RSM Resources

Proposed FASB statements could shed light on merger and acquisition reporting for not-for-profits

With limited guidance on merger and acquisition accountingtreatments for not-for-profit (NFP) organizations, the accounting professionhas been eagerly awaiting clarification from the Financial Accounting StandardsBoard (FASB).

To help mitigate the situation — specifically, helpingaccounting professionals navigate different accounting treatments for similareconomic transactions, resulting in diverse reporting practices — the FASBrecently issued two exposure drafts that propose M&A accounting support forNFPs. Similar to existing direction used for business combinations in thefor-profit sector, the proposed statements include:

• Not-for-Profit Organizations: Mergers and Acquisitions. Thiswould eliminate the pooling-of-interests method of accounting where assetsacquired and liabilities assumed are recorded as “carryover” amounts on thebooks of obtained organizations. This plan would also require application ofthe acquisition method to all M&A transactions in which an NFP would needto:
  
  
• Recognize identifiable assets acquired and liabilitiesassumed that compose the business or NFP activity acquired in a merger oracquisition.
• Measure those assets and liabilities at their fair values asof the acquisition date.
• Identify either goodwill of the acquired business, NFPactivity or the contribution inherent in the merger or acquisition as aresidual based on the value of the identifiable assets acquired, liabilitiesassumed and the consideration transferred (if any).
• Disclose information to enable users of the financialstatements to evaluate the nature and financial effects of the merger oracquisition.
  
  
• Not-for-Profit Organizations: Goodwill and Other IntangibleAssets Acquired in a Merger or Acquisition. This would offer accounting supportfor those intangible assets recorded after a merger or acquisition. This isconsistent with the accounting for all other acquired intangible assets —whether purchased, donated or attained individually or as part of a group.Under this proposal, NFPs would be expected to provide consistent andcomparable information about identifiable intangible assets acquired in amerger or acquisition.  It would also more faithfully represent relevantinformation about events resulting in impairments of goodwill that an NFP hasacquired.

NFPs would be required to apply the provisions in bothproposed statements prospectively in fiscal years beginning approximately sixmonths after the issuance of a final statement. The proposed M&A standardwill be applicable to new acquisitions occurring after the beginning of thefirst valid fiscal year. NFPs also would be required to apply certaintransition provisions to intangible assets that were acquired before theadoption of the proposed statement — in regard to intangible assets that wereaccounted for using the purchase method.

These proposed statements will have a major impact on therequired accounting for future business combination in the not-for-profitenvironment.

For more information and to view the drafts, visit www.fasb.org/draft/major_standards_projects_ed.shtml.They will be available for comment until Jan. 29, 2007.