Notice for Recipients of This Request …

                        Notice for Recipients of This Request
                 Related to the October 2006 FASB Exposure Draft,
                Not-for-Profit Organizations: Mergers and Acquisitions


        This is a request for additional comments on a potential revision to the October
2006 proposed Statement, Not-for-Profit Organizations: Mergers and Acquisitions, and
for field visit volunteers.

Comments
        The FASB staff is seeking additional comments from respondents to the proposed
Statement about potential criteria for distinguishing a merger between two or more not-
for-profit organizations from an acquisition of another entity (business or nonprofit
activity) by a not-for-profit organization. Comments of others also are welcomed.

       Interested parties should submit their written comments by July 8, 2008.
Comments should be submitted by email to director@fasb.org, with a subject line of
"File Reference No. 1500-100R." Those without email may send their comments to
"Technical Director--1500-100R" and addressed to:

FASB
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116

Field Visit Volunteers
        The staff also is soliciting organizations that have recently merged that would be
willing to participate, on a confidential basis, in field visits or interviews with the FASB
staff. The purpose of the field visit is to test the workability of the proposed guidance
and evaluate the costs and benefits of the proposed change. Those interested volunteers
can contact Ronald J. Bossio, Senior Project Manager, at 203-956-5213 or
rjbossio@fasb.org.




Request for Additional Comments                      Posted to FASB website May 9, 2008
File Reference No. 1500-100R
Purpose of This Paper
1. The Board has made a tentative decision to revise its proposed Statement, Not-for-
Profit Organizations: Mergers and Acquisitions, to distinguish a merger of two or more
not-for-profit organizations from an acquisition of another entity (business or nonprofit
activity) by a not-for-profit organization.     However, before finalizing its decision
through the issuance of a final Statement, the Board has asked the staff to seek further
input on this matter. The purpose of this Paper is to seek comments on the
appropriateness and workability of potential criteria for distinguishing a merger from an
acquisition.

2. In addition to seeking comments from respondents, the staff is also soliciting
organizations that have recently merged that would be willing to participate in field visits
or interviews with the FASB staff. The purpose of the field visit is to test the workability
of the proposed guidance and evaluate the costs and benefits of the proposed change.
Those interested volunteers can contact Ronald J. Bossio, Senior Project Manager, at
203-956-5213 or rjbossio@fasb.org.

Background
3. In October 2006, the Board issued its proposed Statement that would require that all
mergers and acquisitions by not-for-profit organizations be accounted for as acquisitions.
The proposal noted that the FASB "believes that virtually all mergers or acquisitions are,
in substance, the acquisition of net assets." It also noted the Board's view that accounting
for all of them as acquisitions would "produce financial information that better reflects
the economic substance of a merger or acquisition . . . ."

4. The proposed Statement explained how the Board's tentative decision at that time
related to an earlier conclusion reached in FASB Statement No. 141, Business
Combinations (June 2001), which applies to business entities.

       B27. In developing Statement 141, the Board considered whether any
       business combinations are not acquisitions and, if so, whether a method
       other than the acquisition method should be used to account for them.
       Paragraph B42 of Statement 141 states:

               The Board concluded that "true mergers" or "mergers of
           equals" are nonexistent or so rare as to be virtually nonexistent,
           and many respondents agreed. Other respondents stated that even if
           a true merger or merger of equals did occur, it would be so rare
           that a separate accounting treatment is not warranted. They also
           stated that developing the criteria necessary to identify those trans-
           actions simply would be a continuation of the same problems and
           potential for abuse evidenced by Opinion 16. . . . The Board further
           observed that respondents and other constituents were unable to
           suggest an unambiguous and nonarbitrary boundary for distin-
           guishing true mergers or mergers of equals from other two-party

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             business combinations and concluded that developing such an op-
             erational boundary would not be feasible. Moreover, even if those
             mergers could feasibly be distinguished from other combinations,
             the Board concluded that it does not follow that such combinations
             should be accounted for on a carry-over basis. If they were to be
             accounted for using a method other than the purchase method, the
             Board believes that a better method would be the fresh-start
             method.

         B28. The Board affirmed those conclusions in this proposed Statement
         and concluded that, generally, the economic substance of the merger or
         acquisition by a not-for-profit organization is that one organization
         acquires an integrated group of assets (by purchase or by gift). Therefore,
         because those transactions are generally acquisitions and because those
         that are not acquisitions cannot be distinguished using an unambiguous
         basis, all mergers and acquisitions by not-for-profit organizations should
         be accounted for using the acquisition method.

