Statement of Principles

Restructurings
Prepared by: Public Sector Accounting Board February 2013

Comments are requested by May 17, 2013

PSAB

Commenting on this Statement of Principles

This Statement of Principles reflects proposals made by the Public Sector Accounting Board (PSAB). It presents key principles that the Board expects to include in a future exposure draft. Individuals, governments and organizations are invited to send written comments on this Statement of Principles. Comments are most helpful if they are related to a specific principle, paragraph or group of paragraphs. Any comments that express disagreement with the proposals in the Statement of Principles should clearly explain the problem and include a suggested alternative, supported by specific reasoning. All comments received will be available on the website shortly after the comment deadline, unless confidentiality is requested. The request for confidentiality must be stated explicitly within the response. For your convenience, a PDF response form has been posted with this document. You can save the form both during and after completion for future reference. You are not restricted by the size of the interactive comment fields in the response form and there is also a general comments section. Alternatively, you may send written comments by e-mail in Word format to: ed.psector@cica.ca To be considered, comments must be received by May 17, 2013, addressed to: Tim Beauchamp, Director Public Sector Accounting The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, Ontario M5V 3H2

Highlights
The Public Sector Accounting Board (PSAB) proposes, subject to comments received on this Statement of Principles and following its due process, to expose a proposed new Section on restructurings. The Section would apply to public sector entities that base their accounting policies on the CICA Public Sector Accounting (PSA) Handbook. Main features The main features of this Statement of Principles are as follows: A restructuring transaction is defined separately from an acquisition. A restructuring transaction is a transfer of an integrated set of assets and liabilities, together with related program or operating responsibilities, that does not involve an exchange of significant consideration, which is determined primarily based on the fair value of the individual assets acquired and liabilities assumed. Individual assets and liabilities items transferred in a restructuring transaction are recognized by the restructured entity at their carrying amounts. The carrying amounts of assets and liabilities transferred in a restructuring transaction are adjusted, where necessary. The difference between the total assets and total liabilities transferred in a restructuring transaction are recognized in: opening accumulated surplus or deficit if the restructured entity is a new entity; or revenue or an expense if the restructured entity existed prior to restructuring. Restructuring-related costs are recognized as expenses when incurred. Individual assets and liabilities transferred in a restructuring transaction are initially classified in the statement of financial position of the restructured entity based on its accounting policy and circumstances at the restructuring date. Financial position and results of operations of the restructured entity prior to restructuring date are not restated. Disclosure of information about the restructuring entities or transferred operations prior to restructuring date is encouraged but not required.

Comments requested PSAB welcomes comments from individuals, governments and organizations on all aspects of the Statement of Principles.

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When comments have been prepared as a result of a consultative process within an organization, it is helpful to identify generically the source of the comment in the response. This will promote understanding of how the proposals are affecting various aspects of an organization. Comments are most helpful if they relate to a specific principle, paragraph or group of paragraphs. Any comments that express disagreement with the proposals in the Statement of Principles should clearly explain the problem and include a suggested alternative, supported by specific reasoning, for alternative wording. Supporting reasons for your comments are most valuable when they demonstrate how the Statement of Principles proposals, or your alternatives: produce more relevant information for accountability and decision-making by external users; improve the representation of the substance of the underlying transaction or event; contribute to improved measures and understanding of financial position and annual results; facilitate enhanced comparability; and provide sufficient information for external users to understand the financial statements.

Please respond to the following question(s): 1. Do you think that there is a need to address accounting and reporting issues of a restructuring entity? If so, please identify issues that should be addressed and the reasons for guidance on those issues. 2. Is the definition of a restructuring transaction practical and workable? If so, can you provide examples of past transactions with application of this definition? 3. Do you agree that the carrying amount is the appropriate initial measure of assets and liabilities transferred in a restructuring? 4. Do you agree that whether a restructured entity is newly formed or an existing entity should determine how the restructuring transaction is recognized, and other presentation and disclosure requirements, as summarized in Table 5? 5. Do you agree that information about the restructuring entities and transferred operations prior to restructuring date should be encouraged but not required? 6. Can you provide examples of issues arising from or related to restructuring that have and have not been addressed in this Statement of Principles (for example, compensation, related arrangements and transactions)? Please comment on the need for guidance on issues not addressed.

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7. Can you identify the effects of applying principles proposed in this Statement of Principles on how transactions would be accounted for differently and on public sector financial reporting? 8. Would you be interested in participating in a task force or advisory group should PSAB decide to form one?

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RESTRUCTURINGS TABLE OF CONTENTS

PARAGRAPH

Background ................................................................................................... Need for a public sector standard on restructurings ................................ Intended outcomes and expected effects ................................................. Methods of accounting for entity combinations ...................................... Approach of other standard setters .......................................................... Approach in this Statement of Principles ................................................ Purpose and Scope ..................................................................................... Restructuring transactions ....................................................................... Exchange of consideration .............................................................. Transfer of an integrated set of assets and liabilities with related responsibilities ................................................................................ Definitions ...................................................................................................... Accounting Policy ....................................................................................... Recognition Individual assets and liabilities transferred.............................................. Difference between assets and liabilities transferred ............................... Assets and liabilities with restrictions ..................................................... Restructuring-related costs ...................................................................... Compensation .......................................................................................... Other restructuring-related transactions and arrangements ..................... Measurement................................................................................................. Classification ................................................................................................ Presentation .................................................................................................. Disclosure ...................................................................................................... Minimum disclosure ................................................................................ Optional disclosure ..................................................................................

