GRAP - Pages. GRAP/02...The City of Tshwane and the City of Johannesburg are not under common...

ACCOUNTING GUIDELINE

GRAP

Transfer of

Functions, Mergers

and Discontinued

Operations

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Permission to reproduce limited extracts from the publication will not usually be withheld.

Though National Treasury (NT) believes reasonable efforts have been made to ensure the accuracy of the information contained in the guideline,

it may include inaccuracies or typographical errors and may be changed or updated without notice. NT may amend these guidelines at any time by

posting the amended terms on NT's Web site.

Note that this document is not part of the GRAP standard. The GRAP takes precedence while this guideline is used mainly to provide further

explanations on the concepts already in the GRAP.

GRAP on Transfer of Functions, Mergers and Discontinued Operations

Issued February 2020 of 47

Contents

1. Introduction .................................................................................................................. 4

2. Transfer of Functions ................................................................................................... 5

2.1 Scope ................................................................................................................. 5

2.2 Definition and identification of an acquirer and a transferor ................................. 6

2.2.1 Establishing common control ..................................................................... 7

2.2.2 Identifying a Function ................................................................................. 9

2.3 Accounting for a transfer of functions between entities under common control

(GRAP 105) ...................................................................................................... 11

2.3.1 Identifying the transfer date ..................................................................... 11

2.3.2 Recognition and measurement ................................................................ 11

2.4 Transfer of Functions Between Entities Not Under Common Control

(GRAP 106) ...................................................................................................... 20

2.4.1 Identifying the acquisition date ................................................................. 20

2.4.2 Recognition and measurement ................................................................ 20

3. Mergers (GRAP 107) ................................................................................................. 38

3.1 Scope ............................................................................................................... 38

3.2 Definition and identification of mergers ............................................................. 38

3.3 Determining the merger date ............................................................................ 39

3.4 Recognition and measurement ......................................................................... 40

4. Discontinued operations (GRAP 100) ........................................................................ 45

4.1 Scope ............................................................................................................... 45

4.2 Definition of discontinued operations ................................................................ 45

4.3 Presentation ..................................................................................................... 46

5. Useful links and references ........................................................................................ 47



1. Introduction

This document provides guidance on the accounting treatment of transfer of functions,

mergers and discontinued operations.

The contents should be read in conjunction with the relevant Standard of GRAP.

For purposes of this guide, “entities” refer to the following bodies to which the standard of

GRAP relate to, unless specifically stated otherwise:

Public entities

Constitutional institutions

Municipalities and all other entities under their control

Trading entities and government components applying the standards of GRAP

Parliament and the provincial legislatures

TVET and CET colleges

Explanation of images used in manual:

Definition

Take note

Management process and decision making

Example



2. Transfer of Functions

This section deals with GRAP 105 on Transfers of Functions Between Entities Under Common

Control as well as GRAP 106 on Transfers of Functions Between Entities Not Under Common

Control.

2.1 Scope

GRAP 105 and GRAP 106 is applicable to all entities on the accrual basis of accounting for

an acquirer and transferor to account for a transaction or event that meets the definition of

a transfer of functions.

The standards do not apply to:

transfers of individual or groups of assets and/or liabilities that do not meet the definition

of a transfer of functions (for example SANRAL may be requested to take over provincial

roads from various provincial departments from time to time - this will be treated as an

acquisition of assets by SANRAL in terms of GRAP 17 on Property, Plant and Equipment

rather than a transfer of functions) (refer to accounting guideline GRAP 17 for details);

a merger (refer to accounting guideline GRAP 107 for details).

When should a transfer of functions be accounted for in accordance with GRAP 105

and when should GRAP 106 be applied?

GRAP 105 on Transfer of Functions Between Entities Under Common Control establishes

accounting principles for an acquirer and transferor in a transfer of functions between entities

under common control whereas GRAP 106 on Transfer of Functions Between Entities Not

Under Common Control provides guidance to an acquirer where a transfer of functions is

undertaken between entities not under common control.

In determining whether GRAP 105 or GRAP 106 should be applied in accounting for the

transaction or event, entities should consider whether the transaction or event was undertaken

between entities in the same sphere of government; and/or between entities that are part of

the same economic entity.

The Government of the Republic of South Africa is divided into three distinct spheres, i.e.

national, provincial and local and each is independent from the decision-making of another

sphere. Even if the transaction or event occurred between entities within the same sphere of

government, entities should ultimately be controlled by the same party (economic entity)

before and after the transfer of functions for it to be within the same economic entity (i.e. a

group of entities).



Where transactions or events occurred between entities within different spheres of

government, the relationship between the entities need to be assessed to determine whether

the entities are ultimately controlled by the same economic entity before and after the transfer

of functions in order for it to be under common control.

If two departments within the same province enters into a transaction or event where it is

concluded that such a transaction or event is a transfer of functions, the entity should consider

applying the principles in GRAP 105, because (a) the transaction or event occurred between

two departments that are within the same sphere of government (i.e. the same province), and

(b) the departments are ultimately controlled by the same economic entity before and after the

transfer of functions.

Even though all municipalities are within the same sphere of government, each municipality is

independent from every other municipality and each municipality is responsible for the

establishment and election of its own municipal council. If a transaction or event occurs

between two municipalities, the transaction or event will not be a transfer of functions between

entities under common control because the transaction or event did not occur between entities

that are controlled by the same party before and after the transaction or event.

Thus, even though municipalities are within the same sphere of government, the entities are

not part of the same economic entity (i.e. the same municipal council) before and after the

transaction or event. Municipalities should also consider whether GRAP 106 on Transfer of

Functions between entities Not under Common Control or GRAP 107 on Mergers is more

applicable in accounting for the transaction or event, depending on whether one municipality

gained control over another municipality.

2.2 Definition and identification of an acquirer and a transferor

The terms and conditions are set out in a binding agreement between the parties (this can be

a formal written agreement, legislation, council resolution, etc.).

This agreement will usually set out the parties, indicating the transferor and the acquirer.

When the transferor and the acquirer are not clearly indicated in the agreement, the behaviour

or the actions of the entities may indicate which entity are the transferor and which entity is

the acquirer.

The acquirer is the entity which obtains control / takes possession of the acquiree.

The transferor is the entity that relinquishes or give up their control of a function



For example, where a transfer of functions is effected by transferring cash, other assets or

incurring liabilities, the entity transferring the cash or other assets or who incurs the liabilities

is usually the acquirer.

If no acquirer can be identified, the transaction or event should be accounted for in terms of

GRAP 107 on Mergers.

Example: Identity the transferor and acquirer

The Department of Health is currently running a nutritional programme for unemployed persons. New legislation mandated the Department of Health to transfer this programme to the Department of Social Development. The agreement did not specify which entity is the transferor and which entity is the acquirer. After the transfer the Department of Health will receive no more grants in respect of this project.

There is thus a clear indication by evaluating the transaction that the transferor will be the Department of Health and the acquirer will be the Department of Social Development.

Additional evidence that the Department of Health is the transferor is that the Department of Health will no longer receive funding to carry out the nutritional programme

2.2.1 Establishing common control

Common control can only occur between entities in the same sphere of government or

between entities that are part of the same economic entity (where entities are finally controlled

by the same entity before and after the transfer of functions, the transfer would be within the

same economic entity). Each sphere of government is responsible for executing its assigned

functions which should be in line with the overall policies and objectives set by national

government.

