ASC 805-958
Not-for-Profit Entities
805 Business Combinations
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ASC 958-805 (indexed here as 805-958) governs combinations in which a not-for-profit entity is the reporting entity and combines with other NFPs, businesses, or nonprofit activities. If the participating governing boards cede control to a new NFP, the transaction is a merger accounted for under the carryover method (combine GAAP carrying amounts, no fresh start, no new assets); if one entity obtains control of the other, it is an acquisition accounted for under the acquisition method with NFP-specific rules for identifying the acquirer, goodwill, and inherent contributions.
Key points (7)
- An NFP must classify the transaction by applying the definitions: ceding control to a new NFP is the sole definitive criterion for a merger, and one entity obtaining control of another is the sole definitive criterion for an acquisition (958-805-25-1; 958-805-55-1).
- Under the carryover method the new NFP combines the merging entities' GAAP carrying amounts as of the merger date, recognizes no additional assets such as internally developed intangibles, carries forward prior classifications and designations, conforms accounting policies, and eliminates intra-entity balances (958-805-25-4 through 25-9; 958-805-30-1 through 30-4).
- Because the carryover method is not a fresh-start measurement, a merger does not permit new elections (or reversals) of options restricted to initial acquisition or recognition, such as the fair value option (958-805-30-3).
- The new NFP is a new reporting entity whose initial period begins on the merger date; the merger is not reported as activity of that period, and combined amounts appear as opening balances (958-805-45-1 through 45-2).
- An NFP acquirer applies the acquisition method with modifications: the acquirer is identified using NFP/health care consolidation control guidance (958-805-25-15), acquired donor relationships are subsumed into goodwill (958-805-25-22), uncapitalized collection items are not recognized as assets (958-805-25-23), and conditional promises to give are recognized only if conditions are substantially met (958-805-25-26).
- If the acquiree's operations are expected to be predominantly supported by contributions and returns on investments, the acquirer recognizes an immediate separate charge in the statement of activities instead of goodwill; otherwise goodwill is recognized (958-805-25-28 through 25-30; 958-805-30-6; presented per 958-805-45-4).
- Instead of a bargain purchase gain, an excess of net identifiable assets acquired over consideration is recognized as an inherent contribution received, reported as a separate line item and classified according to donor restrictions without applying the 958-605-45-4A exception (958-805-25-31; 958-805-30-8; 958-805-45-5 through 45-6).
For students. Exams love the merger/acquisition fork: NFPs are the only reporting entities that may use the carryover method, and only when both boards cede control to a genuinely new governing body. The classic mistake is treating an excess of net assets acquired as a bargain purchase gain (it is an inherent contribution) or automatically recognizing goodwill when the acquiree is contribution-supported (that excess is charged immediately to the statement of activities).
merger of not-for-profit entitiesacquisition by a not-for-profit entitycarryover methodceding of controlinherent contribution receivedgoodwill versus immediate chargedonor relationships and collectionsconditional promises to give
Machine-generated study aid for ASC 805-958. Check the source paragraphs below.
805-958-00Status
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805-958-00-1
The following table identifies the changes made to this Subtopic.
805-958-05Overview and Background
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805-958-05-1
This Subtopic provides guidance on a transaction or other event in which a not-for-profit entity (NFP) that is the reporting entity combines with one or more other NFPs, businesses, or nonprofit activitiesin a transaction that meets the definition of a merger of not-for-profit entitiesor an acquisition by a not-for-profit entity. The guidance is presented in the following three Subsections:
- aGeneral
- bMerger of Not-for-Profit Entities
- cAcquisition by a Not-for-Profit Entity.
805-958-05-2
The General Subsections provide overall guidance on the recognition of combinations involving NFPs, and they provide implementation guidance for determining whether a combination between an NFP and one or more businesses, nonprofit activities, or another NFP is a merger or an acquisition.
805-958-05-3
Paragraphs presented in bold type in this Subtopic state the main principles. All paragraphs have equal authority.
Merger of Not-for-Profit Entities
805-958-05-4
The Merger of Not-for-Profit Entities Subsections establish standards of financial accounting and reporting for transactions or other events that meet the definition of a merger of not-for-profit entities. Specifically, these Subsections establish principles and requirements for how a not-for-profit entity (NFP) does both of the following:
- aApplies the carryover method in accounting for a merger
- bDetermines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger.
Acquisition by a Not-for-Profit Entity
805-958-05-5
The Acquisition by a Not-for-Profit Entity Subsections establish standards of financial accounting and reporting for transactions or other events that meet the definition of an acquisition by a not-for-profit entity. Those standards are incremental to the guidance in Subtopics 805-10, 805-20, and 805-40. Specifically, these Subsections establish principles and requirements for how a not-for-profit entity does both of the following:
- aApplies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer
- bDetermines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of an acquisition.
805-958-10Objectives
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805-958-10-1
The objective of this Subtopic is to improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity (NFP) that is a reporting entity provides in its financial reports about a combination with one or more other NFPs, businesses, or nonprofit activities.
805-958-15Scope and Scope Exceptions
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Overall Guidance
805-958-15-1
This Subtopic follows the same scope and scope exceptions as the Overall Subtopic, see Section 958-10-15.
805-958-15-2
The General Subsection of this Section establishes the pervasive scope for this Subtopic.
Transactions
805-958-15-3
The guidance in this Subtopic applies to a transaction or other event that meets the definition of either of the following:
- a
- b
805-958-15-4
This Subtopic does not apply to all of the following:
- aThe formation of a joint venture
- bThe acquisition of an asset or a group of assets that does not constitute either a business or a nonprofit activity. (Subtopic 805-50 addresses the typical accounting for an asset acquisition.)
- cA combination between not-for-profit entities (NFPs), businesses, or nonprofit activities under common control. (Subtopic 805-50 addresses the typical accounting for a transfer of assets or an exchange of shares between entities under common control.)
- dA transaction or other event in which an NFP obtains control of another not-for-profit entity but does not consolidate that entity, as permitted or required by Section 958-810-25. Similarly, this Subtopic does not apply if an NFP that obtained control in a transaction or other event in which consolidation was permitted but not required decides in a subsequent annual reporting period to begin consolidating a controlled entity that it initially chose not to consolidate.
Merger of Not-for-Profit Entities
Overall Guidance
805-958-15-5
The Merger of Not-for-Profit Entities Subsections follow the same Scope and Scope Exceptions as the General Subsections of this Subtopic, see Section 958-805-15, with specific exceptions noted below.
Transactions
805-958-15-6
The guidance in the Merger of Not-for-Profit Entities Subsections applies only to transactions or other events that meet the definition of a merger of not-for-profit entities.
Acquisition by a Not-for-Profit Entity
Overall Guidance
805-958-15-7
The Acquisition by a Not-for-Profit Entity Subsections follow the same Scope and Scope Exceptions as the General Subsections of this Subtopic, see Section 958-805-15, with specific exceptions noted below.
Transactions
805-958-15-8
The guidance in the Acquisition by a Not-for-Profit Entity Subsections applies only to transactions or other events that meet the definition of an acquisition by a not-for-profit entity.
805-958-25Recognition
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805-958-25-1
A not-for-profit entity (NFP) shall determine whether a transaction or other event is a merger of not-for-profit entities or an acquisition by a not-for-profit entity by applying the definitions.
805-958-25-2
Paragraphs provide guidance on distinguishing between a merger and an acquisition.
Merger of Not-for-Profit Entities
805-958-25-3
The not-for-profit entity (NFP) resulting from a merger (the new entity) shall account for the merger by applying the carryover method described in the Merger of Not-for-Profit Entities Subsections of this Subtopic.
805-958-25-4
Applying the carryover method requires combining the assets and liabilities recognized in the separate financial statements of the merging entities as of the merger date (or that would be recognized if the entities issued financial statements as of that date), adjusted as necessary in accordance with paragraph 958-805-25-7 and paragraphs .
805-958-25-5
The remainder of the discussion of the carryover method refers to financial statements of the merging entities, rather than a more precise, but longer, phrase such as assets and liabilities that would be recognized in the financial statements of the merging entities if statements are prepared. Use of the shorter phrase is not intended to exclude, for example, an NFP that has not prepared or issued financial statements. In that situation, the phrase refers to the items in the entity's financial records that would be the basis for preparing financial statements.
805-958-25-6
The new NFP shall recognize in its financial statements the assets and liabilities reported in the separate financial statements of the merging entities as of the merger date in accordance with generally accepted accounting principles (GAAP).
805-958-25-7
The new NFP does not recognize additional assets or liabilities, such as internally developed intangible assets, that GAAP did not require or permit the merging entities to recognize. However, if a merging entity's separate financial statements are not prepared in accordance with GAAP, those statements shall be adjusted to GAAP before the new entity recognizes the assets and liabilities.
Classifying or Designating Assets and Liabilities in a Merger
805-958-25-8
The new NFP shall carry forward at the merger date the merging entities' classifications and designations of their assets and liabilities unless one of the exceptions in the following paragraph applies.
805-958-25-9
In some situations, GAAP provides for different accounting depending on how an entity classifies or designates a particular asset or liability. Paragraphs provide examples of such classifications and designations. The new NFP shall carry forward into the opening balances in its financial statements (see paragraph 958-805-45-2(a)) the merging entities' classifications and designations unless either of the following situations applies:
- a The merger results in a modification of a contract in a manner that would change those previous classifications or designations; for example, if the provisions of a lease are modified and the modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8
- b Reclassifications are necessary to conform accounting policies in accordance with paragraph 958-805-30-2.
805-958-25-10
In situation (a) in the preceding paragraph, the new NFP shall classify or designate the asset or liability on the basis of the contractual terms, economic conditions, its operating or accounting policies, and other pertinent conditions as they exist at the date of that modification. In situation (b) in the preceding paragraph, the new NFP shall classify or designate the asset or liability on the basis of the conformed accounting policies at the merger date.
805-958-25-11
At the merger date, the new NFP may contemplate renegotiating and modifying leases of the business or nonprofit activity acquired. Modifications made after the merger date, including those that were planned at the time of the combination, are postcombination events that should be accounted for separately by the new NFP in accordance with Topic 842.
Acquisition by a Not-for-Profit Entity
805-958-25-12
A not-for-profit entity (NFP) shall account for each acquisition of a business or nonprofit activity by applying the acquisition method described in the Acquisition by a Not-for-Profit Entity Subsections of this Subtopic.
805-958-25-13
The acquisition method in the Acquisition by a Not-for-Profit Entity Subsections is the same as the acquisition method described in Topic 805. However, these Subsections include guidance on aspects of the following items that are unique or especially significant to an NFP:
- aIdentifying the acquirer
- bIdentifying the acquisition date
- cRecognizing the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree
- dRecognizing goodwill acquired or a contribution received, including consideration transferred
- eDetermining what is part of the acquisition transaction.
