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Most NFP combinations will be accounted for using the acquisition accounting model. Broadly speaking, an acquisition is an event that results in initial inclusion of an NFP, a business entity, or a portion of an entity (discussed in NP 5.3.2) in an NFP parent’s consolidated financial statements. For example, if one NFP’s articles of incorporation are modified to designate the other as its sole corporate member, or if one NFP’s articles of incorporation are modified to give the other entity a majority voting interest in its board (and an economic interest is present), an acquisition has taken place.
The ASC 805 acquisition model applies to acquisitions made by NFPs, with certain adjustments based on differences in the nature of NFP acquisitions. The adjustments based on the differences are found in the “Acquisition by a Not-for-Profit Entity” subsections of ASC 958-805. Figure NP 5-7 summarizes the key differences between the NFP and business entity acquisition methods. In particular, it indicates whether ASC 958-805’s guidance supplements the guidance in ASC 805, or is applied in lieu of the guidance in ASC 805.
Figure NP 5-7
Contrasting acquisition accounting in ASC 958-805 and ASC 805
Topic
ASC 958-805: Primary or supplemental
Reference
Identifying the acquirer
Primary. Uses the concepts of control in the NFP consolidation model instead of the guidance in ASC 805-10-25-5.
Supplemental. If the identity of the acquirer is unclear, NFPs consider factors in in addition to the factors in ASC 805-10-55.
Identifying the acquisition date
Supplemental.
Supplements
ASC 805-20 with guidance on acquisitions involving sole corporate memberships.
Recognizing identifiable assets acquired, liabilities assumed, and noncontrolling interest
Supplemental. Supplements ASC 805-20 with NFP-specific considerations regarding recognition conditions, classifying or designating assets acquired and liabilities assumed, and exceptions to the recognition principle.
Recognition and measurement of consideration and the residual (goodwill or contribution)
Primary. ASC 805-30’s scope excludes NFPs. NFPs do not measure the fair value of the acquiree as a whole. ASC 958-805 requires use of a “net asset” approach to recognize and measure any goodwill or inherent contribution received.
Inherent contribution received (assets acquired exceed liabilities assumed and consideration paid)
Primary. ASC 958-805 views this residual as a contribution received, not a bargain purchase.
Goodwill (liabilities assumed and consideration paid exceed assets acquired)
Primary. Goodwill arising from certain transactions is expensed immediately.
Consideration transferred (including contingent consideration)
Primary. Provides recognition and measurement guidance in lieu of guidance in ASC 805-30.
Also addresses the interaction of consideration transfers with releases of donor restrictions
Determining what is part of the transaction
Supplemental. Supplements ASC 805-10-25-1 examples.
Subsequent measurement
Supplemental. Supplements
ASC 805-10-35-1 and ASC 805-20-35 with incremental guidance on contingent consideration arrangements and goodwill acquired. ASC 954-805-35 also contains HCO considerations.
The most significant difference is that the NFP model measures an acquiree based on the fair value of individual assets acquired and liabilities assumed (a “net assets” approach), while the ASC 805 model measures the acquisition using the fair value of the acquiree as a whole (“enterprise value”). As a result, the guidance in ASC 958-805 is applied in lieu of guidance in ASC 805-30.
The NFP acquisition model involves the following steps:
  • Identify the acquirer
  • Determine the acquisition date
  • Recognize and measure the identifiable assets acquired, the liabilities assumed, the consideration transferred (if any), and (if appropriate) any noncontrolling interest in the acquiree
  • Recognize and measure inherent contribution income or goodwill as a residual

See AAG-NFP chapter 3 and AAG-HCO chapter 12 for additional discussion.

5.5.1 Identifying the acquirer

The concepts of the NFP consolidation model discussed in NP 5.2 are used to identify the acquirer. If the acquirer’s identity is unclear, a process similar to that discussed in NP 5.3 for distinguishing a merger from an acquisition is used to designate one. This requires consideration of all facts and circumstances surrounding the transaction, such as whether one of the parties can select (or dictate the process of selecting) a voting majority of the combined organization’s governing board or whether the combined entity retains the name and mission of one of the parties. ASC 958-805-55-42 through ASC 958-805-55-46 provide NFP-specific factors to consider, in addition to the general factors in ASC 805-10-55.

