Why is Merger Accounting not allowed anymore?

Charity SORP 27.4A disallows Merger Accounting when an incorporated charity merges with a 3rd party

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I'm involved in carrying out some Due Diligence for 2 incorporated charities potentially looking to combine.

Ther arrangements are such that they fit the criteria for a merger as per the charity SORP para 27.4 but 27.4A now disallows merger accounting in this instance due to "changes in UK company law"

I'm interested to know what the changes were and why do they now preclude incorporated charities

You'd think I'd got bigger things to worry about but does anyone know?





Replies (3)

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By David Gordon FCCA
02nd Dec 2020 16:42

Read 27.4a carefully
My understanding is:
It does not refer to a "Merger" between charities it refers to an arrangement with third parties.
That is, something other than a straightforward merger wherein the parties jointly subsume themselves into what is in effect a new entity.
This is itself different from a "Takeover".
The descriptive words used in regulation are important.
Also read the final sentences of this paragraph.

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By David Gordon FCCA
02nd Dec 2020 16:57

To clarify further
If the arrangement is clearly within the merger criteria set out in section 27.4 then merger accounting may be used.
If the proposed arrangement does not fully meet those criteria, then it falls under 27.4a

For "Due diligence" the auditor should first satisfy himself re 1) above.

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By hairyfingers
07th Dec 2020 09:39

thanks for your reply. Though, I'm not sure I agree.

I think I've found the answer though


"Charitable companies are only able to use merger accounting where the acquired undertaking is ultimately controlled by the same party, both before and after the acquisition (SI 2008/410, Sch. 6, para. 10, as amended by SI 2015/980). As the SORP notes in para. 27.4A, this will mean that UK charitable companies will no longer be able to apply merger accounting to a business combination with a third party. However, non-company charities are still able to do so, provided that they meet the criteria set out in FRS 102 and the SORP."

The SORP merger criteria requires all parties to participate in establishing the management structure therefore the "acquired" entity will not be controlled by the same party before and after combination - so merger accounting is no longer allowed (unless you want to apply a True & Fair override)

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