.01-.22 .05-.08 .09-.10 .11-.14 .15-.16 .17-.22 .23-.41 .30-.41 .30-.33 .34-.41 .42-.50 .51-.54 .55-.77 .57-.62 .63-.65 .66-.67 .68-.70 .71-.75 .76-.77 .78-.81 .82-.85 .86-.88 .89-.96 .91 .92-.96

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BACKGROUND
.01 There is a wide range of restructuring activities in the Canadian public sector. They include, but are not limited to, amalgamation of entities or operations, annexation or boundary alteration between neighboring local governments, transfers of operations or programs from one entity to another and shared services arrangement entered into by local governments in a region. Certain types of restructuring activities are more common in some jurisdictions than in others. Different jurisdictions may use different terms to refer to similar restructuring activities. Restructurings can be initiated by the entities involved or imposed by a higher level of government through legislation. One-time lump sum or ongoing compensation may be provided in restructurings. Some compensation may be provided over an extended period subsequent to a restructuring. A restructuring may also give rise to other transactions, new arrangements or changes to existing ones. Restructurings in the public sector may be initiated for financial and nonfinancial reasons. Cost reduction, elimination of duplication, economies of scale are common motivations for restructuring. However, restructurings may also be driven by the need for sufficient land to support future economic development, long-term infrastructure planning and other non-financial reasons. Not all restructuring activities involve transfer of assets and liabilities. When there is no transfer of assets and liabilities, there would be no restructuring transaction to be accounted for.

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Need for a public sector standard on restructurings .05 Acquisitions of private sector entities or acquisitions that are of a purchase nature have already been addressed in ADDITIONAL AREAS OF CONSOLIDATION, Section PS 2510, and INVESTMENT IN GOVERNMENT BUSINESS ENTERPRISES, Section PS 3070, depending on whether the acquiree meets the definition of a government business enterprise. Accounting for restructuring transactions is not specifically addressed in the CICA Public Sector Accounting (PSA) Handbook. Following the guidance in GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150, may lead some to apply the purchase method prescribed in Section PS 2510 and Section PS 3070 to account for assets and liabilities transferred in restructuring transactions. The purchase method, which is appropriate for transactions that are of a purchase nature, would not result in faithful representation of restructuring transactions that are of a non-purchase nature. Other national and international public sector standard setters have also recognized the need for a standard to address public sector entity combinations

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and transfers of operations. Their pronounced and proposed guidance has been considered in the development of this Statement of Principles. .08 Public sector restructuring or reform is being contemplated by many Canadian governments to address fiscal challenges left behind from the recession and fiscal pressure from an aging population and deteriorating infrastructure. Accounting guidance that addresses a wide range of restructuring transactions is needed to ensure consistent treatment.

Intended outcomes and expected effects .09 The intended outcome of a new Section on restructurings is to provide accounting and financial reporting guidance that reflects the nature and economic substance of a wide range of restructuring transactions in the Canadian public sector. The expected result is: (a) a faithful representation and consistent treatment of restructuring transactions by restructured entities; (b) adequate user understanding of the nature and effects of a restructuring on the financial position and operations of restructured entities; (c) better information for user assessment of pre- and post-restructuring performance; (d) better information for user evaluation of whether certain objectives of a restructuring have been achieved; (e) enhanced comparability of financial statements of restructured entities; and (f) comparability of restructured entities with other public sector entities that have not gone through restructurings.

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Methods of accounting for entity combinations .11 There are three methods of accounting for entity combinations in accounting literature the purchase method, the pooling method and the fresh start method. Each method is appropriate for certain types of entity combinations. The purchase method requires identification of an acquirer among the combining entities. The acquirers own assets and liabilities are reported at their carrying amounts while the assets and liabilities acquired from another combining entity are recognized at their fair values at the date of combination. Results of operations of the acquiree are reported by the acquirer from the date of the combination. This method essentially accounts for the entity combination as a purchase and is usually used to account for acquisitions. The pooling method is sometimes called merger accounting, carry-over method, continuity-of-interest method or uniting-of-interest method. Assets and liabilities of the combining entities are recognized by the merged entity at their carrying

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amounts at the date of combination. Results of operations of the combining entities are combined as if the merged entity had always existed as a single entity. This method is usually used to account for mergers of equals in the private sector and for restructuring transactions in the public sector. .14 The fresh start method assumes that none of the combining entities survives the entity combination and the history of the new combined entity begins at the date of combination. Assets and liabilities of the combining entities are recognized by the new entity that takes control over them at their fair values at the date of combination. This method is usually used after corporations emerge from bankruptcy.