Although the national government provides funding to the other spheres of government and

the national government benefits from the activities of the other spheres of government (as

Where functions are transferred to a newly established entity which did not exist prior to the acquisition date, this will be regarded as a transfer of functions between entities not under common control, if this newly established entity is identified as the acquirer and the acquiree does not form part of the same economic entity subsequent to the transfer.

Control is where an entity has power to govern or direct the financial and operating policies of another entity, so that the entity will receive benefits from its activities.



they assist in achieving its overall policies and objectives), this does not imply control for

financial reporting purposes. Entities within one sphere of government are thus independent

of other spheres of government.

When a transfer of functions take place, the level of non-controlling interest is irrelevant in

determining if the transaction involves entities under common control.

Common control is not transitory / temporary.

The following figure illustrates the entities in the South African government context (note that

entities within the different spheres of government are not under common control):

*for the purpose of this illustration assume public entities include Constitutional Institutions and/trading entities. Departments include government components.

Example: Entities under common control within the relevant spheres of government

National sphere:

For example: Telkom, the Post Office, Transnet, the National Departments of Public Works and Trade and Industry, the Competition Commission and the Market Theatre will all be under common control, as they fall within the national sphere of government.

Provincial sphere:

For example: The Gauteng Department of Health, Gauteng Economic Development Agency, Gauteng Gambling Board and the Gauteng Tourism Authority will all be under common control , as they fall within the same province. Note that these entities will not be under common control in relation to any departments or public entities from another province.

Local sphere:

For example: The City of Johannesburg and its municipal entities are under common control. The City of Tshwane and the City of Johannesburg are not under common control.



2.2.2 Identifying a Function

Achieving the entity’s objectives can be either by providing economic benefits or service

potential.

A transfer of functions results in a wide range of outcomes, and as a result may be undertaken

for a variety of reasons, including:

To provide a return to owners of the entity, either in the form of economic benefits or

service potential. For example, entities may acquire entities or parts of entities in the

private sector for the potential return to be yielded by the entity;

To generate revenue. Trading entities and public entities may be established by

government in order to maximise the revenue potential of certain activities, for example,

the establishment of a property management company to maximise rental revenue

generated from government owned land and buildings;

To reduce costs or improve the way in which resources are used. Entities may be

rationalised in order to save on costs, maximise efficiencies, or as a means of improving

service delivery. For example, the transfer of certain functions from the national and

Example: Identifying a transfer of functions

The Department of Health is currently running a nutritional programme for unemployed persons. New legislation mandated the Department of Health to transfer this programme to the Department of Social Development.

Acquirer: will be the Department of Social Development.

Sphere: is within national government.

Function: nutritional programme

Both departments are within the same sphere of government (national) and within the same economic entity.

The transfer of function will thus fall within the scope of GRAP 105 on Transfer of Functions Between Entities Under Common Control.

If however, the function was transferred from the National Department of Health to the Gauteng Department of Health and Social Development, then the transfer of function will fall within the scope of GRAP 106 on Transfer of Functions Between Entities Not Under Common Control. This is because the departments do not fall within the same sphere of government or within the same economic entity.

Function is an integrated set of activities that is capable of being conducted and managed for purposes of achieving an entity’s objectives, by either providing economic benefits (increased sales, cash flow, net income) or service potential (anticipated future benefits to be obtained from an asset).



various provincial departments of social development to a newly formed agency in a bid

to improve service delivery; and

To deliver goods and services (whether for full or only part compensation). An example

of this is the establishment of municipal entities by municipalities to provide essential

services such as electricity, water supply, and rubbish removal in return for fees charged

to users.

A function consists of three elements, i.e. input, process and output as shown in the figure

below:



2.3 Accounting for a transfer of functions between entities under common control (GRAP 105)

2.3.1 Identifying the transfer date

The transfer date will be the date on which the acquirer obtains control and the transferor /

acquiree loses control over this function.

This date is sometimes determined in a binding arrangement. However, it is important to note

that the acquirer may obtain control on a date that is either earlier or later than the date

specified in the binding arrangement. The acquirer has to consider all the relevant facts and

circumstances in determining the transfer or acquisition date.

The acquirer will account for the assets acquired and liabilities assumed in its financial

statements from the transfer date. The transferor will derecognise the assets transferred and

liabilities relinquished in its financial statements from that date.

2.3.2 Recognition and measurement

Recognition and measurement principles

The figure below summarises the recognition principles in a transfer of functions between

entities under common control for the acquirer and transferor:

Under common control (initial recognition)

Acquirer Transferor

Amount of consideration (if any) Recognise the purchase consideration paid (if any) – can be cash / assets – derecognise these assets

Recognised the purchased consideration received (if any) – if assets recognise the assets at fair value

Assets and liabilities Recognise the carrying amounts

Carrying amounts = amounts in the statement of financial position of transferor

Derecgonise the carrying amounts of the assets and liabilities being transferred

Difference between the carrying amount of assets acquired / transferred

Recognise in accumulated surplus / deficit


Example: Determining the transfer date

Department A decides to transfer certain functions of Entity A to Entity B, which are both under the common control of Department A. A directive from Department A stipulates that the effective date of the transfer is 1 April 20X9 however; Entity B only obtains control over the assets and liabilities of Entity A on 1 June 20X9 in terms of a memorandum of understanding between the entities.

As Entity B can only use or otherwise benefit from the transfer of functions from 1 June 20X9, this is the date from which the transfer should be accounted for.



Under common control (initial recognition)

and liabilities assumed / derecognised and consideration received / paid

Acquisition related costs Recognise as expense in the period in which the costs are incurred

The assets and liabilities that should be recognised should be governed by the terms and

conditions as indicated in the binding arrangement.

The assets acquired or transferred and the liabilities assumed or relinquished must be part of

what had been agreed in terms of the binding arrangement, rather than the result of separate

transactions. The acquirer and transferor should determine which assets are acquired or

transferred and which liabilities are assumed or relinquished as part of a transfer of functions

and which, if any, are the result of separate transactions to be accounted for in accordance

with their nature and the applicable standard of GRAP.

The acquirer should identify any amounts that are not part of what the acquirer and transferor

transferred in a transfer of functions in the following situations:

The acquirer and transferor had a pre-existing relationship before or when negotiations

for a transfer of functions began; or

The acquirer and transferor entered into a binding arrangement during the negotiations

that is separate from a transfer of functions.

The following are examples of separate transactions that are not part of a transfer of functions:

A transaction that in effect settles pre-existing relationships between the acquirer and the

transferor (this is discussed in more detail below);

A transaction that reimburses the transferor for paying the acquirer‘s acquisition-related

costs; and

Contributions received from third parties as compensation for future services as a result

of undertaking the transfer of functions.

A pre-existing relationship between the acquirer and transferor may be contractual (for

example, vendor and customer or supplier) or non-contractual (for example, plaintiff and

defendant). A gain or loss should be recognised by the acquirer if a transfer of functions in

effect settles a pre-existing relationship. The measurement will be different depending on

whether the pre-existing relationship was contractual or non-contractual.



For a pre-existing non-contractual relationship, the gain or loss should be measured at fair

value.

