IPSAS 40 Public Sector Combinations

The International Public Sector Accounting Standards Board (IPSASB) has issued a new accounting standard - IPSAS 40 Public Sector Combinations.

IPSAS 40 provides the first international accounting requirements that specifically address the needs of the public sector when accounting for combinations of entities and operations  It recognises two types of public sector combinations: amalgamations and acquisitions. By contrast, IFRS 3 Business Combinations, used by private sector entities, treat all combinations as acquisitions, which requires obtaining fair value information.

The accounting requirements for amalgamations in IPSAS 40 are based on existing information, which enables public sector entities to avoid unnecessary valuation costs, while still meeting users’ needs. 

It requires use of the “modified pooling of interests” method of accounting for amalgamations, which reflects the amalgamation as at the date it takes place. For acquisitions (i.e. those which do not fall to be accounted for as an amalgamation), the same approach as IFRS 3 Business Combinations is required. This is supplemented with guidance for public sector-specific situations

The idea that gaining of control over an operation creates a rebuttable presumption that the combination is an acquisition, which was included in the January 2016 exposure draft, has been dropped in the final version of the standard.  Instead a two-step approach to determining the appropriate classification is introduced:

• firstly it looks into whether one party to the public sector combination gains control of operations; and
• secondly it assesses whether the economic substance of the public sector combination is that of an amalgamation.

IPSAS 40 applies from January 1, 2019, with earlier adoption encouraged.   Further information is available on the International Federation of Accountant’s (IFAC’s) web site here.