In a long-awaited move, the Financial Accounting Standards Board has proposed new accounting for mergers and acquisitions by not-for-profit organizations.Reflecting a proposed standard on for-profit business combinations, Not-for-Profit Organizations: Mergers and Acquisitions proposes the elimination of the pooling-of-interests method, the measurement of assets and liabilities at fair value, and the recognition of goodwill upon initial recognition of another entity, be it for-profit or not-for-profit.

A second proposal, Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition, issued simultaneously, presents guidance for intangible assets after a merger or acquisition.

Frank L. Kurre, national managing partner of Grant Thornton's not-for-profit industry practice, praised the proposal as solid progress. "I think it looks good," Kurre said. "It's time to be moving away from the pooling-of-interest method and going with a fair value approach when you truly have a merger or acquisition of not-for-profits that are at arm's length, where there isn't a controlling interest between them."

While the pooling method records assets and liabilities at "carryover" amounts recorded on the books of the acquired organization, the proposed rules would require the application of the acquisition method to all mergers and acquisitions. Assumed identifiable assets and liabilities would be recognized and measured at their fair value on the acquisition date, with certain exceptions. Organizations would recognize either the goodwill of the acquired organization or the contribution inherent in the merger or acquisition as a residual based on the value of the assets and liabilities and the consideration transferred.

Not discouraging mergers

Alicia Posta, the FASB staffer who manages the project, said that the underlying principles of for-profit and not-for-profit M&A are very similar. She did not see the eventual standard facilitating or hindering future mergers. "By better reflecting the economics, the accounting may cause people to take a better look at the results afterward, but if the transaction makes sense based on the economics and missions of the organizations, it will happen regardless," she said.

The proposal parallels the principles that have been proposed in a project to revise the accounting for business combinations that was set in FASB Statement 141. An exposure draft was issued last year, and redeliberations are underway. As the original proposal is modified, the board will consider similar modifications to the exposure draft on not-for-profits.

The not-for-profit sector in the United States is large and growing larger, according to Posta. She said that the number of entities within the NFP sector grew by 68 percent from 1993 to 2003.

As it hammered out the proposed standard, the board had to grapple with some of the intrinsic differences between mergers and acquisitions of for-profit and not-for-profit organizations. For example, a not-for-profit may receive as a gift a controlling interest in a for-profit company - an unlikely scenario in the for-profit sector. Also, two organizations could merge without an exchange of assets.

In stating the objectives of the proposed guidance, the board expressed its belief that "all mergers or acquisitions are, in substance, the acquisition of net assets."

The guidance helps preparers, investors and auditors use judgment to assess qualitative information to determine which of two organizations is acquiring the other, which is more difficult in nonprofit mergers than in commercial mergers. Assessing a fair value on intangibles can also be more difficult.

Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition proposes treatment for intangibles that is consistent with accounting for any other intangible assets that have been purchased or donated, whether individually or as a group.

If adopted as proposed, the standard would require more consistent and comparable information about identifiable intangible assets and, in the case of impairment of goodwill, better information about the events that led up to it.

"In the past, when you have goodwill situations, you followed an old methodology that didn't look at the impairment of goodwill the way we do with commercial companies," Grant Thornton's Kurre said. "What I like about the standard is that it moves toward a fair value approach, yet distinguishes the fact that not-for-profits are different, that the treatment isn't identical to that of for-profit organizations."

The board has requested comments on the exposure draft by Jan. 29, 2007. Copies can be found at The board plans to hold a public discussion at its headquarters on March 27, 2007.

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