Alert: Combinations – Initial Measurement and Related Disclosures

Alert: Combinations – Initial Measurement and Related Disclosures

In January 2020, the Accounting Standards Board (AcSB) issued an exposure draft (ED) proposing a new Section to be included Part III of the CPA Canada Handbook - Accounting. The proposed Section 4449 Combinations by Not-for-Profit Organizations aims to provide guidance on accounting for a combination of not-for-profit organizations (NPOs) and specifically addresses combinations involving two or more related or unrelated NPOs. Currently, Part III does not contain guidance for NPO combinations, which has led to diversity in practice when accounting for NPO combinations.

To reduce this diversity, the proposed Section provides a model with a set of five criteria to determine when a combination is accounted for as a merger or as an acquisition. According to this model, all of the following criteria must be met to account for a combination as a merger:

  1. No party is characterized as the acquirer or acquiree
  2. Those charged with governance of the predecessor entities participate in determining the terms of the combination
  3. No significant consideration flows to a third party
  4. The combined entity encompasses the purposes of the combining entities
  5. There is no significant decline in the client communities served

If all of the above criteria are not met, the combination would be accounted for as an acquisition.

Accounting for a Combination as a Merger

Where a combination satisfies all criteria to be accounted for as a merger, the new Section proposes the following measurement, presentation and disclosure requirements that would result in accounting for the merger as if the combining entities have always been part of the same entity:

  • The carrying value of all of the assets, liabilities and net assets of the entities subject to the combination would be combined into a single reporting entity.
  • Comparative information presented by the reporting entity would show the aggregate results of the prior period as if the entities have always been combined.
  • The reporting entity would make adjustments to achieve uniformity of accounting policies across the combining entities for the current and comparative combined financial statements of the reporting entity.
  • Subsequently, the combined assets, liabilities and net assets would be accounted for in accordance with other applicable Sections for those items and the entity’s accounting policies.
  • The reporting entity would disclose sufficient information to enable users of the financial statements to evaluate the nature and financial effect of a combination as it relates to the current year and the prior year financials of the combining entities.

Accounting for a Combination as an Acquisition

If any of the five criteria are not met, the combination would be accounted for using the proposed acquisition method. This method is primarily consistent with the four-step acquisition method as detailed in ASPE 1582 Business Combinations in Part II of the Handbook, but contains some exceptions and guidance necessary to address the unique characteristics of NPOs:

  • Guidance in Section 4450 Reporting Controlled or Related Entities by Not-for-Profit Organizations would be applied in determining the acquirer in the transaction.
  • As of the combination date, the acquirer would recognize the identifiable assets acquired and liabilities assumed in the acquiree.
  • The identifiable assets acquired and liabilities assumed would be measured at their acquisition-date fair values.
  • In the case of excess consideration transferred or a bargain purchase, a corresponding expense or gain would be recognized and presented separately in the statement of operations on the combination date.
  • Subsequently, the assets acquired and liabilities assumed would be accounted for in accordance with other applicable Sections for those items.

Alternatively, if the reporting entity chooses to disclose its controlled NPOs in accordance with Section 4450, it would identify the acquirer and determine the combination date. Further, the reporting entity would provide disclosures as required by proposed Section 4449 and Section 4450 to enable users of the financial statements to evaluate the nature and financial effect of the combination.

The ED proposes that this new Section would be effective for combinations occurring on or after January 1, 2022, with earlier application permitted. The requirements of this Section would be applied prospectively.

The deadline to submit comments on the ED was extended from April 14, 2020 to May 14, 2020 in light of the evolving uncertainties created by the COVID-19 pandemic. The AcSB expects to issue the final standard in the second quarter of 2021 if no significant changes to the proposals are required as a result of comments received.

To access the ED and for more information on this project, including updates on the AcSB’s board deliberations and decisions, click here.


This communication contains a general overview of the topic and is current as of May 8, 2020. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person’s use of or reliance upon this material. © MNP LLP 2020. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.