Summary of Statement No. 164

Not-for-Profit Entities: Mergers and Acquisitions—Including an amendment of FASB Statement No. 142


Why Is the FASB Issuing This Statement and When Is It Effective?

The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity provides in its financial reports about a combination with one or more other not-for-profit entities, businesses, or nonprofit activities. To accomplish that, this Statement establishes principles and requirements for how a not-for-profit entity:

  1. Determines whether a combination is a merger or an acquisition


  2. Applies the carryover method in accounting for a merger


  3. Applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer


  4. Determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition.


This Statement also improves the relevance, representational faithfulness, and comparability of the information a not-for-profit entity provides about goodwill and other intangible assets after an acquisition by amending FASB Statement No. 142, Goodwill and Other Intangible Assets, to make it fully applicable to not-for-profit entities.

This Statement is effective for:

  1. Mergers for which the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009


  2. Acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009.


It may not be applied to mergers or acquisitions before those dates.

Because the following items were not effective for not-for-profit entities upon their initial effective dates, this Statement also provides an effective date for them:

  1. Statement 142’s requirements on subsequent accounting for goodwill and other intangible assets acquired in an acquisition by a not-for-profit entity (Statement 142 refers to assets acquired in a business combination.)


  2. The amendments that FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, made to Accounting Research Bulletin ARB No. 51, Consolidated Financial Statements, and to other existing pronouncements


  3. The amendments that FASB Statement No. 141 (revised 2007), Business Combinations, made to existing pronouncements.


A not-for-profit entity shall apply those items prospectively in the first set of initial or annual financial statements for a reporting period beginning on or after December 15, 2009. Application before that date is prohibited.

What Is the Scope of This Statement?

This Statement provides guidance on accounting for a combination of not-for-profit entities, which is a transaction or other event that results in a not-for-profit entity initially recognizing another not-for-profit entity, a business, or a nonprofit activity in its financial statements. This Statement applies to a combination that meets the definition of either a merger of not-for-profit entities or an acquisition by a not-for-profit entity. This Statement does not apply to:

  1. The formation of a joint venture


  2. The acquisition of an asset or a group of assets that does not constitute either a business or a nonprofit activity


  3. A combination between not-for-profit entities, businesses, or nonprofit activities under common control


  4. A transaction or other event in which a not-for-profit entity obtains control of another entity but does not consolidate that entity, as permitted or required by AICPA Statement of Position 94-3, Reporting of Related Entities by Not-for-Profit Organizations, or AICPA Audit and Accounting Guide, Health Care Organizations.


How Will This Statement Improve Current Accounting Practice?

Until now, not-for-profit entities have accounted for mergers and acquisitions by analogizing to guidance developed for business entities, specifically, APB Opinion No. 16, Business Combinations. FASB Statement No. 141, Business Combinations, replaced Opinion 16 for business entities, and Statement 141 was itself replaced by Statement 141(R). However, the Board excluded not-for-profit entities from the scope of both Statement 141 and Statement 141(R), pending the issuance of guidance developed specifically for them. This Statement provides that guidance, which takes into account the unique features of not-for-profit entities and the combinations in which they engage.

Unique Features of Not-for-Profit Entities and Their Combinations

Combinations by not-for-profit entities and combinations by business entities are similar in many ways. In particular, acquisitions by the two types of entities are sufficiently similar that the same basic accounting method—the acquisition method—is appropriate for both. But not-for-profit entities differ from business entities in some important ways. Thus, this project began by identifying and analyzing differences between not-for-profit entities and business entities and the combinations in which they engage. The Board then considered how the similarities and differences between business entities and not-for-profit entities should affect the financial accounting and reporting requirements for combinations of not-for-profit entities.

One fundamental difference between combinations of not-for-profit entities and combinations involving only businesses has significant financial reporting implications. Because a not-for-profit entity lacks the type of ownership interests that business entities have, negotiations in not-for-profit mergers and acquisitions generally focus on the furtherance for the benefit of the public of the mission, governance, and programs of the entity, rather than on maximizing returns for equity holders. Many mergers and acquisitions by not-for-profit entities do not involve a transfer of consideration. In other words, many mergers and acquisitions by not-for-profit entities are not fair value exchanges but rather are nonreciprocal transfers. That fundamental difference contributed significantly to this Statement’s requirement that different accounting methods apply to a merger of not-for-profit entities and an acquisition by a not-for-profit entity. For an acquisition, those combinations result in a contribution of the acquiree’s net assets to the acquirer, which this Statement refers to as an inherent contribution received to distinguish it from other contributions received by a not-for-profit entity.

Determining Whether a Combination Is a Merger or an Acquisition

This Statement requires use of the carryover method to account for a merger of not-for-profit entities, which is a combination 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. In contrast, the acquisition method must be used to account for an acquisition by a not-for-profit entity, which is a combination in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses. This Statement also provides implementation guidance on distinguishing between a merger and an acquisition, including illustrations of how that guidance might be applied to hypothetical combinations.

