Accounting Changes for Nonprofit Mergers and Acquisitions
| Abbreviations Key |
| FASB: Financial Accounting Standards Board |
| AICPA: American Institute of Certified Public Accountants |
| SFAS 164: Statement of Financial Accounting Standards No. 164, Not-for-Profit Entities: Mergers and Acquisitions |
| SFAS 141(R): Statement of Financial Accounting Standards No. 141(R), Business Combinations |
SFAS 142: Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
|
| SFAS 160: Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in Consolidated Financial Statements |
| SOP 94-3: AICPA Statement of Position 94-3, Reporting of Related Entities by Not-for-Profit Organizations |
| APB Opinion 16: Accounting Principles Board Opinion No. 16, Business Combinations |
| ARB 51: Accounting Research Bulletin No. 51, Consolidated Financial Statements |
If you are considering combining your operation with another nonprofit, it’s important to understand the new standards that will govern how nonprofit organizations account for mergers and acquisitions. Until now, nonprofits accounted for combinations by analogizing to guidance developed for business entities. A new standard addresses the unique characteristics of not-for-profit entities and provides guidance specific to them. FASB recently issued SFAS 164,
Not-for-Profit Entities: Mergers and Acquisitions.
This statement significantly changes the accounting for nonprofit combinations and requires enhanced disclosures to enable financial statement users to evaluate the nature and financial effect of a merger or acquisition.
“Because the accounting differs, the key to applying Statement 164 is to determine whether the combination is an acquisition or a merger,” explains Mike Westervelt, an assurance and accounting manager with LarsonAllen.
Principles and requirements
SFAS 164 establishes principles and requirements for how a not-for-profit entity:
- Determines whether a combination is a merger or an acquisition
- Applies the carryover method in accounting for a merger
- Applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer
- Determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition
The FASB states, “The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity provides in its financial reports about a combination with one or more other not-for-profit entities, businesses, or nonprofit activities.”
How to account for an acquisition
In an acquisition, a not-for-profit acquirer obtains control of a nonprofit activity (as defined by SFAS 164) and initially recognizes the assets and liabilities in its financial statements. SFAS 164 requires not-for-profit entities to account for acquisitions using the acquisition method. The acquisition method in SFAS 164 is essentially the same as the method prescribed in SFAS 141(R) with some additional guidance distinctive to not-for-profit entities.
The acquisition method requires the acquirer to recognize and measure at fair value the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree as of the acquisition date.
Recording of goodwill or a contribution received
Situation 1
|
| An acquirer that expects the acquiree as part of the combined entity to operate like a business (for instance, charging fees to cover costs) is required to recognize goodwill as an asset at the acquisition date. |
Situation 2
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| An acquirer that expects the operations of the acquiree as part of the combined entity to be predominately supported by contributions and returns on investments is required to recognize as a separate charge in its statement of activities the amount that otherwise would be recognized as a goodwill asset at the acquisition date. |
SFAS 164 differs from SFAS 141(R) in the area of
goodwill recognition. Some not-for-profit entities, such as a soup kitchen, are predominately supported by contributions and returns on investments. Other not-for-profit entities, such as a nonprofit hospital, operate more like a business, receiving most of their support from fees for services. The more “businesslike” a not-for-profit entity’s operations, the more relevant information about goodwill acquired is to users of the financial statements. Information about goodwill is of limited use to donors in their assessment of whether to provide resources to a not-for-profit entity. Goodwill is therefore recorded differently in the two situations.
SFAS 164 also differs from SFAS 141(R) in the area of recognizing inherent contributions received. Because a nonprofit does not have ownership interests like a business entity, a not-for-profit combination focuses on furthering the public benefit, rather than maximizing returns for equity holders. Many acquisitions by not-for-profit entities constitute an inherent contribution received because the acquirer receives net assets without transferring consideration. SFAS 164 requires the acquirer to recognize such a contribution received as a separate credit in its statement of activities on the acquisition date.
How to account for a merger
In a merger, the governing bodies of the entities cede control of those entities to create a new not-for-profit entity. To cede control requires that the merging entities not retain shared control of the new entity. The new combined entity must have a newly formed governing body, but this does not require a new legal entity.
SFAS 164 requires the new entity to account for the merger using the carryover method. Generally, the carryover method requires the new entity to combine the assets and liabilities in its initial financial statements at amounts reported in the merging entities’ separate financial statements at the merger date. The initial reporting period of the combined entity shall begin as of the merger date, and the merger itself shall not be reported as an activity of that period.
Scope of SFAS 164
SFAS 164 does not apply to the following transactions:
- Joint venture formations
- Acquisitions of assets that do not constitute a business or nonprofit activity
- Combinations between not-for-profit entities, businesses, or nonprofit activities under common control
- Transactions or other events in which a not-for-profit entity obtains control of another entity, but does not consolidate that entity, as permitted or required by AICPA SOP 94-3 or the AICPA Audit and Accounting Guide, Health Care Organizations
This statement requires that a recognized noncontrolling interest in another entity, whether a business or another nonprofit organization, be measured at its fair value at the acquisition date.
The new standard also provides transition guidance for goodwill and intangible assets previously recognized by not-for-profit entities from transactions accounted for using the purchase method in APB Opinion 16.
Effective dates
SFAS 164 applies to:
- Mergers for which the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009
- 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
Early application of this statement is not permitted.
In addition, SFAS 164 provides effective dates for standards not effective for not-for-profit entities upon their initial effective dates:
- SFAS 142 requirements on subsequent accounting for goodwill and other intangible assets acquired in an acquisition
- The amendments SFAS 160 made to ARB 51 and other pronouncements
- The amendments SFAS 141(R) made to existing pronouncements
Nonprofits must apply these standards prospectively in the first set of initial or annual financial statements for a reporting period beginning on or after December 15, 2009. Application before that date is prohibited.
How we can help
If you are considering an acquisition or a merger, LarsonAllen can help guide you through the standards affecting nonprofit business combinations. In addition, if you have recorded goodwill or intangible assets previously recognized from transactions accounted for using the purchase method, we can help you implement the transition guidance. For more information,
contact us or
access the standards.