Comments of Respondents to the Proposal
5. A few respondents agreed with the conclusions reached in the quoted paragraph B28.
However, most respondents, including participants in a March 2007 roundtable, said that
mergers of not-for-profit organizations occur with greater frequency than they do among
business entities, and most of those respondents also argued that mergers can and should
be distinguished from acquisitions.1

6. The Board discussed those comments with participants at a March 2007 roundtable
and considered whether workable criteria can be established for making that distinction.
Through those discussions, the Board learned that there is a considerable degree of
agreement among the roundtable participants about certain potential criteria that could be
used for making that distinction in practice.2 In issuing this request for comments, the
Board and its staff are seeking to learn more about the criteria under consideration and,
particularly, whether those criteria would provide an unambiguous (workable) basis for
distinguishing between a merger and the following types of transactions:
    a. An acquisition in which one entity acquires another entity by gift (that is, the
       acquired entity donates its net assets to the acquiring entity)




1
  For a fuller discussion of the comments received on this issue, see paragraphs 3 and 6­21 of the comment
letter summary posted at the FASB's project website. Individual comment letters of respondents also are
available from the FASB's website.
2
  At the March 2007 roundtable, the Board also heard that the views of participants are mixed as to the
appropriate accounting method to be used for mergers. Some suggested that the fresh-start method should
be applied, but others suggested that the Board retain the carry-over basis, as used in present practice. At
its September 19, 2007 meeting, the Board tentatively decided, for pragmatic reasons, to retain the carry-
over basis. For a fuller discussion of the reasons for the Board's decision to retain the carry-over basis, see
paragraphs 1-23 of the minutes of the meeting, which are available at the FASB's project website.
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   b   A "combination" that is in substance a joint venture in which the net assets of two
       nonprofit activities are joined together for a period of time with an expectation or
       possibility that the activities would revert back to the venture partners in the
       future.


Potential Criteria
A Tentative Criterion
7. At its meeting of September 19, 2007, the Board agreed that the feature that
distinguishes a merger from an acquisition is that the governing bodies of two or more
not-for-profit organizations cede control of those organizations to create a new
organization. In an acquisition, one organization obtains control over the net assets of
another organization, business or nonprofit activity by purchase, gift or otherwise.
Paragraph 4(i) of the October 2006 proposal provides the following definition of control:
          The direct or indirect ability to determine the direction of management
       and policies through ownership, contract, or otherwise" (paragraph 20 of
       AICPA Statement of Position (SOP) 94-3, Reporting of Related Entities
       by Not-for-Profit Organizations, and paragraph 11.08 of AICPA Audit and
       Accounting Guide, Health Care Organizations).

8. At its September 2007 meeting, the Board also discussed guidance to clarify that a
new organization is a combined organization with a newly formed governing body. That
is, the substance carries more weight than the legal form and, thus, a new legal
corporation is not a prerequisite to qualify as a merger. For example, in some mergers,
the resulting combined organization may use the existing legal form of one of the
merging organizations with modifications that include a newly formed governing body.
That clarification is intended to allow for a reconstituted legal form that is a new
economic organization, as well as a new legal organization, to qualify as a merger if the
tentative criterion or other potential criteria are met.

Reservations about the tentative criterion
9. Despite supporting ceding of control as the determinative criterion for distinguishing
a merger from an acquisition, Board members continue to have reservations. Those
reservations center on whether preparers of financial statements and their auditors will be
able to reach common judgments when applying that criterion in practice.

10. Some Board members are concerned that the ceding of control criterion and related
definition of control, by themselves, may not provide a sufficient basis for distinguishing
a merger from the formation of a joint venture (which is outside the scope of the
proposal). They indicated that the ceding of control criterion or definition of control may
require further clarifications or additional criteria. Two examples of their concerns were
noted:
   a. When two not-for-profit organizations join their nonprofit activities by
      transferring them to a new organization with equal representation on its governing
      board; thus, each of the two organizations seemingly cedes its independent control
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      of an integrated set of net assets, but each retains shared control in the combined
      entity
   b. When two not-for-profit organizations seemingly combine their nonprofit
      activities, but one or both organizations hold an option to "opt-out" of the
      combined activity and thus regain independent control of the transferred nonprofit
      activity.
However, other Board members cautioned against adding detailed guidance or lists of
criteria to consider in distinguishing a merger from an acquisition.

11. Some members also remain concerned that the tentative decision to retain the carry-
over basis as the method of accounting could put undue pressure on practice. That is,
organizations that prefer to avoid reporting the fair value of the assets and liabilities of an
acquired organization may attempt to disguise an acquisition as a merger. For example,
if one organization's governing body donates the net assets of the organization to another
organization, the parties to the merger may attempt to structure the Board composition of
the acquiring organization to make it appear as if the acquisition was a merger.

12. The staff is seeking to learn whether the ceding control criterion and related definition
of control are appropriate and can be applied in practice. If not, we seek to learn whether
and how that criterion and definition might be modified or supplemented without creating
a list of detailed and potentially complex rules.

