IPSAS 40
Active
Public Sector Combinations
Establishes principles for classifying a public sector combination as an amalgamation or an acquisition, and how a reporting entity accounts for it – amalgamations via the modified pooling-of-interests method and acquisitions via the acquisition method, including goodwill, bargain purchases, non-controlling interests and combinations under common control. Effective 1 January 2019. (IFRS 3 equivalent.)
Active Standard
IPSAS 40 Public Sector Combinations is the current, active standard issued by the IPSASB for identifying, classifying and accounting for public sector combinations – amalgamations (modified pooling) and acquisitions (acquisition method). Effective for periods beginning on or after 1 January 2019 (earlier application encouraged). Paras. 1–125.
IPSAS 40 is the IPSASB's adaptation of IFRS 3 Business Combinations for the public sector – keeping the acquisition-method core but adding the amalgamation (modified pooling) carve-out, the public-sector 'operation' test, and explicit tax-forgiveness treatment.
1
Objective, Scope & the "Operation" Test (paras. 1–4)
Objective & scope (para. 1)
Improves the relevance, faithful representation, and comparability of information about a public sector combination – establishing how a reporting entity CLASSIFIES a combination (amalgamation vs acquisition) and accounts for it.
Key definitions
Operation test
Whether the combining entities will continue the operations of the acquired entity as part of their own.
Public sector combination
The joining of two or more governments or government entities under one control structure.
2
Definitions – Amalgamation, Acquisition & Related Terms (para. 5)
Core terms (para. 5)
TermMeaning
AcquisitionOne existing entity obtains control of another
AmalgamationCombining entities become part of a new or existing entity
CombinationAn acquisition or amalgamation
3
Identifying & Classifying a Combination (paras. 6–9)
Is it a combination? (para. 6)
A transaction or events is a combination if (a) one entity acquires control of one or more businesses, OR (b) the entities combine to form a new entity and exchange equity interests – i.e. the 'acquisition' or 'amalgamation' criteria both point to a combination rather than a financing or sale.
Acquisition of controlExchange of equityContinuity of interestsNot a financing
4
Indicators That a Combination Is an Amalgamation (paras. 10–14)
Pooling indicators (para. 10)
Indicators of an amalgamation include: a new entity is formed; the combining entities' voting shares are exchanged and each receives control in the new entity; and the surviving entity is the combining entity with the larger relative shareholdings or the larger number of directors. These are indicia, not thresholds.
In the public sector, amalgamations are the norm (mergers of departments / local governments) – acquisitions are less common.
5
Accounting for Amalgamations – the Modified Pooling of Interests Method (paras. 15–20)
Pooling method (para. 15)
Under the modified pooling-of-interests method, the combining entities' assets, liabilities and reserves are COMBINED AT CARRYING AMOUNT (not fair value) in the new/amalgamated entity's statement of financial position. No goodwill or bargain purchase is recognised.
Mechanical stepResult
Combine carrying amountsNo revaluation
Pooling reservesEquity combined at book value
6
Amalgamations – Recognition, Measurement & Exceptions (paras. 21–35)
Recognise & measure (para. 21)
After combination at carrying amount, the amalgamated entity re-measures each asset and liability to its FAIR VALUE (prospectively) from the acquisition date, recognising any gain/loss directly in net assets. Subsequent measurement follows the applicable IPSAS.
Exceptions: government-mandated combination valuations, tax-forgiveness transactions, and where fair value cannot be determined.
7
Amalgamations – the Net Assets/Equity Mechanism (paras. 37–39)
Equity reset (para. 37)
In the pooling, the amalgamated entity's NET ASSETS/EQUITY is the sum of the combining entities' net assets at carrying amount – with a corresponding revaluation reserve adjustment to equity. The combined equity is then allocated to the combining entities on a relative-book-value basis.
The reserve is not distributable – it is a capital buffer against future revaluation effects.
8
Amalgamations – Measurement Period, Related Costs & Tax Forgiveness (paras. 40–49)
Period + costs (para. 40)
ItemTreatment
Measurement periodUp to 12 months; adjust retrospectively
Combination costsExpensed as incurred (legal, advisory)
Tax forgivenessNot a taxable transfer – no gain recognised
9
Amalgamations – Statement Formats & Disclosures (paras. 50–56)
Format note (para. 50)
The amalgamated entity presents a single set of statements, but must disclose the combining entities' contribution and the basis of combination (carrying amount vs fair value) – including a reconciliation of the combining entities' carrying amounts to the amalgamated entity's.
Disclosure is required even though no goodwill is recognised – transparency over the 'book value' combination.
