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Acquisition Accounting for Not-for-Profit Systems Becoming More Taxing: Preparing for SFAS 164

Passage of the Health Care Reform Act in March has caused a dramatic increase in merger and acquisition volume within the healthcare services market. Now that the bill has become law, not-for-profit hospitals have entered the marketplace looking for merger and acquisition targets. The level of acquisition activity is expected to continue to rise with the gradual implementation of health care reform. To add further complexity to the current operating environment, accounting for these mergers and acquisitions has recently become much more challenging for NFP hospitals.

What happened
The Financial Accounting Standard Board (FASB) released new accounting guidance for NFPs through the Statement of Financial Accounting Standards (SFAS) 164, Not-for-Profit Entities:  Mergers and Acquisitions, which will significantly change the accounting procedures for NFP combinations. FASB believes that NFPs should be held to the same standard of disclosure as for-profit enterprises. According to the FASB, "The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity provides in its financial reports about a combination with one or more other not-for-profit entities, businesses, or nonprofit activities." The additional regulations on NFP will resemble the existing rules for for-profit companies and increase the financial reporting burden for NFPs.

New SFAS 164
SFAS 164 establishes principles and requirements for NFP mergers and acquisitions, which were originally detailed in SFAS 141/141R, Business Combinations. Specifically, SFAS 164 establishes principles and requirements for how a not-for-profit entity:
  • Determines whether a combination is a merger or an acquisition;
  • Applies the carryover method in accounting for a merger;
  • Applies the acquisition method in accounting for an acquisition and includes guidance to determine which combining entity is the acquirer; and
  • Determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition.

SFAS 164 also makes SFAS 142 ("Goodwill and Other Intangible Assets") fully relevant for not-for-profit organizations. As a result, SFAS 164 may have some implementation effects even for NFPs that are not contemplating a future merger or acquisition. The new standard provides transition guidance for goodwill and intangible assets previously recognized by NFP entities from transactions accounted for using the purchase method in APB Opinion 16.

Additionally, SFAS 164 is effective for transactions occurring in reporting periods beginning on or after Dec. 15, 2009, but early adoption for reporting periods before Dec. 15, 2009, is prohibited.  

Results of SFAS 164
It is important for NFPs to understand the impact of SFAS 164 on their financial statements and to be able to adjust to the new reporting requirements and valuation needs for their respective transactions.  As a result of SFAS 164, NFPs should expect increased costs associated with disclosure and compliance.  NFP hospital systems can expect the following as a result of SFAS 164:
  • More volatility in financial statements;
  • Added confusion to the NFP's board, creditors, rating agencies, etc.;
  • Increased need for valuation consultants; and
  • Increased accuracy and usability of financial statements.

What NFPs need to do now
SFAS 164 will increase the need for NFPs to evaluate their intangible assets for impairment. If your hospital system has been involved in any acquisitions or is considering combining operations with another NFP, it is important to understand how these new standards will govern accounting for mergers and acquisitions.  Now is the time to prepare for these new reporting standards by analyzing past acquisitions for goodwill impairment and make on-going adjustments to internal processes. Without evidence of compliance, an auditor could issue a qualified report, which will damage a NFP's ability to grow and the NFP will incur un-needed additional costs. Acquisitions are essential for the future growth and development of many NFP organizations. Compliance with SFAS 164 will not only increase the relevance and usability of financial statements but will also ensure the ability of NFP hospital systems to participate in future merger and acquisition activity.   

Contact Mr. Jeter at elliottj@vmghealth.com. Contact Mr. McDermott at colinm@vmghealth.com. Learn more about VMG Health.

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