PORTFOLIO

Accounting for Mergers and Acquisitions of Not-for-Profit Entities (Portfolio 5203)

Bloomberg BNA Tax and Accounting Portfolio 5203, Accounting for Mergers and Acquisitions of Not-for-Profit Entities (Accounting Policy and Practice) provides a comprehensive discussion of the accounting and reporting requirements of U.S. Generally Accepted Accounting Principles (GAAP) for mergers and acquisitions of most nongovernmental not-for-profit entities.

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DESCRIPTION

Bloomberg BNA Tax and Accounting Portfolio 5203, Accounting for Mergers and Acquisitions of Not-for-Profit Entities (Accounting Policy and Practice) provides a comprehensive discussion of the accounting and reporting requirements of U.S. Generally Accepted Accounting Principles (GAAP) for mergers and acquisitions of most nongovernmental not-for-profit entities.
Accounting and disclosure requirements for not-for-profit entities differ from those of for-profit entities because not-for-profit entities do not generally have ownership interests; instead they often receive a significant portion of their revenues from donors. Moreover, unlike for-profit entities, not-for-profit entities by definition lack a profit motive.
This Portfolio describes the accounting rules and reporting requirements that apply specifically to mergers and acquisitions of not-for-profit entities. It describes the types of mergers and acquisitions that commonly occur in the not-for-profit sector. It also explains when and how to apply the two accepted methods for accounting for business combinations in this sector – the acquisition method and the carryover method.
Similar to the accounting and disclosure requirements for for-profit entities, acquisitions of not-for-profit entities are accounted for using the acquisition method. The main provisions of the acquisition method provided in Topic 805, Business Combinations, of the FASB Accounting Standards Codification (ASC) are applicable to transactions that are classified as acquisitions of not-for-profit entities, with incremental guidance provided for not-for-profit entities in ASC 958-805, Not-for-Profit Entities: Business Combinations. Although for-profit entities can only use the acquisition method for business combinations, not-for-profit entities can use the carryover method for transactions that are classified as mergers of not-for-profit entities. Accounting guidance for transactions that are classified as mergers of not-for-profit entities is provided in ASC 958-805.
This Portfolio also describes the accounting and disclosure requirements for identifiable intangible assets and goodwill that are recognized in acquisitions of not-for-profit entities, in accordance with ASC 350, Intangibles – Goodwill and Other. The accounting for intangible assets and goodwill for not-for-profit entities is similar to the accounting treatment used by for-profit entities. Subsequent to an acquisition, intangible assets may be either amortized over their useful lives, or evaluated for impairment, depending on whether they have finite or infinite useful lives. Goodwill should be evaluated for impairment subsequent to an acquisition using either the qualitative evaluation method or two-step impairment test.
This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5203, Daher and Daher, Accounting for Mergers and Acquisitions of Not-for-Profit Entities (Accounting Policy and Practice Series). This Portfolio cites to other portfolios within the Accounting Policy and Practice Series as Bloomberg BNA Tax and Accounting Portfolio. For instance, this Portfolio refers extensively to a companion portfolio cited as Bloomberg BNA Tax and Accounting Portfolio 5200-2nd, Accounting for Not-for-Profit Organizations.


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AUTHORS

DOMINIC L. DAHER, MACC, JD, LLM IN TAXATION
Dominic L. Daher is the Director of Internal Audit and Tax Compliance at the University of San Francisco. Mr. Daher is a graduate of New York University School of Law (Master of Laws in Taxation); Washington University School of Law (Juris Doctor); and the University of Missouri-Columbia (Master and Bachelor of Accountancy).
Mr. Daher writes for various scholarly and professional journals. In addition, he serves on editorial advisory boards for numerous professional publications. Mr. Daher also serves as an adjunct member of the faculty at the University of San Francisco in its School of Business and School of Law, where he teaches a variety of accounting and law courses. In May 2005, Mr. Daher garnered the Outstanding Faculty Teaching Award.

STACY E. DAHER, MACC, CPA
Stacy E. Daher is the Associate Vice President for Finance and Treasury at the University of San Francisco. In her role as Associate Vice President, Ms. Daher is responsible for the management of the university's endowment investments, cash management, and debt issuance. In addition, Ms. Daher serves as a member of the California Educational Facilities Authority. Ms. Daher was formerly with the international accounting firm, PricewaterhouseCoopers. Ms. Daher is a graduate of Saint Louis University (Master of Accountancy) and the University of Missouri-Columbia (Bachelor of Music). Ms. Daher was previously an adjunct member of the faculty at the University of San Francisco in its School of Business.

