FASB Addresses Not-for-Profit Mergers and Acquisitions

June 17, 2009

Last month the Financial Accounting Standards Board (FASB) issued its long awaited Statement 164, "Not-for-Profit Entities, Mergers and Acquisitions," marking the completion of a decade-long project to create standards for the combination of one not-for-profit entity with another not-for-profit entity or activity. It requires the parties in a combination to begin by determining whether the combination is a merger or an acquisition.

A merger is accounted for on a carryover basis, which means that the initial balance sheet of the combined (new) entity carries forward the assets and liabilities on the balance sheets of the two entities that are combining. (This is true if both balance sheets were prepared in accordance with generally accepted accounting principles). An acquisition is accounted for by the acquirer at the fair value of the assets acquired and liabilities assumed. In certain cases, goodwill will be recognized as an acquired asset. Special rules apply if the acquirer expects that the operations of the acquiree (as part of the combined entity) will be predominantly supported by contributions and returns on investments. In that situation, the amount that otherwise would be recognized as a goodwill asset as of the acquisition date would instead be written off as a separate charge in its statement of activities.

SFAS 164 also makes fully effective for not-for-profit organizations the standards in FASB Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). As a result, SFAS 164 may have some implementation effects even for institutions that are not contemplating a future merger or acquisition. SFAS 164 has different effective dates and transitions for its merger, acquisition, and intangible asset guidance, but in general it is effective for periods beginning on or after December 15, 2009 (i.e., CY 2010 or FY 2011). Earlier application is prohibited. SFAS 164 will be discussed in a future issue. For more information.

Staff Resource: Sue Menditto, director, accounting policy