Fall 2009 issue of Horizons

INDUSTRY u Not-for-Profit

M&A Operational Advantages and SFAS 164 Reporting Requirements In light of financial challenges due to the recent sharp decline in the overall economy, some not-for- profit organizations (NPOs) are currently evaluating the potential for operational synergies and cost- reductions by merging with or acquiring other exempt organizations. Common synergies and cost-reductions that NPOs could experience in a combination include: 1. Overall reduction of expenditures formanagement, overhead and fundraising. 2. Decreased health care and benefit costs for employees. 3. Increased outcome measurement and numbers of clients served. 4. Eliminationofperceivedcompetitionbyconsolidation of similar charities. 5. Increased credibility and visibility of the larger consolidated entity. 6. Larger endowment funds for long-term health of the new entity. 7. Expansion of donor-base. By Brent Stevens, CPA

In addition to considering the operational benefits and costs of merging or acquiring another organization, an NPO also must consider the impact the transaction will have on its financial statements. The Financial Accounting Standards Board recently released additional guidance for NPOs that could drastically alter the way a merger or acquisition is reported. Previously, NPOs have been allowed to utilize the “pooling of interests” method to account for mergers and acquisitions. Prior to the newly issued SFAS 164 — Not-for-Profit Entities: Mergers and Acquisitions (note all references to authoritative guidance are prior to the issuance of the recent FASB codification), the majority of transactions involving change of control (without an exchange of consideration) were allowed to use the pooling of interests method. Under SFAS 164, the majority of such transactions will be classified as acquisitions, with the acquired assets and liabilities re-measured at fair value. 1. Determines whether a combination is a merger or an acquisition. 2. Can elect to apply the “pooling of interests method” for a merger (renamed as “carryover accounting treatment”). 3. Applies the acquisition method in accounting for a combination that meets the criteria of an acquisition, including the determination of which of the combining entities is the acquirer. 4. Determines what information to disclose related to the combination to users of the financial statements. The process for determining if a combination of two or more NPOs is accounted for as a merger requires that the governing bodies of the NPOs (prior to the combination) cede control of the organizations in order to create the new NPO. Further, the governing bodies cannot retain any shared control of the newly formed NPO. The guidance released by the FASB provides numerous examples to assist the NPOs SFAS 164 establishes principles and requirements for how an NPO:

41 u fall 2009 issue