New Standards Exist For Merging Schools, Not-For-ProfitsSeptember 01, 2010
By Marcus R. Harwood, CPA
Difficult economic times have put additional stresses on the finances of many mission-driven organizations just as they face unprecedented demands for their services. Many endowments have declined in value, and fundraising efforts are often yielding fewer results amidst economic uncertainties. Consistent levels of funding from fiscally challenged state governments may also be in jeopardy.
In this environment, schools, hospitals and other non-profit organizations may conclude that the most effective way to continue to achieve their missions is by joining their resources with other similar organizations.
Organizations that reach this conclusion should bear in mind that the Financial Accounting Standards Board (FASB) Statement 164 - Not-for-profit Entities - Mergers and Acquisitions - Including an Amendment of FASB Statement 142 (SFAS 164) - is now effective. SFAS 164 has been incorporated into Accounting Standards Codification Topic 958 and provides guidance on how to account for combinations with other non-profit organizations.
Our firm has been involved in discussions with healthcare organizations and educational institutions who are considering combining their resources with other such institutions. These organizations are faced with fundamental questions about how to effect the combination. Their decisions shape the operations and governance structure of the post-combination organization, but they will determine how to account for the combination itself.
As an example, let's say that School A is planning on combining its resources with School B. Both are private high schools with their own endowments, assets and Boards of Trustees. The nature of their combination will determine whether it is considered a merger or an acquisition. If both governing bodies cede control, for example, to a newly formed organization, the combination may be considered a merger whereas if one governing body cedes control to the other, the combination would be considered an acquisition. SFAS 164 provides specific guidance for both mergers and acquisitions.
In the case of a merger, the book value of Schools A and B's assets and liabilities on the transaction date are carried over onto the books of the combined entity. No new assets or liabilities will be recognized, and the values of the existing assets and liabilities will not change.
If the combination is considered an acquisition, the accounting will resemble purchase accounting rules that already apply to for-profit organizations, with certain modifications that address items that are unique to non-profit organizations. Generally speaking, many of the assets and liabilities of the acquired entity would be recorded by the acquiring entity at their transaction date fair value. If consideration is paid and it exceeds the fair value of the net assets acquired, goodwill may or may not be recognized depending on the nature of the operations of the acquired entity. If the fair value of the net assets acquired exceeds consideration paid, or if no consideration is paid, the difference is accounted for as an inherent contribution that is recognized in the statement of activities.
If the combination of Schools A and B is accounted for as an acquisition, they will need to consider not only the fair value of assets and liabilities already recognized, but whether any previously unrecognized intangible assets exist. Although there are scope exceptions for certain items such as collections, donor relationships and conditional promises to give, these valuation considerations very well may require the use of a valuation specialist.
As schools and non-profits continue to navigate the difficult economic climate, they may consider the possibility of a merger and/or acquisitions as the best course of action for their financial future. As they do this, they will need to be familiar with the new standards put forward in SFAS 164 and will need to adapt to them.
Taking steps to merge or to be acquired could indeed be the right thing to do for such an organization. But those making those decisions need to be aware that there is a new process in place that must be followed, one that finally brings uniformity to the process and creates a framework within which any organization can operate.