When a nonprofit organization combines with one or more other nonprofits, using the proper accounting treatment depends on if it is deemed a merger or an acquisition. Generally Accepted Accounting Principles (GAAP) differentiate between a merger and an acquisition as follows:
When the Board of Directors cede control of two or more nonprofit organizations and a new organization is created, a merger occurs.
When one organization obtains controls of one or more nonprofit or for-profit organizations, an acquisition occurs.
Mergers
The premise behind a merger is that no combining nonprofit organization dominates the new organization. So while a new legal entity does not need to be formed, to qualify as a new nonprofit organization a new governing body must be formed. In addition, the combining organizations should share (as equally as possible) the ability to appoint governing board members of the new entity, retain key employees, and have a say in bylaws and operating policies and practices of the new organization.
Accounting for a merger is relatively simple: GAAP states that the carryover method must be used. In other words, all assets and liabilities of the merging organizations should simply be “carried forward” to the newly formed entity, so long as they are on a consistent basis of accounting.
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