Presenting a live 110‐minute teleconference with interactive Q&A

Non‐Profit M&A: Benefits and PitfallsAnalyzing Tax, Accounting and Business Aspects of Partnerships With Other NPOs and For‐Profit Entities

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, MARCH 14, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

W. Marshall Sanders, Counsel, Alston & Bird, Atlanta, , ,

Dan McCormick, CEO, McCormick Group, Fripp Island, S.C.

Lee Klumpp, National Non-Profit Group Audit and Accounting Technical Leader, BDO USA, Bethesda, Md.

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N P fit M&A  B fit   d Pitf ll  Non‐Profit M&A: Benefits and Pitfalls Seminar

March 14, 2011

Lee Klumpp, BDO USAlklumpp@bdo.com

W. Marshall Sanders, Alston & Birdmarshall.sanders@astc.com

Dan McCormick, McCormick Group danh@mcc-group.com

Today’s ProgramRelated Legal Issues Slide 7 – Slide 12[W. Marshall Sanders]

Types Of Business Relationships To Consider[Dan McCormick and Lee Klumpp]

Slide 13 – Slide 17

Reasons To Pursue Or Avoid Such A Relationship[Lee Klumpp and Dan McCormick]

A li bl R l St d d A d G id

Slide 18 – Slide 25

Slid 26 Slid 51Applicable Rules, Standards And Guidance[Lee Klumpp]

Potential Risks To A Non-Profit’s Tax Exemption[Lee Klumpp]

Slide 26 – Slide 51

Slide 52 – Slide 53[Lee Klumpp]

Leading An Organization Into Merger Consideration[Dan McCormick]

Slide 54 – Slide 59

Commentary On Employee Benefits, HR Issues[All speakers]

Slide 60

RELATED LEGAL ISSUESW. Marshall Sanders, Alston & Bird

RELATED LEGAL ISSUES

Forms Of Corporate ReorganizationForms Of Corporate Reorganization

A Contractual arrangementsA. Contractual arrangements

B. Dissolution

C. Consolidation

D. Merger

8

Merger: Basic Legal Attributes

A. Automatic assumption of liabilities by survivor

B. Automatic assignment of assets to survivor

C. Surviving corporation “stands in shoes” of non-surviving C. Su v v g co po a o s a ds s oes o o su v v gcorporation

9

Pre Merger StepsPre-Merger Steps

A M d f d di / hA. Memorandum of understanding/term sheet

B. Due diligence

10

Merger Plan And Articles

I. Plan Of merger

A S iA. Statutory requirementsB. Board of Directors approvalC. Membership approval

II. Articles (or certificate) of merger

11

State And Federal Oversight Of MergersState And Federal Oversight Of Mergers

A Attorney generalA. Attorney general1. Sect. 501(c)(3) mergers2. Non-charitable or for-profit mergers

B. Internal Revenue Service1 Final tax information return1. Final tax information return2. Public charity status of surviving corporation3. Private foundations

12

D  M C i k  M C i k G

TYPES OF BUSINESS 

Dan McCormick, McCormick GroupLee Klumpp, BDO USA

TYPES OF BUSINESS RELATIONSHIPS TO CONSIDER

Th  C ll b i  C iThe Collaboration ContinuumTHE COLLABORATIVE CONTINUUMTHE COLLABORATIVE CONTINUUM

INITIATIVES

Service Joint Shared

POTENTIAL BENEFITS

CommunicateServiceSharing

JointVentures

SharedGovernance Merger

COMPLEXITY

MOU/LOA* ContractsLegalFilings

INSTRUMENTS

Filings

* Memo of understanding/letter of agreement

14

Formal Collaborations Short Of Merger 

I.Joint venture

A. Two or more parties form an alliance to create or operate a new venture together. Each entity bring specialized skills and resources to the table.

II.Shared services

A. Two or more parties agree to meld specific activities or programs into a single delivery or service system (e.g., accounts receivables and payables are handled by a centralized center)payables are handled by a centralized center).

III.Shared governance

A. Two or more parties agree to establish an enterprise by melding resources and more importantly equally sharing governance and resources and, more importantly, equally sharing governance and strategic decisions.

“More than 100,000 nonprofit groups nationwide will fail within the next two years, including a few "big brand-name nonprofits”- Paul C. Light, professor of public service at New York University

15

C ll b i  C i  (C )Collaboration Continuum (Cont.)

As the opportunity for potential gain increases, so does the complexity of the relationship.

A collaboration does not have to progress; it can start at any point collabo at o does ot ave to p og ess; t ca sta t at a y po t across the continuum.