805-958-25-14
Differences in the application of the acquisition method by a NFP acquirer from the application of the acquisition method by a business entity include all of the following:
- aThe identification of the acquirer in accordance with paragraphs , instead of the guidance in paragraph 805-10-25-5
- bThe recognition and measurement of goodwill (or the immediate charge to the statement of activities) in accordance with paragraphs , instead of the guidance in paragraph 805-30-25-1 and paragraphs
- cThe recognition and measurement of an inherent contribution received in accordance with paragraph 958-805-25-31 and paragraphs , instead of the guidance for a gain from a bargain purchase in paragraphs and paragraphs .
Identifying the Acquirer
805-958-25-15
Paragraph 805-10-25-4 requires that one of the combining entities be identified as the acquirer. Instead of applying the guidance in paragraph 805-10-25-5, the following guidance on control and consolidation of NFPs shall be used to identify the acquirer:
- aFor an NFP acquirer other than a health care entity within the scope of Topic 954, the guidance in Subtopic 958-810, including the guidance referenced in paragraph 958-810-15-4.
- bFor a not-for-profit health care acquirer within the scope of Topic 954 (see Section 954-10-15), the guidance referenced in paragraph 954-810-15-3.
- cControl of a for-profit business has the meaning of controlling financial interest in paragraphs 810-10-15-8 through 15-8A.
- d
805-958-25-16
If an acquisition by a not-for-profit entity has occurred but applying the guidance in the previous paragraph does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs shall be considered in making that determination.
Identifying the Acquisition Date
805-958-25-17
Paragraphs require identifying the acquisition date and provide guidance for doing so. In addition to that guidance, the date on which an NFP acquirer obtains control of an NFP with sole corporate membership generally also is the date on which the acquirer becomes the sole corporate member of that entity.
Recognizing the Identifiable Assets Acquired, the Liabilities Assumed, and Any Noncontrolling Interest in the Acquiree
805-958-25-18
This Subsection includes the following guidance that is incremental to Subtopic 805-20 for the recognition of identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree:
- aRecognition conditions
- bClassifying or designating identifiable assets acquired and liabilities assumed
- cAdditional exceptions to the recognition principle.
805-958-25-18A
For guidance on the accounting alternative to subsume certain identifiable intangible assets acquired into goodwill, see Subtopic 805-20 on business combinations—identifiable assets and liabilities, and any noncontrolling interest and see paragraph 805-20-65-2 for transition guidance on applying the accounting alternative.
805-958-25-19
When considering whether an identifiable asset or liability assumed qualifies for recognition as part of applying the acquisition method as described in paragraph 805-20-25-3, an identifiable asset or liability also qualifies if it is part of what was contributed in an acquisition that includes an inherent contribution (see paragraph 958-805-25-31).
805-958-25-20
An NFP acquirer is not required to classify investments as described in paragraph 805-20-25-7(a). However, an NFP acquirer that is a health care entity (see Section 954-10-15) shall classify particular investments as described in paragraph 954-805-25-1.
805-958-25-21
This Subsection provides the following limited exceptions to the recognition principle in paragraph 805-20-25-1, which are incremental to the exceptions provided by paragraphs :
- aDonor relationships
- b
- c
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10This Subsection provides the following limited exceptions to the recognition principle in paragraph 805-20-25-1, which are incremental to the exceptions discussed in paragraphs and related guidance:- aDonor relationships
- b
- c
805-958-25-21A
Transition date:(P) December 16, 2028; (N) December 16, 2029Transition guidance:
832-10-65-2The exception to the recognition principle in paragraph 805-20-25-28D for a grant related to income is not applicable to entities that apply the guidance within this Subtopic. 805-958-25-22
An NFP acquirer shall not recognize an acquired donor relationship as an identifiable intangible asset separate from goodwill. Unlike acquired customer relationships (see paragraphs ), acquired donor relationships are not recognized separately; they are instead subsumed into goodwill.
805-958-25-23
An NFP acquirer that has an organizational policy of not capitalizing collections in accordance with paragraph 958-360-25-3 shall not recognize as an asset those items (works of art, historical treasures, or similar assets) that it acquires as part of an acquisition and adds to its collection. Rather, the acquirer shall do both of the following:
- aRecognize the cost of the collection items purchased (either by the transfer of consideration or the assumption of liabilities in excess of assets acquired) as a decrease in the appropriate class of net assets in the statement of activities and as a cash outflow for investing activities
- bNot recognize the fair value of collection items contributed—either as an asset or as contribution revenue.
805-958-25-24
An acquired item that is not added to the acquirer's collection shall be recognized as an asset in accordance with paragraph 805-20-25-1.
805-958-25-25
Example 1 (see paragraphs ) and Example 2 (see paragraphs ) provide guidance on determining whether an acquired collection item is purchased or contributed and, if purchased, the appropriate amount of cost to attribute to it.
805-958-25-26
An NFP acquirer shall apply the guidance in paragraphs to account for conditional promises to give. That guidance requires the acquirer to do either of the following:
- aRecognize a conditional promise only if the conditions on which it depends are substantially met as of the acquisition date
- bRecognize a transfer of assets with a conditional promise to contribute them as a refundable advance unless the conditions have been substantially met as of the acquisition date.
Recognizing Goodwill Acquired or a Contribution Received, Including Consideration Transferred
805-958-25-27
An NFP acquirer applies the guidance in this Subsection instead of Subtopic 805-30 for the recognition of the following items:
- aGoodwill acquired, whether recognized as an asset or as an immediate charge to the statement of activities
- bA contribution received in an acquisition
- cConsideration transferred, including contingent consideration.
805-958-25-28
Unless the operations of the acquiree are expected to be predominantly supported by contributions and returns on investments (see paragraphs ), an NFP acquirer shall recognize goodwill as of the acquisition date, measured in accordance with paragraph 958-805-30-6.
805-958-25-29
If the operations of the acquiree as part of the combined entity are expected to be predominantly supported by contributions and returns on investments, an NFP acquirer shall recognize a separate charge in its statement of activities as of the acquisition date, measured in accordance with paragraph 958-805-30-6, rather than goodwill. Predominantly supported by means that contributions and returns on investments are expected to be significantly more than the total of all other sources of revenues.
805-958-25-30
An NFP acquirer shall consider all relevant qualitative and quantitative factors in determining the expected nature of the predominant source of support for an acquiree's operations as part of the combined entity. For example, an NFP acquirer shall consider qualitative and quantitative information about all forms of contributed support, including contributions that are precluded from being recognized or are not required to be recognized in the financial statements (such as certain contributed services and collection items and conditional promises to give).
805-958-25-31
An NFP acquirer shall recognize an inherent contribution received, measured in accordance with paragraph 958-805-30-8, as a separate credit in its statement of activities as of the acquisition date.Example 1 (see paragraphs ) and Example 6 (see paragraphs ) illustrate acquisitions with inherent contributions.
805-958-25-32
An NFP acquirer might transfer consideration to the former owner of the acquiree or to a designee of the former owner. The NFP acquirer also might receive assistance from an unrelated third party, which shall be taken into account in measuring the consideration transferred. Examples of potential forms of consideration include any of the following:
- aCash
- bOther assets
- cA business or a nonprofit activity of the acquirer
- dContingent consideration.
805-958-25-33
An asset transferred by an NFP acquirer to an unrelated third party as a required condition of an acquisition shall be accounted for as consideration transferred for the acquiree unless the NFP acquirer retains control over the transferred assets. Example 4 (see paragraphs ) illustrates assistance received from a third party.
805-958-25-34
The consideration transferred may include assets or liabilities of the NFP acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, nonmonetary assets or a business of the acquirer). If so, the NFP acquirer shall recognize the resulting gains or losses, if any, in the statement of activities. However, sometimes the transferred assets or liabilities remain within the combined entity after the acquisition, and the acquirer therefore retains control of them. An NFP acquirer that retains control over the transferred assets shall not recognize a gain or loss in the statement of activities on assets or liabilities it controls both before and after the acquisition.
805-958-25-35
Examples of asset transfers in which control over the future economic benefits of the transferred assets is retained by the acquirer include all of the following:
- aThe assets are transferred to the acquiree rather than to its former owners or are otherwise transferred to a recipient that is controlled by the acquirer. By virtue of its control over the recipient, the acquiring entity has the ability to revoke the transfer or to direct the use of the assets to itself or an affiliate.
- bThe asset transfer is otherwise revocable, repayable, or refundable.
- cThe assets are transferred with the stipulation that they be used on behalf of, or for the benefit of, the acquiree, the acquirer, the consolidated entity, or their affiliates. Example 3 (see paragraphs ) illustrates an asset transfer in which the NFP acquirer retains control over the future economic benefits after the acquisition.
805-958-25-36
The consideration an NFP acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement. The NFP acquirer shall recognize the contingent consideration as part of the consideration transferred in exchange for the acquiree.
Determining What Is Part of the Acquisition Transaction
805-958-25-37
In addition to the examples in paragraph 805-10-25-21, a payment by a former owner of an acquired business that is unrelated to the acquiree, such as a contribution to fund activities of the acquirer or its affiliates that are unrelated to those of the acquiree, is an example of a separate transaction that is not to be included in applying the acquisition method. Those contributions made shall be accounted for in accordance with the guidance in Subtopic 720-25.
805-958-30Initial Measurement
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Merger of Not-for-Profit Entities
805-958-30-1
The new not-for-profit entity (NFP) shall measure the assets and liabilities in its financial statements as of the merger date at the amounts reported in the financial statements of the merging entities as of that date prepared in accordance with GAAP, adjusted as necessary in accordance with paragraphs .
805-958-30-2
The merging entities may have measured assets and liabilities using different methods of accounting in their separate financial statements. The new NFP shall adjust the amounts of those assets and liabilities as necessary to reflect a consistent method of accounting.
805-958-30-3
However, because the carryover method does not reflect a fresh-start measurement, a merger is not an event that permits the election of accounting options that are restricted to the entity's initial acquisition or recognition of an item (or the reversal of a previous election). Thus, for example, one merging entity's election to apply the Fair Value Option Subsections of Subtopic 825-10 for a particular financial asset or liability permits neither the new NFP's election of the fair value option for other financial assets or liabilities at the merger date nor the reversal of the previous selection of the fair value option.
805-958-30-4
The new NFP shall eliminate the effects of any intra-entity transactions on its assets, liabilities, and net assets as of the merger date.
