By: Rich Banner, CPA
When one thinks about mergers and acquisitions, the popular image may be of Gordon Gecko in the 80’s movie, Wall Street, gobbling up companies like Pac-Man. However, due to the recent uncertain economic times, leadership of not-for-profit entities may look to merge or acquire other not-for-profit entities with similar missions. The perception that there is “safety in numbers” may drive leadership to explore such opportunities. As if on cue, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-07 (formerly, Statement of Financial Accounting Standards No. 164), Not-for-Profit Entities: Mergers and Acquisitions. This new standard was an effort on the part of the FASB to clarify the definitions of and accounting for mergers and acquisitions among not-for-profit entities. Prior to issuance of the new standard, not-for-profit entities relied on the guidance found in APB Opinion No. 16, Business Combinations which was written for the for-profit world. Opinion No. 16 was subsequently superseded by FASB Statement No. 141, Business Combinations, and FASB 141(R), but the Board excluded not-for-profits from implementing these two statements while guidance was developed specifically for the industry.
The goal of the new standard is to improve the accounting and disclosure of the transactions related to mergers and acquisitions by:
Defining what constitutes a merger and what is considered an acquisition.
Identifies the carryover method as the proper method to account for a merger.
Changes how an acquiring not-for-profit entity recognizes certain transactions during an acquisition.
Prescribes the information that should be disclosed to users of the financial statements regarding mergers and acquisitions.
In the new standard, a merger is defined as two or more not-for-profit entities ceding control to a brand new entity. The newly formed entity must have a new governing body, but need not be a new legal entity.
Prior to issuance of the standard, business combinations involving not-for-profit entities were accounted for in one of two ways: the “purchase” method or the “pooling of interests” method. Derived from the “pooling of interests” method, the “carryover method” is identified as the proper accounting method for mergers in the new standard. The assets and liabilities of the combining entities are carried forward to the new entity’s financial statements as of the merger date. The merger date is the date the merger becomes effective. The use of the merger date is a change from the prior standard which identified the measurement date – the beginning of the period in which the merger became effective – as the date the financial information was carried forward to the new entity. The reasoning for the change in recognition date is logical. Since the new entity had no operations prior to the merger date, then that date should be used.
The disclosures surrounding a merger include such information that allows users of the financial statements to evaluate the details and financial impact of the merger. Information such as the name and description of the entities that merged to form the brand new not-for-profit as well as the merger date should be disclosed. Also, the amounts of each major class of assets, liabilities and net assets for each merging entity are required to be disclosed.
In contrast to a merger, in an acquisition, one party to the transaction obtains control of one or more not-for-profit entities. The party obtaining control continues to operate and control is not ceded to a newly formed entity. The acquiring party accounts for the transaction using the “acquisition method” derived from the “purchase method” prescribed by the earlier guidance.
Changes in accounting principles for an acquisition are also part of the new standard. These changes reflect the specific nature of a not-for-profit entity’s business environment and should provide better information to users of the financial statements. The standard notes that not-for-profit entities fall into one of two categories: those predominantly supported by contributions and investment returns and those supported by fees for services. Based on this assumption, information regarding the recognition of goodwill may be of limited use to users of financial statements. It is now required for a not-for-profit entity who acquires another not-for-profit entity that is predominantly supported by contributions and investment returns to recognize the amount that would otherwise be recognized as a goodwill asset as a separate charge in the statement of activities. Examples of how this separate charge in the statement of activities should be described are “excess of consideration paid over net assets acquired in acquisition of entity X” or “excess of liabilities assumed over assets acquired in acquisition of entity X.” The standard also notes that acquisitions by not-for profit entities may occur without any consideration being transferred for net assets acquired. In this case, the acquiring entity should record the excess of assets acquired over liabilities assumed as a contribution in the statement of activities. In both instances, the recognition would occur at the acquisition date.
In the case of an acquisition, the disclosure requirements are lengthy and readers should consult the standard for a comprehensive list of the information required to be disclosed.
Rather than superimposing for-profit accounting standards over not-for-profit entities, it appears that the FASB tailored the new standard for the industry. The standard should provide clarity for accounting for these types of transactions and should provide a guide to the information that should be presented to users of the financial statements.Rich Banner, CPA is a Manager in Tate & Tryon’s Audit and Assurance Services department and can be reached at email@example.com.