New Accounting Standard for Not-for-Profit Mergers and Acquisitions Effective

Dec. 31, 2010 not only marks the end of the first decade of the 21st century, it also marks the year-end date for which not-for-profit organizations (NFPs) will start to report business combinations in accordance with their own industry-specific standard. Accounting Standards Codification 958-805 was originally issued in April 2009 under its original name, FASB Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions.

Accounting considerations
This standard addresses how NFPs should provide information in their financial statements about a combination with one or more NFPs or other businesses or activities. Principles are provided for determining whether the combination is a merger or an acquisition.

• A merger results when two or more NFPs cede control to create a new entity
• An acquisition is the result of an NFP obtaining control of one or more not-for-profit activities or businesses

Generally speaking, if the business combination does not qualify as a merger, acquisition accounting will be used. Control is deemed ceded to a new entity when a newly formed governing board assumes control of the merging entities. The original statement contains guidance and examples that will help financial statement preparers distinguish between a merger, acquisition or another form of combination.

Mergers are accounted for using the carryover method, which is similar to the old pooling-of-interest approach. Under the carryover method, the assets and liabilities of the combining organizations are merged into the financial statements of the new entity at the existing (carryover) basis. The measurement date is the merger date, not the beginning of the reporting period as was historically used under the pooling-of-interest method. This is consistent with the position that a new merged entity has been formed and that this is not a continuation of the merged-in entities.

NFPs who apply the acquisition method will have to identify the acquiring entity; determine the acquisition date and recognize identifiable tangible and intangible assets acquired, liabilities assumed and any noncontrolling interests in the acquiree(s) at fair value; and recognize goodwill or a contribution received.

The original statement and codification provide guidance for identifying the acquirer; determining the acquisition date; and recognizing and measuring assets, liabilities and noncontrolling interests. Specific guidance is provided in the statement for the recognition and measurement of donor relationships, collections, conditional promises to give, operating leases, assets held for sale and employee benefits.

When the acquiring entity does not expect the operation of the acquiree(s) to be predominantly supported by contribution and returns on investments, goodwill will be recognized as of the acquisition date. Goodwill is the excess of the consideration transferred (including the fair value of any noncontrolling interest), over the net amount of assets recognized. If net assets recognized exceed consideration transferred, a contribution is recognized by the acquiring entity instead of goodwill.

When the acquiring entity expects the operation of the acquiree(s) to be predominantly supported by contributions and returns on investments, a separate charge in the statement of activities as of the acquisition date is reported for the difference between the consideration transferred, if any, and net amount of assets recognized.

The term “predominantly supported” is defined in the statement to mean that contributions and returns on investments are expected to significantly exceed the total of all other sources of revenue.

We expect that many acquisitions will result in the recognition of a contribution received rather than goodwill, because historically, acquiring entities often receive assets net of liabilities assumed without transferring any consideration to an acquiree.

Reporting considerations
A merger is not reported as an activity of the reporting period. Therefore, the statement of financial position reflects the combined assets, liabilities and net assets of the merged entity as of the merger date and for periods ending thereafter. The statement of activities reflects the results of operations from the merger date through the end of the reporting period.
When an acquisition occurs, it is treated as an activity of the reporting period. The statement of activities reflects any charge or contribution received on a separate line. NFPs that use a health care industry reporting model reflect the charge in the performance indicator. A contribution should be reported based on whether the contribution is restricted or unrestricted.

Certain disclosures are required whether the transaction is accounted for as a merger or an acquisition, including the names of the combining organizations and the reason for the combination. In a merger, the amounts acquired by class are to be disclosed as well. In an acquisition, the disclosures will include the rights or intangible assets recognized in the combination, the consideration associated with the transaction and other details as warranted. More details about disclosure requirements and examples are provided in the statement.

The statement also generally requires NFPs to apply the same standards that for-profit entities apply when accounting for and reporting goodwill as well as other intangible assets and noncontrolling interests in consolidated financial statements.

Future considerations
If you are associated with a not-for-profit organization that is contemplating a business combination, you will want to become familiar with these requirements to make sure the structure of the transaction is consistent with the organization’s accounting and reporting objectives.

For more information, please contact McGladrey & Pullen National Director of Public Sector Services Brian Schebler at 952.921.7761.