5.5.2 Identifying and measuring assets and liabilities

The acquiree’s fair value is determined by aggregating the fair values of its individual assets and liabilities.
Other than a few specific exceptions, all assets acquired and liabilities assumed are recognized at fair value, including intangible assets that may not have been recognized on the acquiree’s balance sheet (e.g., the value of trade names, non-compete agreements, management agreements, curriculum acquired). Several general exceptions to the recognition and measurement principle are described in BCG 2.5. The following are additional exceptions to recognition provided by ASC 958-805:
  • An acquirer that has an organizational policy of not capitalizing collections of works of art, historical treasures, and similar items (see NP 10) would not recognize collection items that it acquires as part of an acquisition and adds to its collection. For additional information, see NP 10.3.3.
  • Unrecognized conditional promises to give that are acquired as part of an acquisition are not recognized unless the conditions on which they depend are substantially met as of the acquisition date.
  • No value is ascribed to the acquiree’s donor relationships (i.e., the information the acquiree has about its donors, and the donors’ ability to make direct contact with the acquiree). Unlike acquired customer relationships (which are recognized and valued separately), the FASB concluded that the benefit did not outweigh the cost of estimating the fair value of donor relationships. Instead, the value of these relationships are subsumed into goodwill.

The fair value of each recognized asset and liability is determined based on the principles of the framework described in ASC 820. BCG 2 and BCG 4 and FV 7 discuss relevant considerations related to measurement.
Private company alternative
In ASU 2019-06, the FASB extended to NFPs certain private company alternatives that simplify the accounting for intangible assets acquired in a business combination. Under the alternative, an NFP acquirer can make an accounting policy election to not recognize and measure: (a) customer-related intangibles (unless they are capable of being sold or licensed independent from the other assets of the acquired business) and (b) noncompetition agreements. These alternatives are described more fully in BC 4.7. An NFP that elects the accounting alternative for intangibles must also adopt the accounting alternative to amortize goodwill, discussed at NP 10.4.3.1. The provisions became eligible for adoption by NFPs upon issuance of the ASU in May 2019.

5.5.3 Measuring goodwill or inherent contribution

The aggregate fair value of the identifiable assets acquired is compared to the aggregate fair value of (a) liabilities assumed, (b) consideration transferred, if any, and (c) any noncontrolling interest (NCI) held by outside parties. The residual is recognized as either an inherent contribution or goodwill.
The guidance used by NFPs for this step differs significantly from the guidance used by business entities. As a result, NFPs are excluded from the scope of ASC 805-30 by ASC 805-30-15-2 and apply only the NFP-specific guidance in ASC 958-805.

ASC 805-30-15-2

The guidance in this Subtopic does not apply to not-for-profit entities. NFPs apply the guidance in Subtopic 958-805 for measuring goodwill acquired, a contribution received, and consideration transferred.

5.5.3.1 Inherent contribution in an acquisition

If the fair value of identifiable assets acquired is greater than the fair value of liabilities assumed, consideration transferred, and NCI, the acquirer recognizes the residual as an inherent contribution received. Note that if an acquiree has significant property, plant, and equipment (and in particular, land), it is likely that the requirement to measure real estate at fair value will result in an inherent contribution even if the historical net assets of the acquiree reflected a net deficit.
An inherent contribution that arises in a combination is different than the contributions discussed in NP 6 through NP 8, and must be reported in the statement of activities in a separate line item that is appropriately captioned—for example, “excess of assets acquired over liabilities assumed in donation of Entity X,” “contribution received in donation of Entity X,” or “excess of fair value of net assets acquired over consideration paid in acquisition of Entity X.” This is discussed at ASC 958-805-45-5.
The inherent contribution received increases the acquirer’s donor-restricted net assets, net assets without donor restrictions, or some combination of those categories. ASC 958-805-45-6 addresses considerations for classifying a portion as donor restricted.

Excerpt from ASC 958-805-45-6

An NFP acquirer shall classify the inherent contribution received…on the basis of the donor restrictions imposed on the related net assets. In classifying those net assets, an acquirer shall do both of the following:

  1. Include restrictions imposed on the net assets of the acquiree by a donor before the acquisition and those imposed by the donor of the business or nonprofit activity acquired, if any, in accordance with Section 958-605-45.
  2. Report donor-restricted contributions as donor-restricted support even if the restrictions are met in the same reporting period in which the acquisition occurs. That is, the acquirer shall not apply the reporting exception in paragraph 958-605-45-4 to net assets with donor restrictions acquired in an acquisition.

