Business Combination Accounting

Transcription

1 Business Combination Accounting

2 Today s Agenda Business Combination Accounting - Accounting Refresher - Pushdown Accounting

3 Accounting Refresher

4 Not-for-profit entities mergers and acquisitions Provides guidance for - Combinations of two or more NPOs - NPO acquisitions of for-profit organizations - Noncontrolling interests (minority interests) - Goodwill - Intangible assets Codified in ASC

5 Does FAS 164 apply to my transaction? Yes 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 Merger (complete ceding of control to form a new entity) No Acquisition of a group of assets Acquisition made by any for-profit entity

6 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

7 Indicators to consider Indicators for a merger No one party can dominate the negotiations and process leading to formation of combined entity Combining entities cease to exist as autonomous entities Indicators for an acquisition One party dominates the process and/or dictates the terms of the transaction 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

8 Merger Accounting If transaction is determined to be a merger Assets & liabilities brought forward at book values on merger date (not as of beginning of the period) Combined activity is reported from merger date forward Conform accounting policies

9 Hospital A mergers with Hospital B creating Hospital C As of the Merger Date Hospital A Hospital B Conforming Adjustments Carrying Carrying value value Hospital C 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

10 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)

11 Determining fair value of assets and liabilities Item Current assets ASC (FAS 124) investments Alternative investments -- FV (FV option ) Alternative investments equity method Alternative investments cost Pledges/split-interest agreements Considerations Acquisition Date CV generally approximates fair value Carried at FV Carried at FV Equity method may approximate fair value FV must be determined (establish new cost basis ) FV must be determined AICPA white paper issued November 2012 might be helpful

12 Determining fair value of assets and liabilities Item PP&E Intangible assets Current liabilities Unfunded pension obligations Tax-exempt debt Contingencies Considerations FV must be determined (e.g., through appraisal) FV must be determined (typically using income approach ) CV generally approximates fair value Remains at CV not fair valued Consider type of debt: VRDOs - FV Fixed or auction rate FV must be determined Tip: See EMMA for recent trade data, but consider ASC (Fair Value Measurement and Disclosure) and ASU Special considerations may apply to measuring contingent liabilities

13 Hospital A acquires Hospital B Hospital B as of the Acquisition Date Assets Carrying Fair value value Liabilities & Net Assets Carrying Fair value value Cash 36,000 36,000 Payables 51,000 51,000 PPE 182, ,000 Bank loans 115, ,000 and other Intangibles -- 2,000 Other 265, ,000 Other assets 443, ,000 URNA 224,000 TRNA/ 6,000 PRNA Total 661,000 Total 661,000

14 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 6,000 revenue Subtotals 731, ,000 UR contribution revenue * 294,000

15 Intangible asset considerations Consider the value of commonly identified intangible assets as part of 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.

16 Pushdown Accounting

17 Pushdown accounting 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 Addresses the scope and threshold for applying pushdown accounting in a subsidiary s financial statements. Provides guidance for public entities, private companies, and notfor-profits. On the horizon Coming soon Recently issued

18 Pushdown accounting Application Considerations The application of pushdown accounting represents the termination of the old 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 )

19 Questions