Not-for-Profit Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting not-for-profit organizations.

The Accounting and Financial Reporting Complexities of Nonprofit Collaboration

As funding sources diminish, an increasing number of nonprofit organizations are collaborating, merging or being acquired by other organizations. Pooling resources cuts costs and often increases efficiency, but it also means complicated accounting work and uncharted reporting obligations. Here, we'll explore different ways nonprofits are collaborating and what it means from an accounting and financial reporting perspective. 

Nonprofit Collaborationcollaborating

For accounting purposes, the simplest relationship nonprofits can form is a collaborative arrangement. These are typically contractual agreements in which two or more organizations are active participants in a joint operating activity. In this type of arrangement, each individual organization remains independent and active, they just now work together. For example, if a hospital is jointly operated by two nonprofit health care organizations, these health care organizations are entered into a collaborative, contractual relationship and they must report on this accordingly.  

What are some accounting considerations in a nonprofit collaboration? Costs incurred and revenue generated from transactions with third parties should be reported, on a gross basis, on the statement of activities, by the nonprofit that’s considered the “principal” for that specific transaction. Generally, the principal is the entity that has control of the goods or services provided in the transaction. But you should follow Generally Accepted Accounting Principles (GAAP) for your particular situation.

Payments between participants are presented according to their nature (following accounting guidance for the type of revenue or expense the transaction involves). Participants also must make certain disclosures, such as the nature and purpose of the arrangement and each organization’s rights and obligations.

Nonprofit Mergers and Acquisitions

In a more complicated arrangement, two or more organizations form a completely new legal entity. These are considered nonprofit mergers. A merger takes place when the boards of directors of the nonprofits involved cede control of themselves to the brand new entity. The assets and liabilities of the organizations are combined as of the merger date.

Another option is for the board of one organization to cede control of its operations to another entity to enable a cooperative activity — but without creating a new legal entity. This is considered an acquisition, and the remaining organization (the acquirer) must determine how to record it based on the current value of the assets and liabilities of the organization acquired.

If there’s an excess of value, it should be recorded as a contribution. If the value is lower, the difference is generally recorded as goodwill. But, if the operations of the acquired organization are expected to be predominantly supported by contributions and returns on investments, the difference should be recorded as a separate charge in the acquirer’s statement of activities.

Is Collaboration Right For You?

There are many benefits with nonprofit collaboration: lower costs, increased resources and leadership, combined and expanded donor networks, etc. At the same time, it’s important to be prepared for the new accounting challenges you will face. Considering a collaborative relationship of any kind? Contact us today.