According to ASC 958-805-45-6(a), a donor-restricted portion of an inherent contribution could arise in two ways:
  • If the acquired entity has donor-restricted net assets, the acquirer must classify a corresponding portion of the inherent contribution as donor restricted. In obtaining the acquiree’s assets and liabilities, the acquirer assumes fiduciary responsibilities to the acquiree’s donors. ASC 958-805-55-62 through ASC 958-805-55-66 illustrate this requirement.
  • If the acquiree was donated by another entity (for example, a subsidiary donated by its parent), the donating entity might impose restrictions on how the acquirer must use the acquiree’s net assets without donor restrictions. For example, as a condition of an acquisition, the donor might require the acquirer to use $2 million of net assets without donor restrictions to invest in upgraded fixed assets for the acquiree. This requirement would impose a donor restriction on $2 million of the inherent contribution. ASC 958-805-55-67 illustrates this requirement.

If an acquirer has an accounting policy of reporting as unrestricted those restricted contributions for which the conditions are met in the same reporting period that the contribution was received (as discussed in NP 6.7.2.3), it cannot apply that policy to the donor-restricted portion of an inherent contribution arising from an acquisition. The donor-restricted portion of an inherent contribution in an acquisition must always be reported as restricted support, as required by ASC 958-805-45-6(b).
The portion of an inherent contribution that is not donor restricted would increase the acquirer’s net assets without donor restrictions. If the acquirer is an HCO within the scope of ASC 954, any unrestricted portion of the contribution must be presented within the performance indicator (above the line) in the statement of operations, as required by ASC 954-805-45-2.

5.5.3.2 Goodwill in an NFP acquisition

If the fair value of liabilities assumed, consideration transferred, and NCI exceeds the fair value of identifiable assets acquired, the acquirer would recognize goodwill or an immediate charge to income (in essence, like a contribution made). The choice is not voluntary, but must be based on how the acquiree’s operations are expected to be funded within the combined organization.
If the acquiree will be predominantly supported by contributions and investment income, the excess is immediately expensed (as if the acquirer had made a contribution in taking on the acquired entity). According to ASC 958-805-45-4, this amount is reported as a separate line item in the statement of activities with an appropriate descriptive caption—for example, “excess of liabilities assumed over assets acquired in acquisition of Entity X” or “excess of consideration paid over net assets acquired in acquisition of Entity X.” NFP HCOs must report the expense within the performance indicator (above the line), as required by ASC 954-805-45-1.
For purposes of this evaluation, “predominantly supported” means that contributions and returns on investment are expected to be significantly more than the total of all other sources of revenues. The FASB considered but rejected a threshold of “primarily supported” (which generally connotes more than half), determining that a higher threshold was needed.
If the acquiree’s operations are not expected to be predominantly contribution supported, the acquired net deficit represents goodwill that is reported as an asset in the balance sheet.
For additional discussion of goodwill acquired in NFP transactions, see NP 10.4.3.

5.5.4 Consideration transferred in an acquisition

Consideration transferred in an NFP acquisition effectively serves to reduce the amount of inherent contribution recognized (or, although less common, to increase the amount of goodwill recognized or expensed in an acquisition of a net deficit).
Consideration transferred can take different forms, as noted in ASC 958-805-25-32.

Excerpt from ASC 958-805-25-32

An NFP acquirer might transfer consideration to the former owner of the acquiree or to a designee of the former owner. Examples of potential forms of consideration include any of the following:
  1. Cash
  2. Other assets
  3. A business or a nonprofit activity of the acquirer
  4. Contingent consideration.

Often, NFP acquisitions do not involve an exchange of consideration other than the assumption of an acquiree’s liabilities. If consideration is paid, it might be unrelated to the fair value of the acquiree. Further, in some transactions, consideration is paid to a party other than a seller. For example, consideration might be transferred to an independent NFP foundation established in connection with the transaction. A transfer of assets to an unrelated third party as a requirement of a combination is accounted for as consideration transferred in accordance with ASC 958-805-25-33 unless the acquirer retains control over the transferred assets. For discussion of situations in which an acquirer retains control, see NP 5.5.5.2. Question NP 5-8 illustrates these concepts.

ASC 958-805-25-33

An asset transferred by an NFP acquirer to an unrelated third party as a required condition of an acquisition shall be accounted for as consideration transferred for the acquiree unless the NFP acquirer retains control over the transferred assets.

