Accounting Todays Agenda Business Combination Accounting - - - PowerPoint PPT Presentation

Business Combination Accounting

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Today’s Agenda

Business Combination Accounting

• Accounting Refresher
• Pushdown Accounting

Accounting Refresher

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Not-for-profit entities – mergers and acquisitions

• Provides guidance for
• Combinations of two or more

NPOs

• NPO acquisitions of for-profit
• rganizations
• Noncontrolling interests

(minority interests)

• Goodwill
• Intangible assets
• Codified in ASC 958-805

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Does FAS 164 apply to my transaction?

Yes No

• Acquisition of an NPO
• Joint venture
• Acquisition of a for-profit by an NPO
• Reorganization of entities under common control
• Acquisition of department, division, or other portion of

an entity – when meets FAS 141(R) “definition of a business”

• Acquisition of a group of assets
• Merger (complete ceding of control to form a new

entity)

• Acquisition made by any for-profit entity

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Merger vs. Acquisition

Is my transaction a merger or an acquisition?

• Merger
• Two (or more) entities cede control to new economic entity. None of the

combining organizations controls the new entity; a brand-new economic entity has been created

• Acquisition
• One entity obtains control over another

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Indicators for a merger Indicators for an acquisition

No one party can dominate the negotiations and process leading to formation of combined entity One party dominates the process and/or dictates the terms of the transaction Combining entities cease to exist as autonomous entities One organization continues on as the surviving corporation Neither entity dominates the day to day management or governance One entity appoints significantly more of the governing board One entity retains significantly more of its key officers New articles, bylaws, operating policies, and practices are created One party retains its bylaws, operating policies, and practices substantially unchanged

Indicators to consider

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Merger Accounting

If transaction is determined to be a merger

• Assets & liabilities brought forward at book values on merger date (not as
• f beginning of the period)
• Combined activity is reported from merger date forward
• Conform accounting policies

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Hospital A mergers with Hospital B creating Hospital C

As of the Merger Date Hospital A Hospital B Conforming Adjustments Hospital C Carrying value Carrying value Assets 500,000 Assets 600,000 50,000 1,050,000 Liabilities 250,000 Liabilities 350,000 (25,000) 575,000 Net assets 250,000 Net assets 250,000 475,000

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Acquisition accounting – general rule

5 step process 1. Inventory all assets acquired and liabilities assumed

• 2. Determine FV of each asset and liability as of the acquisition date
• 3. Aggregate FVs of all assets and liabilities
• 4. If FV assets > FV of liabilities + consideration, recognize inherent

contribution (income)

• 5. If FV liabilities + consideration > FV of assets, recognize goodwill or

contribution expense, as appropriate (depends on whether acquiree predominantly contribution supported)

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Determining fair value of assets and liabilities

Item Considerations – Acquisition Date Current assets CV generally approximates fair value ASC 958-320 (FAS 124) investments Carried at FV Alternative investments -- FV (FV

• ption )

Carried at FV Alternative investments – equity method Equity method may approximate fair value Alternative investments – cost FV must be determined (establish new “cost basis”) Pledges/split-interest agreements FV must be determined AICPA white paper issued November 2012 might be helpful

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Determining fair value of assets and liabilities

Item Considerations PP&E FV must be determined (e.g., through appraisal) Intangible assets FV must be determined (typically using “income approach”) Current liabilities CV generally approximates fair value Unfunded pension

• bligations

Remains at CV – not fair valued Tax-exempt debt Consider type of debt: VRDOs - FV Fixed or auction rate – FV must be determined Tip: See EMMA for recent trade data, but consider ASC 820-10 (Fair Value Measurement and Disclosure) and ASU 2009-05 Contingencies Special considerations may apply to measuring contingent liabilities

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Hospital A acquires Hospital B

Hospital B as of the Acquisition Date Assets Liabilities & Net Assets Carrying value Fair value Carrying value Fair value Cash 36,000 36,000 Payables 51,000 51,000 PPE 182,000 250,000 Bank loans and other 115,000 115,000 Intangibles

• 2,000

Other 265,000 265,000 Other assets 443,000 443,000 URNA 224,000 TRNA/ PRNA 6,000 Total 661,000 Total 661,000

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Hospital A’s Journal Entry

* Reported within Hospital A’s performance indicator Debit Credit Cash 36,000 PPE 250,000 Intangible assets 2,000 Other assets 443,000 Payables 51,000 Debt (non-bonds) 115,000 Other liabilities 265,000 TRNA/PRNA contribution revenue 6,000 Subtotals 731,000 437,000 UR contribution revenue * 294,000

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Intangible asset considerations

Consider the value of commonly identified intangible assets as part

• f a business combination

transaction: Trade names Patient records Certificates of need Non-compete agreements Note the following:

• Assembled workforce

does not meet the definition of identifiable intangible.

• Unlike acquired

customer relationships, acquired donor relationships are not recognized separately-- subsumed into goodwill.

Pushdown Accounting

Pushdown accounting

Addresses the scope and threshold for applying pushdown accounting in a subsidiary’s financial statements.

What you need to know

• Pushdown accounting optional upon a

change in control

• No circumstances would require or preclude

pushdown accounting

• Prospective to new transactions or

retrospective to previous transactions if there is a change in control

• Each change-in-control event considered

separately (not an accounting policy), but election is irrevocable once pushdown accounting is elected

On the horizon Coming soon Recently issued

Provides guidance for public entities, private companies, and not- for-profits.

Pushdown accounting

Application Considerations

• The application of pushdown accounting represents the termination of the
• ld accounting entity and the creation of a new one
• Step-up basis of assets and liabilities reported
• Predecessor / successor considerations in acquiree’s stand alone financial

statements

• Standalone statements should mirror consolidating statement

presentation

• Acquiree’s information should not include the contribution revenue

recorded from the acquisition

• Sample items to consider when electing pushdown accounting
• Needs and uses of the acquiree’s financial statements
• Future record keeping (ie one or two sets of “books” )

Questions