TABLE OF CONTENTS

Portfolio 5203-1st: Accounting for Mergers and Acquisitions of Not-for-Profit Entities

Portfolio Description

Authors

Description

Detailed Analysis

I. Background and Scope of Portfolio

A. Background

1. Definition of Not-for-Profit Entity

2. Not-for-Profit Entities Within the Scope of This Portfolio

B. Organization of the Portfolio

II. Nature of Not-for-Profit Business Combinations

A. Objectives of Not-for-Profit Entities vs. For-Profit Entities

B. Reasons for Not-for-Profit Business Combinations

C. Types of Not-for-Profit Business Combinations

1. Outright Merger

2. Asset Transfer

3. Interlocking Boards

4. Parent-Subsidiary Merger

5. Decision Tree

D. The Cost of a Merger of Not-for-Profit Organizations

III. Authoritative Accounting Literature and Accounting Issues Unique to Not-for-Profit Entities

A. Significant Not-for-Profit Entity Accounting Literature

B. Accounting Issues That Relate Specifically to Not-for-Profit Entities

1. Net Asset Classes

a. Unrestricted Net Assets

b. Temporarily Restricted Net Assets

c. Permanently Restricted Net Assets

d. Reclassifications and Releases From Restriction

2. Revenues and Receivables From Contributions

IV. Consolidated Financial Statements of Not-for-Profit Entities

Introductory Material

A. Financial Statements of Not-for-Profit Organizations

1. Statement of Financial Position

2. Statement of Activities

3. Statement of Cash Flows

B. Financial Statement Consolidation Requirements

1. Consolidation Requirements for Not-for-Profit Entities Other Than Health Care Organizations

a. Investments in Majority-Owned For-Profit Subsidiaries

b. Intercompany Transactions

c. Investments in Common Stock of For-Profit Businesses That Are Not Majority Owned

d. Consolidating Two Not-for-Profit Entities

i. Consolidation Based on Ownership

ii. Consolidation Based on an Economic Interest

iii. Consolidation Based on Contract or Agreement

iv. Disclosures When Entities Are Not Consolidated

2. Consolidation Requirements for Not-for-Profit Health Care Entities

C. Illustrative Footnote Disclosures of the Nature of the Reporting Organization and Consolidation Policies

V. Defining and Classifying Business Combinations Involving Not-for-Profit Entities

A. Defining a Business Combination Involving Not-for-Profit Entities

B. Classifying Business Combinations by Not-for-Profit Entities

VI. Carryover Method of Accounting

Introductory Material

A. Preparing Financial Statements After a Merger

1. GAAP Requirement

2. Unrecognized Assets and Liabilities

3. Classification of Assets and Liabilities

4. Methods of Accounting

5. Periods Covered by Financial Statements

6. Comprehensive Example of the Carryover Method

B. Financial Statement Disclosures

VII. The Acquisition Method

Introductory Material

A. Identifying the Acquiring Entity

1. The Transfer of Consideration

2. Combined Organization's Governing Body

3. Size of Organizations Included in the Combination

4. Selection of the Management Team of the Combined Entity

5. Mission and Name of Combined Organization

6. Organization That Initiated the Transaction

7. Formation of a New Organization

B. Determining the Acquisition Date

C. Determining Consideration Exchanged

1. Assets Transferred to or From a Third Party

2. Assessing the Nature of Consideration Transferred to the Acquired Entity

a. Payments That Settle Preexisting Relationships

b. Payment Arrangements for Employee Services

i. Continued Employment

ii. Duration of Continued Employment

iii. Level of Payment

iv. Incremental Payments to Employees

v. Formula Used to Determine Consideration

c. Reimbursement of Acquisition Costs

3. Transaction Costs

4. Contingent Consideration

D. Recognizing and Measuring Assets Acquired and Liabilities Assumed Under the Acquisition Method of Accounting

1. General Recognition and Measurement Requirements

2. Acquired Investments

a. Alternative Investments

b. Alternative Investment Valuations

3. Identifiable Intangible Assets

a. Marketing-Related Intangible Assets

b. Donor-and Customer-Related Intangible Assets

c. Artistic-Related Intangible Assets

d. Contract-Based Intangible Assets

e. Technology-Based Intangible Assets

4. Acquired Research and Development Assets

a. Definition of Research and Development Activities

b. Accounting for Acquired Research and Development Assets

5. Operating Leases

6. Exceptions to Recognition Requirements

a. Liabilities Arising From Contingencies

b. Indemnification Assets

c. Collection Items

d. Conditional Promises to Give

7. Exceptions to Measurement Requirements

a. Reacquired Rights

b. Assets Held for Sale

E. Provisional Amounts and the Measurement Period

F. Recognizing Goodwill or Inherent Contribution in an Acquisition

1. Recognition of Goodwill

2. Recognition of an Inherent Contribution Received

3. Comprehensive Examples of the Acquisition Method of Accounting and the Recognition of Either Goodwill or a Contribution Received