Question NP 5-8
Community Hospital agreed to be acquired by NFP Health System in a transaction that is an inherent contribution. At closing, NFP Health System was required to transfer $5 million to establish and fund a foundation with a mission of supporting initiatives to benefit the health and welfare of the community. The new foundation is unrelated to either NFP Health System or Community Hospital, and is governed by an independent board. The transferred funds can be used for any purpose that is consistent with the foundation’s mission.

Does the $5 million transferred at closing represent consideration paid by Health System?
PwC response
Yes. A transfer of assets to an independent third-party that is made as a requirement of an acquisition is accounted for as consideration transferred, unless the acquirer retains control over the assets (or over the economic benefits they represent). NFP Health System neither controls the foundation nor retains control over the transferred assets, as the foundation’s independent board can use the resources for any purpose that is consistent with its mission. Accordingly, the transfer represents consideration that serves to reduce the amount of inherent contribution that otherwise would be recognized by NFP Health System in the acquisition accounting.
If instead, the acquisition agreement had stipulated that the assets transferred could only be used to fund future capital improvements at Community Hospital, the $5 million would not represent consideration transferred, because System would retain control over the future economic benefits of the transferred assets post-acquisition.

Consideration transferred is measured at its acquisition-date fair value in accordance with ASC 958-805-30-10. Sometimes the assets transferred will be noncash assets whose fair value at the acquisition date differs from their carrying value. In those situations, ASC 958-805-25-34 requires a gain or loss to be recognized for the difference. This gain or loss on remeasurement is not part of the acquisition accounting (that is, it is not included in the calculation of the inherent contribution or goodwill recognized). Instead, those gains or losses are reported as current period activity in the statement of activities. Consistent with the requirement for business entities to include remeasurement gains or losses in earnings, an NFP HCO would include these gains or losses in its performance indicator.

ASC 958-805-30-10

The consideration transferred in an acquisition by an NFP shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer and the liabilities incurred by the acquirer.

Excerpt from ASC 958-805-25-34

The consideration transferred may include assets or liabilities of the NFP acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, nonmonetary assets or a business of the acquirer). If so, the NFP acquirer shall recognize the resulting gains or losses, if any, in the statement of activities.

ASC 958-805 also addresses the presentation in the statement of cash flows of cash consideration paid. Generally, such cash outflows are netted against any cash acquired from the acquiree and classified as an investing activity, according to ASC 958-805-45-11. Special considerations apply to cash payments associated with contingent consideration; these are discussed in ASC 958-805-45-11 through ASC 958-805-45-12.

Excerpt from ASC 958-805-45-11

An NFP acquirer shall report the entire amount of any net cash flow related to an acquisition (cash paid as consideration, if any, less acquired cash of the acquiree) in the statement of cash flows as an investing activity. Example 7 (see paragraphs958-805-55-68 through 55-70) illustrates this requirement.

5.5.4.1 Contingent consideration

The parties to an NFP acquisition might agree to a contingent consideration arrangement. Under these arrangements, if specified future events occur or conditions are met, the acquirer has an obligation to make additional payments (or in some cases, has a right to the return of consideration previously paid). The ASC 958-805 accounting framework for contingent consideration is generally consistent with the requirements applied by business entities, as described in BCG 6.2.4. However, because NFPs do not have ownership interests like those of business entities, contingent consideration paid in NFP acquisitions would never take the form of equity interests that would be accounted for within equity (net assets).
ASC 958-805-30-13 provides guidance on the initial measurement of contingent consideration, and ASC 958-805-35-1 through ASC 958-805-35-4 provide guidance on the subsequent measurement. Changes in the fair value of contingent consideration are reported in the statement of activities. An NFP HCO generally reports those changes within the performance indicator (see ASC 954-805-35-1 for additional information).

5.5.4.2 Consideration transferred triggers net asset reclassifications

ASC 958-805-45-8 requires that when an acquirer transfers assets that qualify as consideration, it must consider whether that outlay will satisfy a restriction on its donor-restricted net assets and therefore, trigger a change in its own net asset classifications.

ASC 958-805-45-8

An NFP acquirer that transfers assets as consideration for an acquired nonprofit activity or business shall assess whether that transaction satisfies a donor-imposed restriction [see paragraph 958-805-45-9] or otherwise results in a change in its net asset classifications (see paragraph 958-805-45-10).