Approach of other standard setters .15 Accounting for entity combinations has evolved over the years in the private sector. In the past, a common approach is to define mergers and establish criteria to distinguish mergers from acquisitions. Mergers were accounted for following the pooling method and acquisitions were accounted for following the purchase method. Standard setters in the private sector have abandoned this approach in recent years primarily because it is difficult to draw an unambiguous and nonarbitrary line between mergers and acquisitions. They also concluded that true mergers of equals rarely occur. The purchase method is now the only method allowed when accounting for business combinations in the private sector. Standard setters in the public and not-for-profit sectors question whether the purchase method would be appropriate for all types of entity combinations in their sectors. Many adapted the old private sector merger versus acquisition approach in their standards or projects to accommodate the non-acquisition type of combinations.

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Approach in this Statement of Principles .17 The merger versus acquisition approach would not be sufficient to address the wide range of restructuring activities in the Canadian public sector. Mergers of equals or amalgamations represent only one of many types of restructuring transactions in Canada. Many restructuring transactions do not meet the traditional merger definition or criteria, or share the characteristics of acquisitions. For example, applying the merger versus acquisition approach to amalgamations of entities of different sizes may result in the largest amalgamating entity being the in-substance acquirer and the amalgamation being accounted for as an acquisition. Restructuring activities can be complex and may involve multiple entities entering into more than one type of restructuring transaction. For example, a restructuring may involve part of Town A being annexed to neighboring County B, with the rest of Town A amalgamated with neighboring Town C. For this reason, the term restructurings is chosen as the title of this Statement of
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Principles instead of the traditional terms mergers and acquisitions or combinations used by some private and public sector standard setters to cover the different types of restructurings in the Canadian public sector. .19 Therefore, this Statement of Principles does not focus on the three methods of accounting for entity combinations but on developing principles that reflect the substance and nature of restructuring transactions in the Canadian public sector. This involves defining restructuring transactions by their common characteristics and classifying them according to attributes that have implications for accounting and financial reporting. Restructurings in the public sector share many common characteristics. Key characteristics that reflect the economic substance of all restructuring transactions in the public sector are: (a) their non-exchange, non-purchase nature; (b) a transfer of an integrated set of assets and liabilities that are not random or unrelated; and (c) a transfer of program or operating responsibilities is related to the assets and liabilities transferred. These characteristics are used to define a restructuring transaction and the scope for application of the proposed principles. .21 Transactions that meet the definition of a restructuring transaction may differ in other aspects. For example, the transaction may involve a transfer of an entire entity or a portion of an entity, a new entity may be formed in the restructuring and not all entities involved in the restructuring may continue to exist after the restructuring. For the purpose of providing accounting guidance for reporting assets received and liabilities assumed by the restructured entity, the only aspect that matters is whether a new restructured entity is formed. To a new restructured entity, the restructuring transaction gives rise to its formation. To a restructured entity that existed prior to restructuring, the restructuring is simply a transaction. Whether a new entity is formed or it is a continuation of an existing entity will have implications on how the restructuring transaction is recognized and presented.

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PURPOSE AND SCOPE

.23 The purpose of this Statement of Principles is to explain and seek stakeholder feedback on the principles that would be used to develop guidance on accounting and reporting of assets and liabilities transferred in restructuring transactions by a restructured entity.

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A restructuring transaction is a transfer of an integrated set of assets and liabilities, together with related program or operating responsibilities, that does not involve an exchange of significant consideration, which is determined primarily based on the fair value of the individual assets acquired and liabilities assumed. This Statement of Principles does not deal with accounting for: (a) acquisitions of a group of assets, an operation or an entity; (b) contributions of assets or assumptions of liabilities; (c) restructuring transactions among related parties; and (d) restructuring transactions by the restructuring entity. Accounting for acquisitions of an operation or an entity has already been addressed in ADDITIONAL AREAS OF CONSOLIDATION, Section PS 2510, and INVESTMENT IN GOVERNMENT BUSINESS ENTERPRISES, Section PS 3070. Accounting for acquisitions of assets and groups of assets are addressed in Sections in the PSA Handbook that address specific types of assets. Contributions of assets or assumptions of liabilities are, in substance, gifts and would be accounted for in accordance with guidance in GOVERNMENT TRANSFERS, Section PS 3410. The Public Sector Accounting Board (PSAB) has issued an Exposure Draft proposing a new Section on related party transactions. Restructuring transactions among entities under common control or under shared control will be considered after PSAB approves this new Section. Accounting for restructuring transactions by a restructuring entity would be a straightforward application of general principles in the PSA Handbook. Assets and liabilities transferred would be derecognized at their carrying amounts. The net impact of the transfer would be recognized as revenue or as an expense regardless of whether the restructuring entity will continue to exist after restructuring. Other restructuring-related costs incurred by the restructuring entity would be recognized as an expense when incurred.

