For accounting purposes, a merger occurs when two or more NFPs join together in their entirety to create a new organization. The governing bodies of the combining entities cede control of their respective entities to a new entity with a newly-formed governing body.
The requirements for merger accounting are set forth in the Merger of Not-for-Profit Entities subsections of ASC 958-805
. Merger accounting has no business entity counterpart in ASC 805
; it is unique to NFPs.
discusses the FASB’s considerations for distinguishing between a merger and an acquisition. According to ASC 958-805-55-1
, the ceding of control by all parties to a new entity is the sole definitive criterion for identifying a merger. In establishing a merger framework within the model, the FASB indicated their expectation that there would be a relatively high hurdle for qualifying to use merger accounting. The evaluation of whether all parties have ceded control must be based on a preponderance of the evidence.
Question NP 5-3 addresses the composition of the new entity’s governing board after a merger.
Question NP 5-3
In order for a combination of two NFPs to be considered a merger, must the governing board of the new entity have exactly equal representation from each entity?
No. In fact, the FASB provides an example illustrating a combination that is accounted for as a merger in which the initial board of the combined entity has 15 members, with 9 appointed by one entity and 6 appointed by the other (see ASC 958-805-55-9
through ASC 958-805-55-16
). The example analyzes the characteristics of the process leading to the combination, the participants in the combination, and the combined entity. Based on the preponderance of the evidence, it concludes that both entities have ceded control to a new entity in a transaction that would be accounted for as a merger.
The guidance for determining whether a combination is a merger is principles based and all relevant facts and circumstances of a particular transaction should be considered. For example, if the bylaws of the combined entity indicate that major decisions require a simple majority vote, and one of the combining organizations has one more board member than the other, then the entity with the additional board member would always be able to dictate the board’s decisions. However, if major decisions require a supermajority vote, an imbalance of board members might be less of a concern. It is important to bear in mind that no single indicator is by itself determinative, and that decisions should be made based on the preponderance of the evidence, using professional judgment.
Question NP 5-4 addresses whether cash consideration impacts the ability to qualify as a merger.
Question NP 5-4
Would a transfer of cash consideration preclude the use of merger accounting?
No. Although a merger typically is accomplished without a transfer of cash or other assets to any of the participating entities or any of their owners, members, sponsors, or other designated beneficiaries, we believe the presence or absence of consideration is not a determinative factor in distinguishing a merger from an acquisition.
Question NP 5-5 addresses qualification as a merger when one entity is a subsidiary.
Question NP 5-5
A freestanding hospital is combining with an entity that is a subsidiary of a hospital system. Can merger accounting be applied if one of the combining NFPs is a subsidiary of a larger organization?
No. If one of the combining entities continues to be operated as the subsidiary of another entity, then the entities have not come together in their entirety, and a new entity has not been created. In substance, this is an acquisition of the freestanding hospital by the system, using one of its subsidiaries to effect the acquisition.