Acquisition by a Not-for-Profit Entity
805-958-30-5
A not-for-profit entity (NFP) that is an acquirer applies the guidance in this Subsection instead of Subtopic 805-30 for the measurement of the following items:
- aGoodwill acquired, whether recognized as an asset or an immediate charge to the statement of activities
- bA contribution received in an acquisition
- cConsideration transferred, including contingent consideration.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10A not-for-profit entity (NFP) that is an acquirer applies the guidance in this Subsection instead of Subtopics 805-20 and 805-30 for the measurement of the following items:- aGoodwill acquired, whether recognized as an asset or an immediate charge to the statement of activities
- bA contribution received in an acquisition
- cConsideration transferred, including contingent consideration.
Goodwill Acquired, Whether Recognized as an Asset or an Immediate Charge to the Statement of Activities
805-958-30-6
An NFP acquirer shall measure goodwill acquired, including goodwill recognized as an immediate charge to the statement of activities, as of the acquisition date as the excess of (a) over (b):
- aThe aggregate of the following:
- 1The consideration transferred measured at its acquisition-date fair value (see paragraphs )
- 2The fair value of any noncontrolling interest in the acquiree
- 3In an acquisition by a not-for-profit entity achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree.
- 1
- bThe net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with Subtopic 805-20 and this Subtopic.
805-958-30-7
The result of the equation in the preceding paragraph will be to measure goodwill or the separate charge to the statement of activities as the excess of liabilities assumed over assets acquired if the acquisition by the NFP meets all of the following criteria:
- aNo consideration is transferred.
- bThere is no noncontrolling interest in an acquiree.
- cThe acquisition was not achieved in stages.
A Contribution Received in an Acquisition
805-958-30-8
An inherent contribution recognized in accordance with paragraph 958-805-25-31 shall be measured as the excess of the amount in paragraph 958-805-30-6(b) over the amount in paragraph 958-805-30-6(a).
805-958-30-9
The inherent contribution received will be measured as the excess of assets acquired over liabilities assumed if the acquisition meets all of the following criteria:
- aThat acquisition is effected without the transfer of consideration.
- bThere is no noncontrolling interest in an acquiree.
- cThe acquisition was not achieved in stages.
Consideration Transferred, Including Contingent Consideration
805-958-30-10
The consideration transferred in an acquisition by an NFP shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer and the liabilities incurred by the acquirer.
805-958-30-11
If the consideration transferred includes assets or liabilities of the NFP acquirer that have carrying amounts that differ from their fair values at the acquisition date, as discussed in paragraph 958-805-25-34, the NFP acquirer shall remeasure the transferred assets or liabilities to their fair values as of the acquisition date.
805-958-30-12
An NFP acquirer that retains control over the transferred assets as described in paragraphs shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date.
805-958-30-13
Contingent consideration shall be measured initially at acquisition-date fair value.
805-958-35Subsequent Measurement
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Acquisition by a Not-for-Profit Entity
805-958-35-1
The guidance in this Section together with the guidance in paragraph 805-10-35-1 and Section 805-20-35 applies to a not-for-profit entity (NFP) that is an acquirer. This Section provides the following incremental guidance for assets acquired and liabilities assumed or incurred in an acquisition by a not-for-profit entity:
- aContingent consideration, including contingent consideration arrangements assumed by an acquirer
- bGoodwill acquired.
Contingent Consideration, Including Contingent Consideration Arrangements Assumed by an Acquirer
805-958-35-2
Some changes in the fair value of contingent consideration and contingent consideration arrangements assumed from an acquiree that the acquirer recognizes after the acquisition date may be the result of additional information about facts and circumstances that existed at the acquisition date that the acquirer obtained after that date. Such changes are measurement period adjustments in accordance with paragraphs and Section 805-10-30.
805-958-35-3
Changes resulting from events after the acquisition date, such as meeting an earnings or other performance target, reaching a specified share price, or reaching a milestone on a research and development project, are not measurement period adjustments. An NFP acquirer shall account for such changes by remeasuring the related asset or liability to fair value at each reporting date until the contingency is resolved and recognizing the changes in fair value in the statement of activities.
805-958-35-4
Contingent consideration arrangements of an acquiree assumed by the acquirer shall be measured subsequently in accordance with the guidance for contingent consideration arrangements in paragraphs .
Goodwill Acquired
805-958-35-5
For guidance, including the related accounting alternative on subsequently measuring goodwill recognized in an acquisition of a business or a nonprofit activity, see Subtopic 350-20. See paragraph 350-20-65-2 for transition guidance on applying the accounting alternative for amortizing goodwill in Subtopic 350-20 and paragraph 350-20-65-4 for transition guidance on applying the accounting alternative for a goodwill impairment triggering event evaluation.
805-958-45Other Presentation Matters
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Merger of Not-for-Profit Entities
805-958-45-1
The not-for-profit entity (NFP) resulting from a merger of not-for-profit entities is a new reporting entity, with no activities before the merger date. Thus, the new NFP's initial reporting period begins with the merger date, and the merger itself shall not be reported as activity of the new NFP's initial reporting period. Rather, 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 presented.
805-958-45-2
The new NFP's statement of activities and statement of cash flows for its initial reporting period shall do both of the following:
- aInclude in the reported amounts as of the beginning of the period (the opening amounts), such as cash and cash equivalents at the beginning of the period, the combined amounts of the merging entities' assets, liabilities, and net assets (in total and by classes of net assets) as of the merger date. The following changes shall be reflected in the opening amounts:
- 1Accounting changes necessary to adjust a merging entity's financial statements to generally accepted accounting principles (GAAP) in accordance with paragraph 958-805-25-7
- 2Accounting changes to conform the individual accounting policies of the merging entities in accordance with paragraph 958-805-30-2
- 3Changes to eliminate intra-entity balances in accordance with paragraph 958-805-30-4.
- 1
- bReport activity from the merger date through the end of the reporting period.
Acquisition by a Not-for-Profit Entity
805-958-45-3
The financial statements of an acquirer (the combined entity) shall report an acquisition by a not-for-profit entity as activity of the period in which it occurs.
Statement of Activities
805-958-45-4
A not-for-profit entity (NFP) acquirer shall report the excess amount recognized in accordance with the guidance in paragraph 958-805-25-29 as a separate line item on the face of its statement of activities. The separate line item shall be appropriately described, for example, as excess of consideration paid over net assets acquired in acquisition of Entity AB (or as excess of liabilities assumed over assets acquired in acquisition of Entity AB). Example 5 (see paragraphs ) illustrates one way an acquirer might present that amount in its statement of activities.
805-958-45-5
An NFP acquirer shall report the inherent contribution recognized in accordance with paragraph 958-805-25-31 as a separate line item on the face of the statement of activities. The separate line item shall be appropriately described, for example, as excess of assets acquired over liabilities assumed in donation of Entity XY or as contribution received in donation of Entity XY. In another situation, that excess might be described as excess of fair value of net assets acquired over consideration paid in acquisition of Entity XY.
805-958-45-6
An NFP acquirer shall classify the inherent contribution received presented in accordance with the preceding paragraph on the basis of the donor restrictions imposed on the related net assets. In classifying those net assets, an acquirer shall do both of the following:
- a Include restrictions imposed on the net assets of the acquiree by a donor before the acquisition and those imposed by the donor of the business or nonprofit activity acquired, if any, in accordance with Section 958-605-45.
- b Report donor-restricted contributions as donor-restricted support even if the restrictions are met in the same reporting period in which the acquisition occurs. That is, the acquirer shall not apply the reporting exception in paragraph 958-605-45-4A to net assets with donor restrictions acquired in an acquisition.
805-958-45-7
Thus, the inherent contribution received may increase net assets with donor restrictions, net assets without donor restrictions, or some combination of those items. Example 6 (see paragraphs ) illustrates the application of the preceding paragraph's guidance on reporting donor-imposed restrictions on an inherent contribution received.
805-958-45-8
An NFP acquirer that transfers assets as consideration for an acquired nonprofit activity or business shall assess whether that transaction satisfies a donor-imposed restriction (see the following paragraph) or otherwise results in a change in its net asset classifications (see paragraph 958-805-45-10).
805-958-45-9
For example, transferring consideration in an acquisition might satisfy a donor-imposed restriction on the acquirer's net assets that were restricted for acquisition of land, buildings, works of art, or other long-lived assets if the acquiree has the qualifying assets. If so, the acquirer may either report the expiration of those restrictions separately or aggregate and report them together with other similar expirations of donor-imposed restrictions during the period in which the acquisition occurs.
805-958-45-10
If transferring consideration results in changes in net asset classifications other than those described in the preceding paragraph, an NFP acquirer shall report those changes separately from both any other reclassification of net assets and any expiration of those restrictions during the period in which the acquisition occurs. For example, an acquirer that transfers as consideration its assets with no associated donor restrictions and acquires assets from the acquiree that have associated donor restrictions shall recognize a reclassification of net assets in its statement of activities.
Statement of Cash Flows
805-958-45-11
An NFP acquirer shall report the entire amount of any net cash flows related to an acquisition (cash paid as consideration, if any, less acquired cash of the acquiree) in the statement of cash flows as an investing activity, except for cash payments made to settle a contingent consideration liability arising from the acquisition that are not paid soon after the business combination. Example 7 (see paragraphs ) illustrates this requirement. In addition, cash payments made soon after the acquisition date of the business combination by an acquirer to settle a contingent consideration liability shall be classified as investing activities.
805-958-45-12
Cash payments, or the portion of the payments, not made soon after the acquisition date of a business combination by the NFP acquirer to settle a contingent consideration liability up to the amount of the contingent consideration liability recognized at the acquisition date, including measurement-period adjustments, less any amounts paid soon after the acquisition date to settle the contingent consideration liability shall be classified as cash outflows for financing activities. Cash payments, or the portion of the payments, not made soon after the acquisition date of a business combination by the NFP acquirer to settle a contingent consideration liability that exceed the amount of the contingent consideration liability recognized at the acquisition date, including measurement-period adjustments, less any amounts paid soon after the acquisition date to settle the contingent consideration liability shall be classified as cash outflows for operating activities.
805-958-50Disclosure
Source downloaded: .Record version c5af3e8cfeb3. Effective date must be checked in the source.
Merger of Not-for-Profit Entities
805-958-50-1
The new not-for-profit entity (NFP) shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of the merger of not-for-profit entities that resulted in its formation.
805-958-50-2
To meet the objective in paragraph 958-805-50-1, the new NFP shall disclose the following information for the merger that resulted in its formation:
- aThe name and a description of each merging entity
- bThe merger date
- cThe primary reasons for the merger
- dBoth of the following for each merging entity:
- 1The amounts recognized as of the merger date for each major class of assets and liabilities and each class of net assets
- 2The nature and amounts, if applicable, of any significant assets (for example, conditional promises receivable or collections) or liabilities (for example, conditional promises payable) not otherwise required to be recognized under generally accepted accounting principles (GAAP).
