FASB Statement 164: for Non-

presents Preparing for New Standards on Combinations, Accounting Methods and Disclosures

A Live 110-Minute Audio Conference with Interactive Q&A Today's panel features: Russell Coleman, Partner, Cherry Bekaert & Holland, Charlotte, N.C. Colette Kamps, Senior Manager, Henry & Horne, Scottsdale, Ariz. Jay Meglich, Shareholder, Schneider Downs, Columbus, Ohio

Wednesday, September 16, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific

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Sept. 16, 2009

History of Prior Guidance; Practical Impacts from FAS 164

Russell Coleman Cherry Bekaert & Holland [email protected]

1 Introduction - Moving Away From Pooling Of Interests

• FASB instituted a project to revise accounting for business combinations in 1996 • APB Opinion 16 provided two methods: – Pooling of interests – Purchase • The methods produce significantly different results • FASB believes that the accounting for a transaction should produce similar results, unless there are differences in the transaction • FASB Statement 141, replaced by 141R, eliminated pooling of interests

2 Introduction - Moving Away From Pooling Of Interests (Cont.) • FASB Statement 141R specifically excluded the not-for- profit sector from its scope • There are significant differences between combinations of for-profit and not-for-profit entities – Combinations of for-profit entities always have a profit motive for ownership – Combinations of not-for-profit entities generally do not involve ownership interests – Many combinations of not-for-profit entities do not involve consideration • FASB, after a lengthy period of discussion, decided two methods of accounting are appropriate

3 Practical Considerations And Applications

• The current economic climate favors more activity – The current economic and financial conditions have affected smaller not-for-profit organizations – Combinations of smaller organizations with similar missions may better serve the community • Large community organizations, particularly united fundraising and community foundations, may prompt more combinations – Local United Way and community foundations generally support many organizations – Consolidate grant-making efforts

4 Practical Considerations And Applications (Cont.)

• Determination of when a combination is a merger method – Ceding of control to a new entity: Is it really a new entity? – Combination of organizations with similar missions – Transfer of consideration • Issues related to applying carryover method vs. fresh start method – The elections between alternative accounting methods for new entities are not available – There may be differences among the choices made by the merging entities

5 Practical Considerations And Applications (Cont.) • Issues related to applying carryover method vs. fresh start method (Cont.) – Historical bases of existing may no longer represent the value to the organization • Determination of when a combination is an acquisition – When is control not ceded to a new entity? • Who controlled the terms of combination? • Who controls new organization? • Issues related to: – Intangible assets excepted from the recognition principle • Donor relationships • Collections –

6 FASB Statement 164: Accounting for Non- Profit Mergers and Acquisitions Teleconference

Sept. 16, 2009 FAS 164 Background; Drill-Down on Carryover Method

Colette Kamps Henry & Horne LLP [email protected]

1 Introduction To FAS 164 • Goal of FAS 164

• vs. combination – What is a combination of non-profit entities? –What is not a combination?

• How is a non-profit merger/acquisition different from a for-profit merger/acquisition?

• Definitions of “merger” and “acquisition” as applied to non-profits: – Merger = 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

– Acquisition = A combination in which a not-for-profit acquirer obtains control of one or more non-profit businesses

2 Introduction To FAS 164 (Cont.)

• Non-profit merger – Use the carryover method

• Non-profit acquisition – Use the acquisition method

• Effective date

• Other standards that will now be effective for non-profits – FASB Statement 142 (goodwill) – FASB Statement 160 (non-controlling interests) – FASB Statement 141 (business combinations)

3 Mergers: Carryover Method • How do you know it’s a merger?

• How do you know if control has been ceded? Considerations include: – The process leading to the combination – The participants to the combination – The combined entity

• Example of a merger

• When is the merger date/measurement date?

