Mergers and Acquisitions

FAS 164 issued in April 2009, sets out the principles and requirements for how a not-for-profit entity should determine whether a combination is in fact a merger or an acquisition. Prior to the issuance of this standard FAS 141 provided guidance on combinations for Business entities (for-profit organizations). There are different motivators for acquiring or merging with another organizations. For-profit entities tend to be motivated by market share, generating revenues and maximizing net income. Nonprofit organizations may merge for different reasons, other than the effect on the bottom line. Enhanced program services and missional outreach while reducing overhead, play important factors in negotiating a combination.

Non-profit organizations exempt status requires continued operational compliance with its exemption. Whether the organization fulfills a religious, educational, scientific, cultural service to the community, any organizational changes have to be focused on continuing or expanding the operational exemption. Many non-profit combinations involve an inherent contribution between the organizations.

When two non-profit organizations are combined – is it a merger or an acquisition? After the combination, who controls the combined entity? Who is in control? A new governance team – the combination is recorded as a merger. If one entity cedes control to another entity – the combination is recorded as an acquisition.

How is the combination recorded?

If two entities are merged – the carryover method records the merged assets/liabilities/net assets of the organization. The new entity’s initial reporting period begins with the merger date and the merger itself shall not be reported as activity in the new entity’s initial reporting period. The combined assets, liabilities, and net assets of the merging entities are included in the statement of financial position as of the beginning of that initial reporting period.

If a combination occurs because of an acquisition (control of the acquiree cedes to the acquiror) – the assets/liabilities of the acquiree are measured at fair value and any difference (calculated between consideration/assets received less liabilities assumed) is determined. This difference (if positive) is recorded by the acquiror, either as a contribution (if the acquiree is predominately supported by contributions and investment income) or as an asset called goodwill. If the liabilities assumed exceed the assets received/consideration given, then an expense is recorded in the statement of activities.

Combining organizations should be carefully considered by both boards/executive management. Determining “how” can be difficult and costly. Understand “who” will control and execute the mission, and then combine. SFAS 164 provides the accounting guidance for the transaction.