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- eThe nature and amount of any significant adjustments made to conform the individual accounting policies of the merging entities or to eliminate intra-entity balances.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1To meet the objective in paragraph 958-805-50-1, the new NFP shall disclose in interim and annual reporting periods the following information for the merger that resulted in its formation:- aThe name and a description of each merging entity
- bThe merger date
- cThe primary reasons for the merger
- dBoth of the following for each merging entity:
- 1The amounts recognized as of the merger date for each major class of assets and liabilities and each class of net assets
- 2The nature and amounts, if applicable, of any significant assets (for example, conditional promises receivable or collections) or liabilities (for example, conditional promises payable) not otherwise required to be recognized under generally accepted accounting principles (GAAP).
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- eThe nature and amount of any significant adjustments made to conform the individual accounting policies of the merging entities or to eliminate intra-entity balances.
805-958-50-3
If the new NFP is a public entity and the merger occurs at other than the beginning of an annual reporting period (that is, if its initial financial statements thus cover less than an annual reporting period), the new NFP shall disclose the following supplemental pro forma information:
- aRevenue for the current reporting period as though the merger date had been the beginning of the annual reporting period
- bChanges in net assets without donor restrictions and changes in net assets with donor restrictions for the current reporting period as though the merger date had been the beginning of the annual reporting period.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If the new NFP is a public entity and the merger occurs at other than the beginning of an annual reporting period (that is, if its initial financial statements thus cover less than an annual reporting period), the new NFP shall disclose the following supplemental pro forma information in interim and annual reporting periods:- aRevenue for the current reporting period as though the merger date had been the beginning of the annual reporting period
- bChanges in net assets without donor restrictions and changes in net assets with donor restrictions for the current reporting period as though the merger date had been the beginning of the annual reporting period.
805-958-50-4
If the new NFP is a public entity and it presents comparative financial information in the annual reporting period following the year in which the merger occurs, it shall disclose the supplemental pro forma information in paragraph 958-805-50-3 for the comparable prior reporting period as though the merger date had been the beginning of that prior annual reporting period.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If the new NFP is a public entity and it presents comparative financial information in interim and annual reporting periods following the year in which the merger occurs, it shall disclose the supplemental pro forma information in paragraph 958-805-50-3 for the comparable prior interim and annual reporting periods as though the merger date had been the beginning of that prior reporting period. 805-958-50-5
If disclosure of any of the information required by paragraphs is impracticable, the new NFP shall disclose that fact and explain why the disclosure is impracticable. The term impracticable has the same meaning as impracticability in paragraph 250-10-45-9.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If disclosure of any of the information required by paragraphs is impracticable, the new NFP shall disclose that fact and explain why the disclosure is impracticable in interim and annual reporting periods. The term impracticable has the same meaning as impracticability in paragraph 250-10-45-9. 805-958-50-6
If the specific disclosures required by this Subsection do not meet the objective in paragraph 958-805-50-1, the new NFP shall disclose whatever additional information is necessary to meet that objective.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If the specific disclosures required by this Subsection do not meet the objective in paragraph 958-805-50-1, the new NFP shall disclose in interim and annual reporting periods whatever additional information is necessary to meet that objective. Acquisition by a Not-for-Profit Entity
805-958-50-7
To meet the objective in paragraph 805-10-50-1, an NFP acquirer shall disclose the information required by paragraph 805-10-50-2(a) through (g).
805-958-50-8
Instead of disclosing the information in paragraph 805-10-50-2(h), an NFP acquirer that is a public entity shall disclose the following information for each acquisition that occurs during the reporting period:
- aRevenues attributable to the acquiree since the acquisition date that are included in the statement of activities for the reporting period
- bChanges in net assets without donor restrictions and changes in net assets with donor restrictions attributable to the acquiree since the acquisition date that are included in the statement of activities for the reporting period
- cThe revenues of the combined entity as though the acquisition date for all acquisitions that occurred during the current year had been at the beginning of the annual reporting period (supplemental pro forma information)
- dChanges in net assets without donor restrictions and changes in net assets with donor restrictions as though the acquisition date for all acquisitions that occurred during the current year had been at the beginning of the annual reporting period (supplemental pro forma information)
- eThe nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the acquisition(s) included in the reported pro forma revenues and changes in net assets without donor restrictions and changes in net assets with donor restrictions (supplemental pro forma information).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Instead of disclosing the information in paragraph 805-10-50-2(h), an NFP acquirer that is a public entity shall disclose in interim and annual reporting periods the following information for each acquisition that occurs during the reporting period: - aRevenues attributable to the acquiree since the acquisition date that are included in the statement of activities for the reporting period
- bChanges in net assets without donor restrictions and changes in net assets with donor restrictions attributable to the acquiree since the acquisition date that are included in the statement of activities for the reporting period
- cThe revenues of the combined entity as though the acquisition date for all acquisitions that occurred during the current year had been at the beginning of the annual reporting period (supplemental pro forma information)
- dChanges in net assets without donor restrictions and changes in net assets with donor restrictions as though the acquisition date for all acquisitions that occurred during the current year had been at the beginning of the annual reporting period (supplemental pro forma information)
- eThe nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the acquisition(s) included in the reported pro forma revenues and changes in net assets without donor restrictions and changes in net assets with donor restrictions (supplemental pro forma information).
805-958-50-9
If it presents comparative financial information, an NFP acquirer that is a public entity shall disclose the supplemental pro forma information required by paragraph 958-805-50-8 as though the acquisition(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. For example, for a calendar year-end entity, disclosures would be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised if 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If it presents comparative financial information in interim and annual reporting periods, an NFP acquirer that is a public entity shall disclose the supplemental pro forma information required by paragraph 958-805-50-8 as though the acquisition(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. For example, for a calendar year-end entity, disclosures would be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised if 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented).805-958-50-10
If the disclosure of any of the information required by paragraphs is impracticable, the NFP acquirer shall disclose that fact and explain why the disclosure is impracticable. The term impracticable has the same meaning as impracticability in paragraph 250-10-45-9.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If the disclosure of any of the information required by paragraphs is impracticable, the NFP acquirer shall disclose in interim and annual reporting periods that fact and explain why the disclosure is impracticable. The term impracticable has the same meaning as impracticability in paragraph 250-10-45-9. 805-958-50-11
Instead of the information required by Section 805-30-50, an NFP acquirer shall disclose the following information for each acquisition that occurs during the reporting period:
- aA qualitative description of the factors, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition, or other factors, such as the nonrecognition of collections, that make up either of the following:
- 1The goodwill recognized
- 2The separate charge recognized in the statement of activities in accordance with paragraph 958-805-25-29.
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- bThe acquisition-date fair value of the total consideration transferred (or if no consideration was transferred, that fact) and the acquisition-date fair value of each major class of consideration, such as:
- 1Cash
- 2Other tangible or intangible assets, including a business or subsidiary of the acquirer
- 3Liabilities incurred, for example, a liability for contingent consideration.
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- cFor contingent consideration arrangements, all of the following:
- 1The amount recognized as of the acquisition date
- 2A description of the arrangement and the basis for determining the amount of the payment
- 3An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact.
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- dThe total amount of goodwill that is expected to be deductible for tax purposes.
- eIf the acquisition results in an inherent contribution received, a description of the reasons why the transaction resulted in a contribution received (see paragraph 958-805-25-31).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Instead of the information required by Section 805-30-50, an NFP acquirer shall disclose in interim and annual reporting periods the following information for each acquisition that occurs during the reporting period: - aA qualitative description of the factors, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition, or other factors, such as the nonrecognition of collections, that make up either of the following:
- 1The goodwill recognized
- 2The separate charge recognized in the statement of activities in accordance with paragraph 958-805-25-29.
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- bThe acquisition-date fair value of the total consideration transferred (or if no consideration was transferred, that fact) and the acquisition-date fair value of each major class of consideration, such as:
- 1Cash
- 2Other tangible or intangible assets, including a business or subsidiary of the acquirer
- 3Liabilities incurred, for example, a liability for contingent consideration.
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- cFor contingent consideration arrangements, all of the following:
- 1The amount recognized as of the acquisition date
- 2A description of the arrangement and the basis for determining the amount of the payment
- 3An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact.
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- dThe total amount of goodwill that is expected to be deductible for tax purposes.
- eIf the acquisition results in an inherent contribution received, a description of the reasons why the transaction resulted in a contribution received (see paragraph 958-805-25-31).
805-958-50-12
Additionally, an NFP acquirer shall disclose the following information for each acquisition that occurs during the reporting period:
- aThe amount of collection items acquired that are recognized in the statement of activities as a decrease in the acquirer's net assets in accordance with paragraph 958-805-25-23.
- bThe undiscounted amount of conditional promises to give acquired or assumed and a description and the amount of each group of promises with similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Additionally, an NFP acquirer shall disclose in interim and annual reporting periods the following information for each acquisition that occurs during the reporting period: - aThe amount of collection items acquired that are recognized in the statement of activities as a decrease in the acquirer's net assets in accordance with paragraph 958-805-25-23.
- bThe undiscounted amount of conditional promises to give acquired or assumed and a description and the amount of each group of promises with similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date.
805-958-50-13
For individually immaterial acquisitions occurring during the reporting period that are material collectively, the NFP acquirer shall disclose the information required by paragraphs and 805-10-50-2(e) through (g) in the aggregate.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For individually immaterial acquisitions occurring during the reporting period that are material collectively, the NFP acquirer shall disclose the information required by paragraphs and 805-10-50-2(e) through (g) in the aggregate in interim and annual reporting periods.805-958-50-14
If the date of an acquisition is after the reporting date but before the financial statements are issued or available for issue, the NFP acquirer shall disclose the information required by paragraphs unless the initial accounting for the acquisition is incomplete at the time the financial statements are issued or available for issue. In that situation, the acquirer shall describe which disclosures could not be made and the reason why they could not be made.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If the date of an acquisition is after the reporting date but before the financial statements are issued or available for issue, the NFP acquirer shall disclose in interim and annual reporting periods the information required by paragraphs unless the initial accounting for the acquisition is incomplete at the time the financial statements are issued or available for issue. In that situation, the acquirer shall describe which disclosures could not be made and the reason why they could not be made. 805-958-50-15
An NFP acquirer shall disclose any noncash contributions received and any other noncash amounts received or transferred in relation to an acquisition as noncash activities in accordance with paragraph 230-10-50-3. Example 7 (see paragraphs ) illustrates the disclosure of noncash activities.