10
Accounting for Acquisitions – the Acquisition Method
Acquisition method (para. 58)
The acquisition method requires: (1) identify the acquirer; (2) identify and measure (at FV) the identifiable assets acquired, liabilities assumed and any non-controlling interests; (3) determine goodwill = consideration transferred + NCI − FV of net identifiable assets.
Identify acquirerMV identifiable assets/liabilitiesDetermine goodwill
11
Acquisitions – Recognition & Measurement Principles (paras. 64–74)
Steps at FV (para. 64)
ComponentMeasurement
Tangible/A intangible assetsFV at acquisition date
LiabilitiesFV (incl. contingent – PV of best estimate)
GoodwillResidual at FV
Assets/liabilities measured with little market input use unobservable inputs – provide a level-3 reconciliation.
12
Acquisitions – Exceptions to Recognition/Measurement (paras. 75–84)
Exceptions (para. 75)
Exceptions where FV is NOT used or is replaced: (a) government-mandated valuations; (b) tax-forgiveness transactions; (c) assets measured by an alternative IFRS (e.g. investment property at FVOCI); (d) contingent liabilities where no obligation exists or the outflow is not probable.
Gov't-mandated valuationAlternative measurementTax forgivenessNo gain/lossContingent liability (remote)Not recognised
13
Goodwill, Bargain Purchases & Non-Exchange Acquisitions (paras. 85–93)
Goodwill economics (para. 85)
OutcomeAccounting
Goodwill (normal)Recognise; test annually for impairment (IPSAS 26)
Bargain purchaseRecognise gain in P&L (IPSAS 26)
Non-exchange acquisitionUse FV of asset received if cheaper than consideration
14
Non-Controlling Interests, Measurement Period & Staged Acquisitions (paras. 73, 99–105)
NCI + stages (para. 99)
NCI is measured at FV (equity or gross method). A staged acquisition (step acquisition) re-measures a previously held interest at FV at the acquisition date with the change recognised in profit or loss. The measurement period allows amendments for up to 12 months.
A previously held equity-accounted interest is re-measured to FV – the gain/loss is recognised in profit or loss (not OCI).
15
Acquisitions – Disclosure Requirements (paras. 119–125)
Disclosure checklist (para. 119)
The matterDisclosed
Nature of combinationAcquisition vs amalgamation
Goodwill/Bargain purchaseAmount, sensitivity
Revenue/earnings of acquireePro forma as if acquired at start
Measurement periodAdjustments made, if any
16
Public Sector Combinations Under Common Control (paras. AG37–AG39)
Common control (para. AG37)
Where a combination is under COMMON CONTROL (e.g. a central government merging two departments), the public-sector 'transfer-and-merge' approach is available – assets and liabilities are transferred at carrying amount to the surviving entity, which then applies the amalgamation method.
No bargain purchase / goodwill arises under common control – the combination is a transfer of net assets at book value.
17
Effective Date & Amendment Timeline (paras. 126–126D)
Timeline
DateEvent
Jan 2017Issued
1 Jan 2019Effective date
2023Amended (latest)
IPSAS 40 superseded the previous IPSAS 15 (Financial Instruments: Disclosure and Presentation) for combinations content.
18
Relationship to IFRS 3
Mapping (para. 127)
IPSAS 40 adopts IFRS 3's acquisition-method core (identifiable assets/liabilities at FV, goodwill, NCI, measurement period) but diverges on: the amalgamation (modified pooling) carve-out, the public-sector 'operation' test, tax-forgiveness treatment, and combinations under common control.
IFRS 3 acquisition methodIPSAS 40 sameIFRS 3 amalgamationIPSAS 40 modified poolingIFRS 3 common controlIPSAS 40 transfer-and-merge
19
Statement / Process Mapping
Where it flows
ProcessLedger
Deal captureM&A Desk → Combination classifier
FV measurementFA Valuation → Identifiable assets/liabilities
Goodwill trackingIntangible Asset Register → Goodwill
DisclosureDisclosure Engine → IPSAS 7200
20
Related Standards – Cross-Reference Map
See also
StandardRelation
IPSAS 26Goodwill impairment testing
IPSAS 39Employee benefits acquired
IPSAS 34/35Separate/consolidated statements
IFRS 3Direct equivalent
21
Quick-Reference Glossary
Amalgamation
Entities combine into a new/amalgamated entity; pooling method.
Acquisition
One entity obtains control of another; acquisition method.
Goodwill
FV of net assets acquired over cost; impairse annually.
Bargain purchase
Negative goodwill; gain recognised in P&L.
Measurement period
Up to 12 months to finalise FV of net assets.
Common control
Transfer-and-merge approach at carrying amount.