Accounting for Mergers & Acquisitions

Not-for-profit organizations that plan to combine may be subject to new accounting rules governing how mergers and acquisitions should be reflected in the organizations’ financial statements.

 The Financial Accounting Standards Board (FASB) has provided authoritative guidance addressing how not-for-profits should reflect a combination in their financial reports in its new Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions.

Defining the Combination
Not-for-profit combination arrangements can take many forms. Statement No. 164 applies only to mergers and acquisitions. Other combinations, such as joint ventures, are not addressed.

 According to the guidance, a merger involves the governing bodies of two or more not-for-profit entities ceding control of those entities to create a new entity that has a newly formed governing body. The new organization may be a new legal entity, but that won’t always be the case.

 When a not-for-profit obtains control of another (or several other) organization’s not-for-profit activities or business, the combination constitutes an acquisition. For purposes of this guidance, control is defined as having the ability to direct, by way of ownership, contract, or some other means, the acquired organization’s management and policies.

Using Proper Accounting
When organizations have merged, Statement No. 164 requires a carryover accounting method. The assets and liabilities of the combining entities are carried forward at book value as of the effective date of the merger. The new organization’s operating history begins at that point.

 When an acquisition occurs, a different accounting method applies. The acquiring organization must recognize the liabilities it has assumed and the identifiable assets (plus any goodwill) it has acquired — all measured at fair value — as of the acquisition date. Several exceptions apply.

 The new rules generally are effective for mergers and acquisitions that occur in reporting periods beginning on or after December 15, 2009. If you’re currently negotiating a combination, or contemplating one, you’ll want to discuss the new FASB rules with us soon.