805-958-50-16
To meet the objective in paragraph 805-10-50-5, an NFP acquirer shall disclose the information in this paragraph and paragraph 805-20-50-4A for each material acquisition or in the aggregate for individually immaterial business combinations that are material collectively. For each reporting period after the acquisition date until the NFP acquirer collects, sells, or otherwise loses the right to a contingent consideration asset, or until the NFP acquirer settles a contingent consideration liability or the liability is cancelled or expires, the NFP acquirer shall disclose all of the following:
- aAny changes in the recognized amounts, including any differences arising upon settlement
- bAny changes in the range of outcomes (undiscounted) and the reasons for those changes
- cThe disclosures required by Section 820-10-50.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1To meet the objective in paragraph 805-10-50-5, an NFP acquirer shall disclose in interim and annual reporting periods the information in this paragraph and paragraph 805-20-50-4A for each material acquisition or in the aggregate for individually immaterial business combinations that are material collectively. For each interim and annual reporting period after the acquisition date until the NFP acquirer collects, sells, or otherwise loses the right to a contingent consideration asset, or until the NFP acquirer settles a contingent consideration liability or the liability is cancelled or expires, the NFP acquirer shall disclose all of the following:- aAny changes in the recognized amounts, including any differences arising upon settlement
- bAny changes in the range of outcomes (undiscounted) and the reasons for those changes
- cThe disclosures required by Section 820-10-50.
805-958-50-17
An NFP acquirer that does not adopt the accounting alternative for amortizing goodwill in Subtopic 350-20shall provide a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period as required by paragraph 350-20-50-1 for each material acquisition or in the aggregate for individually immaterial acquisitions that are material collectively.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an NFP acquirer that does not adopt the accounting alternative for amortizing goodwill in Subtopic 350-20shall provide a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period as required by paragraph 350-20-50-1 for each material acquisition or in the aggregate for individually immaterial acquisitions that are material collectively. 805-958-55Implementation Guidance and Illustrations
Source downloaded: .Record version 88d4afa5cabd. Effective date must be checked in the source.
Implementation Guidance
805-958-55-1
This implementation guidance addresses the application of the definitions merger of not-for-profit entities and acquisition by a not-for-profit entity in making the determination required by paragraph 958-805-25-1 as to whether a transaction is a merger or an acquisition. Ceding control to a new NFP is the sole definitive criterion for identifying a merger, and one entity obtaining control over the other is the sole definitive criterion for an acquisition. If the participating entities in a combination retain shared control of the new not-for-profit entity (NFP), they have not ceded control. To qualify as a new NFP, the combined entity must have a newly formed governing body; a new NFP often is, but need not be, a new legal entity. The formation of a new NFP is not a pertinent factor in assessing whether one entity has obtained control over another.
805-958-55-2
Other transaction-specific characteristics can help in determining whether a particular combination is a merger, an acquisition, or another form of combination, such as the formation of a joint venture. The other characteristics, discussed in paragraphs , are indicators that often may help in identifying a merger. The participating entities should consider all of those characteristics and any other pertinent factors. Based on the preponderance of the evidence, the parties must make a professional judgment about whether each of the governing bodies has ceded control of those entities to create a new NFP, whether one entity has acquired the other, or whether another form of combination, such as the formation of a joint venture, has occurred.
805-958-55-3
Determining whether each of the governing bodies of the entities participating in a combination cede control of those entities to a new NFP requires assessing the characteristics of all of the following:
- a The process leading to the combination
- b The participants to the combination
- c The combined entity.
805-958-55-4
In a merger, generally no one party dominates or is capable of dominating the negotiations and process leading to the formation of the combined entity. In an acquisition, on the other hand, one party—the acquirer—often dominates that process, and sometimes may in effect dictate the terms of the transaction, including the date the combination occurs.
805-958-55-5
The characteristics of the entities participating in a combination and of the resulting combined entity that can help to distinguish between a merger and an acquisition fit into the following two groups:
- a Governance and related control powers
- b Financial capacity.
805-958-55-6
For example, one entity appointing significantly more of the governing board of the newly formed entity, retaining significantly more of its key senior officers, or retaining its bylaws, operating policies, and practices substantially unchanged is more likely to be a feature of an acquisition than of a merger. Similarly, the relative financial strength and relative size of the participants in the combination may help to determine whether one participant is able to dominate the process leading to the combination. For example, if one entity is financially strong and the other is experiencing financial difficulty, the stronger entity may be able to dominate the transaction, which would indicate that the transaction is an acquisition rather than a merger. Similarly, a participant that is substantially larger than each of the others in terms of revenues, assets, and net assets may be able to dominate the transaction. However, relative size, like relative financial strength and the other indicators discussed, is only one characteristic that may help to distinguish between a merger and an acquisition in particular situations—none of the indicators, by itself, is determinative. As discussed in paragraph 958-805-55-1, ceding of control is the sole definitive criterion for a merger.
805-958-55-7
Unlike an acquisition by a not-for-profit entity, a merger generally is accomplished by combining all of the assets and liabilities of the merging entities into a newly formed entity that assumes all of the assets and liabilities of the participating entities without a transfer of cash or other assets to those entities or any of their owners, members, sponsors, or other designated beneficiaries. Also, unlike the formation of a joint venture in which the venturers continue to exist and usually hold a financial interest, the creators of the merged entity cease to exist as autonomous entities and no one holds financial interests in the merged entity. Moreover, the merged entity generally has a perpetual life rather than a life that is limited by the period of the venture or that allows for one or more of the participating entities to opt out of the venture or other arrangement.
805-958-55-8
A particular combination of business entities may seem similar in some aspects to a merger of not-for-profit entities. For example, a new entity may be formed to effect a business combination, and no consideration is exchanged in some business combinations. Nevertheless, the guidance in this Subtopic on mergers does not apply in a business combination, and it shall not be applied by analogy.
Illustrations
805-958-55-9
This Example has two Cases, which share the assumptions in paragraphs . The Cases illustrate the application of paragraph 958-805-25-1, which requires an NFP to determine whether a transaction or other event is a merger or acquisition, and the related implementation guidance in paragraphs . The Cases are:
- aA combination that is a merger (Case A)
- bA combination that is neither a merger nor an acquisition (Case B).
805-958-55-10
A community foundation that is a major grantor to social service entities in its metropolitan area begins a program to encourage its grantees to consider opportunities to improve their services through collaborative arrangements, including mergers, acquisitions, and joint ventures. In January 20X9, the community foundation convenes a meeting of the chief officers and chairpersons of several charities that provide complementary and, to some extent, overlapping services within its metropolitan area. Following that meeting, representatives of Charity A and Charity B see fruitful opportunities for collaborative efforts based on their geographic proximity and service areas; similar missions, programs, and operating practices; and complementary financial strengths with one having a much larger base of current contributors and unpaid volunteers and the other having a larger endowment and base of investment income. Charity A is 30 to 40 percent larger than Charity B in terms of most individual financial measures, including revenues and the fair value of assets and net assets.
805-958-55-11
In February 20X9, the governing boards of Charity A and Charity B authorize the formation of an exploratory committee to recommend whether the two charities should combine and, if so, to develop a plan for implementing a combination. The committee consists of three members from Charity A and the executive director and one additional member from Charity B, with administrative support from the legal counsel of each entity. Each of the five committee members has one vote, and a recommendation of the committee requires at least four votes of the members. Its recommendation is to be accompanied by the reasons underlying both the recommendation of the committee and any dissenting votes.
805-958-55-12
In July 20X9, after completing its discussions, the committee recommends, with the full support of all five of its members, that Charity A and Charity B combine under an agreement with the following key provisions:
- a A new NFP named Charity AB is to be formed.
- b The chief executive officer of Charity B will be offered the position of chief executive officer of Charity AB for a term of at least two years.
- c The initial Board of Charity AB will consist of 15 members. Charity A will appoint 9 of the initial members, preferably from the members of its existing 25-member board and its current chief executive officer. Charity B will appoint 6 of the initial members, preferably from its existing 50-member board.
- d The charter of Charity AB will provide for a maximum of 25 board members. The committee recommended that a search be undertaken to add 6 new members within a year, with each new member requiring approval by a minimum of 10 of the 15 initial members.
- e The headquarters of Charity A and its underlying lease (which has eight remaining years) will be retained.
- f A transition committee consisting of two members each from the current boards of Charity A and Charity B, under the authority of the chief executive officer of Charity AB, will be appointed to perform the following duties:
- 1 Submit a formal plan of merger to each of the governing boards and, if approved, seek approval from the appropriate state authorities.
- 2 Seek opportunities to sublease the headquarters space of Charity B for the remaining two-year lease term or to utilize that space for program activities.
- 3 Interview existing staff and other candidates for senior management positions.
- 4 Make recommendations about each of the following:
- i Eliminating program and operating redundancies, including severance packages for any terminated staff.
- ii Improving the current operating policies and practices of Charity A and Charity B.
- iii Revising employee benefit plans with the objective of adopting unified plans for Charity AB's employees without diminishing the overall benefits being offered to existing employees.
- i
- 1
805-958-55-13
In discussing revisions of employee benefit plans, the exploratory committee's report notes that the committee interviewed the current chief executive officers of Charity A and Charity B and found both well qualified to serve as the chief executive officer of Charity AB. However, although both chief executive officers are in their early 60s and are eager to assist Charity AB through the initial transition period, the chief executive officer of Charity A had been contemplating retiring within the next year. The committee saw no need to open the chief executive officer search to other candidates.
805-958-55-14
During August 20X9, each of the governing boards of Charity A and Charity B tentatively approves the committee recommendations and appoints its members to the recommended transition committee. The boards also asked their respective nominating committees to make recommendations to each of their boards about the initial members to be appointed to the board of Charity AB. During October, each board approved the plan for their combination, and it was submitted to the state for approval. During November, the plan received the required state approval, and the combination became effective on January 1, 20X0, as proposed.
805-958-55-15
In this Case, the executive committee recommends (and each of the governing boards of Charity A and B approves) that to minimize costs the corporate charter of Charity A is to be retained as the charter of Charity AB. The assets and liabilities of Charity B are to be transferred to Charity AB and Charity B will cease to exist. On the date the merger becomes effective (as approved by the appropriate state official), the corporate charter will be amended to reflect the new NFP's name and its expanded mission, which is to encompass Charity B's research and advocacy functions as well as the charitable functions of both entities. Thus, in effect, both Charity A and Charity B will cease to exist in their precombination forms.