(a) Example of Acquisition With Goodwill

(b) Example of Acquisition With Contribution Received

VIII. Fair Value Measurement Principles Applied to Acquisitions of Not-for-Profit Entities

Introductory Material

A. General Discussion of Fair Value Measurements

B. Fair Value Measurement Assumptions

1. Orderly Transaction and Market Participant Assumptions

2. Principal or Most Advantageous Market Assumption

3. Highest and Best Use Assumption

C. Valuation Techniques

D. Hierarchy of Inputs to Valuation Techniques

1. Level 1 Inputs

2. Level 2 Inputs

3. Level 3 Inputs

E. The Use of Appraisals to Determine Fair Value for Financial Statement Reporting

IX. Financial Statement Presentation Requirements for Acquisitions

Introductory Material

A. Statement of Activities — Presentation

1. Goodwill

2. Inherent Contribution

B. Statement of Cash Flows

C. Financial Statement Disclosure Requirements

1. Disclosure of the Nature and Financial Effect of an Acquisition

2. Transactions Recognized Separately From the Acquisition

3. Acquisitions Achieved in Stages

4. Additional Disclosures When the Acquiring Entity Is a Public Entity

5. Consideration Transferred

6. Assets and Liabilities Recognized in an Acquisition

7. Goodwill

8. Noncontrolling Interests

9. Current Period Adjustments Related to Acquisitions in the Current or Previous Reporting Periods

X. Accounting for Goodwill and Other Intangible Assets Subsequent to an Acquisition of a Not-for-Profit Entity

Introductory Material

A. Intangible Assets Recognized Separately From Goodwill

1. Determining the Useful Life of an Intangible Asset

2. Accounting for Intangible Assets With Finite Useful Lives

3. Accounting for Intangible Assets With Indefinite Useful Lives

4. Required Financial Statement Disclosures for Identifiable Intangible Assets

B. Goodwill

1. Evaluating Goodwill for Impairment

2. Determination of Reporting Units

a. Identifying Operating Segments

b. Identifying Components

3. Assigning Identifiable Assets Acquired and Liabilities Assumed to Reporting Units

4. Assigning Goodwill to Reporting Units

5. Evaluating Goodwill for Impairment

a. Qualitative Method for Evaluating Goodwill for Impairment

b. Two-Step Goodwill Impairment Test

6. Goodwill Disclosure Requirements

a. General Goodwill Disclosure Requirements

b. Disclosures of Impairment Losses


WORKING PAPERS

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Carryover Method v. Acquisition Method: The Practical Differences

Worksheet 2 Differences Between the Current and Historical Business Combination Rules

Worksheet 3 Sample Statement of Financial Position

Worksheet 4 Sample Statement of Activities

Worksheet 5 Sample Statement of Cash Flows

Worksheet 6 Transactions Reported in the Illustrative Financial Statements

Worksheet 7 Illustrative Financial Statements for a Not-for-Profit Hospital

Worksheet 8 Hospital A and B Statement of Financial Position Prior to and Subsequent to Combination Using the Carryover Method of Accounting

Worksheet 9 Hospital A and B Statement of Activities Prior to and Subsequent to Consolidation Using the Carryover Method of Accounting

Worksheet 10 Statements of Financial Position for Hospital A and Hospital B Prior to Acquisition

Worksheet 11 Statements of Financial Position Subsequent to the Acquisition of Hospital B by Hospital A

Worksheet 12 Acquisition Method of Accounting — Illustrative Example of the Statement of Financial Position of the Acquiring Organization Before the Combination

Worksheet 13 Acquisition Method of Accounting — Illustrative Example of the Statement of Financial Position of the Acquired Organization Before the Combination

Worksheet 14 Illustrative Example of a Goodwill Calculation

Worksheet 15 Illustrative Example of the Statement of Financial Position of the Acquiring Organization Subsequent to Combination When Goodwill Is Recorded at the Acquisition

Worksheet 16 Illustrative Example of a Goodwill Calculation That Results in the Recognition of a Contribution Received by the Acquiring Organization

Worksheet 17 Illustrative Example of the Statement of Financial Position of the Acquiring Organization Subsequent to Combination Received Is Recorded by the Acquiring Entity at the Acquisition

Worksheet 18 Sample Not-for-Profit Hospital Notes to Financial Statements

Bibliography

OFFICIAL

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)

FASB Accounting Standards Codification:

FASB Concepts Statements:

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

AICPA Audit and Accounting Guides:

FEDERAL REGULATIONS

Treasury Regulations:

UNOFFICIAL

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)

FASB Statements of Financial Accounting Standards (superseded by FASB Accounting Standards Codification):

Proposed FASB Statements of Financial Accounting Standards:

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

AICPA Statements of Position (superseded by FASB Accounting Standards Codification):

APB Opinions (superseded by FASB Accounting Standards Codification):

Accounting Research Bulletins (superseded by FASB Accounting Standards Codification):

OTHER:

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