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.

According to ASC 958-805-45-6(a), a donor-restricted portion of an inherent contribution could arise in two ways:

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.

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).

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.

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?

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.

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.

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.