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Restructuring transactions
Exchange of consideration

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As guidance on accounting for acquisitions already exists, one of the objectives of this Statement of Principles is to determine which transactions would follow ADDITIONAL AREAS OF CONSOLIDATION, Section PS 2510, and INVESTMENT IN GOVERNMENT BUSINESS ENTERPRISES, Section PS 3070, and which would follow a restructurings standard.

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The description of an acquisition in Section PS 2510,1 indicates that consideration is provided to the seller for the net assets acquired. The consideration made in exchange is not necessary equal to the fair value of the assets and liabilities transferred, otherwise goodwill or bargain purchase would not exist. Most restructurings do not involve an exchange of consideration. Even when some forms of compensation are provided, they usually do not reflect the fair value of the individual assets and liabilities transferred or the fair value of the transferred programs or operations (if that can be determined). The key difference between an acquisition and a restructuring is the absence or presence of an exchange of consideration that is primarily based on, but not necessarily equal to, the fair value of the individual assets and liabilities transferred.

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Transfer of an integrated set of assets and liabilities with related responsibilities

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Restructuring transactions are, in some ways, similar to acquisitions as they involve a transfer of an integrated set of assets and liabilities with related operations. The assets and liabilities transferred in a restructuring are not random or isolated assets or liabilities. They are an integrated set that is somewhat complete in supporting the program or operation for which the responsibility is also transferred in the restructuring. The entity that receives the assets and liabilities also assumes the responsibility for the delivery of programs or administration of operations that are associated with the assets and liabilities transferred in the restructuring transaction. How the service will be delivered, and by whom, the level of service and the location in which the service will be provided may change subsequent to a restructuring. Assumption of responsibility to provide services previously provided by the entity that transfers the related assets and liabilities distinguishes restructuring transactions from receipts of contributions, gifts or government transfers. For example, an entity that received a building from another entity without providing consideration received a gift or a government transfer. On the other hand, an entity that received a building and the responsibility for delivering community programs located in that building did not receive a gift or a government transfer.

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Paragraph PS 2510.11 states, in part: An acquisition means that the government had acquired control of a governmental unit and the government, as the buyer, pays cash or other consideration to the seller either for shares representing voting control or f or net assets.

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The scope of this Statement of Principle can be summarized in the table below:
Table 1: SCOPE OF A RESTRUCTURING TRANSACTION Presence of consideration or compensation? What is transferred? What kind of transaction? Significant exchange Asset or group of assets Asset purchase Significant exchange Assets + liabilities + responsibilities Acquisition Substantial but non-exchange Assets + liabilities + responsibilities Restructuring No or nominal Assets + liabilities + responsibilities Restructuring No or nominal Only assets or liabilities Transfer

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A transfer of an integrated set of assets and liabilities together with related program or operating responsibilities with no or nominal compensation is obviously a restructuring transaction. Determining whether a transfer with substantial compensation is an acquisition or a restructuring may not be as straight forward. How the amount is determined would help determine whether they are in substance consideration for an acquisition or compensation provided in a restructuring transaction. Consideration that is determined primarily based on the fair value of the individual assets acquired and liabilities assumed generally reflects the purchase nature of acquisitions. Terms and conditions of any applicable agreements and relevant factors in the circumstances would be considered in the exercise of professional judgment. For example, compensation may include reimbursement of costs or short-term relief of losses.

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Principle 1 A restructuring transaction is a transfer of an integrated set of assets and liabilities together with related program or operating responsibilities, that does not involve an exchange of significant consideration, which is determined primarily based on the fair value of the individual assets acquired and liabilities assumed.

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DEFINITIONS
.42 At least two parties are involved in a restructuring transaction. An entity involved in a restructuring transaction can be a restructuring and/or a restructured entity. Their definitions are summarized and compared in the table below:
Table 2: PARTIES TO A RESTRUCTURING TRANSACTION Restructuring Entity Exists before restructuring Transfers in restructuring Receives in restructuring Formed in restructuring Exists after restructuring Yes Yes Not necessary No May be Restructured Entity May be Not necessary Yes May be Yes

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A restructuring entity is an entity that is subject to a restructuring transaction. It exists before a restructuring transaction. A restructuring entity transfers assets and liabilities together with related program or operating responsibilities in a restructuring transaction. In some restructurings, a restructuring entity may also receive new assets and assume new liabilities and related program or operating responsibilities. A restructured entity is an entity resulting from a restructuring transaction. It exists after a restructuring transaction. It may be a new entity formed as a result of the restructuring transaction or an existing entity that receives new assets and assumes new liabilities and related program or operating responsibilities. There can be more than one restructured entity in a restructuring transaction. Whether a restructured entity is a new or an existing entity depends on if the governing board of one of the restructuring entities takes control over the financial and operating policies of the restructured entity. For example, two members are added to the eight-member governing board of restructuring entity A to provide representation from restructuring entity B. Since the governing board of restructuring entity A has the power to govern restructured entity AB, the restructured entity AB is an existing restructured entity (i.e., a continuation of restructuring entity A.) A restructuring may involve a transfer of assets, liabilities and responsibilities from different restructuring entities at different dates. Application of this Statement of Principles would be based on whether the ultimate restructured entity is a new or an existing entity. The restructuring agreement entered into by them or the restructuring plan of the imposing government would indicate whether the governing board of one of the restructuring entities will take control over the ultimate restructured entity after all the transfers are completed.