For a pre-existing contractual relationship, the gain or loss should be measured at the lesser

of:

The amount by which the binding arrangement is favourable or unfavourable from the

perspective of the acquirer when compared with terms for current market transactions for

the same or similar items.

The amount of any stated settlement provisions in the binding arrangement available to

the counterparty to which the contract is unfavourable.

If the latter is less than the former, the difference should be included as part of the transfer of

functions accounting.

The settlement of a pre-existing relationship between the acquirer and the acquiree is not part

of the transfer of functions as these transactions were entered into by, or on behalf of the

acquirer or primarily for the benefit of the acquirer rather than primarily for the benefit of the

acquiree before a transfer of functions. Consequently, these transactions should be accounted

for in terms of the applicable Standards of GRAP.

Example: Pre-existing non-contractual relationship

Department A, the acquirer, is a defendant in a lawsuit brought about by transferee. At the date of transfer, the fair value of the settlement of the lawsuit is R2 million. This is the amount at which the loss should be measured at.

If the acquirer already recognised a provision for the settlement of the lawsuit for R1.5 million, then the loss recognised would be measured at R500,000 (the difference between R2m and R1.5m already recognised.

This has to be recognised as a separate transaction to the transfer of functions.

Example: Pre-existing contractual relationship

Entity A, the acquirer, leases an office building from Entity B, the transferor.

If the contract terms are unfavourable by R2 million, then a R2 million loss should be recognised at the transfer date.

However, if the contract includes is a provision for the acquirer to settle the contract by making a payment of R1.2 million, then the loss will be recognised at this reduced amount.

The difference between the two amounts (R800,000) is included as part of the transfer of functions accounting.



As these transactions were entered into in at arm’s length, the acquirer should measure the

gain or loss when settling the pre-existing relationship, at its fair value

The assets and liabilities that qualify for recognition under a transfer of functions must meet

the definition of an asset or a liability in the Framework for the Preparation and Presentation

of Financial Statements and the recognition criteria in the applicable standards of GRAP at

the transfer date.

For example, the expected costs, when the acquirer in future plans to exit an activity of the

transferor, terminate employment, or relocate the transferor’s employees, should not be

included as part of the liabilities in a transfer of functions, but should be expensed in the period

in which the expenditure is incurred (thus after the transfer of functions has occurred).

The consideration paid by the acquirer can be in the form of cash, cash equivalents, or other

assets. If the consideration paid is in the form of other assets, the acquirer should de-recognise

such assets on the transfer date at their carrying amounts, i.e. the amount at which the asset

is recognised by the acquirer in its statement of financial position as of the transfer date.

The consideration received from the acquirer can be in the form of cash, cash equivalents, or

other assets. If the consideration received is in the form of other assets, the transferor should

measure such assets at their fair value on the transfer date in accordance with the applicable

standard of GRAP.

All acquisition related costs, such as advisory, legal, accounting, other professional and

consulting fees, etc., should be expensed by the acquirer in the period in which the costs are

incurred and the services are received.

Measurement period

If the initial accounting of a transfer of functions is incomplete at the end of the reporting period,

the assets acquired and liabilities assumed for which the accounting is incomplete should be

recognised at their provisional amounts.

If, prior to the transfer of functions, the transferor was not applying the accrual basis of accounting, the transferor should change its basis of accounting to the accrual basis of accounting prior to the transfer.



The acquirer is allowed a two-year measurement period from the transfer date in order to

obtain the information necessary to identity and measure the following as in accordance with

the requirements of GRAP 105:

The assets acquired, and liabilities assumed;

The consideration transferred, if any, for the transferor; and

The resulting excess of the purchase consideration paid (if any) over the assets acquired

and liabilities assumed.

After the transfer date (the measurement period), the provisional amounts should be

retrospectively adjusted to reflect the new information obtained about facts and circumstances

that existed at the transfer date and, if known, would have affected the measurement of

amounts recognised as of that date.

An increase in the provisional amount recognised for an asset (liability) will result in a

corresponding decrease (increase) in the excess of the purchase consideration paid (if any)

over the carrying amount of the assets acquired and liabilities assumed previously recognised

in accumulated surplus or deficit.

Conversely a decrease in the provisional amount recognised for an asset (liability) will result

in a corresponding increase (decrease) in the excess of the purchase consideration paid (if

any) over the carrying amount of the assets acquired and liabilities assumed previously

recognised in accumulated surplus or deficit.

The measurement period ends as soon as the acquirer receives the information it was seeking

about facts and circumstances that existed as of the transfer date or learns that more

information is not obtainable.

Subsequent measurement

Subsequent to the transfer, all assets and liabilities recognised should be measured in

accordance with the applicable standards of GRAP.

The assets acquired and liabilities assumed should be classified or designated at the transfer

date as necessary, to apply other standards of GRAP subsequent to the transfer date, based

on the terms of the binding arrangement, economic conditions, the operating or accounting

policies and other relevant conditions as these exist at the transfer date.

An example of a classification or designation to be made on the basis of the relevant

conditions, as they exist at the transfer date is that of a particular financial asset or liability as



a financial asset or liability at fair value or amortised cost in accordance with GRAP 104 on

Financial Instruments.

There is an exception to above. The following contracts should be classified or designated based on the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the merger date):

Classification of a lease contract as either an operating lease or a finance lease in accordance with GRAP 13 on Leases; and

Classification of a contract as an insurance contract in accordance with the International Financial Reporting Standard (IFRS) 4 on Insurance Contracts.



Example: Accounting for a transfer of functions between entities under common control

New legislation has determined that Entity B should be integrated in Entity A as at 31 March 20X0. All the assets and liabilities are transferred to Entity A for zero consideration. The two entities are within the same sphere of government.

The carrying amounts of Entity B’s assets, liabilities and net assets are as follows as at 31 March 20X0:

Property, plant and equipment R200,000

Trade receivables R75,000

Cash and cash equivalents R45,000

Trade payables (R250,000)

Net assets (accumulated surplus) (R70,000)

Entity A incurred acquisition cost amounting to R5,000.

The fair value of Entity B’s assets and liabilities are R520,000 and R250,000 respectively.

Journal entries:

The following journal entries will be made for both entities:

Acquirer (Entity A):

31 March 20X0 Debit Credit

R R

Property, plant and equipment 200,000

Trade receivables 75,000

Cash and cash equivalents 45,000

Trade payables 250,000

Gain from transfer of functions (accumulated surplus or deficit) 70,000

Acquisition cost 5,000

Bank 5,000

Account for transfer of functions between entities under common control



Acquiree (Entity B):


R R







If Entity A would have paid a consideration for the net assets cash to the value of R40,000 and by means of equipment with a carrying value of R10,000 (fair value of R50,000), the journal entries will be as follows:

Acquirer (Entity A):


R R





Bank 40,000

Equipment 10,000



Bank 5,000




Acquiree (Entity B):


R R





Bank 40,000

Equipment 50,000





2.4 Transfer of Functions Between Entities Not Under Common Control (GRAP 106)

2.4.1 Identifying the acquisition date

The acquisition date will be the date on which the acquirer obtains control and the acquiree

loses control over this function.

This date is sometimes determined in a binding arrangement. However, it is important to note

that the acquirer may obtain control on a date that is either earlier or later than the date

specified in the binding arrangement. The acquirer has to consider all the relevant facts and

circumstances in determining the acquisition date.