• Carryover method – How does this work? – Recording the transaction – Financial reporting period

4 Mergers: Carryover Method (Cont.)

• Disclosures – Name and description of each merging entity – The merger date – The primary reason for the merger – The amounts recognized for each major class of assets, liabilities and net assets (for each merging entity) – The nature and amounts of any significant adjustments made to conform the accounting policies of the merging entities – The nature and amounts of any significant eliminations of intra-entity balances

5 Mergers: Carryover Method (Cont.)

• Disclosure example:

• NFP ABC was formed on June 15, 20X1, as the result of a merger of three local not-for-profit entities: NFP A, NFP B and NFP C. All three entities shared the common mission of supporting youth education. Through their merger, the entities seek to further their common mission by (a) substantially improving their after-school youth programs in the region and their capability to assist youth in need, and (b) achieving economies of scale and other synergies through integrating their services

6 Major Classes of Assets June 15, 20X1

NFP A NFB-B NPF-C TOTAL

Assets and equivalents $412,700 $721,300 $317,900 $1,451.900 Promises to give 30,530 51,020 27,360 108,910

Property and equipment 433,370 599,210 158,750 1,191,330 Investments 549,870 108,234 420,004 1,078,108 Total Assets $1,426,470 $1,479,764 $924,014 $3,830,248

Liabilities and net assets $31,280 $64,120 $33,330 $128,730 Long term 329,800 451,900 185,560 967,260 Total Liabilities 361,080 516,020 218,890 1,095,990 Temp restricted N/A 108,470 282,000 159,660 550,130 Unrestricted N/A 956,920 681,744 545,464 2,184,128 Liab and Net Assets $1,426,470 $1,479,764 $924,014 $3,830,248

7 FASB Statement 164: Accounting for Non-Profit Mergers and Acquisitions Teleconference

Sept. 16, 2009 Drill-Down on Acquisition Method Jay R. Meglich Schneider Downs [email protected]

STRICTLY PRIVATE AND CONFIDENTIAL Acquisition Accounting In FAS 164

• An acquisition of a business or non-profit activity is accounted for using the acquisition method of accounting

• Acquisitions of assets not constituting a business or non-profit activity are accounted for as purchases

• Business – Integrated set of activities and assets managed to provide a return (for profit) • Non-profit activity – Integrated set of activities and assets managed to provide benefits to fulfill purpose or mission

STRICTLY PRIVATE AND CONFIDENTIAL Acquisition Method Requirements

• Acquisition method in FAS 164 is the same method as outlined in FAS 141(R)

• Requirements:

– Identification of acquirer

– Determination of acquisition date

– Recognize and measure identifiable assets acquired, liabilities assumed, and non- in the acquiree

3 STRICTLY PRIVATE AND CONFIDENTIAL Identification Of The Acquirer

• The entity that obtains control of the acquiree is determined as follows:

– Non-profit acquirer other than a healthcare entity • Follow SOP 94-3 – Appendix D in SOP 94-3 for decision tree

– Non-profit healthcare acquirer • Follow Chap. 11 of AICPA healthcare guide • Similar requirements as SOP 94-3

4 STRICTLY PRIVATE AND CONFIDENTIAL Acquisition Date

• Identified by the acquirer

• Generally, date acquirer obtains control – Legal transfer of consideration (if any) – Acquires assets – Assumes liabilities

• Other acquisition date considerations – Written agreement transferring control before closing date

5 STRICTLY PRIVATE AND CONFIDENTIAL Recognition Requirements

• Recognize separately from goodwill, identifiable assets acquired, liabilities assumed, and any non-controlling interest

• Refer to FASB Concepts Statement No. 6 for definitions of assets and liabilities – Expected , not obligated, are not acquisition liabilities (program termination, severance, relocation …) – Part of acquisition vs. separate transaction (see para. 68) – Identifiable assets (intangibles) may not be on Statement of Financial Position of acquiree

6 STRICTLY PRIVATE AND CONFIDENTIAL Recognition Exceptions

• Limited recognition exceptions provider for in FAS 164 as follows: – No recognition as an identifiable separate from goodwill for acquired donor relationships (See para. A72) – Charge capitalized collections against the appropriate net asset as a decrease, if the acquirer has a policy of not capitalizing collections (FAS 116 para. 11) – Follow FAS 116 for recognition criteria for conditional promises to give that the acquiree has received

The above items are unique to non-profit organizations and therefore are specifically addressed in FAS 164

