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Is it a Merger or an Acquisition?

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While the terms “merger” and “acquisition” are often used interchangeably, they are quite different from an accounting standpoint. 

If your nonprofit explores combining with another organization, one of the many considerations will be how to structure the arrangement. Will it be a merger or an acquisition? 

We provide a quick overview of each option below. If you’re responsible for the financial statements for an organization involved in a merger, acquisition, joint venture, or shared services agreement, it’s important to read FASB ASU 2010-07, Not-for-Profit Entities: Mergers and Acquisitions, and consult with your accounting professionals.

Nonprofit Merger Definition

Although the word “merger” is used a lot, nonprofit mergers are relatively rare. ASU 2010-07 defines a merger of not-for-profit entities as:

… a transaction or other event in which the governing bodies of two or more not-for-profit entities cede control of those entities to create a new not-for-profit entity.

The key is that the governing bodies of each entity cede control to create a new entity. Let’s say, for example, that Organization A and Organization B combine to create new nonprofit, Organization C. Most of Organization A’s board members are on the board of the new organization. This would be an acquisition, not a merger. 

There are no clear-cut rules for this, and it requires careful reading of legal documents and thorough understanding of the accounting treatment. It’s important to work with experienced professionals to determine the best approach.

The accounting treatment for a merger applies the carryover method: Organization A’s financial position plus Organization B’s financial position equals Organization C’s financial position.

Here’s an example:

 AssetsLiabilitiesNet Assets (Book Values)
Organization A$3 million$2 million$1 million

Organization B$5 million$4 million$1 million
Organization C
(combined entity)
$8 million$6 million$2 million

The new entity, Organization C, will have the combined assets, liabilities, and net assets of Organization A and Organization B as of the date the merger becomes effective. 

Nonprofit Acquisition Definition

Acquisitions are more common than mergers. ASU 2010-07 defines an acquisition by a not-for-profit entity as:

A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer’s financial statements.

In other words, in an acquisition one entity takes over another. The accounting treatment is significantly different than the treatment for a merger and involves these steps:

  1. Identify the acquirer
  2. Identify the acquisition date
  3. Identify special items
  4. Recognize goodwill acquired or a contribution received

While it’s not necessary to identify which type of arrangement you want to enter into when you’re starting the merger or acquisition process, you should be mindful of the different accounting treatments as you go forward. 

CapinCrouse is experienced at assisting nonprofit organizations through mergers and acquisitions, from conducting due diligence to helping structure the deal. Please contact us to learn more about how we could assist you. 

Fran Brown provided additional insight on this topic in a webcast on “Mergers and Acquisitions – How to Make Them Work for Your Organization.” Watch a recording here. 

Fran Brown

Fran has more than 30 years of experience providing audit and management consulting services to a variety of not-for-profit entities, including colleges and universities. His expertise includes strategic planning, budgeting, financial statement preparation, exempt-organization tax filing, real property sales and leases, board training, and enterprise risk management (ERM) training.

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