New Standards for Mergers of Not-for-Profit Organizations

In 2009 the Financial Accounting Standards Board (FASB) issued FASB Statement 164, Not-for-Profit Entities: Mergers and Acquisitions. This new standard is effective for either:

1. initial mergers for which the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009 or
2. acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009

The guidance in this statement may not be applied to mergers that occurred before the effective date. This statement applies only to combinations of entities that are either considered mergers or acquisitions. It does not apply to the following types of transactions:

1. the formation of a joint venture
2. the acquisition of an asset or a group of assets that does not constitute either a business or a nonprofit activity
3. a combination between not-for-profit entities, businesses, or nonprofit activities under common control
4. a transaction or other event in which a not-for-profit entity obtains control of another entity but does not consolidate that entity.

Another important aspect of this standard is that mergers are treated differently than acquisitions. Therefore, one of the crucial aspects in applying this standard is determining if the combination is a merger or an acquisition. The difference between a merger and an acquisition is a merger of not-for-profit entities, is a combination in which the governing bodies of two or more not-for-profit entities cede control of those entities to create a new not-for-profit entity. In contrast, an acquisition is a combination in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses.

Mergers

In a merger of organizations the new entity is required to use the carryover method of accounting. Under the carryover method, the combined entity's initial set of financial statements carry forward the assets and liabilities of the combining entities, measured at their carrying amounts in the books of the combining entities at the merger date. The merging entities may have measured assets and liabilities using different methods of accounting in their separate financial statements. The new entity shall adjust the amounts of those assets and liabilities as necessary to reflect a consistent method of accounting. However, because the carryover method does not reflect a “fresh-start” measurement, a merger is not an event that permits the election of accounting options that are restricted to the entity's initial acquisition or recognition of an item (or the reversal of a previous election). Thus, for example, one merging entity's election of the fair value option in FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, for a particular financial asset or liability permits neither the new entity's election of the fair value option for other financial assets or liabilities at the merger date nor the reversal of the previous selection of the fair value option. Further, the entity resulting from a merger is a new reporting entity, with no activities before the date of the merger. Thus, the new entity's initial reporting period begins with the merger date, and the merger itself shall not be reported as activity of the new entity's initial reporting period. Rather, the combined assets, liabilities, and net assets of the merging entities are included in the statement of financial position as of the beginning of that initial reporting period, if presented. Lastly, there are certain required disclosures for the financial statements of the new entity:

1. the name and a description of each merging entity
2. the merger date
3. the primary reasons for the merger
4. for each merging entity:
   1. the amounts recognized as of the merger date for each major class of assets and liabilities and each class of net assets
   2. the nature and amounts, if applicable, of any significant assets (for example, conditional promises receivable or collections) or liabilities (for example, conditional promises payable) that GAAP does not require to be recognized
5. the nature and amount of any significant adjustments made to conform the individual accounting policies of the merging entities or to eliminate intraentity balances

Acquisitions

In an acquisition, one entity must be identified as the acquirer and one must be identified as the acquiree. This determination is based primarily on which organization retains control. In an acquisition the acquirer is required to account for the assets and liabilities of the acquiree at their fair values at the date of acquisition (generally the date on which the assets and liabilities are legally transferred). There are certain exceptions to this measurement principle, including:

1. The acquirer shall not recognize an acquired donor relationship as an intangible asset.
2. If the acquirer has a policy of not capitalizing collections then any acquired collections shall not be recognized as assets but instead the purchase cost of the collection shall be deducted from the appropriate net asset class.
3. The acquirer shall recognize and measure a liability (or asset, if any) related to the acquiree's employee benefit arrangements in accordance with other GAAP, as amended.
4. At the acquisition date, the acquirer shall measure an acquired long-lived asset (or disposal group) that is classified as held for sale at fair value less cost to sell in accordance with paragraphs 34 and 35 of that Statement.

In a typical acquisition, the acquirer would recognize the acquired assets and liabilities and also goodwill equal to the excess of the assets over the liabilities as an intangible asset. However, if the acquirer expects the operations of the acquiree (as part of the combined entity) to be predominantly supported by contributions and returns on investments then any amount that would be treated as goodwill would instead be recognized as a separate charge in its statement of activities. Predominantly supported by means that contributions and returns on investments are expected to be significantly more than the total of all other sources of revenues. Due to the nature of not-for-profit organizations, many acquisitions by not-for-profit entities constitute an inherent contribution received because the acquirer receives net assets without transferring consideration. This Statement requires the acquirer to recognize such a contribution received as a separate credit in its statement of activities on the acquisition date. As with the carryover method, there are certain required disclosures in the financial statements of the acquirer:

1. the name and a description of the acquiree
2. the acquisition date
3. if applicable, the percentage of ownership interests, such as voting equity instruments, acquired
4. the primary reasons for the acquisition and a description of how the acquirer obtained control of the acquiree
5. a qualitative description of the factors, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition, or other factors, such as the nonrecognition of collections, that make up either:
   1. the goodwill recognized; or
   2. the separate charge recognized in the statement of activities
6. the acquisition-date fair value of the total consideration transferred (or if no consideration was transferred, that fact) and the acquisition-date fair value of each major class of consideration, such as:
   1. cash
   2. other tangible or intangible assets, including a business or subsidiary of the acquirer
   3. liabilities incurred, for example, a liability for contingent consideration

Conclusion

As you can see there have been some significant changes in how combinations of not-for-profit organizations are accounted for. While accounting consideration should not be a major factor in deciding to combine organizations, there are certain decisions that must be made at the time of combination so the accounting can be handled properly.