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In straightforward restructuring transactions, a restructuring entity that exists prior to a restructuring would only transfer assets, liabilities and related responsibilities to a restructured entity. The restructured entity would only receive the transferred assets, liabilities and related responsibilities.

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In the more complex restructuring transactions, a restructuring entity may become an existing restructured entity if responsibilities and related assets and liabilities are received from or swapped with another entity. For example, a provincial government may transfer the responsibility for maintaining local roads and bridges with related assets and liabilities to municipalities and assume the responsibility for delivery of certain social programs with related assets and liabilities from municipalities in a restructuring transaction. Restructuring date is the date the restructured entity obtains control of the assets, becomes obligated for the liabilities and assumes responsibilities for the related program or operation transferred. The carrying amount of an asset acquired or a liability assumed is the amount reported in the statement of financial position of the restructuring entities at the restructuring date.

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ACCOUNTING POLICY
.51 The definition of the carrying amount assumes that a restructuring entity prepared its financial statements in accordance with PSA standards prior to restructuring. If this is not the case, the carrying amounts of the transferred assets and liabilities would be adjusted to comply with PSA standards before they can be recognized by the restructured entity at the restructuring date. Restructuring entities may have adopted different accounting policies and methods from those to be adopted by the restructured entity. The economic assumptions used by the restructuring entities, such as the expected inflation escalation and discount rate in determining the long-term liabilities transferred in a restructurings, may not be consistent with those to be used by the restructured entity. Consistent accounting policies, methods and assumptions would apply to a restructured entitys existing assets and liabilities, if any, and those received in a restructuring. Adjustments to the carrying amounts of assets and liabilities received to achieve consistency would be made prior to their initial recognition by the restructured entity to establish consistent bases for reporting subsequent to the restructuring date. These changes are made at the restructuring date because they arise from the restructuring transaction, not from results of operation of the restructured entity subsequent to restructuring date.

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Conforming to accounting policies of the restructured entity may also require reclassification of assets and liabilities transferred in a restructuring transaction at the restructuring date. For example, reclassification would be required if the restructuring and the restructured entities have different accounting policies on designating financial assets and financial liabilities in the fair value category under FINANCIAL INSTRUMENTS, paragraph PS 3450.023, and the restructuring does not give rise to changes in how risks would be managed and performance would be evaluated.

Principle 2 The carrying amounts of assets and liabilities transferred in a restructuring transaction should be adjusted, where necessary: (a) to comply with Public Sector Accounting Standards; (b) to align with the accounting policies, methods and assumptions of the restructured entity; and (c) to reflect changes in circumstances arising from restructuring, prior to their initial recognition by the restructured entity at the restructuring date.

RECOGNITION
.55 A restructured entity may encounter up to three types of recognition issues in a restructuring those related to the assets received and liabilities assumed, those related to restructuring-related costs and those related to other transactions or arrangements arising from restructuring. They are summarized in the table below:
Table 3: RECOGNITION ISSUES Assets and Liabilities Transferred Restructuring--related Costs Individual assets and liabilities Before restructuring date costs to enable a restructuring transaction Difference between total assets and total At restructuring date liabilities transferred compensation Assets and liabilities with restrictions After restructuring date costs to achieve the objectives of restructuring Other Restructuring Related Transactions

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Recognition principles proposed in this Statement of Principles are consistent with the general recognition principles in the conceptual framework and other Sections in the PSA Handbook. Classifying restructuring-related costs as the before, at and after restructuring date categories in the table above are meant to illustrate when these costs are usually incurred. It is not intended to override the general recognition principle (i.e., costs recognized when incurred) and the recognition criteria in applicable standards if and when these costs are not incurred as shown in the table above.

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Individual assets and liabilities transferred .57 Under the traditional merger accounting method, a restructured entity is only allowed to recognize assets and liabilities that were previously recognized by the restructuring entities. No additional assets or liabilities can be recognized by the restructured entity. In effect, this approach carries over the perspective of the restructuring entity to the restructured entity and is considered consistent with the initial measure of assets and liabilities transferred at their carrying amounts. Another reason for this approach is to prevent a restructured entity from recognizing intangible assets that were developed internally and are not permitted to be recognized by the restructuring entity. Recognition of internally developed intangible assets is prohibited by many standard setters. This is not an issue because the PSA Handbook does not allow recognition of intangibles regardless of whether they are purchased or developed internally. The view taken in this Statement of Principles is that meeting the definitions of assets and liabilities in the conceptual framework and the recognition criteria in the applicable standards are fundamental to the recognition of an asset and a liability. This approach focuses on the perspective and circumstances of the restructured entity at the restructuring date. One of the results of this approach is that inter-entity balances arising prior to restructuring between operations or entities that are combined in the restructuring will be effectively eliminated. When applying the applicable recognition criteria to individual assets and liabilities transferred, an adjustment to their carrying amounts at the restructuring date may be required as the restructuring may result in changes in circumstances affecting the transferred assets and liabilities. For example, the manner and duration of use of a tangible capital asset transferred may change as a result of restructuring. Its carrying amount at the restructuring date may need to be adjusted to recognize any impairment loss that may have resulted from the restructuring. Environmental standards applicable to a solid waste landfill site or a contaminated site transferred in a restructuring may be different in the restructured entity. Adjustment to the carrying amounts of these liabilities may be required at the restructuring date. Adjustments to the carrying amounts of assets and liabilities initially recognized by the restructured entities would only be made to reflect changes that are effective upon restructuring and new conditions existing at the restructuring date. Plans for future change or anticipated future conditions would not be recognized earlier than they would have been otherwise by applying the applicable Sections in the PSA Handbook.