The acquirer will account for the assets acquired and liabilities assumed in its financial

statements from the acquisition date.

The acquiree will derecognise the assets transferred and liabilities relinquished in its financial

statements from that date.

2.4.2 Recognition and measurement


The figure below summarises the recognition principles in a transfer of functions between

entities not under common control:

Not under common control (initial recognition)

Acquirer Transferor

Amount of consideration (if any) Recognise the purchase consideration paid (if any) – can be cash / assets

If assets – derecognise the assets

Recognise the purchase consideration received (if any)

If assets – recognise the assets at fair value

Assets and liabilities Recognise at fair value at the transaction date

Derecognise the carrying amounts of the assets being transferred

Example: Determining the acquisition date

Legislation passed in Parliament on 1 April 20X1 requires Department A to take over the functions of Department B. The departments are not within the same sphere of government (thus not under common control). A directive is issued stating that the effective date of the transfer is 1 June 201 however; Department A only obtains control over the assets and liabilities of Department B on 1 July 201 in terms of a memorandum of understanding between the departments.

As Department A can only use or otherwise benefit from the transfer of functions from 1 July 201, this is the date from which the transfer should be accounted for.



Not under common control (initial recognition)

Acquirer Transferor

Difference between the fair values of assets and liabilities assumed and consideration paid

Recognise in surplus / deficit

Difference between carrying amounts of assets transferred and liabilities derecognised and consideration received

Recognise in surplus / deficit

Acquisition related costs Recognise as expense in the period in which the costs are incurred

For transfer of functions between entities not under common control, all identifiable assets

acquired and liabilities assumed by the acquirer should be measured at acquisition-date fair

values.

The assets acquired or transferred and the liabilities assumed or relinquished must be part of

what had been agreed in terms of the binding arrangement, rather than the result of separate

transactions. The acquirer and acquiree should determine which assets are acquired or

transferred and which liabilities are assumed or relinquished as part of a transfer of functions

and which, if any, are the result of separate transactions to be accounted for in accordance

with their nature and the applicable standard of GRAP.

The acquirer should identify any amounts that are not part of what the acquirer and acquiree

exchanged in a transfer of functions in the following situations:

The acquirer and acquiree had a pre-existing relationship before or when negotiations for

a transfer of functions began; or

The acquirer and acquiree enter into a binding arrangement during the negotiations that

is separate from a transfer of functions.

From this point forward, up to the illustrative examples, the guide only deals with the accounting of a transfer of functions from the acquirer’s perspective.



The following are examples of separate transactions that are not to be included in applying

the acquisition method:

A transaction that in effect settles pre-existing relationships between the acquirer and the

acquiree (this is discussed in more detail below);

A transaction that reimburses the acquiree or its former owners for paying the acquirer‘s

acquisition-related costs; and

Contributions received from third parties as compensation for future services as a result

of undertaking the transfer of functions.

A pre-existing relationship between the acquirer and acquiree may be contractual (for


defendant). A gain or loss should be recognised by the acquirer if a transfer of functions in

effect settles a pre-existing relationship, the measurement would be different depending on

whether the pre-existing relationship was contractual or non-contractual.


value.


of:








Example: Pre-existing non-contractual relationship

Department A, the acquirer, is a defendant in a lawsuit brought about by acquiree. At the date of transfer, the fair value of the settlement of the lawsuit is R2 million. This is the amount at which the loss should be measured at.

If the acquirer already recognised a provision for the settlement of the lawsuit for R1.5 million, then the loss recognised would be measured at R500,000 (the difference between R2m and R1.5m already recognised.

This has to be recognised as a separate transaction to the transfer of functions.



The settlement of a pre-existing relationship between the acquirer and the acquiree is not part

of the transfer of functions as these transactions were entered into by, or on behalf of the

acquirer or primarily for the benefit of the acquirer rather than primarily for the benefit of the

acquiree before a transfer of functions. Consequently, these transactions should be

accounted for in terms of the applicable Standards of GRAP.

As these transactions were entered into in at arm’s length, the acquirer should measure the

gain or loss when settling the pre-existing relationship, at its fair value

All acquisition related costs, such as advisory, legal, accounting, valuation, other professional

and consulting fees, etc., should be expensed by the acquirer in the period in which the costs

are incurred and the services are received. However, if the acquirer incurs costs to issue debt

or equity securities, those costs should be recognised in accordance with GRAP 104 on

Financial Instruments, i.e. capitalised or taken to net assets.

Subsequent to the transfer, all assets and liabilities recognised should be measured in


The acquisition method requires that:

1. The acquirer should be identified.

2. The acquisition date should be determined.

3. The identifiable assets acquired, the liabilities assumed and non-controlling interest in the

acquiree should be recognised and measured at their acquisition-date fair values (there

are however exceptions).

4. The difference between the identifiable assets acquired, the liabilities assumed and non-

controlling interest in the acquiree and the consideration transferred to the acquiree

should be recognised in surplus and deficit.

Example: Pre-existing contractual relationship

Entity A, the acquirer, leases an office building from Entity B, the acquiree.

If the contract terms are unfavourable by R2 million, then a R2 million loss should be recognised at the transfer date.

However, if the contract includes is a provision for the acquirer to settle the contract by making a payment of R1.2 million, then the loss will be recognised at this reduced amount.

The difference between the two amounts (R800,000) is included as part of the transfer of functions accounting.



Steps 1 to 4 are discussed below.

1. Identify the acquirer

The terms and conditions are set out in a binding arrangement which may encompass a formal

written agreement between the entities, legislation passed in parliament or a provincial

legislature, cabinet decision, ministerial order, a decision made by a municipal council,

regulation or a notice or other official means.

Where a transfer of functions is effected by transferring cash, other assets or incurring

liabilities, the entity transferring the cash or other assets or who incurs the liabilities is usually

the acquirer.

Where a transfer is brought about through the exchange of residual interests, the acquirer will

be the entity that does not experience a change in control.

If no acquirer can be identified, the transaction or event should be accounted for in terms of

GRAP 107 in Mergers.

2. Determining the acquisition date

The acquisition date is the date where the acquirer obtains control over the acquiree.

The binding arrangement may specify an effective date for the transfer of functions. There

may however be cases where the acquirer obtains control over the acquiree on a date that is

earlier or later than the date on which the assets and liabilities are transferred by the acquiree,

or specified in the binding arrangement.

Example: Identifying the acquisition date

Legislation passed on 1 April 20X2 requires Provincial Department A (acquirer) to take over the functions of Department B (acquiree). The departments are not within the same sphere of government.

A directive is issued that states that the effective date of the transfer is 1 June 20X2.

Department A however only obtains control of the assets and liabilities on 1 July 20X2 through a memorandum of understanding.

The transaction date (date when the transfer of functions should be accounted for) will only be 1 July 20X2, since that is the date when the acquirer can use or otherwise benefit from the transfer of functions in pursuit of its objectives, or exclude or otherwise regulate the access of others to those benefits, i.e. obtains control over the assets and liabilities.



3. Recognition and measurement of identifiable assets acquired, liabilities assumed

and any non-controlling interest in the acquiree

The following should happen:

The identifiable assets acquired and liabilities assumed must meet the definitions of

assets and liabilities in the Framework for the Preparation and Presentation of Financial

Statements and the recognition criteria in the applicable standards of GRAP at the

acquisition date;

For example, the expected costs, when the acquirer in future plans to exit an activity of

the transferor, terminate employment, or relocate employees, should not be included as

part of the liabilities in a transfer of functions, but should be expensed in the period in

which the expenditure is incurred (thus after the transfer of functions has occurred).

