New Standard on Mergers and Acquisitions for Not-for-Profit Entities

 

In a tough economy many nonprofits are considering merging or acquiring other nonprofits to leave one larger organization to share resources. If your organization is exploring this option, be aware that a new standard has been released. The Financial Accounting Standards Board (FASB) issued SFAS 164, Not-for-Profit Entities: Mergers and Acquisitions. This standard made finally gives guidance to nonprofits for the unique features of not-for-profits and the combinations that they engage in. The guidance provides for:

•　 Distinguishment between a merger and an acquisition.

•　 Allowance of goodwill to be written off as of the acquisition date under certain circumstances.

A Merger, or an Acquisition?

The most significant determination the FASB made was to decide that a merger can occur in the nonprofit sector. A merger is accounted for by carrying over the book values of the assets and liabilities of the two merging organizations to a new entity. A merger is easier to accomplish in financial statements than an acquisition because it does not require identifying all the assets acquired and liabilities assumed (including some not previously recorded by the acquiree) and then determining the fair values as of the acquisition date.

Thus, the FASB recognized the unique characteristics of combinations between nonprofit organizations. The new guidance requires the nonprofit participants in a combination begin by determining whether the combination is a merger or an acquisition. The factor identified by the FASB that distinguishes a merger from an acquisition is how the entities gain or cede control of the two entities to create a new entity. Examining the composition of the combined entity’s governing board helps determine whether a combination is a merger or an acquisition.

In a merger, the governing boards of two or more nonprofit organizations cede control to create a new entity with a newly formed governing body, and neither of the combining nonprofit organizations dominates the seats in that new governing body. To qualify as a new entity, the combined entity must have a newly formed governing body. The new entity need not be, but often is, a new legal entity. In a merger, the nonprofit organizations that combined cease to exist as autonomous entities, and no one holds financial interests in the merged entity.

If the combination is not a merger, it is by default an acquisition. In an acquisition, one nonprofit organization (the acquirer) gains control over the net assets (equity) of another entity, business, or nonprofit activity (the acquiree) without ceding control itself. An acquisition is recognized using the same acquisition method described in Generally Accepted Accounting Principles (GAAP) for business entities; that is, the acquirer recognizes the fair value of the assets it acquires and liabilities it assumes. However, unlike a combination between businesses, in some acquisitions involving not-for-profit organizations there is a contribution inherent in the acquisition.

New Rules for Goodwill in an Acquisition

Another significant decision made by the FASB was its decision to provide special guidance related to goodwill in a nonprofit acquisition. Rather than adopting all of the same requirements as in a for-profit acquisition, the FASB concluded that if an acquiree’s operations, when combined with the acquirer, would be predominantly supported by contributions and returns on investments, the amount that otherwise would be recognized as goodwill would instead be written off at the acquisition date. In this decision, the FASB was swayed by comments from respondents about the relative usefulness of information about goodwill. The Board also determined that information about goodwill is most likely to be relevant if the acquiree’s operations, when combined with the acquirer, are expected to be predominantly supported by fees or other earned revenues. In that case, goodwill is recognized at the acquisition date and tested for impairment in accordance with GAAP for business entities.

　

Conclusion

Traditionally, mergers and acquisitions are relatively rare in the nonprofit sector but as the economy worsens, many nonprofits are recognizing the benefits of a combined organization. If you are exploring a merger or acquisition, you will need to have sufficient resources to address the accounting issues in addition to the equally important and difficult issues surrounding combining different corporate cultures and announcing the acquisition to the public and constituents. This guidance is effective for mergers on or after the beginning of the initial reporting period beginning on or after December 15, 2009. Give us a call if you need assistance.