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Principle 3 Individual assets and liabilities transferred in a restructuring transaction should be recognized by the restructured entity if they meet the definitions of assets and liabilities and applicable recognition criteria at the restructuring date.

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The initial amount to be recognized for the individual assets received and liabilities assumed by the restructured entity would be the sum of the following, where applicable:

Table 4: INITIAL RECOGNIZED AMOUNT FOR INDIVIDUAL ASSETS AND LIABILITIES = Carrying amount as reported by the restructuring entity (paragraph .50) + Adjustments to comply with PSA standards (paragraph .51) + Adjustments to comply with restructured entitys accounting policies, methods and assumptions (paragraphs .52 and .53) + Adjustments to reflect changes in circumstances arising from restructuring (paragraphs .60 and .61)

Difference between assets and liabilities transferred .63 Recognition of the effects of restructuring (i.e., the difference between the total assets and total liabilities initially recognized by the restructured entity at the restructuring date), would reflect the nature of the restructuring transaction from the perspective of the restructured entity. If a new restructured entity is formed as a result of a restructuring, its history begins on the restructuring date, when it receives the assets and assumes the liabilities and related responsibilities transferred. Because it is a new entity, the difference between the total assets and total liabilities initially recognized by the restructured entity at the restructuring date would be recognized as the opening accumulated surplus or deficit balance of the restructured entity. If a restructured entity exists before the restructuring, the restructuring is a transaction of that entity. The difference between the total assets and total liabilities initially recognized by the restructured entity at the restructuring date would be recognized as revenue or as an expense in its statement of operations in the reporting period the restructuring occurs.

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Principle 4 The difference between the total assets and total liabilities transferred in a restructuring transaction should be recognized in the opening accumulated surplus or deficit balance of a newly-formed restructured entity, or as revenue or as an expense of a restructured entity that existed prior to restructuring. Assets and liabilities with restrictions Some restructuring transactions may involve a transfer of assets that will continue to benefit residents of the restructuring entity and/or a transfer of liabilities that will continue to be the obligations of residents of the restructuring

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entity that makes the transfer. Depending on the terms and conditions of the applicable agreement, the nature of the restrictions in the particular circumstance, the assets transferred may be externally or internally restricted assets, or designated assets. .66 Such assets and liabilities would be recognized in accordance with applicable guidance in RESTRICTED ASSETS AND REVENUES, Section PS 3100, FUNDS AND RESERVES, PSG-4, and other relevant Sections in the PSA Handbook.

Restructuring-related costs .67 Costs incurred to enable a restructuring transaction may include, but are not limited to, legal, accounting, valuation, consulting and professional services. These costs are usually incurred prior to the restructuring date. Costs incurred to achieve the objectives of restructuring may include, but are not limited to, those related to exiting an activity, terminating and combining programs, relocating and terminating employees, and terminating contracts. These costs are usually incurred by the restructured entity after the restructuring date. These restructuring-related costs would be recognized by the entity that incurs the expense in accordance with the applicable standards. Restructuring is not an event that can justify a delay or an advance in recognition of these costs as expenses. For example, termination benefits would be recognized as an expense in accordance with guidance in POST-EMPLOYMENT BENEFITS, COMPENSATED ABSENCES AND TERMINATION BENEFITS, paragraph PS 3255.28.

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Principle 5 Restructuring-related costs should be recognized as an expense when incurred in accordance with the applicable Sections in the PSA Handbook. Compensation .70 Compensation in various forms may be provided in some restructurings. The compensated amount may be substantive depending on the nature of the restructuring, the relative bargaining power of entities involved and the effects of restructuring on those entities. Compensation may be made at the restructuring date, provided at a future date or made over an extended period subsequent to the restructuring date. Certain compensation may depend on the occurrence of future events or transactions (for example, future revenues). Compensation or promises are part of the restructuring transaction if it can be established that the liability exists at the restructuring date.