805-958-55-16
Paragraph 958-805-55-4 describes the assessments required when determining whether each of the governing bodies of the participating entities in a combination cedes control of those entities to a new NFP. On the basis of the evidence, both Charity A and Charity B participated in the process leading to the combination. Moreover, the evidence indicates that neither charity was experiencing financial difficulties or other circumstances that might allow the other entity to dominate the negotiations leading to and through the approval of the transaction by both charities. Neither charity appointed significantly more of Charity AB's initial governing board. Although the chief executive officer of Charity B is the only key senior officer for which a retention decision has been made, neither charity dominated the selection process of the governing board and senior management, collectively. Lastly, although the corporate charter and bylaws of Charity A were retained, the stated mission of Charity AB includes the operating objectives of Charity B. In addition, the bylaws and operating policies and practices of Charities A and B were similar. Thus, on the basis of the preponderance of the evidence, it is determined that the combination is a merger—that the governing boards of Charity A and Charity B each ceded control to the new NFP, Charity AB, which has a newly formed governing body.
805-958-55-17
In this Case, Charity AB is established as a new legal entity with its own charter. Charity A and Charity B will each continue to exist with its current governing body but cease to operate its existing programs. Each has the power to veto nominations for future members of Charity AB's governing body for two years. Each will retain $200,000 in operating cash and all of the investment assets of its donor-restricted endowment funds.
805-958-55-18
Charity A and Charity B each have the right to dissolve Charity AB. If the right is exercised, it will result in a reversion of assets, liabilities, and staff. Upon reversion, all staff will be retained by their respective legacy entity. In addition, the assets and liabilities of Charity AB will be transferred to each legacy entity in a distribution ratio equivalent to the fair value of the net assets contributed by each (which was determined to be about 65:35 at the combination date). Two years following the combination date, Charity A and Charity B will dissolve and transfer their remaining assets to Charity AB unless either exercises its right of withdrawal.
805-958-55-19
In this Case, it appears that Charity A and Charity B may intend to combine after the passage of a two-year period. But neither of their governing boards has ceded control, as defined, and neither entity has obtained control of the other. Therefore, the combination is neither a merger nor an acquisition; rather, on the basis of the preponderance of the evidence, it appears that Charity AB is a joint venture of Charity A and Charity B.
805-958-55-20
Charity C provides health and human services to residents of City and two adjoining counties, referred to as Metro Area, a substantial portion of which is provided through its support to grantee agencies in its area. Charity D provides health and human services to residents of County, which adjoins the northern part of Metro Area. The charities share a common mission and operate under the same national brand name; that is, the charities operate as Brand Name of Metro Area and Brand Name of County. Each charity receives contributions from the residents of its service area.
805-958-55-21
In 20X1, the regions served by both charities were experiencing sharp economic declines, and contributions to both charities were declining as a result. To create efficiencies, the charities entered into two joint operating agreements. Under the first agreement, they conduct joint annual fundraising campaigns. Under the second, Charity C provides all information technology and marketing services to Charity D for a nominal fee.
805-958-55-22
By January 20X4, Charity D has successfully implemented three innovative program services, but it has not been able to improve its declining contribution revenues. Despite some staff layoffs, it continues to experience significant operating deficits. In March 20X4, the chief executive officers of the two charities encouraged their respective executive committees to explore opportunities to combine and restructure their operations and governance. In July 20X4, the executive committees of both charities formed a joint strategy committee to investigate opportunities to create the best charity for the combined service area and to develop recommendations for accomplishing that objective.
805-958-55-23
The strategy committee members include the chief executive officers and 6 directors from each charity and 10 community leaders from the area. It is chaired by the chief executive officer of a major corporation in the area who also is a director of Charity C. In January 20X5, although the strategy committee's work was ongoing, the executive committees of both charities unanimously approved and advanced to the full governing board of each charity the committee's recommendations for the governance model for a new charity to be formed by consolidating and dissolving both of the existing charities and its recommendations for the new charity's name, mission, vision, and business model. That business model is the same as the model Charity D had adopted in 20X2, under which it successfully implemented three new programs. Charity C wanted to leverage the experiences of Charity D.
805-958-55-24
On November 1, 20X5, the governing boards of both charities approved the strategy committee's plan of consolidation. The chief executive officers of both charities executed a joint memorandum of understanding, which includes the following statements:
- a The charities will create a new NFP named Charity E upon completing the due diligence process and obtaining approvals of the state authorities and Internal Revenue Service (IRS) qualification as a tax exempt public charity, which will be concluded no later than December 31, 20X5. Charity E incorporates Charity C's name into its own.
- b The bylaws of Charity E will establish a board of directors of up to 30 members.
- c The board of directors of Charity C will nominate 15 of the initial members of the board of Charity E. (All 15 nominees selected were current members of the board of directors of which 13 were also members of the executive committee.) The board of directors of Charity D will nominate five of the initial members.
- d Charity E will have four local community committees representing four geographic areas, one of which is County. Each committee will provide advice to the board of directors for local decision-making consistent with Charity E's mission and vision. At each election after the installation of the initial board, each local community committee may nominate up to four candidates for a one-year renewable term on the board of Charity E. The board will select a minimum of two members from each local community committee, for a total of eight additional members.
- e Amendments to the articles of incorporation or bylaws, significant transactions (a merger, reorganization, termination, or sale of substantially all assets), and reductions in the authority and responsibilities of local community committees will require an affirmative vote of at least 60 percent of the board of directors.
- f Each charity's board of directors will appoint five members to a joint transition committee, with the charge of and authority to implement the plan of consolidation.
- g Until the consolidation is complete, each charity's board of directors agrees to do the following:
- 1 Use reasonable efforts to conduct their activities consistent with their current mission allowing for changes consistent with moving to the business model, mission, and vision of Charity E.
- 2 Preserve their tax-exempt status and relationships with contributors and grantee agencies.
- 3 Not materially amend or modify their articles of incorporation or bylaws.
- 1
- h During the first three years after the combination, Charity E will do the following:
- 1 Use the business model (direct-services based) to increase its capacity for making sustained change to address key social needs.
- 2 Fund and maintain no less than four geographic sites, with one in County, to allow for community involvement in campaign, community impact programs, marketing, and public policy.
- 3 Fund and maintain the financial and program commitments of both of the consolidating charities to their respective grantee agencies, subject to available funding.
- 4 Strive to expand Brand Name program of Charity D and its strategies throughout Charity E's service area. Given the success of that program, its current staff will be given full opportunity and consideration to lead the Brand Name program for Charity E.
- 5 Not reduce significantly the current staff of the charities. It is understood that reassignments or realignments are probable. Any reductions of the staff of Charity D will be made in consultation with its former chief executive officer, who will become the vice president for program services and strategic development of Charity E.
- 1
- i The obligations of Charity D, which are outlined in the memorandum of understanding, are subject to approval by its board of directors. The obligations of Charity C, which also are outlined in the memorandum of understanding, are subject to approval by its executive committee.
805-958-55-25
The following table summarizes certain facts for each of the combining charities and the initial staffing of the combined Charity E.
-
Charity C Charity D Financial—years ended 20X5 and 20X4: $ millions $ millions Revenues $45 $46 $30 $37 Expenses 42 42 37 38 Net excess (deficit) 3 4 (7) (1) Net assets—carrying amount 70 67 13 20 Employee head count 119 120 90 90 Joint operating agreements: Fund raising—net revenue sharing ratio 65% 35% "Information technology and marketing provided by Charity C" " receives nominal fee, pays all costs " " pays nominal fee " Governance: Members of board of directors 80 50 Members of executive committee 20 16 Staffing of Entity E: Senior officers of Entity E: President former chief executive officer Vice president strategic relations former chief executive officer Chief financial officer former chief financial officer "VP public policy (vacant, being recruited)"
805-958-55-26
Some factors in this Example might suggest that the combination is a merger. For example, the evidence indicates that each charity participated in the process leading to the combination. That is, their governing boards both approved the formation of the strategy committee, both were represented on that committee, and both had the opportunity to accept or reject the recommendations of the committee. In addition, the legal dissolution of both charities to form Charity E resulted in a new NFP with a newly formed governing body, to which the governing boards of both charities ceded control of their operations and net assets, at least in legal form.
805-958-55-27
However, other factors indicate that one charity acquired the other, that is, that the governing board of the financially stronger and larger Charity C dominated the terms of the combination and did not, in substance, cede control of its operations and net assets to the governing board of Charity E. Those factors include the following:
- a Charity C's dominance in the selection of 15 of the 20 members of the initial board of directors of Charity E. It also seems that the governing power center of Charity C—its executive committee—continues to control because 13 of its members continued as members of the initial 20-member board of Charity E and, together with the other 2 board members from that charity, would have a strong (if not dominating) voice in selecting at least 6 of the minimum of 8 members yet to be selected from the nominees of the 4 local community committees.
- b Charity C's dominance in the selection of the key senior officers. The table in paragraph 958-805-55-25 indicates that early on it was decided that the chief executive officer of Charity C would be retained as chief executive officer and president of Charity E, that the chief executive officer of Charity D of County would become one of Charity E's vice presidents, and that there was no need to open the chief executive officer search process to external parties.
- c Charity C's dominance in terms of financial capability and viability. Charity D has been experiencing financial difficulties and since 20X1 has been somewhat dependent on Charity C to provide back-office and information technology support for a below-cost fee.
805-958-55-28
In addition, it appears that Charity C wanted to preserve and obtain certain aspects of Charity D's operations and resources, including the following:
- a Charity D's expertise in implementing new programs developed and promoted by the national entity
- b Charity D's existing donor relationships
- c Charity D's residual net assets.
805-958-55-29
Charity C also apparently wanted to restructure its governance to have a much smaller governing board of 20 to 30 high-impact community leaders (like the members of its existing executive committee). Charity C's wishes concerning aspects of Charity D's operations and resources and restructuring its governance do not relate directly to the indicators that help to distinguish a merger from an acquisition. But those additional factors are part of what is considered in making a judgment on the basis of the preponderance of the evidence, as this Subtopic requires.
805-958-55-30
On the basis of the preponderance of the evidence, it is determined that Charity C acquired Charity D. The acquisition was achieved by, in effect, a gift of Charity D to Charity C. Although each charity legally dissolved, the substance of the combination is much the same as if Charity C first restructured its board of directors along the lines desired and then absorbed Charity D and added five of its nominees to the restructured board.
805-958-55-31
Despite the process and legal form used, the economic substance of the transaction is judged to be one in which the central governing power residing in the executive committee of Charity C was not surrendered; that is, the governing body of Charity C did not cede control of the entity to the governing body of Charity E. The transaction is an acquisition in which the economic substance and existence of Charity C (the acquirer) continues, although with a different name and expanded operations.
Merger of Not-for-Profit Entities
805-958-55-32
This Example illustrates some of the disclosures required for a merger of not-for-profit entities in paragraphs . The Example assumes that three not-for-profit entities (NFPs) merge to create a new NFP. NFP F, NFP G, and NFP H merge to create NFP I, which is a public entity.