Other suggestions considered but tentatively rejected
13. Respondents to the October 2006 proposal and participants in the March 2007
roundtable offered several other suggestions for distinguishing between a merger and an
acquisition. Paragraph 5 of that proposal, which did not make a distinction, stated that "a
merger or acquisition is any transaction or other event that result in a not-for-profit
organization initially recognizing a business or nonprofit activity in its financial
statements."

14. Many of the respondents suggested that one or both of the following criteria also must
be present to qualify for merger accounting:
   a. Common or Similar Missions: The combining organizations must have similar
      missions before the combination, and the combined organization must reflect the
      key components of those prior mission statements. That circumstance is said to
      often exist among merging parties and may be an important aspect of the
      motivation for a merger. Respondents noted that this often occurs among
      contiguous or affiliated organizations that serve similar constituents and seek
      opportunities to provide their services more cost-effectively (for example, achieve
      cost savings through economies of scale). However, if mergers occur between
      not-for-profit organizations that have different (perhaps complementary)
      missions, this factor could preclude accounting for those transactions as mergers.
      Moreover, past experiences suggest that differing views of the meaning of similar
      often lead to repeated requests for more detailed guidance. Thus, Board members
      are not convinced that a criterion related to the organzations' missions is

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       determinative or that it would provide an unambiguous basis for distinguishing a
       merger.
   b. No Consideration Exchanged: There must be (1) no monetary consideration
      paid or received or (2) no consideration exchanged beyond assumption of
      liabilities. Either of those two similar, but slightly different, criteria could be
      useful as an indicator since the existence of monetary consideration exchanged
      between the combining parties generally suggests that the combination is an
      acquisition by purchase. However, the absence of monetary consideration could
      be associated with either a merger or an acquisition by gift in which the acquired
      entity donates all of its assets and liabilities and receives no payment in return.
      Thus, the Board did not find that criterion to be determinative in distinguishing a
      merger from an acquisition by gift.

15. A few respondents who supported different accounting for "true mergers" (or mergers
of equals) suggested that the Board develop criteria to rebut a presumption that a
combination is an acquisition. Such presumptions often are suggested as a means of
mitigating concerns about inconsistent reporting, particularly when alternative methods
of accounting exist for similar but not identical economic circumstances. Although such
a presumptive attitude could help mitigate the concern expressed in paragraph 10, it still
would require a definition or description of a merger that distinguishes it from other
combinations. Moreover, this approach also could generate requests to provide criteria to
rebut the presumption, which seems contrary to the desires of some Board members to
avoid lists of indicators and detailed rules.

Request for Comments
16. As noted in paragraph 7, the Board has tentatively agreed that (a) in a merger, the
governing bodies of two or more not-for-profit organizations cede control of those
organizations to create a new organization, and (b) control is defined as the direct or
indirect ability to determine the direction of management and policies through ownership,
contract, or otherwise.

   Question 1: Is the definition of a merger appropriate for distinguishing mergers from
   acquisitions by not-for-profit organizations? If not, why?

   Question 2: Would the definition of a merger, together with the definition of control,
   be workable in practice? That is, can it be applied in practice with a reasonable
   degree of consistency, particularly in distinguishing a merger from the transactions
   noted in paragraph 6(a) and 6(b)? If not, why, and how might it be improved?

   Question 3: Do the definitions of a merger and control, taken together, make it
   sufficiently clear that transferring an integrated set of net assets to a newly created
   joint venture in which the transferor retains shared control is not the equivalent of
   ceding control? If not, how might the Board clarify the definitions or make it clear
   that the creation of a joint venture is beyond the scope of the proposal?

   Question 4: Does the definition of a merger require any additional criteria or
   guidance to address the concern noted in paragraph 10? That is, in general, will the
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ceding of control be discernable in practice from the surrounding facts and
circumstances, despite the possibility that some entities may attempt to structure the
new organization's Board composition, senior management, or charter to disguise
circumstances in which one of the governing bodies retains control over the newly
created organization?

Question 5: If one or more parties to a potential combination retains an opt-out
clause, would that alone be sufficient evidence to determine that that party has not
ceded control? Some respondents asked the Board to consider whether retention of
so-called opt-out clauses by the parties to a combination would indicate that a merger
or acquisition had not occurred. The staff has been told that such contingent
provisions sometimes are included in acquisitions of physician practices by not-for-
profit organizations. However, presumably, such provisions could occur in mergers
or acquisitions of other private practices, including acquisitions by business entities.
The staff thinks that the specific terms of each contractual arrangement need to be
assessed to determine whether the definition of a merger or acquisition has been met
and would not expect a unique interpretation for mergers or acquisitions by not-for-
profit organizations.




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