Accounting for Nonprofit Mergers and Acquisitions – September 01, 2017 by Marie Brilmyer

When a nonprofit organization combines with one or more other nonprofits, using the proper accounting treatment depends on if it is deemed a merger or an acquisition. Generally Accepted Accounting Principles (GAAP) differentiate between a merger and an acquisition as follows:

  • When the Board of Directors cede control of two or more nonprofit organizations and a new organization is created, a merger occurs. 
  • When one organization obtains controls of one or more nonprofit or for-profit organizations, an acquisition occurs.

Mergers

The premise behind a merger is that no combining nonprofit organization dominates the new organization. So while a new legal entity does not need to be formed, to qualify as a new nonprofit organization a new governing body must be formed. In addition, the combining organizations should share (as equally as possible) the ability to appoint governing board members of the new entity, retain key employees, and have a say in bylaws and operating policies and practices of the new organization.
 
Accounting for a merger is relatively simple: GAAP states that the carryover method must be used. In other words, all assets and liabilities of the merging organizations should simply be “carried forward” to the newly formed entity, so long as they are on a consistent basis of accounting.

Acquisitions

If the combination between two or more nonprofits is NOT a merger, then it is an acquisition and must be accounted for under the acquisition method of accounting. If the nonprofit combines with a for-profit entity, the acquisition method of accounting also must be used.
 
GAAP sets forth the following steps to account for an acquisition:

  1. Identify the acquirer. Who obtains control of the acquiree? While the “larger” organization is typically deemed the acquirer, that is not always the case. If one organization dominates in choosing board members and key employees, then that is an indication of control. 

  2. Determine the acquisition date. This should simply be the closing date, unless a written agreement specifies another date. 

  3. Recognize the identifiable assets and liabilities. This is where acquisition accounting gets complicated, particularly as compared to mergers. Assets and liabilities of the acquiree must be accounted for at fair value, including any intangible assets. For example, the acquiree may have property and equipment that is carried on its books at its historical cost less accumulated depreciation. The property and equipment would need revalued to its fair value under acquisition accounting, which may be more or less than its depreciated value.

If your organization enters into a combination of any kind, consult your accountant as soon as possible to avoid surprises during your year-end audit.

 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.