805-958-55-33
Although this Example presents the illustrative notes separately, NFP I might present the disclosures illustrated in a single note. The required supplemental information is presented in a separate schedule outside the notes. This Example illustrates the following disclosures:
- aDescription of the merger
- bSignificant asset not required to be recognized
- cConforming accounting policies
- dMajor classes of assets, liabilities, and net assets
- eRequired supplemental information.
805-958-55-34
The following note illustrates the disclosures required by paragraphs 958-805-50-2(a) through (c).
- NFP I was formed on June 15, 20X1, as the result of a merger of three local not-for-profit entities—NFP F, NFP G, and NFP H. All three entities shared the common mission of supporting youth education. Through their merger, the entities seek to further their common mission by substantially improving their after-school youth programs in the region and their capability to assist youth in need. They also seek to achieve economies of scale and other synergies through integrating their services.
805-958-55-35
The following note illustrates the disclosures required by paragraph 958-805-50-2(d)(2).
- At June 15, 20X1, NFP F had a conditional promise receivable of $1.4 million from a donor to be used to construct a new after-school youth facility. The promise is conditioned upon NFP F raising an equivalent amount from others by the end of 20X4 to be used for construction of the facility. At the merger date, NFP F had raised $420,000. NFP I expects to successfully raise the remaining amount by the end of 20X4.
805-958-55-36
The following note illustrates the disclosure required by paragraph 958-805-50-2(e).
- NFP G and NFP H have a policy to report donor-restricted contributions whose restrictions are met in the same reporting period as support within net assets without donor restrictions. NFP F reports donor-restricted contributions whose restrictions are met in the same reporting period as donor-restricted support and subsequently releases the donor-restricted net assets when the restrictions are met. NFP I has conformed its policy to that of NFP G and NFP H. The accounting policy difference affects only the statement of activities; thus, no adjustment to the opening balance of NFP I's net asset classes is necessary.
805-958-55-37
The following note illustrates the disclosures required by paragraph 958-805-50-2(d).
"Major Classes of Assets June 15, 20X1" (amounts in thousands) Adjustments NFP F NFP G NFP H Debit Credit Total (NFP I) Assets Cash and short-term investments " $4,127 " " $7,213 " " $3,179 " - - " $14,519 " Contributions receivable " 3,053 " " 5,102 " " 2,696 " - - " 10,851 " Allowance for uncollectibles (295) (524) (157) - - (976) "Contributions receivable, net" " 2,758 " " 4,578 " " 2,539 " - - " 9,875 " "Land, buildings, and equipment" " 43,337 " " 59,021 " " 15,875 " - - " 118,233 " "Accumulated depreciation" " (8,458)" " (9,935)" " (1,990)" - - " (20,383)" "Land, buildings, and equipment, net" " 34,879 " " 49,086 " " 13,885 " - - " 97,850 " "Long-term investments" " 54,987 " " 108,234 " " 42,004 " - - " 205,225 " Liabilities - - Accounts payable and accrued expenses " 3,128 " " 6,412 " " 3,333 " - - " 12,873 " Grants payable " 2,893 " " 3,765 " " 2,232 " - - " 8,890 " Long-term debt " 32,980 " " 45,190 " " 18,556 " - - " 96,726 " Net assets With donor restrictions "48,834" "86,409" "28,895" - - "164,138" Without donor restrictions " 8,916 " " 27,335 " " 8,591 " - - "44,842" Total net assets " $57,750 " " $113,744 " " $37,486 " - - " $208,980 "
805-958-55-38
The following supplemental information is required by paragraph 958-805-50-3. If NFP I presents comparative financial information in the annual reporting period following the year in which the merger occurs, the supplemental pro forma information would be presented in the financial report of that year as well.
-
Supplementary Pro Forma Information (Unaudited) The following information is not audited. "NFP I's revenue and changes in net assets without donor restrictions and net assets with donor restrictions for the year ending December 31, 20X1, as if the merger had occurred at January 1, 20X1, are:" Revenue Change in Net Assets without Donor Restrictions Change in Net Assets with Donor Restrictions Supplemental pro forma information for 1/1/20X1-12/31/20X1 " $17,139 " " $5,715 " "($2,575)"
Acquisition by a Not-for-Profit Entity
Implementation Guidance
805-958-55-39
This Subsection provides implementation guidance, which is incremental to the guidance in Sections 805-10-55 and 805-20-55, on all of the following:
- aDefinition of a business and a nonprofit activity
- bIdentifying the acquirer
- cIntangible assets that are identifiable
- dTransactions between entities under common control.
805-958-55-40
Paragraph 805-10-15-4 uses the term business to differentiate an acquisition of an integrated set of activities and assets that is within the scope of Topic 805 from an acquisition of a group of assets that is outside its scope. This Subtopic uses that same definition. In addition to the term business, this Subtopic also uses the term nonprofit activity to differentiate an acquisition of an integrated set of activities and assets that is within its scope from an acquisition of a group of assets that is outside its scope. It builds on the definition of a business in defining a nonprofit activity; each is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits. The nature of the benefits provided distinguishes a business from a nonprofit activity. Thus, in applying the guidance in paragraphs , references to a business or businesses also refer to a not-for-profit activity or not-for-profit activities, and references to the three elements of input, process, and output also include outputs that provide or have the ability to provide goods or services to beneficiaries, customers, or members that fulfill the purpose or mission for which a not-for-profit entity (NFP) exists.
805-958-55-41
Furthermore, because an integrated set of activities that is in the development stage might not have outputs, an acquirer should consider, in addition to the factors in paragraph 805-10-55-5D, whether the set will be able to obtain access to beneficiaries or members that will purchase or otherwise receive the outputs that fulfill the purpose or mission for which an NFP exists.
805-958-55-42
Paragraph 958-805-25-15 provides guidance used by the combining entities to determine the acquirer. If applying the guidance in that paragraph does not clearly indicate which of the combining entities is the acquirer, paragraph 958-805-25-16 requires that the combining entities consider the factors in paragraphs and in paragraphs .
805-958-55-43
If one of the combining entities can select or dominate the process of selecting the management team of the resulting organization, that entity is likely to be the acquirer.
805-958-55-44
The acquirer usually is the entity whose governing body has the ability to select or dominate the process of selecting the governing body of the combined entity, which may be a newly created entity, although whether a new entity is created is not a pertinent factor in identifying an acquisition (see paragraph 958-805-55-1). That ability may be demonstrated by an entity's powers to elect or appoint members to the combined entity's governing body or an entity's powers to dominate the process of selecting a voting majority. In determining whether one of the entities has the power to dominate the selection process, consideration shall be given to the existence of rights to elect or appoint members to the governing body that are provided by the entity's articles of incorporation, by its bylaws, or by provisions in the acquisition agreement. Consideration also shall be given to the ability of one entity to dominate the selection process through other means.
805-958-55-45
The combined entity often retains the mission and the legal name of the acquirer.
805-958-55-46
The following factors should be considered in assessing which entity is able to select or to dominate the process of selecting the governing body:
- a If the combined entity's articles of incorporation or bylaws state that the members of the governing body are appointed, whether one of the entities has the right to appoint a voting majority of the governing body.
- b Both of the following factors, if the combined entity's governing body is self-perpetuating:
- 1 Whether one of the entities has the right to select a voting majority of the initial governing body of the entity as part of the acquisition agreement
- 2 Whether one of the entities has the ability to dominate the selection of a voting majority of the initial governing body of the entity through means other than negotiated selection rights, such as through disproportionate representation on the committee that selects nominees for that body.
- 1
- c If the initial governing body of the combined entity is selected by the governing members of the combining entities, whether one entity's members have the majority of the voting rights.
- d Any other rights to appoint or designate members of the combined entity's governing body either as of the acquisition date or in the near future (such as upon the expiration of the terms of some or all of the initial members).
- e If positions on the combined entity's governing body are designated positions, the effect of those designated positions on the ability of an entity to appoint a voting majority of the resulting entity's governing body.
- f The powers of any sponsoring entities or members of an NFP and the composition of those sponsors and members. If sponsors and corporate members have limited powers, the effect of those limited powers on the ability of one of the entities to control the combined entity.
- g If the combined entity's governing body delegates powers to committees, the nature of those delegated powers and the composition of the committees.
- h The effect of voting requirements (such as supermajority voting requirements) on the ability of one entity to appoint or dominate the selection of a supermajority of the governing body of the combined entity.
805-958-55-47
In addition to the examples of intangible assets provided in paragraphs , a donor list is an example of an identifiable asset.
805-958-55-48
A donor list is different from a customer list (see paragraph 805-20-55-21), although a donor list consists of similar information about donors, such as their names and contact information. A donor list also may be in the form of a database that includes other information about the donors, such as their donation histories and demographic information. A donor list may but does not always arise from contractual or other legal rights. However, donor lists are frequently leased or exchanged. Therefore, a donor list acquired in an acquisition by a not-for-profit entity normally meets the separability criterion (see paragraph 805-20-55-4). However, a donor list would not meet the separability criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing, or otherwise exchanging information about its donors.
Illustrations
805-958-55-49
This Example illustrates application of the guidance in paragraphs . Museum B, which has a policy of not capitalizing its collection, acquires Museum A without transferring consideration. As part of the transaction, Museum B acquires 500 paintings owned by Museum A. Museum B adds 450 of Museum A's paintings to its collection. The remaining 50 paintings acquired from Museum A are not suitable for Museum B's collection. They are not subject to donor restrictions, and Museum B expects to sell them. The fair values of Museum A's assets and liabilities other than collection items (the 450 paintings) at the acquisition date follows.
-
Cash $200 Accounts receivable 400 Contributions receivable 200 "Property, plant, and equipment" 800 Paintings (50 paintings) 100 Liabilities (200) Identifiable net assets other than collections " $1,500 "
805-958-55-50
An NFP acquirer needs to determine whether acquired collection items were purchased or contributed and, if purchased, the cost to attribute to them. Because Museum B transferred no consideration, it would recognize a separate credit to its statement of activities (contribution received) of $1,500 in accordance with paragraph 958-805-25-31. No measurement of the collection items (the 450 paintings) would be required because it is evident that those items were contributed as part of the acquisition. It is evident that the items were contributed because the fair value of the identifiable assets (excluding the collection items) exceeds the fair value of the liabilities assumed and no consideration was transferred for the acquiree. Any value that might be ascribed to the newly acquired collection items would increase the amount of the contribution received by Museum B in the acquisition. Consistent with paragraph 958-605-25-19, contributed collection items shall not be recognized as a contribution received if collections are not capitalized.