Applying the Carryover Method

Under the carryover method, the combined entity’s initial set of financial statements carry forward the assets and liabilities of the combining entities, measured at their carrying amounts in the books of the combining entities at the merger date. An entity applying the carryover method recognizes neither additional assets or liabilities nor changes in the fair value of recognized assets and liabilities not already recognized in the combining entities’ financial statements before the merger under generally accepted accounting principles (GAAP). (Exceptions are made to reflect a consistent method of accounting for the new entity if the merging entities used different methods and to eliminate the effects of intraentity transactions.) This Statement’s guidance on applying the carryover method improves on Opinion 16’s guidance on applying the pooling method in several ways.

First, in Opinion 16, the measurement date—the date as of which information about the merging entities’ assets and liabilities was included in the combined entity’s financial statements—was the beginning of the period in which the merger occurred, regardless of the actual date of the merger. The measurement date for a merger in this Statement is the merger date—the date the combination becomes effective. The not-for-profit entity that results from a merger is a new entity and therefore a new reporting entity. An entity’s history begins at its inception; a new entity has no previous operations. The guidance on measurement date and related presentation issues in this Statement is consistent with the merged entity’s status as a new entity.

This Statement also provides additional guidance for the carryover method. For example, this Statement provides guidance on how to make the classifications and designations that are required to apply other GAAP, such as applying hedge accounting requirements. The new entity is to carry forward into the opening balances in its financial statements the merging entities’ classifications and designations unless either:

  1. The merger results in a modification of a contract in a manner that would change those previous classifications or designations; or


  2. Reclassifications are necessary to conform accounting policies.


This Statement also specifies minimum disclosures to be made as of the merger date to enable users of the new entity’s financial statements to evaluate the nature and financial effect of the merger that resulted in its formation.

Applying the Acquisition Method

The acquisition method in this Statement is the same as the acquisition method described in Statement 141(R), with the addition of guidance on items unique or especially significant to a not-for-profit entity and the elimination of guidance that does not apply to a not-for-profit acquirer. For example, this Statement’s guidance on identifying both the acquirer and the acquisition date is in substance the same as the guidance that Statement 141(R) provides on those issues, but this Statement uses different terminology and adds a few details unique to not-for-profit entities.

Recognizing Goodwill or a Contribution Received

The area in which this Statement provides guidance that differs most in substance from that in Statement 141(R) is recognition of goodwill. Unlike business entities, some not-for-profit entities are solely or predominantly supported by contributions and returns on investments. Others are more “businesslike,” receiving most, or even all, of their support from fees for services. An example of the former is a soup kitchen; an example of the latter is a not-for-profit hospital that charges fees to cover its costs. In general, the more business-like a not-for-profit entity, the more relevant is information about goodwill acquired to users of the entity’s financial statements. This Statement recognizes that information about goodwill may be of limited use to donors in their assessments of whether to provide resources to a not-for-profit entity. Accordingly, this Statement requires an acquirer that expects the operations of the acquiree as part of the combined entity to be predominantly supported by contributions and returns on investments to recognize as a separate charge in its statement of activities the amount that otherwise would be recognized as a goodwill asset as of the acquisition date. Predominantly supported by means that contributions and returns on investments are expected to be significantly more than the total of all other sources of revenues.

As already noted, many acquisitions by not-for-profit entities constitute an inherent contribution received because the acquirer receives net assets without transferring consideration. This Statement requires the acquirer to recognize such a contribution received as a separate credit in its statement of activities on the acquisition date.

Recognizing and Measuring Noncontrolling Interests

This Statement requires that a recognized noncontrolling interest in another entity, whether a business or another not-for-profit entity, be measured at its fair value at the acquisition date. In addition, as noted in discussing effective date, this Statement makes Statement 160’s amendments to ARB 51 effective for not-for-profit entities. Many of those amendments deal with accounting for a noncontrolling interest after its acquisition. This Statement also provides guidance on and illustrates presentation of a noncontrolling interest in a not-for-profit entity’s financial statements.

Other Provisions of the Acquisition Method That Are Specific to Not-for-Profit Entities

This Statement also provides other guidance on applying the acquisition method in areas that are unique or especially significant for not-for-profit entities. For example, this Statement establishes exceptions to its recognition principle for donor relationships, collections, and conditional promises to give.

This Statement also provides guidance on how to present in the statement of activities and the statement of cash flows various items that are unique to not-for-profit entities, including the immediate charge or credit to the statement of activities for the amount that otherwise would be recognized as goodwill or an inherent contribution received, respectively. For an entity subject to the health care Guide, that guidance indicates whether specific items are to be within the performance indicator.

Like Statement 141(R), this Statement establishes disclosure objectives for an acquisition and requires minimum disclosures needed to meet those objectives. The disclosure objectives are the same as for a business combination, as are many of the minimum disclosures required. But the minimum disclosures are tailored for acquisitions by not-for-profit entities in some areas. For example, this Statement requires disclosure of the amount of collection items acquired that are recognized in the statement of activities as a decrease in the acquirer’s net assets rather than as assets in accordance with FASB Statement No. 116, Accounting for Contributions Received and Contributions Made.

How Does This Statement Affect Convergence with International Reporting Standards?

International convergence is not a consideration for financial reporting standards applicable only to not-for-profit entities, like this one. The IASB’s standards do not deal explicitly with not-for-profit entities.