March 26, 2012

If you are considering combining your organization with another nonprofit, you need to be familiar with current rules for business combinations.

The key step in complying with the current rules – Accounting Standards Codification 958-805 that became effective for business combinations after Dec. 15, 2009 – is to determine if the combination is a merger or an acquisition.


A merger occurs when the boards of two or more nonprofit organizations cede control to create a new entity. The governing board of the new entity must be newly formed, but forming a new legal entity is not a requirement.

An acquisition is the result of a nonprofit organization obtaining control of one or more not-for-profit activities or businesses.

Accounting for Mergers

Mergers are accounted for using the carryover method, which is similar to the pooling-of-interest approach. You simply add together the historical financial data of the merging entities as of the merger date.

However, under the new rules, a new entity starts at the merger date for accounting purposes. Financial statements of the period of the merger include only data since the merger date.

Since the successor organization is a new entity after a merger, there is no prior period statement of activity or cash flows. Under the old method, the measurement date was the beginning of the reporting period, treating it as a continuation of the merged-in entities.

Accounting for Acquisitions

If a combination does not qualify as a merger, then acquisition accounting will be used.

If acquisition accounting is required, the organizations will have to identify which entity is the acquirer, determine the acquisition date, and recognize identifiable tangible and intangible assets acquired, liabilities assumed, and goodwill or a contribution received.

The acquisition method requires all assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. A valuation expert may need to be engaged to assist in identifying and valuing intangible assets.

If consideration is transferred, goodwill can be recognized if the consideration is in excess of the fair value of net assets acquired. An acquirer that expects the acquired organization as part of the combined entity to operate like a business – for instance, charging fees to cover costs – must recognize goodwill as an asset at the acquisition date.

An acquirer that expects the operations of the acquired organization, as part of the combined entity, to be predominately supported by contributions and returns on investments is required to recognize as a separate charge in its statement of activities the amount that otherwise would be recognized as a goodwill asset at the acquisition date.

If no consideration is exchanged, then the acquirer recognizes an inherent contribution received for the fair value of assets acquired in excess of liabilities assumed. If a deficit is absorbed with no consideration transferred, then the acquirer follows the goodwill approach mentioned above. All costs of acquisition are expensed as period costs.

There are differing forms of combinations, collaborations and alliances between nonprofit organizations. Organizations should seek legal counsel to help with structuring “the deal.”

This article was originally posted on March 26, 2012 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at