For example, if the acquirer has net assets that are restricted for acquisition of long-lived assets and the acquiree has long-lived assets of the type needed or used by the acquirer, it is possible that the act of transferring consideration could satisfy some or all of those donor-imposed restrictions, as illustrated in Example NP 5-3.
EXAMPLE NP 5-3
Consideration transferred satisfies a donor restriction on the acquirer’s net assets
NFP A pays consideration of $800 to acquire NFP B. At the acquisition date, the fair value of NFP B’s assets and liabilities are as follows:
Land, buildings, and equipment
$1,000
Noncapital assets
200
Liabilities
(400)
Net assets acquired
$ 800
NFP A’s own donor-restricted net assets include $2,000 that is restricted for unspecified capital purposes.
Would NFP A’s $800 outlay to acquire NFP B satisfy any of the restrictions on its net assets that are donor-restricted for capital purposes?
Analysis
This situation would require the exercise of judgment. Most of the acquisition’s value is concentrated in the acquiree’s PP&E. Assuming that NFP B’s long-lived assets are consistent with the types of long-lived assets used in (and needed for) NFP A’s operations, it might be reasonable to conclude that NFP A’s $800 outlay to acquire NFP B would satisfy the restriction with respect to $800 of its $2,000 of net assets restricted for acquisition of capital assets. In that case, NFP A’s statement of activities would reflect a reclassification from donor-restricted net assets to net assets without donor restrictions in the amount of $800 in acquisition accounting.

In the situation illustrated in Example NP 5-3, the NFP acquirer has flexibility in how it reports the expiration of the restriction (the reclassification–the simultaneous increase in one class of net assets and decrease of another) in the statement of activities. That reclassification can be displayed separately or aggregated together with the NFP’s other expirations of donor-imposed restrictions.
In other cases, transferring consideration could result in imposition of additional donor-restrictions on the acquirer’s own net assets. For example, if an acquirer transfers unrestricted resources in exchange for an acquiree’s donor-restricted resources, the acquirer has (in effect) replaced a portion of its own net assets without donor restrictions with donor-restricted net assets of the acquiree. In that situation, the acquirer would need to adjust its net asset classifications to reflect the shift associated with the assumption of fiduciary responsibility to the acquiree’s original donors. This is illustrated in Example NP 5-4.
EXAMPLE NP 5-4
Consideration transferred imposes additional donor restrictions on acquirer’s net assets
NFP C entered into an agreement to acquire the assets and liabilities of Charity D in exchange for payment of consideration of $80. At the acquisition date, Charity D’s balance sheet consisted entirely of unspent donor-restricted gifts with fair values totaling $100. The acquisition was part-exchange and part-contribution, with NFP C recognizing an inherent contribution of $20.
During the same reporting period, NFP C received $450 of contributions ($200 of which were donor-restricted) and satisfied $150 of donor restrictions. For ease of illustration, NFP C’s expenses for the period are disregarded.
How would NFP C’s statement of activities reflect its assumption of fiduciary responsibilities to the acquired entity’s donors?
Analysis
To recognize the fiduciary responsibilities associated with the donor-restricted assets acquired by contribution, NFP C would report the inherent contribution of $20 as an increase in donor-restricted net assets. For the assets that were purchased, NFP C would report a reclassification that simultaneously increases net assets with donor restrictions and reduces net assets without donor restrictions by $80. In effect, NFP C exchanged $80 of net assets without donor restrictions for donor-restricted net assets of the acquiree. The $80 reclassification, along with expiration of any restrictions on the related net assets during the year of the acquisition, would be reported separate from the reclassifications associated with NFP C’s own donor-restricted contribution activity during the period.
NFP C’s statement of activities would display these transactions as follows:
Net assets
Without donor restrictions
With donor restrictions
Contributions from donors
$ 250
$ 200
Net assets released from restriction
150
(150)
Acquisition of Charity D:
Consideration paid for donor-restricted assets
(80)
80
Expiration of restrictions associated with purchased assets
65
(65)
Excess of net assets acquired over consideration paid (inherent contribution)
--
20
Change in net assets
$ 385
$ 85

In the statement of activities of the reporting period that includes the acquisition, ASC 958-805-45-10 provides specific requirements for displaying the reclassifications associated with the purchased donor-restricted assets. Unlike Example NP 5-3, these reclassifications cannot be aggregated with reclassifications associated with the acquirer’s own contribution transactions. The reclassification associated with the purchase must be reported in a separate line item. Any reclassifications associated with expirations of restrictions on the purchased assets must similarly be segregated and separately displayed.

