New FASB Exposure Drafts Address Not-for-Profit Accounting, Usability Issues

On Monday, the Financial Accounting Standards Board (FASB) issued two Exposure Drafts intended to improve the accounting and disclosures for mergers and acquisition (M&A) activities among not-for-profit organizations. The deadline for submitting comments on the new Exposure Drafts is January 29, 2007.

“The not-for-profit sector makes up a sizable portion of reporting entities and GDP in the U.S. and the accounting for M&A activity can have a significant affect [sic] on the reported financial position of these organizations,” Michael Crooch, FASB member, said in a prepared statement announcing the introduction of the Exposure drafts. “However, today, there is limited accounting guidance for not-for-profits relating to M&A activity. That limited guidance has often led to different financial statement results for similar economic transactions and events.”

The latest Exposure Drafts address these concerns by proposing accounting standards that would produce financial information that is more consistent, comparable, and faithfully representative of the underlying economics of M&A events. Specifically, Not-for-Profit Organizations: Mergers and Acquisitions, would eliminate the use of the pooling-of-interests method of accounting by not-for-profit organizations, in which assets acquired and liabilities assumed are recorded at "carryover" amounts recorded on the books of acquired organizations. This proposal would instead require the application of the acquisition method to all mergers and acquisitions by a not-for-profit organization. In applying that method, the proposal generally would require that not-for-profit organizations:

  1. Recognize the identifiable assets acquired and liabilities assumed that compose the business or nonprofit activity acquired in a merger or acquisition;
  2. Measure those assets and liabilities at their fair values as of the acquisition date;
  3. Recognize either goodwill of the acquired business or nonprofit activity or the contribution inherent in the merger or acquisition as a residual based on the value of the identifiable assets acquired, liabilities assumed, and the consideration transferred (if any); and
  4. Disclose information to enable users of the financial statements to evaluate the nature and financial effects of the merger or acquisition.

The other Exposure Draft, Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition, proposes accounting guidance for those intangible assets after a merger or acquisition. The proposed guidance is consistent with the accounting for all other acquired intangible assets-whether purchased or donated, or whether acquired individually or as part of a group.

Under this proposal, not-for-profit organizations would be required to provide:

  • Consistent and comparable information about identifiable intangible assets acquired by not-for-profit organizations in a merger or acquisition; and
  • More faithfully representative and relevant information about events resulting in impairments of goodwill that a not-for-profit organization has acquired.

"Similar to our improvements to the accounting for business combinations in the for-profit sector, including those proposed in the June 2005 Exposure Draft, today's proposals will provide financial statement users with more consistent and comparable information that more reliably portrays the underlying economics of M&A transactions by not-for-profit organizations," said Alicia Posta, the FASB staffer managing the not-for-profit mergers and acquisitions project.

Recent studies estimate that the total asset base of the United States' not-for-profit sector would make it the sixth largest economy in the world. Similar studies suggest that in the U.S. alone, the number of not-for-profit entities reporting financial results grew by 68 percent between 1993 and 2003, representing approximately 9 percent of the U.S. gross domestic product (GDP).


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