FASB Issues New Guidance on Nonprofit Mergers and Acquisitions

The Financial Accounting Standards Board (FASB) recently issued Statement Number 164 to provide guidance on the accounting associated with a combination of a nonprofit entity with one or more other nonprofit entities, businesses, or nonprofit activities.  The statement establishes principles and requirements on how a nonprofit 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
• Determines what information to disclose in financial statements.

Statement Number 164 is effective for:

• 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.

Statement Number 164 may NOT be applied to mergers or acquisitions before those dates, according to the FASB guidance.

Why the FASB felt the need for special guidance concerning nonprofits

A major difference between combinations of nonprofit organizations and combinations involving only for-profit entities has important financial reporting connotations according to the FASB.  Because a nonprofit organization lacks the type of ownership interests that business entities have, negotiations in nonprofit mergers and acquisitions focus on the furtherance of the public benefit and the mission of the entity, rather than on the returns for the owners.  Many mergers and acquisitions by nonprofit entities do not involve a payment of consideration.  In other words, many mergers and acquisitions by nonprofit organizations are not fair value exchanges but rather are nonreciprocal transfers.  The FASB felt that that difference contributed significantly to the requirement that different accounting methods apply to a merger of nonprofit organizations and an acquisition by a nonprofit entity.

Mergers

Statement Number 164 requires the carryover method to account for a merger of nonprofit entities.  A merger, in this regard, is a combination in which the governing bodies of two or more nonprofit entities cede control of those entities to create a new nonprofit entity. Generally, under the carryover method, the combined entity’s initial financial statements reflect the carryforward basis of assets and liabilities of the combining entities at the merger date.

Acquisitions

With respect to acquisitions, Statement Number 164 requires the acquisition method to account for an acquisition by a nonprofit entity.  An acquisition is a combination in which a nonprofit acquirer secures control of one or more nonprofit activities or businesses.  The acquisition method is the same as the acquisition method described in Statement 141(R), with consideration given to guidance on items unique to a nonprofit entity and the excluding guidance that is not relevant to the nonprofit acquirer.  According to the Accounting Standards Codification™ Section 805-10-05, the acquisition method requires all of the following steps:

1. Identifying the acquirer
2. Determining the acquisition date
3. Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree
4. Recognizing and measuring goodwill or a gain from a bargain purchase.

The area that differs most from Statement 141(R) is the recognition of goodwill.  Unlike business entities, some nonprofit organizations are mostly supported by contributions and investments earnings.  Others are more “businesslike,” and receive most of their support from service charges.  In general, the more businesslike a nonprofit organization, the more relevant is information about the value of goodwill. However, Statement Number 164 recognizes that information about goodwill may be of limited use to donors in their assessments of a not-for-profit entity.  Accordingly, Statement 164 requires an acquirer to account for goodwill as a separate charge against earnings.  In other words, goodwill should not be recognized as an asset. 

Disclosures

With regard to disclosures, Statement Number 164 addresses mergers and acquisitions separately.  The Statement identifies specific requirements under each type of transaction.