Not-for-Profit Mergers and Acquisitions

Not-for-Profit Mergers and Acquisitions

There is a viable option for tax-exempt organizations to ensure that their programs continue to serve the population and also continue to offer the same program’s services —a combination of two or more not-for-profit entities which enables them to continue to serve their populations and sustain the program services offered. As with any business combination, especially one involving not-for-profit mergers and acquisitions, there are accounting and reporting issues that must be understood.

Accounting Standards

Accounting Standards Update 2010-07 Not-for-Profit Entities: Mergers and Acquisitions addresses both mergers and acquisitions by NFPs and was effective for mergers and acquisitions occurring in reporting periods beginning on or after December 15, 2009. This update included an amendment to FASB Statement No. 142 on accounting and reporting by an NFP for:

• The acquisition of a business or nonprofit activity
• The merger of two or more not-for-profit entities
• Goodwill and other intangible assets acquired in the acquisition of a business or nonprofit activity by a not-for-profit entity
• Noncontrolling equity interest in consolidated subsidiaries

Also, as a result of ASU 2010-07 NFP entities must apply the following guidance prospectively:

• Accounting Standards Codification (“ASC”) Number 350 – Intangible Goodwill and Other
• Accounting Standards Codification Number 810-10 – Consolidation
• Accounting Standards Codification Number 958 – Not-for-Profit Entities

Merger of Two or More Not-For-Profit Entities

A merger occurs when two or more NFPs combine to form a new NFP entity in which there is a newly formed governing body (does not have to be a new legal entity). This would mean the former NFP entities’ governing bodies no longer have control. Under generally accepted accounting principles, this new entity must account for the merger using the carryover method, which generally requires measuring and recognizing the assets and liabilities in its financial statements as of the merger date based on their pre-combination carrying values.

In a merger transaction there are required disclosures including, but not limited to, the following:

• A description of the merger including the merger date and the reason for the merger
• For each merging entity amounts recognized for each major class of assets, liabilities and net assets as well as significant assets not required to be recognized
• The nature and amount of adjustments made to conform the accounting policies of the merged entities

Acquisition of a Business or Nonprofit Activity by a Not-For-Profit Entity

A transaction or other event in which an NFP acquires or obtains control of one or more activities or businesses of another NFP and that acquisition is presented in the acquiring NFP’s financial statements. The acquiring NFP Board would remain in place. The acquisition must be accounted for under the acquisition method per ASC 805, Business Combinations with additional guidance under ASC 958-805. The acquisition method requires the acquirer to measure the assets acquired, liabilities assumed and any other noncontrolling ownership interest at fair value at the date of acquisition, with some exceptions.

In an acquisition transaction there are required disclosures including but not limited to the following, for a transaction that occurs during the reporting period or after the reporting period but before the financial statements are issued:

• The name and description of the acquiree and the acquisition date
• The acquisition date fair value of the total consideration transferred
• The percentage of ownership interests acquired, if applicable
• The primary reasons for the acquisition and a description of how the acquirer obtained control
• Amount of goodwill recognized
• A description of contingent consideration arrangements
• The amount recognized for each major class of assets acquired and liabilities assumed

Goodwill

In an acquisition transaction, the NFP acquirer will either initially recognize goodwill as an asset or record an immediate charge to the statement of activities, as follows:

Predominantly supported by means that contributions and returns on investments are expected to be significantly more than the total of all other sources of revenues.

In some acquisitions by not-for-profit entities, no consideration is transferred. In that situation, the result of the equation in items (a and b) above will be to measure goodwill or the separate charge to the statement of activities as the excess of liabilities assumed over assets acquired.

Noncontrolling Interests in Consolidated Financial Statements

The NFP acquires or obtains an interest in another organization or entity but the interest does not create control over that organization or entity. The acquisition must be accounted for under the requirements of consolidation under ASC 810 – 10, Noncontrolling Interests in Consolidated Financial Statements with additional guidance under ASC 958-810-45-1, Presentation of Noncontrolling Interests.

Under this guidance the NFP reporting entity must report the following:

• Noncontrolling ownership interest in the equity (net assets) of consolidated subsidiaries as a separate component of the appropriate class of net assets
• A schedule of changes in net assets attributable to the parent and the noncontrolling interest, if applicable either in the notes to the financial statements or on the face of the financial statements. This schedule must reconcile beginning and ending balances of the parent’s controlling interest and the noncontrolling interests for each class of net assets.

Need More Information?

If you have any questions about this not-for-profit update, please contact your WithumSmith+Brown professional by filling out the form below.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.