The identifiable assets acquired and liabilities assumed must be part of what was agreed

by in the binding arrangement between the acquirer and the acquiree; and

Under the binding arrangement, the acquirer should have an enforceable claim over the

acquiree either, to relinquish control of the entity, or over the assets and liabilities of the

function to be transferred.

There are some specific recognition and measurement principles and exceptions to the

recognition and measurement principles outlined above. These are discussed below.

Operating leases

An acquirer should not recognise any assets or liabilities related to an operating lease in which

the acquiree is the lessee. There are, however, certain exceptions which are summarised in

the figure below:



Example: Determining the whether the terms of an operating lease are favourable or unfavourable

The acquiree is the lessee in an operating lease. At 1 April 20X1, the acquisition date, the lease has a remaining term of four years and the lease rentals are fixed at R120,000 per annum over the remaining term.

A market rate for a similar lease is R140,000 per annum. The lease rentals are therefore favourable relative to market terms.

The acquirer should therefore record an intangible asset for the favourable lease and amortise it over the remaining lease term.

The asset to be recognised should be measured as follows (assuming a market-related interest rate of :

PMT = R20,000 (R140,000 – R120,000)

i = 8% (assumed market-related interest rate)

n = 4

PV = R66,243

1 April 20X1 Debit Credit

R R

Intangible asset – operating lease 66,243

Gain from transfer of functions (surplus or deficit) 66,243

Account for favourable operating lease acquired through a transfer of functions

Subsequently, the intangible asset should be amortised over the remaining lease period. The journal for the first year will be as follows (the entries in respect of subsequent years will be similar):

1 April 20X1 Debit Credit

R R

Amortisation of operating lease (66,243 / 4) 66,243

Intangible asset – operating lease 66,243

Account for amortisation of intangible asset recognised in respect of favourable operating lease acquired

through a transfer of functions



Intangible assets

Identifiable intangible assets acquired in a transfer of functions should be separately

recognised. That is if the intangible asset meets either:

The separability criterion, i.e. capable of being separated or divided from the acquiree and

sold, transferred, licensed, rented or exchanged, either individually or together with a

related contract, identifiable asset or liability (the asset is separable even if the acquirer

does not intend to sell, license or otherwise exchange it); or

The contractual-legal right criterion (the asset is identifiable even if the asset is not

transferable or separable from the acquiree or from other rights and obligations).

Classifying identifiable assets acquired and liabilities assumed

Identifiable assets acquired and liabilities assumed should be classified or designated at the

acquisition date as necessary, to apply other standards of GRAP subsequent to the acquisition

date, based on the terms of the binding agreement, economic conditions, the operating or

accounting policies and other relevant conditions as these exist at the acquisition date.

Example: Assets that meet the separability and contractual-legal right criteria

Separability criterion

An acquired intangible asset will meet the separability criterion if there is evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent and regardless of whether the acquirer is involved in them.

If terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging the intangible asset, it will not meet the separability criterion.

Contractual-legal right criterion

The acquiree leases a facility under an operating lease that has terms that are favourable relative to market terms; it may however not sell or sublease the lease. An intangible asset that meets the contractual-legal right criterion for separate recognition will be recognised for the amount by which the lease terms are favourable compared with the terms of current market transactions for the same or similar items, even if the acquirer cannot sell or otherwise transfer the lease contract (refer to Example 8 above for details and journal entry).

The acquiree owns and operates a power plant under license. An intangible asset that meets the contractual-legal right criterion for separate recognition will be recognised for the license to operate that power plant, even if the acquirer cannot sell or otherwise transfer it separately from the acquired power plant.



An example of a classification or designation to be made on the basis of the relevant conditions

as they exist at the acquisition date is that of a particular financial asset or liability as a financial

asset or liability at fair value or amortised cost in accordance with GRAP 104 on Financial

Instruments.

Non-controlling interest in an acquiree

At acquisition date measure components of non-controlling interests in the acquiree 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 either:

Fair value (either based on the active market prices for the equity shares not held by the

acquirer or by using other valuation techniques where there is no active market prices);

or

The present ownership instruments’ proportionate share in the recognised amounts of the

acquiree's identifiable net assets.

There is an exception to above. The following contracts should be classified or designated based on the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date):

Classification of a lease contract as either an operating lease or a finance lease in accordance with GRAP 13 on Leases; and

Classification of a contract as an insurance contract in accordance with the International Financial Reporting Standard (IFRS) 4 on Insurance Contracts.

Example: Measurement of non-controlling interest in an acquiree

On 31 March 20X2 Entity A acquires an 80% interest in Entity B for a cash consideration.

Details are as follows as at 31 March 20X1:

80% interest at cost (consideration paid) R1,070,000

Fair value of identifiable net assets R1,200,000

Fair value of non-controlling interest (20%) R280,000

GRAP 106 provides a choice on the measurement of non-controlling interest (NCI) at either:

1. fair value; or

2. the acquirer’s proportionate share of the acquiree’s identifiable net assets.

Therefore the value of the non-controlling interest will be R280,000 under option 1 and R240,000 (R1,200,000 x 20%) under option 2.



Assets with uncertain cash flows (valuation allowances)

No separate valuation allowance should be recognised, as the effects of uncertainty about

future cash flows are already included in the fair value measurement. For example, a separate

valuation allowance for the contractual cash flows for acquired receivables (including loans)

that are deemed uncollectible should not be recognised at acquisition date, since the

receivables are measured at their acquisition-date fair values.

Assets subject to operating leases in which the acquiree is the lessor

In measuring the acquisition-date fair value of an asset (e.g. building) that is subject to an

operating lease as lessor, the terms of the lease should be taken into account. Therefore, a

separate asset or liability should not be recognised where an operating lease is either

favourable or unfavourable when compared with market terms for leases in which the acquiree

is the lessor.

There are some exceptions to the recognition and measurement principles. These are

discussed below.

Contingent liabilities

GRAP 19 on Provisions, Contingent Liabilities and Contingent Assets defines a contingent

liability as:

Possible obligation arising from past events and whose existence will only be confirmed

with the occurrence or non-occurrence of the uncertain future events not wholly within the

control of the entity, or

A present obligation arising from a past event, but is not recognised as it is not probable

that an outflow of resources will be required to settle the obligation or the amount of the

obligation cannot be measured reliably.

For the purposes of GRAP 106, a contingent liability assumed in a transfer of functions should

be recognised at acquisition date if there is a present obligation arising from past events and

its fair value can be measured reliably.

Subsequently, up to when the liability is settled, cancelled or expires, a contingent liability

should be measured at the higher of:

The amount that will be recognised in accordance with GRAP 19 on Provisions,

Contingent Liabilities and Contingent Assets; and



The initial amount recognised less cumulative amortisation in accordance with GRAP 9

on Revenue from Exchange Transactions.

Employee benefits

The acquirer should recognise and measure a liability (or asset) related to the acquiree’s

employee benefit arrangements in accordance with GRAP 25 on Employee Benefits.

Indemnification assets

The seller may contractually indemnify the acquirer for the outcome of a contingency or

uncertainty related to all or part of a specific asset or liability.

