Project Updates

Project Objective

The objective of this project is to improve the relevance, completeness, and comparability of financial information about a not-for-profit (NFP) organization’s acquisition of another entity. In addition, this project will provide guidance that assists NFP organizations in the application of FASB Statement No. 142, Goodwill and Other Intangible Assets.

At the inception of this project, the Board affirmed its longstanding view that similar transactions and circumstances should be accounted for similarly. The Board concluded that acquisitions by NFP organizations are similar in many respects to acquisitions made by business entities. Thus, the overall approach in this project has been to presume that the standards applicable to business enterprises (FASB Statement No. 141(revised 2007), Business Combinations) should be applied in accounting for acquisitions by NFP organizations unless a difference is identified that justifies a different accounting treatment.

Due Process Documents

On May 9, 2008, the FASB and its Staff issued a request for additional comments on a potential revision to the October 2006 proposed Statement, Not-for-Profit Organizations: Mergers and Acquisitions, and for field visit volunteers. Comments are requested by July 8, 2008.

Decisions Reached at the Last Meeting

At the June 11, 2008 meeting, the Board considered issues raised by respondents to the October 2006 Exposure Draft, Not-for-Profit Organizations: Mergers and Acquisitions, and decided to:

1. Affirm that for acquisitions by not-for-profit organizations, the acquirer should apply the criteria for recognition and measurement of identifiable assets acquired, including intangible assets, that is consistent with Statement 141(R). Therefore, in accordance with paragraph 3(k) of Statement 141(R), an intangible asset is identifiable if it either:

   (1)  Is separable, that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability, regardless of whether the entity intends to do so; or

   (2)  Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

2. Clarify in the application guidance of the final standard that donor lists normally meet the separability criterion for recognition as intangible assets separate from goodwill. However, that criterion would not be met if, for example, an organization is bound by a confidentiality agreement that precludes the transfer of information about its donors.

3. Clarify in the final standard that donor relationships would not be recognized as intangible assets separate from goodwill because the costs to separately recognize and measure the fair value of those relationships generally outweigh the benefits of providing that information.

Summary of Decisions Reached to Date (as of June 10, 2008)

As part of the redeliberations of the October 2006 Exposure Draft, Not-for-Profit Organizations: Mergers and Acquisitions, the Board reached the following decisions:

1. The Board decided that a merger is different from an acquisition and, therefore, should warrant a different accounting treatment. The Board agreed that the feature that distinguishes a merger from an acquisition is control. In a merger, the governing bodies of two or more not-for-profit organizations cede control of those organizations to create a new organization; in an acquisition, one organization obtains control over the net assets of another organization or business.

2. The Board affirmed that the acquisition method should be required for acquisitions by not-for-profit organizations. The Board decided that the carryover method of accounting should be retained for mergers between not-for-profit organizations. The Board considered but rejected suggestions that it also permit use of the carryover method of accounting for acquisitions by smaller not-for-profit organizations.

The Board also approved an updated plan for its redeliberations and completion of the project by the end of 2008. As part of that plan, the Board agreed to the following:

1. Continue with the existing plan of limiting the Board's substantive redeliberations to significant issues for which new information has arisen. Those issues include (a) differing accounting methods for mergers and acquisitions, (b) donor-related intangible assets (for example, donor lists and relationships), (c) initial recognition of goodwill or a contribution received, and (d) subsequent impairment testing of goodwill.

2. Adhere to the scope and not address requests for more guidance or concerns about other GAAP that are outside the scope of the project, such as a request that the Board address perceived deficiencies in consolidation guidance applicable to not-for-profit organizations.

3. Continue to adhere to the difference-based approach. The Board affirmed that the Statement 141(R) post-Exposure Draft changes are to apply to acquisitions by not-for-profit organizations.

4. Redirect the staff to conduct additional constituent outreach to solicit additional information about the workability of the "ceding control" notion for purposes of distinguishing a merger from an acquisition or other transactions outside the scope of the merger and acquisition proposal. The Board also agreed to utilize more efficient means for gathering that information than issuing a revised Exposure Draft.

*Next Steps

Redeliberations for this project are expected to focus on significant concerns raised by respondents to the Exposure Drafts that also were discussed with respondents at the March 2007 roundtable. Such concerns include the initial recognition of goodwill or a contribution received upon acquisition and the subsequent testing for and measurement of any impairment associated with goodwill. In addition, redeliberations will involve the consideration and analysis of additional comments received regarding the tentative decision to distinguish a merger between not-for-profit organizations from an acquisition of another entity by a not-for-profit organization. The next meeting of the Board is planned for September 2008.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.

Below is a list of the Board meetings from 2002 through 2007. Minutes for meetings generally are posted within two weeks following the meeting.

Background Information

In November 1999, the Board affirmed its earlier decision to undertake a project on mergers and acquisitions by a not-for-profit organization as a separate phase of its business combinations project. As a result of that decision, mergers and acquisitions by a not-for-profit organization are excluded from the scope of FASB Statement No. 141, Business Combinations. The Board also agreed to delay the effective date of Statement 142 as it applies to mergers and acquisitions by a not-for-profit organization until the Board addresses the issues related to such combinations. That means that not-for-profit organizations will continue to account for mergers and acquisitions and acquired intangible assets according to the guidance in APB Opinions No. 16, Business Combinations, and No. 17, Intangible Assets, until this project is completed and a final Statement becomes effective.

The following were among the reasons why the Board decided to undertake this separate project:

• There is diversity in current practice. Some mergers and acquisitions by a not-for-profit organization have characteristics that distinguish them from business combinations. For example, some mergers or acquisitions do not include the exchange of cash or other assets as consideration. There are differing interpretations as to how the provisions of Opinion 16 should be applied to mergers and acquisitions by a not-for-profit organization, particularly those in which there is no exchange of consideration. Those differing interpretations have led to diversity in practice.

• The Board needs to provide guidance due to the elimination of the pooling-of-interests method. Statement 141 eliminated the pooling-of-interests method (pooling method) for acquisitions by business enterprises. In practice today, many mergers and acquisitions by a not-for-profit organization are accounted for in a manner similar to the pooling method. This project is needed to provide guidance to not-for-profit organizations in light of the Board’s prohibition of that method.

By early 2001, the Board had made decisions on several key issues, including (a) the method of accounting for mergers and acquisitions by a not-for-profit organization and (b) the criteria to be used to identify the acquiring not-for-profit organization. Deliberations on this project were temporarily suspended in early 2001 while the Board completed its work on Statements 141 and 142. After the issuance of those Statements, the Board resumed deliberations of the issues remaining in this project.

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