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

Description

Accounting and disclosure requirements for not-for-profit entities (i.e., those that lack motive as a primary consideration) differ from those of for-profit entities because the users of the financial statements of not-for-profit entities differ from those of for-profit entities. In fact, the users of not-for-profit financial statements include different types of stakeholders as a result of the absence of equity shareholders. Furthermore, while not-for-profit entities may also receive exchange-based revenues, similar to for-profit entities, they also rely heavily on contributions. Contribution revenue necessitates separate standard-setting to address the goal of stewardship with donor resources, i.e., donors provide resources to not-for-profit entities to yield a benefit to another party, rather than to benefit themselves.

This Portfolio describes the accounting rules and reporting requirements that apply specifically to mergers and acquisitions (collectively business combinations) of not-for-profit entities. In so doing, it identifies and 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), apply 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, transactions categorized as mergers of not-for-profit entities may be accounted for using the carryover method. ASC 958-805 provides accounting guidance for transactions classified as mergers of not-for-profit entities.

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, under 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, with some exceptions. After 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 after an acquisition using either the qualitative evaluation method or the quantitative impairment test. However, standards permit amortization of goodwill over 10 years if the not-for-profit wishes to avoid having to test for impairment of goodwill as frequently (ASU 2019-06).

This Portfolio may be cited as Bloomberg Tax & Accounting Portfolio 5203-2nd, Deis and Waymire, Accounting for Mergers and Acquisitions of Not-for-Profit Entities. This Portfolio refers extensively to a companion portfolio cited as Bloomberg Tax & Accounting Portfolio 5200, Accounting for Not-for-Profit Organizations.

Table of Contents

I. Background and Scope of Portfolio

II. Nature of Not-for-Profit Business Combinations

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

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

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

VI. Carryover Method of Accounting

VII. The Acquisition Method

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

IX. Financial Statement Presentation Requirements for Acquisitions

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