible assets, including an operation or controlled entity of the acquirer; (iii) Liabilities incurred; and (iv) 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. (g) For acquired receivables: (i) The fair value of the receivables; (ii) The gross amounts receivable in accordance with a binding arrangement; and (iii) 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. (h) The amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed. (i) For each contingent liability recognised in accordance with paragraph 61, the information required in paragraph 6.2 of EAR 10. If a contingent liability is not recognised because its fair value cannot be measured reliably, the acquirer shall disclose: (i) The information required by paragraph 6.4 of EAR 10; and (ii) The reasons why the liability cannot be measured reliably. (j) In an acquisition in which a loss is recognised in surplus or deficit (see paragraph 65): (i) The amount of the loss recognised in accordance with paragraph 65 and the line item in the statement of financial performance in which the loss is recognised; and (ii) A description of the reasons why the transaction resulted in a loss. (k) In a bargain purchase (see paragraphs 67–68): (i) The amount of any gain recognised in accordance with paragraph 67 and the line item in the statement of financial performance in which the gain is recognised; and (ii) A description of the reasons why the transaction resulted in a gain. (l) For each acquisition in which the acquirer holds less than 100 percent of the quantifiable ownership interests or equivalent in the acquired operation at the acquisition date: (i) The amount of the NCI in the acquired operation recognised at the acquisition date and the measurement basis for that amount; and EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 19 of 20 (ii) For each NCI in an acquired operation measured at fair value, the valuation technique(s) and significant inputs used to measure that value. (m) The following information: (i) 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 financial performance for the reporting period; and (ii) 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. 87. For individually immaterial acquisitions occurring during the reporting period that are material collectively, the acquirer shall disclose in aggregate the information required by paragraph 86(e)–(m). 88. If the acquisition date of an acquisition is after the end of the reporting period but before the financial statements are authorized for issue, the acquirer shall disclose the information required by paragraph 86 unless the initial accounting for the acquisition is incomplete at the time the financial statements are authorized for issue. In that situation, the acquirer shall describe which disclosures could not be made and the reasons why they cannot be made. 89. 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. 90. To meet the objective in paragraph 89, the acquirer shall disclose the following information for each material acquisition or in the aggregate for individually immaterial acquisitions that are material collectively: (a) If the initial accounting for an acquisition is incomplete (see paragraph 75) for particular assets, liabilities, NCI or items of consideration and the amounts recognised in the financial statements for the acquisition thus have been determined only provisionally: (i) The reasons why the initial accounting for the acquisition is incomplete; (ii) The assets, liabilities, quantifiable ownership interests (or equivalent) or items of consideration for which the initial accounting is incomplete; and (iii) The nature and amount of any measurement period adjustments recognised during the reporting period in accordance with paragraph 79. (b) For contingent liabilities recognised in an acquisition, the acquirer shall disclose the information required by paragraphs 6.1 and 6.2 of EAR 10 for each class of provision. (c) A reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period showing separately: EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 20: PUBLIC SECTOR COMBINATIONS Date: November 2017 Page 20 of 20 (i) The gross amount and accumulated impairment losses at the beginning of the reporting period. (ii) Additional goodwill recognised during the reporting period. (iii) Adjustments resulting from the subsequent recognition of amounts during the reporting period in accordance with the relevant international accounting standard dealing with income taxes. (iv) Goodwill derecognised during the reporting period. (v) Impairment losses recognised during the reporting period. (vi) Any other changes in the carrying amount during the reporting period. (vii) The gross amount and accumulated impairment losses at the end of the reporting period. (d) The amount and an explanation of any gain or loss recognised in the current reporting period that both: (i) Relates to the identifiable assets acquired or liabilities assumed in an acquisition that was effected in the current or previous reporting period; and (ii) Is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity’s financial statements. 91. If the specific disclosures required by this and other EARs do not meet the objectives set out in paragraphs 85 and 89, the acquirer shall disclose whatever additional information is necessary to meet those objectives. Effective date 92. This accounting rule shall be applied prospectively to public sector combinations on or after the beginning of the first annual reporting period beginning on or after January 1, 2019. Reference to other accounting rules 93. This EAR is based on IPSAS 40 Public Sector Combinations.