While mergers and acquisitions are similar in that they both represent the combination of multiple nonprofit organizations, there are several key differences between the two that impact both the accounting and the financial statement preparation of the newly formed organization.
A merger of nonprofit organizations is a transaction or event in which the governing bodies of two or more nonprofit organizations cede control of their previous entities to create a new nonprofit organization.
- During a merger, the previous organizations relinquish their respective control and work together to create a newly formed organization, resulting in a new governing body and new management. It is important to note that the governing bodies of the previously merged organizations cannot retain shared control; instead, the previous organizations should establish a new governing body.
- A merger does not necessarily require the creation of a new legal entity. The legal entity of one of the previously pre-merged organizations may function as the legal entity of the newly formed organization.
- A merger is also accounted for in the general ledger by combining the assets, liabilities, and net assets of the merged organizations (the carryover method).
- Additionally, the initial reporting period of the newly merged organization commences on the effective date of the merger. The initial statement of activities should report the merged organization’s activity from the merger’s effective date through the end of the reporting period.
An acquisition occurs when a nonprofit organization obtains control of one or more nonprofit activities or businesses.
- An acquisition should be a combination of nonprofit organizations that does not meet the above definition of a merger.
- Some factors that may indicate a combination is an acquisition, and not a merger, include one organization’s ability to:
- Appoint significantly more of the governing board members for the new entity.
- Retain significantly more key senior officers.
- Retain largely unchanged governing documents (bylaws, operating policies).
- In an acquisition the acquiring organization recognizes and measures, at fair value, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired organizations as of the acquisition date. This is the same method of accounting used by for-profit entities in acquisitions.
- The acquisition does not impact the reporting period of the acquiring organization. Presentation of two comparative years in the financial statements is permissible for the year of the acquisition.
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