ASC 958-805-45-10

If transferring consideration results in changes in net asset classifications other than those described in [paragraph 958-805-45-9], an NFP acquirer shall report those changes separately from both any other reclassification of net assets and any expiration of those restrictions during the period in which the acquisition occurs. For example, an acquirer that transfers as consideration its assets with no associated donor restrictions and acquires assets from the acquiree that have associated donor restrictions shall recognize a reclassification of net assets in its statement of activities.

5.5.5 Other transfers required as a condition of an acquisition

An acquisition transaction might require asset transfers whose nature differs from the transfers of consideration discussed in NP 5.5.4. The impact of these transfers on the acquisition accounting (if any) varies based on the circumstances surrounding the transfer.

5.5.5.1 Assets transferred to acquirer by unrelated third party

As a condition of an acquisition that involves a transfer of control without an exchange of consideration, an unrelated third party might be required to transfer assets to an acquirer. In such cases, the acquirer will need to determine whether that transfer is a separate transaction that occurs concurrently with the acquisition, or if instead it should be included in the acquisition accounting.
NFPs apply the same rules for making that assessment as do business entities (ASC 805-20-25-3 and ASC 805-10-25-20 through ASC 805-10-25-23). While the guidance in ASC 805-10 focuses on transactions involving an exchange of consideration, ASC 958-805-25-19 indicates that the concepts would apply equally to nonexchange transactions – for example, an acquisition that represents an inherent contribution, or a nonexchange transfer to induce the acquirer to enter into the transaction.

ASC 805-20-25-3

In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 805-10-25-20 through 25-23 to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable GAAP.

ASC 958-805-25-19

When considering whether an identifiable asset or liability assumed qualifies for recognition as part of applying the acquisition method as described in paragraph 805-20-25-3, an identifiable asset or liability also qualifies if it is part of what was contributed in an acquisition that includes an inherent contribution.

The analysis focuses on identifying which party (the acquirer or the acquiree) the concurrent transaction was intended to benefit. A transaction entered into primarily for the economic benefit of the acquiree is likely to be part of the combination accounting. A transaction entered into primarily for the benefit of the acquirer or the combined entity is likely to be a separate transaction that should be accounted for in accordance with its nature and the applicable GAAP. ASC 805-10-55-18 provides factors to consider. Example NP 5-5 illustrates these concepts.
EXAMPLE NP 5-5
Acquisition-related transfer from unrelated third party
The board of financially troubled Local Hospital is in discussions with a potential acquirer, Health System. The parties believe that the fair value of Local Hospital’s assets at the proposed acquisition date will exceed the fair value of its liabilities by $5 million.
To induce Health System to enter into the transaction, Community Foundation offers to transfer $20 million for the support of Local Hospital to Health System at the closing of the transaction. Community Foundation’s purpose is to support initiatives that benefit the health and welfare of the community and its citizens.
If Health System agrees to the acquisition, would it account for the $20 million transfer from Community Foundation as a separate contribution, or would it include the transfer in the acquisition accounting?
Analysis
In evaluating the transfer under the guidance in ASC 805-20-25-3 and ASC 805-10-25-20 through ASC 805-10-25-23, it is likely that Health System would conclude that the transaction was arranged primarily to achieve economic benefits favorable to Local Hospital. While Health System also benefits from the transfer, the impetus for Community Foundation’s offer was to ensure Local Hospital’s ongoing viability for the benefit of the community’s citizens.
In that case, because the transferred assets would primarily benefit the acquiree, they would be included in acquisition accounting. As a result, Health System would recognize an inherent contribution of $25 million ($20 million from Community Foundation plus $5 million in Local Hospital fair value of net assets) in connection with the acquisition. This accounting outcome is the same as if Community Foundation had made a $20 million contribution to Local Hospital prior to the acquisition.
If instead, Health System had concluded that the transaction was primarily for its own benefit (or the benefit of the combined entity), the $20 million transfer would represent a separate transaction accounted for under ASC 958-605, rather than ASC 958-805. Health System would separately recognize $20 million of contribution revenue associated with the transfer from Community Foundation, along with $5 million of inherent contribution in connection with the acquisition.

ASC 805-10-25-21 provides examples of separate transactions that should not be included in acquisition accounting. ASC 958-805-25-37 provides an additional example of a separate transaction that might occur in conjunction with an acquisition by a not-for-profit entity.