For example, the seller may indemnify the acquirer against losses above a specified amount

on a liability arising from a particular contingency. In other words, the seller guarantees that

the acquirer’s liability will not exceed a specified amount. The acquirer therefore obtains an

indemnification asset.

The acquirer should recognise the indemnification asset at the same time that it recognises

the indemnified item and measure the indemnification asset on the same basis as the

indemnified item, subject to the need for a valuation allowance for uncollectible amounts if it

is not measured at fair value.

Subsequently, the acquirer should measure the indemnification asset on the same basis as

the indemnified liability or asset, subject to any limitations as set in the binding arrangement

on its amount. If the indemnification asset is not subsequently measured at fair value, a

valuation allowance for uncollectible amounts should be included.

The acquirer should derecognise the indemnification asset only when it collects the asset,

sells it, or otherwise loses the right to it.

Reacquired rights

A reacquired right is an intangible asset that the acquirer recognises separately from the

difference between the identifiable assets acquired and liabilities assumed and the

consideration transferred.

The value of a reacquired right recognised as an intangible asset should be measured on the

basis of the remaining contractual term of the related contract or binding agreement.



Where the terms of the binding arrangement are favourable or unfavourable relative to the

terms of current market transactions for the same or similar items, a settlement gain or loss

should be recognised separately from the transfer of functions.

A pre-existing relationship may be a contract that the acquirer recognises as a reacquired

right. A gain or loss should be recognised by the acquirer, the measurement of the gain or

loss will be different depending on whether the pre-existing relationship was contractual (for


defendant).


value.


of:








Subsequently, reacquired rights should be amortised over the remaining contractual period of

the contract in which the right was granted. If the acquirer subsequently sells the reacquired

right to a third party, the carrying amount of the intangible asset should be taken into account

in determining the gain or loss on sale.



4. Recognising and measuring the difference between the assets acquired, liabilities

assumed and the non-controlling interest and the consideration transferred (if

any)

The difference is measured as the excess of 1 over 2 below:

1. The aggregate of:

(i) the consideration transferred (if any) measured in accordance with GRAP 106, which

generally requires acquisition-date fair value (see consideration transferred further

below);

(ii) the amount of any non-controlling interest in the acquiree measured in accordance with

GRAP 106 (see non-controlling interest in an acquiree above); and

(iii) in a transfer of functions achieved in stages (see transfer of functions achieved in stages

further below), the acquisition-date fair value of the acquirer’s previously held equity

interest in the acquiree.

2. The net of the acquisition-date amounts of the identifiable assets acquired and the

liabilities assumed measured in accordance with GRAP 106.

Consideration transferred

The consideration transferred should be measured at fair value, which is the sum of the fair

value of assets transferred, the liabilities incurred, and residual interest issued by the acquirer.

If the carrying amounts of assets transferred or liabilities incurred by the acquirer differ from

their fair values, the acquirer should re-measure the assets or liabilities to their fair values at

acquisition date and recognise any difference in surplus or deficit.

There may be situations where some of the transferred assets or liabilities remain within the combined entity after the transfer of functions and the acquirer therefore retains control of them. These assets and liabilities should not be re-measured to their fair values, but rather measured at their carrying amounts immediately before the acquisition date. No gain or loss will be recognised in surplus or deficit on assets or liabilities that the acquirer controls both before and after the transfer of functions



A transfer of functions achieved in stages

A transfer achieved in stages can be where an acquirer obtains control of an acquiree in which

it held a residual interest prior to the acquisition date.

The acquirer should re-measure its previously held residual interest in the acquiree at its

acquisition-date fair value. Any resulting gain or loss should be recognised in surplus or deficit.

Example: Transfer of functions achieved in stages

In 20X4 Entity A acquired a 30% interest in Entity B for a cash consideration of R320,000.

On 1 April 20Y0 Entity A acquired a further 50% interest in Entity B for a cash consideration of R750,000 which gives Entity A control over Entity B.

This is known as a transfer of functions achieved in stages.

The fair value of Entity A’s original interest (30%) as at 1 April 20Y0 is R400,000.

GRAP 106 requires the acquirer to re-measure its previously held residual interest in the acquiree at its acquisition-date fair value.

The journal entry will be as follows:

31 March 20Y0 Debit Credit

R R

Investment in Entity B

(R400,000 – R320,000)

80,000

Gain on re-measurement of previously held residual interest

(surplus or deficit)

80,000

Re-measure previously held residual interest at acquisition-date fair value



Example: Measurement of the difference between the assets acquired, liabilities assumed and the non-controlling interest and the consideration transferred

In 20X4 Entity A acquired a 30% interest in Entity B for a cash consideration of R320,000 when the fair value of Entity B’s identifiable net assets was R1,000,000.

On 1 April 20Y0 Entity A acquired a further 50% interest in Entity B for a cash consideration.

Details are as follows as at 1 April 20Y0:

50% interest at cost (consideration paid) R750,000

Fair value of identifiable net assets R1,200,000

Fair value of Entity A’s original interest (30%) R400,000

Fair value of non-controlling interest (20%) R280,000

GRAP 106 requires that for a transfer of functions achieved in stages, the acquirer has to re-measure its previously held residual interest in the acquiree at its acquisition-date fair value.

GRAP 106 furthermore provides a choice on the measurement of non-controlling interest (NCI) at either:

• fair value; or

• the acquirer’s proportionate share of the acquiree’s identifiable net assets.

The difference in the calculation of the excess in the two options allowed is illustrated below.

NCI @ fair value NCI @ share of net assets

Fair value of consideration R750,000 R750,000

Non-controlling interest R280,000 R240,000 (R1,200,000 x 20%)

Previously held interest R400,000 R400,000

R1,430,000 R1,390,000

Fair value of identifiable net assets R1,200,000 R1,200,000

Loss from transfer of functions (surplus or deficit)

R230,000 R190,000

The consolidation journal entry will be as follows where the non-controlling interest is measured at fair value:


R R

Net assets of Entity B 1,200,000

Investment in Entity B (R750,000 + R400,000) 1,150,000

Non-controlling interest 280,000

Loss from transfer of functions (surplus or deficit) 230,000

Account for transfer of functions



The consolidation journal entry will be as follows where the non-controlling interest is measured at the proportionate share of the acquiree’s identifiable net assets:


R R

Net assets of Entity B 1,200,000

Investment in Entity B (R750,000 + R400,000) 1,150,000

Non-controlling interest 240,000

Loss from transfer of functions (surplus or deficit) 190,000


Contingent consideration

Any asset or liability resulting from a contingent consideration arrangement should form part

of the consideration that the acquirer transfers in exchange for the acquiree (see consideration

transferred above).

The contingent consideration should be measured at its acquisition-date fair value.

An obligation to pay contingent consideration should be classified as a liability or as net assets

depending on whether it meets the definition of a financial liability or a residual interest in

GRAP 104 on Financial Instruments.

A right to a return of previously transferred consideration if specified conditions are met should

be classified as an asset.

In subsequent reporting periods additional information obtained (thus after the acquisition

date) may result in changes in the fair value of a contingent consideration.

However, changes resulting from events after the acquisition date, such as meeting a

performance target, or reaching a milestone on a research and development project, are not

measurement period adjustments. The acquirer should account for changes in the fair value

of contingent consideration that are not measurement period adjustments as follows:

Contingent considerations classified as net assets should not be remeasured. Subsequent

settlement should be accounted for within net assets.

