| Background to the proposed revisions |
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The Board issued an Exposure Draft (ED 204) on Proposed Revisions to the Standards of GRAP on Transfer of Functions Between Entities Under Common Control (GRAP 105), Transfer of Functions Between Entities Not Under Common Control (GRAP 106) and Mergers (GRAP 107). ED 204 aligns the guidance in GRAP 105, GRAP 106 and GRAP 107 with IPSAS 40 on Public Sector Combinations. As the IFRS Accounting Standard on Business Combinations (IFRS 3) was used to develop parts of GRAP 106, ED 204 also proposes additional guidance from IFRS 3 that was issued after IPSAS 40 was approved.
The comment period for ED 204 closes on 15 July 2023. |
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| The most significant changes proposed to GRAP 106 |
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a. Additional scope exclusion
The ED proposes an additional scope exclusion for the transfer of an investment entity as defined in GRAP 35 on Consolidated Financial Statements.
b. Guidance on an optional test
ED 204 proposes to add guidance from IFRS 3 on an optional test (concentration test) in GRAP 106. This test allows an entity to apply a simplified assessment to decide if an acquired or received set of activities and assets and/or liabilities is not a function. An acquired or received set of activities and assets and/or liabilities is not a function if substantially all the carrying amounts of the gross assets acquired or received are concentrated in a single asset, or group of similar assets.
Illustrative examples are also included to illustrate the application of the optional test.
c. Guidance to assess whether a transferred process is substantive
A function is an integrated set of activities and related assets and/or liabilities that are managed to achieve an entity’s objectives by providing goods and/or services, or generating revenue. The ED proposes additional guidance from IFRS 3 to assess if an acquired or received process is substantive (and thereby would be a function) where the set of activities and assets and/or liabilities do not have outputs. Although a function usually has outputs, outputs are not required for the activities, assets and/or liabilities to be a function.
Illustrative examples are included to illustrate the proposed guidance.
d. Recognition principles for intangible assets
The ED proposes new guidance for intangible assets acquired or received that are not identifiable at the acquisition date. Examples include an assembled workforce and potential binding arrangements. The guidance clarifies that when an acquirer attributes value to the existence of an assembled workforce, it includes the value of the acquired or received intangible asset in the calculation of the resulting excess, rather than to account for the workforce separately as an identifiable intangible asset. Likewise, the acquirer includes any potential binding arrangements that the acquiree is negotiating at the acquisition date in the calculation of the resulting excess, as the binding arrangement itself does not qualify as an identifiable asset.
e. Measurement principles
The ED proposes new measurement principles for: non-controlling interests in the acquiree. This guidance clarifies that the interest in the acquiree should be measured at its fair value at the acquisition date, using valuation techniques, unless a value can be obtained with reference to a quoted price in an active market; and assets that an acquirer intends not to use, or to use in a way that is different from the way other market participants would use them. The guidance clarifies that these assets should be measured at fair value and tested for impairment subsequently. f. Disclosure requirements
The ED proposes a new disclosure requirement for an acquirer to present the GRAP 106 disclosures if the acquisition date of the transfer of functions is after the end of the reporting period, but before the financial statements are authorised for issue. If the transfer of functions is incomplete when the financial statements are authorised for issue, information should be provided to explain which disclosures could not be presented, and the reason therefore. |
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| What principles are retained in GRAP 106? |
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The Board agreed to retain the following principles in GRAP 106, thereby departing from the principles in IPSAS 40 or IFRS 3:
a. Measurement period
The ED retains the two year measurement period that may be applied when the initial accounting for a transfer of functions is incomplete by the end of the reporting period in which the transfer occurs. IPSAS 40 allows a measurement period of one year.
From practical experience, the Board noted that entities locally need more time to obtain the necessary information to identify and measure the assets and/or liabilities in a transfer of functions.
b. Treatment of goodwill
When the Board developed GRAP 106, it agreed to depart from the requirements in IFRS 3 on the treatment of goodwill. As in IFRS 3, IPSAS 40 refers to goodwill as the excess of the consideration transferred, any non-controlling interest in the acquiree and the net of the acquisition date fair values of the identifiable assets acquired or received and liabilities assumed.
In developing GRAP 106, the Board concluded that the excess is a premium paid by the acquirer to the previous owners. The Board also concluded that the definition of an asset or liability in the Framework for the Preparation and Presentation of Financial Statements is not met to support the recognition of goodwill.
In revising GRAP 106, the Board concluded that its reasons to depart from IFRS 3 remain relevant. The Board noted that even if the excess meets the definition of an asset, the entity may not be able to reliably measure it. |
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| Do you agree with the proposed revisions to GRAP 106? |
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| Share your thoughts by accessing the Exposure Draft on ED 204 – ASB, or by attending the roundtable discussion planned for the 4th of July 2023. If you are interested in joining this session, please contact [email protected]. |
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