ASC 958-805-25-37

In addition to the examples in paragraph 805-10-25-21, a payment by a former owner of an acquired business that is unrelated to the acquiree, such as a contribution to fund activities of the acquirer or its affiliates that are unrelated to those of the acquiree, is an example of a separate transaction that is not to be included in applying the acquisition method. Those contributions made shall be accounted for in accordance with the guidance in Subtopic 720-25.

5.5.5.2 Acquirer retains control of economic benefits transferred

In some transactions, instead of paying consideration to a former owner or to an independent foundation, the acquirer makes certain financial commitments to the acquiree as a condition of the acquisition (for example, to fund capital improvements at the acquiree). At closing, the acquirer might transfer the committed resources to the acquiree, a foundation controlled by the acquiree, or to an outside third party.
When assets that are required to be transferred in connection with an acquisition (or the economic benefits associated with the assets) will remain within the consolidated entity after the acquisition (for example, because the assets were transferred to the acquiree rather than to its former owners), the acquirer retains control of the economic benefits. Similarly, if the asset transfer is revocable, repayable, or refundable, or if the transferred resources are not irrevocably committed for the acquiree’s use, the acquirer (by virtue of its control over the acquiree) has the ability to reclaim the resources at will and thus, retains control. These examples are codified in ASC 958-805-25-35.

ASC 958-805-25-35

Examples of asset transfers in which control over the future economic benefits of the transferred assets is retained by the acquirer include all of the following:
  1. The assets are transferred to the acquiree rather than to its former owners or are otherwise transferred to a recipient that is controlled by the acquirer. By virtue of its control over the recipient, the acquiring entity has the ability to revoke the transfer or to direct the use of the assets to itself or an affiliate.
  2. The asset transfer is otherwise revocable, repayable, or refundable.
  3. The assets are transferred with the stipulation that they be used on behalf of, or for the benefit of, the acquiree, the acquirer, the consolidated entity, or their affiliates. Example 3 (see paragraphs 958-805-55-55 through 55-56) illustrates an asset transfer in which the NFP acquirer retains control over the future economic benefits after the acquisition.

Question NP 5-9 and Question NP 5-10 illustrate two fact patterns in which an acquirer retains control of the economic benefits associated with an acquisition-related transfer.
Question NP 5-9
NFP Health System wishes to acquire Community Hospital. As a condition of agreeing to the transaction, Community Hospital’s board negotiates a financial commitment of $5 million from NFP Health System to fund improvements of Community Hospital’s facilities. The purpose of this commitment is to help ensure that Community Hospital will have the wherewithal to be maintained and operated in a manner that benefits the community after the local board surrenders control. NFP Health System will transfer the $5 million to Community Hospital at closing.

Does the $5 million transfer at closing represent consideration paid by NFP Health System?
PwC response
No. In this situation, the transferred assets will remain within the consolidated entity after the transaction closes (by virtue of NFP Health System’s control of Community Hospital post-acquisition). The transfer is not consideration paid and does not impact the amount of inherent contribution or goodwill recognized in the acquisition accounting. In substance, this is a nonreciprocal transfer of funds from a parent to a controlled subsidiary. NFP Health System would credit cash and debit equity transfer for $5 million, and Community Hospital would reflect a corresponding entity.

Question NP 5-10
Community Hospital agreed to be acquired by NFP Health System in a transaction that is an inherent contribution. At closing, NFP Health System was required to transfer $5 million to establish and fund a foundation with a mission of supporting initiatives to benefit the health and welfare of the community. The new foundation is unrelated to either NFP Health System or Community Hospital, and is governed by an independent board.

According to the acquisition agreement, the foundation must use the transferred resources to fund future capital improvements at Community Hospital. The purpose of this stipulation is to help ensure that Community Hospital will have the wherewithal to be maintained and operated in a manner that benefits the community after the local board surrenders control.

Does the $5 million transferred at closing represent consideration paid by NFP Health System?
PwC response
No. Although the assets were transferred to an independent foundation established in connection with the acquisition, the combined entity nonetheless retains the economic benefit of those assets due to the stipulation that they can only be used to fund future capital improvements at Community Hospital. The substance of the transfer is that NFP Health System exchanged one asset for another (that is, it replaced the transferred resources with a beneficial interest in assets held by the foundation).
Thus, the asset transfer does not represent consideration paid, and would not impact the amount of inherent contribution or goodwill recognized in the acquisition accounting. Subsequent to closing, NFP Health System would likely transfer the beneficial interest to Community Hospital through an equity transfer.