Contingent consideration classified as an asset or a liability that:

o Is a financial instrument according to GRAP 104 on Financial Instruments, should be

measured at fair value with gains and losses recognised in surplus or deficit.



o Is not a financial instrument according to GRAP 104 on Financial Instruments, should

be treated according to GRAP 19 on Provisions, Contingent Liabilities and Contingent

Assets or other standards of GRAP as appropriate (such as GRAP 31 on Intangibles

Assets, GRAP on Consolidated and Separate Financial Statements and IFRS 4 on

Insurance Contracts).

Example: Contingent considerations

Scenario 1:

Entity A acquires a 80% interest in Entity B for R210,000 (settled in cash) on 1 April 20X2. In terms of the binding arrangement 10% of this purchase price will have to be repaid (to Entity A) if Entity B’s revenue is below R800,000 for the 12 months following the acquisition date. At that date, Entity B’s identifiable net assets have a fair value of R150,000.

It is regarded highly improbable that the revenue of Entity B will be above R800,000 for the year. It is therefore likely that the contingent consideration will be repayable to Entity A at the end of the 12 month period.

At the date of acquisition the contingent component of the consideration is assessed as having a fair value of R15,000.

The journal entry will be as follows in the separate financial statements:


R R


(R210,000 – R15,000)

195,000

Receivable 15,000

Bank 210,000


The journal entry will be as follows in the consolidated financial statements:


R R

Net assets of Entity B 150,000

Investment in Entity B 195,000

Non-controlling interest (R150,000 x 20%) 30,000

Loss from transfer of functions 75,000




Scenario 2:

Entity A acquires a 80% interest in Entity B for R210,000 (settled in cash) on 1 April 20X2. In terms of the binding arrangement an additional R5,000 will be paid if Entity B’s revenue exceeds R1,000,000 for the 12 months following the acquisition date. At that date, Entity B’s identifiable net assets have a fair value of R150,000.

During the 5 year period preceding the acquisition, the revenue of Entity B never dropped below R1,000,000 per annum. It is therefore regarded highly improbable that the revenue of Entity B will drop below R1,000,000 per year. At the date of acquisition the contingent component of the consideration is assessed as having a fair value of R2,000.

The journal entry will be as follows in the separate financial statements:


R R


(R210,000 + R2,000)

212,000

Payable 2,000

Bank 210,000


The journal entry will be as follows in the consolidated financial statements:


R R

Net assets of Entity B 150,000

Investment in Entity B 212,000

Non-controlling interest (R150,000 x 20%) 30,000

Loss from transfer of functions 92,000




3. Mergers (GRAP 107)

3.1 Scope

GRAP 107 is applicable to all entities on the accrual basis of accounting to account for a

transaction or event that meets the definition of a merger.

This standard does not apply to:

transfer of functions between entities under common control (refer to accounting guideline

GRAP 105 for details); and

transfer of functions between entities not under common control (refer to accounting

guideline GRAP 106 for details).

3.2 Definition and identification of mergers

If an acquirer can be identified in the transaction, GRAP 105 and GRAP 106 on transfer of functions should be applied.

Combined entity is a new reporting entity, which was formed from the combination of two or more entities.

Combining entities are the entities that were combined for mutual sharing of risks and benefits in a merger.

A combined entity and combining entities need to be identified in order for there to be a merger.

There needs to be a binding agreement where the terms and conditions are set out, as well as, which entities need to be combined as a result of the merger. The binding agreement should also identify the new reporting entity (combined entity) after the merger.

Example: Identifying the combining entity and combined entities

A regulation passed by the Municipal Demarcation Board requires three municipalities to transfer all their functions into a new metropolitan municipality.

The combined entity will be the new metropolitan municipality.

The combined entities will be the three municipalities.



3.3 Determining the merger date

The merger date will be when the newly combined entity obtains control over the assets and

liabilities of the combining entities and the combining entities lose control of their assets and

liabilities.

The binding arrangement may specify an effective date for the merger. There may, however,

be cases where the combined entity obtains control of the assets and liabilities on a date that

is earlier or later than the date on which the assets and liabilities are transferred by the

combining entities, or the date specified in the binding arrangement.

A merger is where a new combined entity is established or started and none of the previous entities obtain control over any other and no acquirer can be identified.

Merger – a new combined entity is established and none of the former entities obtains control over any other. With a merger, no acquirer can be identified and it does not result in an entity having or obtaining control over any of the former entities involved in the transaction.

The following criteria indicate that a transaction or event should be accounted for as a merger:

No acquirer can be identified;

None of the parties acquires control. No party is seen to be dominant and all parties combine their relative risks and benefits in the combined entity and maintain and preserve their decision making powers;

All the parties to the transaction or event as represented by management, participate in establishing the management structure and in selecting the management personnel in the new combined entity; and

The size of the combining entities are not so unequal that one entity can dominate the combined entity because of its relative size.

Example: Identifying a merger

A regulation passed by the Municipal Demarcation Board requires three municipalities to transfer all their functions into a new metropolitan municipality.

The above is a merger and not a transfer of functions since no acquirer can be identified and none of the municipalities acquires control.



Example: Identifying the merger date

A regulation passed by the Municipal Demarcation Board on 1 April 20X1 requires three municipalities to transfer all their functions into a new metropolitan municipality.

A directive is issued that states that the effective date of the transfer is 1 June 20X1.

The new metropolitan municipality however only obtains control of the assets and liabilities on 1 July 20X1 through a memorandum of understanding.

The merger date (date when the merger should be accounted for) will only be 1 July 20X1, since that is the date when the new metropolitan municipality can use or otherwise benefit from the combination in pursuit of its objectives, or exclude or otherwise regulate the access of others to those benefits, i.e. obtains control over the assets and liabilities

3.4 Recognition and measurement


The figure below summarises the recognition principles in a merger:

Mergers (initial recognition)

Combined entity Combining entities

Assets and liabilities Recognise at fair value at the transaction date

Derecognise the carrying amounts of the assets being transferred

Difference between carrying amounts of assets acquired / transferred and liabilities assumed / derecognised



Expenditure incurred in relation to merger

Recognise as expense in the period in which the costs are incurred

The assets and liabilities that should be recognised should be determined by the terms and

conditions as indicated in the binding arrangement.

The assets and liabilities that qualify for recognition under a merger must meet the definitions

of assets and liabilities in the Framework for the Preparation and Presentation of Financial

Statements and the recognition criteria in the applicable standards of GRAP at the merger

date.

For example, the expected costs, when the newly combined entity in future plans to exit an

activity of the combining entities, terminate employment, or relocate employees, should not

be included as part of the liabilities in a merger if the entity is not obliged to incur such costs.

These costs should be expensed in the period in which the expenditure is incurred (thus after

the merger has occurred).



All acquisition related costs, such as advisory, legal, accounting, other professional and

consulting fees, etc., should be expensed by the combined entity in the period in which the

costs are incurred and the services are received.

Measurement period

If the initial accounting of a merger is incomplete at the end of the reporting period, the assets

acquired and liabilities assumed for which the accounting is incomplete should be recognised

at their provisional amounts.