805-958-55-51
This Example illustrates application of the guidance in paragraphs . Museum D, which has a policy of not capitalizing its collection, acquires Museum C. To effect the acquisition, Museum D agrees to transfer cash consideration of $1,600 to a foundation designated by Museum C. As part of the acquisition, Museum D acquires 800 paintings owned by Museum C. Museum D adds all of Museum C's paintings to its collection. The fair values of Museum C's assets and liabilities other than collection items at the acquisition date follow.
Cash $100 Accounts receivable 50 Contributions receivable 75 "Property, plant, and equipment" 675 Liabilities assumed (200) Identifiable net assets other than collections $700
805-958-55-52
It is unclear whether the collection items were contributed or purchased because the fair value of the consideration transferred is $1,600, which exceeds the aggregate of the identifiable net assets acquired (excluding the collection items) of $700. The excess $900 paid could be attributable entirely to either the collection items or goodwill, or part could be attributed to the cost of the collection items and part to goodwill.
805-958-55-53
In this circumstance, if Museum D determines that the acquisition-date fair values of the collection items are far greater than $900, it would presume that $900 of the excess relates to the cost of the purchased collection items and that the remainder of the excess relates to contributed collection items. Consistent with how purchased collections are reported in paragraph 958-360-45-5, that $900 cost would be reported as a decrease in the appropriate class of net assets in the statement of activities in the period of the acquisition. No goodwill or contribution revenue would be recognized.
805-958-55-54
If Museum D instead determines that the acquisition-date fair values of the collection items are less than $900, for example, $300, it could not presume that the entire $900 excess relates to the collection. Rather, Museum D would attribute that lesser amount to the cost of the purchased collection items and attribute the remaining portion of the excess ($600) to goodwill in accordance with paragraph 958-805-25-28. (The acquiree, Museum C, as part of the combined entity, is expected to obtain so much of its support from sources other than contributions and returns on investments that it does not qualify to immediately charge to the statement of activities the amount that otherwise is recognized as goodwill.)
805-958-55-55
This Example illustrates application of the guidance in paragraphs . Hospital, an independent, not-for-profit community hospital, agreed to be acquired by System, a nearby not-for-profit health care system. Hospital was in the midst of a major capital project at the acquisition date. To ensure completion of that capital project, Hospital's board of directors required that System transfer $20 million to Foundation, a newly formed, unrelated foundation that is governed by a self-perpetuating board of directors. Foundation's initial board of directors is composed of the former board of directors of Hospital. The acquisition agreement requires that the $20 million be used to complete the project, if necessary, and that any assets remaining in Foundation on completion of the capital project be used solely for future capital projects at Hospital.
805-958-55-56
In this Example, the acquirer has transferred assets to an unrelated third party as a required condition of the acquisition. However, because those assets may be used only for future capital additions at Hospital, System has retained control over the future economic benefits of those assets. A transferor that retains control over the economic benefits in the transferred assets has not transferred assets in exchange for the acquiree. Rather, that transferor has exchanged one asset for another. An asset transfer of that type shall be accounted for as an asset-for-asset exchange rather than as consideration transferred.
805-958-55-57
This Example illustrates application of the guidance in paragraph 958-805-25-35. To induce the acquisition of NFP E, a financially weak not-for-profit entity (NFP), by NFP F, a financially strong NFP, as a condition of NFP F's acquisition of NFP E, a third-party donor agrees to provide a cash contribution to support NFP E's mission. That assistance is transferred to NFP F (the consolidated entity) upon the closing of the acquisition agreement. The donor, as part of its mission and purpose, has an interest in supporting certain NFPs. From the perspective of the donor, the assistance provided to induce NFP F to acquire NFP E is in the furtherance of its mission.
805-958-55-58
In this Example, the transaction was arranged primarily to achieve economic benefits favorable to the acquiree. Thus, that assistance would be an asset acquired at the acquisition date that is recognized as part of accounting for the acquisition. The cash assistance also is included in the acquisition accounting even though it is transferred to the resulting combined entity. The situation is accounted for the same as if the third-party donor had contributed the cash to NFP E before NFP F's acquisition of NFP E.
805-958-55-59
This Example illustrates one way in which a not-for-profit entity (NFP) might implement the requirements of paragraphs 958-805-25-29 and 958-805-45-4. On February 10, 20X0, NFP G, a religious not-for-profit entity, purchases 100 percent of the ownership interests in Restaurant H for consideration of $525,000. On the acquisition date, the amount of the net identifiable assets of Restaurant H recognized and measured in accordance with this Subtopic was $410,000. NFP G acquired Restaurant H for the purpose of converting it to a soup kitchen.
805-958-55-60
Management of NFP G expects the soup kitchen resulting from the conversion of Restaurant H to be predominantly supported by contributions and returns on investments. Specifically, the operating costs of the soup kitchen are expected to be funded by NFP G's existing contribution base. The following table illustrates how NFP G might satisfy the requirements of paragraph 958-805-45-4 for presenting the separate charge to the statement of activities at the acquisition date.
-
"NFP G Statement of Activities For the Year Ended December 31, 20X0 (presented in thousands)" Without Donor Restrictions With Donor Restrictions Total "Revenue, gains, and other support" " $8,640 " "$6,790 " " $15,430 " Net assets released from restrictions " 5,820 " " (5,820)" - "Total revenues, gains, and other support" " 14,460 " 970 " 15,430 " Expenses " (13,115)" - " (13,115)" "Change in net assets before changes related to acquisition of Restaurant H" " 1,345 " 970 "2,315" "Excess of consideration transferred over net assets acquired in acquisition of Restaurant H (Note X)" (115) - (115) Change in net assets " $1,230 " $970 " $2,200 "
805-958-55-61
NFP G might satisfy the requirements of paragraphs 805-10-50-2(a) through (d) and paragraph 958-805-50-11(a) as shown in the illustrative note below.
- Note X: Acquisition of Restaurant H
- On February 10, 20X0, NFP G acquired Restaurant H, a local restaurant, which it converted into a soup kitchen. NFP G acquired Restaurant H as part of furthering its mission to care for the needy. The acquisition was effected by purchasing 100 percent of the ownership interests in Restaurant H.
- Because the operations of the soup kitchen are expected to be predominantly supported by contributions and returns on investments, NFP G has recognized the excess of the consideration transferred over the net assets acquired as a separate charge in its statement of activities rather than as goodwill. NFP G paid consideration of $525,000 for Restaurant H. On the acquisition date, the net identifiable assets of Restaurant H were $410,000. The excess of the amount paid over the net identifiable assets acquired represents the value of Restaurant H's assembled workforce, which is not recognized as a separate intangible asset, and the value of Restaurant H's earnings potential as a restaurant to other potential buyers.
805-958-55-62
This Example illustrates application of the guidance in paragraphs 958-805-25-31, , and . The Example has the following Cases:
- aThe inherent contribution is not subject to additional restrictions (Case A)
- bThe inherent contribution is subject to additional restrictions (Case B).
805-958-55-63
Cases A and B share the following assumptions.
805-958-55-64
Charity I acquires Charity J. Charity I transfers no consideration in exchange for Charity J. The acquisition was achieved by, in effect, a gift of Charity J to Charity I. The fair values of Charity J's assets and liabilities, including donor-imposed restrictions, at the acquisition date follow.
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Cash $75 Net assets without donor restrictions $550 Contributions receivable 225 Net assets with donor restrictions 450 Long-term investments 500 "Plant, property, and equipment" 430 Total net assets " $1,000 " Total assets " 1,230 " Accounts payable (65) Mortgage (165) Total liabilities (230) Total net assets " $1,000 "
805-958-55-65
Charity I recognizes a $1,000 contribution received in the acquisition (the excess of the acquisition date values of the identifiable assets acquired over the acquisition date values of the liabilities assumed). Charity I classifies the inherent contribution received according to the type of donor-imposed restrictions, including any imposed by the donor of the business or nonprofit activity acquired.
805-958-55-66
Based on donor restrictions on Charity J's net assets at the acquisition date, net assets with a fair value of $450 were classified as with donor restrictions. In this Example, Charity J is, in effect, the donor of the acquired nonprofit activity, and it imposes no additional donor restrictions. To recognize the fiduciary responsibilities to the donors of Charity J that are assumed when Charity J's assets and liabilities are acquired, Charity I would classify changes to its net assets as follows.
-
Increase in net assets without donor restrictions: Contribution received in the acquisition of Charity J $550 Increase in net assets with donor restrictions: Contribution received in the acquisition of Charity J $450
805-958-55-67
Charity J is a subsidiary of Parent before the acquisition by Charity I. As a condition of the acquisition, Parent's governing board requires that Charity I use $175 of net assets without donor restrictions for future capital improvements to the facility acquired. The requirement is irrevocable and is not self-imposed. To recognize the fiduciary responsibilities to the donors of Charity J that are assumed when Charity J's assets and liabilities are acquired, Charity I would classify changes to its net assets as follows.
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Increase in net assets without donor restrictions: Contribution received in the acquisition of Charity J $375 Increase in net assets with donor restrictions: Contribution received in the acquisition of Charity J $625
805-958-55-68
This Example illustrates application of the guidance in paragraphs 958-805-45-11 and 958-805-50-15. Entity X, an NFP, acquires Entity S from Entity S's parent. As part of the acquisition, Entity S's parent requires that Entity X transfer consideration of $300 to a third-party community foundation. The fair values of Entity S's assets and liabilities at the acquisition date are as follows.
-
Cash $25 Contributions receivable 155 "Property, plant, and equipment" 900 Long-term note payable (375) Net assets acquired $705
805-958-55-69
Entity X reports the acquisition as a single line in the investing activities section of the statement of cash flows, as follows:
-
"Payment for acquisition of Entity S, net of cash acquired" $(275)
805-958-55-70
Entity X discloses the following additional information in a supplemental schedule of investing and financing activities:
-
"The Entity acquired Entity S by transferring cash of $300. In conjunction with the acquisition, liabilities were assumed and a contribution was received from Entity S's parent as follows:" Fair value of assets acquired " $1,080 " Cash transferred to community foundation (300) Liabilities assumed (375) Contribution received in acquisition of Entity S $405
805-958-65Transition and Open Effective Date Information
Source downloaded: .Record version c7bb4d71c97f. Effective date must be checked in the source.
805-958-65-1
Paragraph superseded on 06/20/2011 after the end of the transition period stated in FASB Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions.
Related subtopics
- 805-954 Health Care EntitiesBusiness Combinations
- 805-20 Identifiable Assets and Liabilities, and Any Noncontrolling InterestBusiness Combinations
- 805-50 Related IssuesBusiness Combinations
- 740-805 Business CombinationsIncome Taxes
- 720-958 Not-for-Profit EntitiesOther Expenses
- 810-954 Health Care EntitiesConsolidation