As detailed in ASC 958-805-30-12, when the acquirer retains control over noncash assets transferred (or economic benefits associated with noncash assets transferred) whose fair value at the acquisition date differs from their carrying value, the assets are not revalued to fair value in connection with the transfer, as they would have been if the transfers were deemed to be consideration. In these transfers, the difference between fair value and carrying value is not recognized.

ASC 958-805-30-12

An NFP acquirer that retains control over the transferred assets as described in paragraphs 958-805-25-33 through 25-34 shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date.

Excerpt from ASC 958-805-25-34

Sometimes the transferred assets or liabilities remain within the combined entity after the acquisition, and the acquirer therefore retains control of them. An NFP acquirer that retains control over the transferred assets shall not recognize a gain or loss in the statement of activities on assets or liabilities it controls both before and after the acquisition.

5.5.6 Recognizing and measuring noncontrolling interests

An NFP may acquire less than 100% of the equity of an acquiree (for example, purchase or receive a contribution of a majority ownership in the equity of a business entity). In that situation, the portion that is owned by others is referred to as the noncontrolling interest (NCI). A not-for-profit entity also might acquire an NFP that had previously recognized an NCI through an acquisition. The ASC 958-805 acquisition model requires an NFP to measure any NCI in the acquiree at its fair value at the acquisition date. For example, if NFP A acquires 80% of Company B, the 20% NCI in Company B would be recognized in the accounting for the business combination and measured at its fair value. See BCG 6 for a detailed discussion of recognizing and measuring an NCI.
If an NFP acquires another NFP by virtue of obtaining a less-than-complete voting interest in that NFP’s board (for example, if it acquires the right to appoint five of seven board members, with another NFP appointing the other two), recognition of a noncontrolling interest is precluded, except in certain specific situations involving NFP HCOs (see NP 5.2.5.1). Presentation and disclosure of noncontrolling interests by an NFP parent is discussed at NP 2.5.3 and NP 3.6.

5.5.7 Pushdown accounting

As discussed at NP 5.5.2, an acquirer initially measures the assets and liabilities acquired based on their fair values. Pushdown accounting refers to the “push down” of the acquirer’s (parent’s) acquisition date fair value basis in the assets and liabilities of the acquired entity to the acquired entity’s standalone financial statements.
Pushdown accounting is optional and can be elected any time there is a change in control event involving an entity. Once made, however, the election is irrevocable, and the entity cannot go back and undo pushdown accounting for a particular transaction. If an acquired entity will continue to issue standalone financial statements, the entity should consider whether to apply pushdown accounting.
The question of whether to apply pushdown accounting might arise if, for example, the acquired entity continues to have debt outstanding that is subject to a continuing disclosure covenant and therefore must continue to file standalone financial statements on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website. The entity should consider whether it is more informative for the bondholders to see information presented consistent with the entity’s historical basis of assets and liabilities, or if information pertaining to the new basis is more informative.

5.5.7.1 Application of pushdown accounting (“black line” reporting)

From the acquired entity’s reporting perspective, the election of pushdown accounting represents the termination of the old accounting entity (referred to as the predecessor entity) and the creation of a new accounting entity (the successor entity). If the acquisition date does not correspond with the beginning or end of a reporting period, the acquired entity’s statement of activities (or statements of operations and changes in net assets) for the period that includes the acquisition must report the activity attributable to the predecessor entity and the activity attributable to the successor entity in separate columns. For example, if an entity is acquired nine months into its fiscal year, the activity for the first nine months of the year would be reported in a column labelled “predecessor entity” and the activity for the remaining three months would be reported in a column labelled “successor entity.” The columns are separated by a black line to indicate that a change in basis has occurred (hence the term “black line reporting”). The statement of cash flows would be reported in a similar manner.

5.5.7.2 Pushdown accounting disclosures and supplemental schedules

Footnote disclosures related to pre- and post-pushdown periods should not be combined. ASC 805-50-50-6 requires that disclosure notify the reader that the reporting entity’s results of operations and cash flows after the transaction are not comparable with those prior to the acquisition as a result of pushdown accounting, and therefore have been segregated within the financial statements. For additional information on pushdown accounting, see FSP 17.6.
If the parent company’s statements include a supplemental consolidating schedule for the statement of activities or statement of operations, the information presented in the acquiree’s column should only include activity from the acquisition date forward (which will correspond to the activity that will be reported in the “successor entity” column of the push-down statements). Any contribution income or goodwill “expense” associated with acquisition accounting would be reported in the parent’s column.
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