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Compensation not dependent on the occurrence of future events or transactions would be recognized at the restructuring date independent of the assets and liabilities transferred in the restructuring transaction. Promises that do not meet the definition of a liability at the restructuring date would not be recognized as they are future transactions. A restructured entity may promise to pay a restructuring entity to continue to provide certain services for a fee subsequent to restructuring until the restructured entity is ready to establish its own operation to deliver the service. The promise to pay, though it arises from restructuring, is a fee for future service and not compensation for the restructuring. The restructured entity does not have a liability until services are provided by the restructuring entity. A restructuring entity may provide upfront lump sum payment or a promise to provide annual funding to a restructured entity to compensate for a program delivery responsibility that is transferred in a restructuring. This funding is not a cost of restructuring to the restructured entity as it is the recipient of a government transfer. The funding would be accounted for in accordance with relevant guidance in GOVERNMENT TRANSFERS, Section PS 3410. A restructured entity may promise to limit future tax increases for an extended period subsequent to restructuring so that the lower tax rate levied by the restructuring entity and the restructured entity would apply to the affected property owners. This promise, though it arises from restructuring, does not establish a liability to the restructured entity at the restructuring date. It would be accounted for in accordance with relevant guidance in TAX REVENUE, Section PS 3510.

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Principle 6 Compensation not dependent on the occurrence of future events or transactions should be recognized as an expense at the restructuring date. Promises that do not meet the definition of a liability at the restructuring date should not be recognized as they are future transactions. Other restructuring-related transactions and arrangements .75 Restructuring may give rise to other transactions that may not be part of the restructuring transaction. Transactions that do not meet the definition of a restructuring transaction would be accounted for in accordance with the applicable Sections in the PSA Handbook separately from the restructuring transaction. Restructuring may give rise to a need for or an opportunity to realign preexisting arrangements or relationships among the restructuring entities. Restructuring entities may also enter into other arrangements during their restructuring discussion. These realignments or new arrangements may not be part of the restructuring transaction, depending on whether they meet the definition of a restructuring transaction.

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MEASUREMENT
.77 Consideration provided in an acquisition in exchange for the net assets acquired establishes a new cost basis for the individual assets acquired and liabilities assumed. As consideration usually reflects the fair value of the net assets acquired, fair value is an appropriate initial measure of assets and liabilities acquired in an acquisition. Restructuring transactions do not have a purchase cost to establish a new cost basis for the assets and liabilities received by the restructured entity. The carrying amount is the most logical and appropriate initial measure for assets and liabilities transferred in restructurings. As assets and liabilities transferred will likely be used for the same purpose immediately after the restructuring, the carrying amounts provide a consistent basis for measuring the cost of programs or operations transferred in the restructuring, resulting in useful information for accountability assessment and comparison of pre- and post-restructuring performance. The carrying amounts also provide a consistent measure for determining whether specific restructuring objectives, such as cost reduction and more efficient use of resources, have been achieved. Not all public sector entities are formed as a result of restructuring. Measuring assets and liabilities transferred in restructurings at the carrying amounts would maintain the external comparability of information reported on or produced from the financial statements of entities that were formed or have gone through restructurings.

.78

.79

.80

Principle 7 Individual assets and liabilities transferred in a restructuring transaction should be initially recognized at their carrying amounts with applicable adjustments at the restructuring date.

CLASSIFICATION
.81 Assets and liabilities transferred in a restructuring would be initially classified at the restructuring date based on the accounting policy of the restructured entity if allowed in the applicable Sections in the PSA Handbook and its circumstances at the restructuring date.
FINANCIAL INSTRUMENTS, Section PS 3450, for example, allows entities to

.82

designate a group of financial assets and/or financial liabilities in the fair value category upon their initial recognition if an entity manages the risk and evaluates the performance of the group of financial items on a fair value basis.

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.83

If a transferred financial asset and/or financial liability was previously designated in the fair value category by the restructuring entity and the restructured entity does not plan to manage its risk or evaluate its performance on a fair value basis, reversal of the previous designation at the restructuring date would be made. On the other hand, if certain financial assets and/or financial liabilities not previously managed or evaluated on a fair value basis by the restructuring entity will be managed and evaluated by the restructured entity on a fair value basis, these financial items would be designated in the fair value category at the restructuring date if it is the restructured entitys accounting policy to designate such items in the fair value category.

.84

Principle 8 Individual assets and liabilities transferred in a restructuring transaction should be initially classified in the statement of financial position of the restructured entity based on its accounting policy and circumstances at the restructuring date.

PRESENTATION
.85 Presentation of the effects of restructuring and the results of operation of the restructured entity would faithfully represent the nature of the restructuring transaction from the perspective of the restructured entity. Financial position and results of operations of the restructured entity prior to the restructuring date would not be restated. A restructured entity that is formed as a result of restructuring would present the restructuring transaction as the transaction that gives rise to the formation of the entity. Its first statement of financial position would present the initial amounts recognized for individual assets and liabilities transferred at the restructuring date, measured at their carrying amounts with applicable adjustments. The statement of operations for the first reporting period would only include the results of operation of the transferred responsibilities from the restructuring date to the end of the reporting period. A restructured entity that exists before a restructuring would present the effect of a restructuring transaction as revenue or as an expense. The statement of operations for the period in which the restructuring occurs would only include the results of operation of the transferred responsibilities from the restructuring date to the end of the reporting period, combined with the results of its own operation for the entire reporting period. Prior periods in the financial statements would not be restated to include the transferred assets and liabilities or the transferred operations for reporting periods prior to the restructuring date.

