Guidance on Non-Profit Mergers and Acquisitions
August 14, 2009
The Financial Accounting Standards Board (FASB) recently completed its 10 year long project to create standards for the combination of one not-for-profit organization with another not-for-profit organization or activity just in time for it to be included in the new FASB Codification system. SFAS 164 applies to mergers when the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009 and acquisitions with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2009. Early adoption of this statement is not permitted.
What Was FASB Hoping To Accomplish
FASB said the “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.” This standard takes into account the distinctive characteristics of not-for-profit accounting and the combinations they enter.
Merger or Acquisition
The first step to applying this standard is discerning if the combination is a merger or an acquisition. FASB provides the following definitions:
“A merger of not-for-profit entities is a transaction or other event 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. The cede control test requires that the merging entities not retain shared control of the new entity. To qualify as a new entity, the combined entity must have a newly formed governing body; a new entity often is, but need not be, a new legal entity.”
“An acquisition by a not-for-profit entity is a transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer’s financial statements.”
The distinction boils down to who is making the decisions. If the combining organization boards will be dissolved and a new board established more than likely you have a merger. If one of the organizations involved in the combination is making the decisions you have an acquisition.
Mergers are required to be accounted for using the “carryover method”. This method is generally the same as the “pooling method” with differences being measurement date, presentation and disclosure requirements. The carryover method defines the measurement date as the merger date whereas the pooling method defines the measurement date as the beginning of the reporting period during which the combination occurred.
Applying the carryover method requires combining, at book value, the assets and liabilities of the separate entity financial statements as of the merger date. This method would not produce additional assets or liabilities, such as internally developed intangible assets. If the merging entities used different methods of accounting or were not prepared in accordance with GAAP, the new entity is must adjust the assets and liabilities to GAAP and apply a consistent methodology to the valuation.
Acquisitions are required to be accounted for using the “acquisition method”. SFAS 164 defines the acquisition method as similar to the acquisition method described in SFAS 141R 805-10-10. However, guidance on items unique or especially significant to a not-for-profit entity (including the provisions of paragraph 51 on the nonrecognition of goodwill for particular acquirees) has been added, and guidance that does not apply to a not-for-profit acquirer has been eliminated. Applying the acquisition method requires:
- Identifying the acquirer – The acquiring entity is the entity that obtains control. The statement requires health care organizations to apply the AICPA Health Care Guide and other not-for-profit organizations to apply AICPA SOP 94-3 for additional guidance to identify the acquirer.
- Determining the acquisition date – SFAS 164 defines the date as when the acquirer obtains control of the acquiree. This is generally the date on which the acquirer legally transfers the consideration, if any, acquires the assets, and assumes the liabilities of the acquiree – the closing date.
- Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree – The acquirer must measure at fair value the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in accordance with SFAS 157 820-10-05. This includes some potential identifiable intangible assets such as trademarks, internet domain names, customer and donor lists, customer contracts, and computer software.
- Recognizing and measuring goodwill (or the immediate charge to the statement or activities required by paragraph 51) or the contribution received – KPMG in their June 2009, Defining Issues summarized the reorganization and measurement as follows:
“Acquirers that do not expect the acquiree’s operations to be predominantly supported by contributions and returns on investments must recognize goodwill as of the acquisition date for the excess of the consideration transferred (including the fair value of any noncontrolling interest) over the net of the amounts recognized for identifiable assets acquired and liabilities assumed. Any excess of the net of the amounts recognized for identifiable assets acquired and liabilities assumed over the consideration transferred is recognized as a contribution to the acquirer instead of goodwill.
Acquirers that expect the acquiree’s operations to be predominantly supported by contributions and returns on investments must recognize the difference between the consideration transferred (including the fair value of any noncontrolling interest) and the net of the amounts recognized for identifiable assets acquired and liabilities assumed as a separate charge in the statement of activities and changes in net assets as of the acquisition date, not as goodwill.”
Financial Statement Disclosure
The disclosures required by SFAS 164 are similar to those required by SFAS 141R. A partial list of disclosures required for mergers and acquisitions follows:
- The name and a description of each merging entity;
- The merger date;
- The primary reasons for the merger;
- The amount recognized as of the merger date for each major class of assets, liabilities and net assets for each organization;
- The nature and amount of any significant adjustments made to conform the individual accounting policies of the merged organizations.
- The name and a description of the acquiree;
- The acquisition date;
- The primary reasons for the acquisition;
- A description of how the acquirer obtained control of the acquiree;
- The fair value of the total consideration given broken down by major class of consideration;
- The amount recognized as of the acquisition date for each major class of assets acquired and liability assumed;
- Information regarding assets and liabilities arising from contingencies recognized a the acquisition date and the nature of the contingencies including those contingencies not recognized but are required to be disclosed by SFAS 5.
As with other new account pronouncements, Aprio is available to help you apply SFAS 164 to your not-for-profit combination.
Contact Aprio’s M&A Advisory team today to connect with an experienced advisor.