New rules from the Financial Accounting Standards Board (FASB) have a bearing on your organization if it recently merged with or acquired another not-for-profit organization. They also merit review if you’re contemplating such a move.
Statement of Financial Accounting Standards (SFAS) No. 164, Not-for-Profit Entities: Mergers and Acquisitions, issued in 2009, sets rules especially for nonprofits. The rules are now listed under Section 958-805 of the Financial Accounting Standards Codification (FASC), the FASB’s new system for accounting standards. Before the new rules, nonprofits followed accounting rules designed for for-profit business.
The new rules
The new rules outline how a nonprofit should determine if a new combination of entities is a merger or an acquisition. They also provide guidance on how to apply the carryover method in accounting for a merger, or the acquisition method for an acquisition. Additionally, they show how to determine what information to disclose to enable financial statement users to evaluate the nature and financial effects of a merger or an acquisition.
The rules took effect prospectively for mergers occurring on or after an initial reporting period beginning on or after Dec. 15, 2009, and for acquisitions occurring on or after the first annual reporting period beginning on or after Dec. 15, 2009.
Mergers and the carryover method
In general, a nonprofit involved in a merger must use the carryover method, under which the merged nonprofit’s first set of financial statements carry forward the merging entities’ assets and liabilities. These assets and liabilities are measured at their carrying amounts in the merging entities’ books at the merger date. Unlike past practice, the merger itself isn’t reported in the statements.
The merged nonprofit doesn’t recognize additional assets and liabilities — or changes in the fair value of recognized assets and liabilities — that weren’t already recognized under Generally Accepted Accounting Principles (GAAP) in the merging entities’ financial statements before the merger. Be aware, however, that there are some exceptions.
Acquisitions and the acquisition method
The acquisition method is required when one nonprofit acquires another nonprofit (or a business). The rules are similar to those followed previously by nonprofits — and still followed by for-profit businesses. But FASC 958-805 adds guidance that’s unique or particularly important to a nonprofit and uses nonprofit terminology.
FASC 958-805 specifies that assets and liabilities should be measured at fair value. This also applies to any noncontrolling interest in the acquiree as of the acquisition date. But there are many exceptions to the recognition and measurement rules; for example, a nonprofit isn’t allowed to recognize acquired “donor relationships” separately from goodwill.
Goodwill and contributions
FASC 958-805 makes a distinction between nonprofits that operate much like for-profit businesses — getting most, if not all, of their revenue from fees for services, sales and tuition — and those that rely heavily, if not entirely, on contributions and investment returns. Different rules for recording goodwill apply to these two nonprofit types.
For nonprofits largely supported by contributions and investment returns, any excess of the fair value of identifiable assets over liabilities is recognized as a “separate charge” in the statement of activities rather than as goodwill. And in certain cases, the reverse could result in a reported “contribution.”
For nonprofits predominantly supported by business-like revenue, any excess of the fair value of identifiable assets over liabilities is recognized as goodwill.
Following these rules in your financial statements can be complicated, and significant new disclosures for mergers and acquisitions also are required. Your financial advisor can help you determine how the new rules will affect your organization if it joins forces with another entity.