Merger and acquisition accounting

New accounting rules for mergers and acquisitions of nonprofit organizations are now in effect.  In the past, when two nonprofit organizations came together, the accounting was essentially to combine the accounting information of the two entities.  This is no longer allowed.

Under the new rules, there are mergers and acquisitions. The accounting for each is quite different.

Merger – A merger is essentially the combination of two equals.  To oversimplify, in this situation a new entity arises which carries over the amounts in the statement of financial position of the two previous organizations.  The new entity starts its existence on the date of the merger and the statement of activity reflects of the results of operations of the new organization from that date forward.  This means the first set of financial statements of the merged entity could be quite peculiar.  For example, a merger date of November 1, 2010 means the statement of activity for the new organization would be for the two months ending December 31, 2010 and would reflect only 60 days of revenue and expense.

Acquisition – An acquisition is when one organization actually “acquires” the other.  Greatly oversimplifying, in this situation the acquiring organization records the assets and liabilities of the acquired nonprofit at the fair value of those assets and liabilities.  Just in case you missed that key phrase “fair value”, the amounts brought in are fair value or the current market value, not what was on the general ledger before the acquisition.  Since there is not a new entity but instead the acquiring organization continues on, the statement of activity would reflect the results of operation of the acquiring organization for the entire year plus the results of operation of the acquired organization from the date of the acquisition.

Fair value – For acquisition accounting there is one massive complication in the new accounting approach that we have not seen before in the nonprofit community.  Since the assets and liabilities will be recorded at fair value it might be necessary to retain the services of qualified appraisers in order to establish those fair values.  Appraisers won’t always be necessary but often will be needed.  This will add to the cost of a transaction. 

Goodwill – In addition there could be goodwill arising from an acquisition.  How the goodwill is handled will depend on whether the organization is primarily funded from contributions or fees.  Goodwill issues will complicate the accounting and thus increase the complexity of the annual audit.  That will in turn increase the cost of the audit.  It is very possible that an acquisition could result in substantial costs.

Effective date – According to paragraph 92b of SFAS 164 (now ASC 805.10.15-4) the effective date for acquisitions is “on or after the beginning of the first annual reporting period beginning on or after December 15, 2009.”  As usual, we need to translate this from accountantese into English.  That means the new rules apply first to acquisitions reported in December 31, 2010 financial statements.  The transition date for mergers is worded slightly differently but translates the same: December 31, 2010 financials.

This is an extremely brief overview.  (“No kidding” I hear you say, since the original statement was 38 pages long, with 53 pages of implementation guidance.)  Hopefully this gives you the general flavor of the new accounting for mergers and acquisitions.  If you enter into discussions to combine the operations of your organization and another ministry, it would be wise to keep in mind that the accounting for such transactions has become far more complex and possibly quite costly.

For the CPAs reading this, the initial pronouncement was SFAS #164, Not-for-Profit Entities: Mergers and Acquisitions.  You know, of course, that document has been superseded.  The text is now a part of the accounting standards codification, primarily at ASC 958.810.  Portions of FAS #164 can be found in ASC 740, 350, 805, and 954.

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