.86

.87

17 | STATEMENT OF PRINCIPLES FEBRUARY 2013

Principle 9 Financial position and results of operations of the restructured entity prior to restructuring date should not be restated.

DISCLOSURE
.88 Users of financial statements need sufficient information to assess the nature and financial effects of a restructuring transaction on the restructured entitys financial position and operations. Some basic financial and non-financial information about the restructuring is fundamental to this understanding, including how the transaction is accounted for, what amounts are recorded and where they are reported in the financial statements, as well as information not yet recognized in the financial statements that has implications for future years. This Statement of Principles proposes that restructured entities that exist prior to restructuring would provide information about their own financial position as at and results up to the restructuring date. This information is important for a complete understanding of the impacts of the restructuring transaction on the restructured entity.

.89

Minimum disclosure .90 As a minimum, the following information would be disclosed in the financial statements of the restructured entity in the reporting period in which the restructuring occurs: (a) A brief description of the restructuring transaction, including: (i) the restructuring entities involved; (ii) the reasons for the restructuring; (iii) the restructuring date; (iv) the nature of assets, liabilities and related responsibilities transferred; (v) the nature and terms of any compensation provided; and (vi) the nature and terms of other promises, concessions, arrangements or transactions arise from the restructuring. (b) The recognition and measurement of assets and liabilities transferred, including: (i) the carrying amounts of assets and liabilities transferred at the restructuring date by major classifications; (ii) the adjustments made to the carrying amounts of assets and liabilities transferred and the rationale for the adjustments; (iii) the amount of assets and liabilities initially recognized by the restructured entity at the restructuring date by major classifications; and

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(c)

(d)

the amount of and the line item in which the difference between the total assets and total liabilities is recognized at the restructuring date. Any contingent liability or contractual obligation transferred that are not recognized in the financial statements would be separately identified in the respective notes. For restructured entities that exist prior to restructuring, additional disclosure of the following: (i) the carrying amounts of the restructured entitys own assets and liabilities at the restructuring date by major classifications; and (ii) the results of operations of the restructured entity from the beginning of the reporting period in which the restructuring occurs to the restructuring date.

(iv)

Optional disclosure .91 Information about the restructuring entities or transferred operations prior to the restructuring date is useful information for a better understanding of the effects of the restructuring transaction, trend analysis and pre- and post-restructuring performance assessment. Some standard setters require provision of pro-forma historical information of the restructuring entities as if they were always a merged entity either presented in the financial statements or disclosed in the notes. This would require restating prior period numbers with the same adjustments made to the carrying amounts of assets and liabilities transferred at the restructuring date. Some of this information may not be available to the restructured entity to make the necessary restatement. On the other hand, information of the restructuring entities, as it was previously reported in their financial statements, would be readily available. In some cases, this may involve preparation of financial statements for the period in which the restructuring occurs, and identification of relevant financial information related to the programs or operations transferred. Though not restated, this information may be useful for comparing the entity prior to and after restructuring. This Statement of Principles proposes that disclosure of information about the restructuring entities or transferred operations prior to the restructuring date would be encouraged but not required. Information needs of users and the cost and practicality of providing this information by the restructured entity would be considered in determining the extent and format of disclosure of such information.

.92

.93

.94

19 | STATEMENT OF PRINCIPLES FEBRUARY 2013

Principle 10 Sufficient information should be disclosed to enable users to assess the nature and financial effects of a restructuring transaction on the restructured entitys financial position and operations. Disclosure of information about the restructuring entities or transferred operations prior to restructuring date is encouraged but not required. .95 Whether a restructured entity is newly formed or an existing entity not only determines how the restructuring transaction is recognized, it also determines where the initial amount of individual assets and liabilities transferred is presented and/or disclosed, what figures are presented in the statement of financial position and other additional disclosure requirements. The differences are summarized in the table below:

Table 5: DIFFERENT ACCOUNTING AND REPORTING OF NEW AND EXISTING RESTRUCTURED ENTITIES New Restructured Entity Existing Restructured Entity Restructuring gives rise to Transaction of restructured Nature of transaction formation of restructured entity. entity. Opening accumulated surplus Revenue or expense. Effects of restructuring or deficit balance. Difference between total assets and total liabilities recognized Initial recognized amount Presentation and disclosure of Initial recognized amount presented in statement of disclosed in notes to financial individual assets and financial position. statements. liabilities transferred No prior period information. Prior period information Prior period information in provided without restatement. statement of financial position Results of operations from Results of operations from Transferred responsibilities restructuring date. restructuring date. in statement of operations Information about own assets Additional disclosure and liabilities at and operations up to restructuring date.

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