7 STRICTLY PRIVATE AND CONFIDENTIAL Classification

• Consider other GAAP principles when classifying assets acquired, liabilities assumed – Investments – Trading or other than trading – Derivatives – Designation as a hedging instrument (FAS 133)

• Consider contractual terms – Leases – Operating or capital (FAS 13 and Interpretation 21) – Insurance contract or deposit contract (FAS 60)

8 STRICTLY PRIVATE AND CONFIDENTIAL Measurement

• Acquisition date is used to measure identifiable assets acquired, liabilities assumed, and any non-controlling interest (FAS 141(R))

• Typically follow other applicable GAAP for subsequent measurement of assets acquired and liabilities assumed

9 STRICTLY PRIVATE AND CONFIDENTIAL Measurement Exceptions

• Reacquired rights (use of acquirer’s technology) are valued based on remaining contractual terms (no consideration given to potential contractual extensions)

• Long-lived assets that are held for sale (per FAS 144) are to be reported at fair value at acquisition date, less cost to sell

10 STRICTLY PRIVATE AND CONFIDENTIAL Contingencies

• Contingent assets and liabilities (FAS 5) are recognized at fair value if it can be determined in the measurement period

• If fair value cannot be determined, recognize only if existence is probable at acquisition date and can be reasonable estimated

• Follow other GAAP if criteria for recognition are met in a period subsequent to the acquisition date

11 STRICTLY PRIVATE AND CONFIDENTIAL Goodwill

• Goodwill represents the excess of: – (A) Consideration transferred at acquisition date fair value, plus fair value of any non-controlling interest in the acquiree, plus acquisition date fair value of previous interest in acquiree; over – (B) Acquisition date net amounts of identifiable assets and liabilities assumed

Goodwill is not recognized if the acquiree, as part of the combined entity, is supported predominantly (meaning, significantly more than the total of all other sources of ) by contributions and investment returns

In situations where (B) exceeds (A), the excess is reported as separate credit on the statement of activities

12 STRICTLY PRIVATE AND CONFIDENTIAL Presentation

• Statement of activities

• Report acquisition as an activity in the period it occurs

• Separate line in Statement of Activities for “negative goodwill” and where reporting of goodwill is precluded as previously discussed. Healthcare organizations will report the charge within or without the performance indicator, depending on the support principle or based on the presence of restrictions – Follow 116 for restricted net assets of the acquiree – Must report donor-imposed restrictions as restricted, even if restrictions are met in same (cannot report as unrestricted if restriction is met in same accounting period)

13 STRICTLY PRIVATE AND CONFIDENTIAL Financial Statement Presentation (Cont.)

• statement

– Entire amount of any cash flow is reported as an investing activity

– Non-cash contributions or other amounts received or transferred are to be disclosed

14 STRICTLY PRIVATE AND CONFIDENTIAL Disclosures

• Required disclosures in the period an acquisition occurs: – Name and description of the acquiree – Acquisition date – Percentage of ownership interests acquired, if applicable – Reason for the acquisition and description of how control was obtained – Qualitative description of factors that make up recognized goodwill or charge in statement of activities – Total, and by major class, of fair values of consideration transferred (must state “none,” if applicable) – Contingent consideration agreements – Certain loan and debt securities disclosures by class – Amounts recognized for each major class of assets acquired and liabilities assumed – Information surrounding contingent assets or liabilities recognized – Amount of goodwill deductible for tax purposes – Amount of collection items recognized in statement of activities

15 STRICTLY PRIVATE AND CONFIDENTIAL Disclosures (Cont.)

• Required disclosures in the period an acquisition occurs – Information regarding conditional promises to give acquired or assumed – Description of transactions entered into that are separate from the acquisition transaction. Acquisitions resulting in the acquirer recognizing a contribution received must disclose a description of the factors – Disclosures surrounding step acquisitions, if applicable – Public entities must disclose activity attributable to the acquiree since the acquisition date, and include pro forma information including comparative information

Disclosures are required if acquisition occurs after year-end but before financial statements are issued

16 STRICTLY PRIVATE AND CONFIDENTIAL Background – FASB Statement 164 http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=i d&blobwhere=1175818801681&blobheader=application%2Fpdf