The further education sector continues to experience structural change, with mergers, group restructures and strategic collaborations becoming increasingly common. Where colleges enter into these arrangements, one of the key financial reporting considerations is determining whether the transaction should be treated as a merger or an acquisition for accounting purposes.
The accounting treatment can have a significant impact on the financial statements, disclosures and future reporting requirements of the college.
Below, we outline the key differences between merger accounting and acquisition accounting, the considerations colleges need to assess, and the practical steps management and boards should take.
Merger Accounting
What is merger accounting?
Under s13.7 of the FE/HE Statement of Recommended Practice (SORP), merger accounting applies where two entities combine to form a new reporting entity and neither party is considered dominant. In substance, merger accounting reflects a partnership arrangement where risks, benefits and governance are shared between the combining entities.
For merger accounting to apply, the following key criteria generally need to be met:
- No party is identified as the acquirer or acquiree
- There is no significant change in the beneficiaries or services provided
- Governance and management decisions are made jointly and by consensus
This assessment requires significant judgement and should be carefully documented by management and the Board.
What do colleges need to consider?
When assessing whether merger accounting is appropriate, colleges should consider:
- The governance structure of the new entity
- Whether one college effectively controls the combined organisation
- The strategic rationale for the transaction
- Whether the colleges operate in similar geographical areas
- Whether the educational provision and student base remain substantially unchanged
- How senior management and board appointments are determined
The conclusion is often highly judgemental, particularly where one institution appears operationally or financially dominant.
Accounting treatment
Where merger accounting applies:
- Assets and liabilities are brought into the accounts at their existing carrying values
- No fair value exercise is performed
- Prior year comparatives are restated as though the entities had always been combined
- Results of both colleges are included from the start of the reporting period
- Any accounting policy differences are aligned on merger
- Merger-related costs are expensed as incurred
In practice, this means the financial statements present the colleges as if they had always operated together.
Additional disclosures are also required, including:
- Names of the combining entities
- Date of the merger
- Analysis of results before and after merger
- Details of accounting policy adjustments
- Carrying values of transferred net assets
Acquisition accounting
What is acquisition accounting?
Acquisition accounting applies where one college obtains control over another entity.
Under S19. FRS 102, this is treated as a business combination, even where no cash consideration is paid.
For FE colleges and other public benefit entities, these transactions are often treated as combinations at nil or nominal consideration.
The key factor is whether one institution has obtained control over another.
What do colleges need to consider?
Management should assess:
- Which entity controls the combined group
- Whether governance arrangements indicate one party is dominant
- Who appoints senior management and board members
- Whether one institution drives strategy and operational decisions
- Whether the transaction is, in substance, an acquisition rather than a partnership merger
This conclusion should be formally documented and presented to the Board.
Accounting treatment
Where acquisition accounting applies:
- Assets and liabilities acquired are recognised at fair value at the acquisition date
- Independent valuations may be required for land, buildings and other assets
- Any excess of assets over liabilities is recognised as a gain in income and expenditure
- Any excess liabilities over assets are recognised as a loss in income and expenditure
- The acquiree’s results are only included from the acquisition date onwards
- Prior year comparatives are not restated
This approach can create significant volatility in reported surpluses or deficits in the year of acquisition.
For example:
- If assets acquired exceed liabilities assumed, a gain may be recognised through income and expenditure
- If liabilities exceed assets, a deficit may arise on acquisition
Colleges must also carefully review accounting policies post-acquisition to ensure consistency across the enlarged group.
Areas requiring particular attention
1. Fixed assets
Land and buildings are typically recognised at fair value on acquisition. This may result in revised depreciation charges going forward.
2. Deferred capital grants & income
Deferred income balances may require reassessment under the acquiring college’s accounting policies.
3. Judgements and disclosures
The basis for concluding that acquisition accounting applies should be clearly disclosed within the financial statements.
Additional disclosures may also be required in relation to:
- Strategic reporting
- Going concern assessments
- Key accounting judgements and estimates
- Post-balance sheet events
What should colleges do if they are in this position?
Where a college is considering or undertaking a merger or acquisition, early financial reporting planning is essential.
Colleges should:
1. Perform an early accounting assessment
2. Prepare a formal Board paper on management’s assessment
3. Review governance and control arrangements
4. Assess independent valuation requirements (Acquisition Only)
5. Review accounting policies to ensure alignment
6. Consider disclosure requirements early
How Menzies can help?
Our Further Education team regularly supports colleges through mergers, acquisitions and structural change projects.
We can assist with:
- Assessing the appropriate accounting treatment
- Reviewing merger and acquisition criteria
- Financial reporting and disclosure requirements
- Technical accounting support
- Audit readiness and stakeholder engagement
- Post-transaction accounting considerations
If your college is considering a merger, acquisition or restructuring, please speak to your usual Menzies contact.
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