The combining entity is allowed a two-year measurement period from the merger date in order

to obtain the information necessary to identity and measure the following in accordance with

the requirements of GRAP 107:

The assets acquired, and liabilities assumed;

The consideration transferred, if any, for the combining entities; and

The resulting excess of the purchase consideration paid (if any) over the assets acquired

and liabilities assumed.

After the merger date (the measurement period), the provisional amounts should be

retrospectively adjusted to reflect the new information obtained about facts and circumstances

that existed at the merger date and, if known, would have affected the measurement of

amounts recognised as of that date.

An increase in the provisional amount recognised for an asset (liability) will result in a

corresponding decrease (increase) in the excess of the purchase consideration paid (if any)

over the carrying amount of the assets acquired and liabilities assumed previously recognised

in accumulated surplus or deficit.

Conversely a decrease in the provisional amount recognised for an asset (liability) will result

in a corresponding increase (decrease) in the excess of the purchase consideration paid (if

any) over the carrying amount of the assets acquired and liabilities assumed previously

recognised in accumulated surplus or deficit.

If, prior to the merger, a combining entity was not applying the accrual basis of accounting, the entity should change its basis of accounting to the accrual basis of accounting prior to the merger.



The measurement period ends as soon as the combined entity receives the information it was

seeking about facts and circumstances that existed as of the merger date or learns that more

information is not obtainable.

Subsequent measurement

Subsequent to the transfer all assets and liabilities recognised should be measured in


The assets acquired and liabilities assumed should be classified or designated at the merger

date as necessary to apply other standards of GRAP subsequent to the merger. The

classifications or designations should be based on the terms of the binding arrangement,

economic conditions, the operating or accounting policies and other relevant conditions as

these exist at the merger date.

An example of a classification or designation to be made on the basis of the relevant

conditions, as they exist at the merger date is that of a particular financial asset or liability as

a financial asset or liability at fair value or amortised cost in accordance with GRAP 104 on

Financial Instruments.

The financial statements of the combined entity should be prepared using uniform accounting

policies for similar transactions and other events or similar circumstances.

There is an exception to the above. The following contracts should be classified or designated based on the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the merger date):

• Classification of a lease contract as either an operating lease or a finance lease in accordance with GRAP 13 on Leases; and

• Classification of a contract as an insurance contract in accordance with the International Financial Reporting Standard (IFRS) 4 on Insurance Contracts.



Example: Accounting for a merger

New legislation has determined that a new combining entity (hereafter called Entity AB) should be established as at 31 March 20X2 by combining the assets and liabilities of Entity A and Entity B. All the assets and liabilities are merged into Entity AB for zero consideration. Neither Entity A nor Entity B will control Entity AB. The carrying amounts of Entity A’s assets, liabilities and net assets are as follows as at 31 March 20X2:






The carrying amounts of Entity B’s assets, liabilities and net assets are as follows as at 31 March 20X2:






Entity AB incurred acquisition cost amounting to R5,000. The fair value of Entity A’s assets and liabilities are R300,000 and R250,000 respectively. The fair value of Entity B’s assets and liabilities are R350,000 and R270,000 respectively.

Journal entries:

The following journal entries will be made for the combined entity and the combining entities:

Combined entity (Entity AB):

1. 31 March 20X2 Debit Credit

R R

Property, plant and equipment (180,000 + R200,000) 380,000

Trade receivables (75,000 + 90,000) 165,000

Cash and cash equivalents (5,000 + 45,000) 50,000

Trade payables (250,000 + 270,000) 520,000

Gain from merger (accumulated surplus or deficit) 75,000


Bank 5,000

Account for merger



Combining entity (Entity A):


R R





Loss from merger (accumulated surplus or deficit) 10,000

Account for merger

Combining entity (Entity B):


R R





Loss from merger (accumulated surplus or deficit) 65,000

Account for merger



4. Discontinued operations (GRAP 100)

4.1 Scope

GRAP 100 is applicable to all entities preparing their financial statements on the accrual basis

of accounting.

4.2 Definition of discontinued operations

Example: Discontinued operations

Nuclear operation plant of XYZ (Electricity providing entity) whose year-end is the 31 of March of each year operates a nuclear power plant in upper northern region of South Africa. This nuclear power generating operating segment generates its revenue through sale of its excessing power supply to nearby industries from their operational needs from which it’s able to sustain its operations. To do this the plant has its own unique set of machinery, staff complement tailored and skilled specifically for its operations and when in need to raise finance for its capital needs, is able to do so through its own set of audited financial statements. Therefore the operations meet the definition of a cash generating unit.

Due to operational reasons XYZ took a decision on the 15 March 20X2 to discontinue its nuclear power plant to its BBBEE partner as part of its economic empowerment program. On the 25 March 20X2 a detailed plan was communicated to all affected parties as to how the plan was to be carried out by hired consultants.

Discontinued Operations is a component of an entity (i.e. operations and cash flows that can be clearly distinguished, operationally and for financially reporting purposes, from the rest of the entity) that has been disposed of and represents a distinguishable activity, group of activities or geographical area operations, or is a controlled entity acquired exclusively with the view to resale.

To qualify as a discontinued operation, the disposal must occur within a single co-ordinated plan. For group of asset to be disposed they need not to be sold or transferred to another but a mere cessation from use as a result of them having reached their economic useful life would be sufficient to qualify these to be classified as discontinued operations i.e. disposal through abandonment or permanent retirement.



An abandoned component would be a discontinued operation if it otherwise satisfies the

criteria in the definition of a discontinued operation. Therefore an entity shall present the

results and cash flow activities of discontinued operations either in the notes or on the face of

the financial statements.

Example: Discontinued operations

In January 20X8 an entity decides to abandon one of two production lines. All work in this production line will stop at reporting date, 31 March 20X8. This production line is considered to be a significant business line; therefore it meets the definition of a discontinued operation.

In the financial statements ending 31 March 20X7, the results and cash flows of this specific production line are disclosed as a continuing operation, as it is still in use.

In the financial statements for the period ending 31 March 20X9, the results and cash flows of this specific production line are treated as a discontinued operation and the required disclosures should be made accordingly.

4.3 Presentation

Extract from Statement of Financial Performance

Notes 20X1 20X0

R R

Continuing operations

Revenue

...... XX XX

...... XX XX

Expenses

...... (X) (X)

Surplus for the period from continued operations XX XX

Discontinued operations

Surplus (or deficit) from discontinued operations * x XX XX

Surplus for the period XXX XXX

‘* - Notes to the financial statements should include an analysis of surplus or deficit from discontinued operations and may require adjustments to comparative figures as well.



5. Useful links and references

Reference Location of reference

Frequently Asked Questions (FAQs)

on the Standards of GRAP

ASB website:

http://www.asb.co.za/frequently-asked-questions/

IGRAP 9 on Distributions of Non-

cash Assets to Owners

ASB website:

http://www.asb.co.za/interpretations-approved-

and-effective/

Guideline on The Application of

Materiality to Financial Statements

ASB website:

http://www.asb.co.za/guidelines/

Standard Chart of Accounts for Local

Government (mSCOA)

National Treasury website:

http://mfma.treasury.gov.za

(mSCOA – Municipal Standard Chart of Accounts)

Illustrative Financial Statements for

local government

National Treasury website:

http://mfma.treasury.gov.za

(mSCOA – Municipal Standard Chart of Accounts)

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