A contract for outsourcing, or melding specific budget line items under a single management system is a less complex optionunder a single management system, is a less complex option.

Sharing cost, oversight, operations management and governance produces the best long-term relationships and builds trust.

16

Alternate Forms For Merger And Acquisition

•Merger (A>B=B) or consolidation (A+B=C)•Merger (A>B=B) or consolidation (A+B=C)

•Consolidation favored; neither has advantage; but exemption consequences

•Acquisition of assets/dissolution•Acquisition of assets/dissolution

•“Alliance,” contract, joint venture, LLC, etc.

•Umbrella entity with subsidiaries

17

Lee Klumpp, BDO USA

REASONS TO PURSUE OR 

Lee Klumpp, BDO USADan McCormick, McCormick Group

AVOID SUCH A RELATIONSHIP

Wh  C id  M  O  A i i i ?Why Consider Merger Or Acquisition?• Build lobbying and advocacy cloutBuild lobbying and advocacy clout

• Complementary, not competing

• Re-positioning for new demographics

• Increase audience/market share

• Cutting costs, dues, fees

• Increase awareness and raise importance in industry/field

• Eliminate competition and build synergies

• Reduce members’ multiple dues

• Increase efficiency avoid duplication cut down on back office support and costs• Increase efficiency, avoid duplication, cut down on back office support and costs

A merger or consolidation only makes sense if there is consensus among both g i ti ’ l d hi th t b l th i t t f h g i ti d th organizations’ leaderships that balances the interest of each organization, and those

interests over the long term favor combining.

19

Factors That Might Prohibit AM  O  A i i iMerger Or Acquisition

• Mission-focused vs profit-focused personalities• Mission-focused vs. profit-focused personalities

• Culture

• HistoryHistory

• Mistrust

• Inability to secure balance of interests

• Leases

• Employee obligations

20

Wh  C id  C ll b i ?Why Consider Collaboration?

• Can you make these statements?

― We are financially stable and have the ability to plan and grow and affect our mission better than any other grow and affect our mission better than any other organization in our field.

― Our income trends are rising, and we have the capacity to invest in growth.

― Our numbers of donors and volunteers are stable and/or growing, and we have all the resources we need to affect growing, and we have all the resources we need to affect our mission and take advantage of coming trends in social giving and constituency support.

21

h d ll b ( )Why Consider Collaboration (Cont.)

• Our organization is trending downward:

― Financially

― In terms of constituent loyaltyIn terms of constituent loyalty

― In terms of number of donors/volunteers

• Trends in our mission sector are going down.

• Our capacity, both human and financial, to affect the mission is slipping or stagnant

• We are being negatively affected by other external factors (local • We are being negatively affected by other external factors (local, national and global).

• The culture of our organization is to react slowly to trend changes, and we have been experiencing negative conditions for more than 12 and we have been experiencing negative conditions for more than 12 months.

22

M  C ll b i  I diMore Collaboration Indicators

• Are we big enough to live up to our vision and brand?

• Do we have some specialized capacity that would be attractive to others in our field?attractive to others in our field?

• Are we spending too much time and money to make our organization look different from our competitors?

"Individually, we are one drop. Together, we are an ocean." -Ryunosuke Satoro

23

P i l I diPractical Indicators

• We need more capacity fast to do something we really want to do.

• Our donor base is telling us to find a way to work more closely Our donor base is telling us to find a way to work more closely with others in the field.

• We know that our “sister” organization are in the same boat; the tide is sinking all of us.

• We can no longer afford some our essential basic needs in personnel, equipment, space and services to our primary personnel, equipment, space and services to our primary constituents.

24

Biggest Reasons NPOs Avoid Inter‐Organizational Relationships

• NPO organizational culture

• We tend to be competitive:

― With other charities and within federations

• We have learned to separate ourselves in order to “show up.”

• We try to display uniqueness in mission and mission approach to attract donors and volunteers.

• We believe that we must be different in some way to distinguish our organization as more worthy of support.

• We tend to return to tried-and-true methods when times get tough.We tend to return to tried and true methods when times get tough.

• We are traditionally optimistic.

• Our senior staff leadership does not want to work with former competitors.

S"The secret is to gang up on the problem, rather than each other." - Thomas Stallkamp

25

APPLICABLE RULES, Lee Klumpp, BDO USA

,STANDARDS AND GUIDANCE

Accounting For Combinations OfNot‐For‐Profit  Organizations

Statement of Financial Accounting Standard (SFAS) No. 164 (ASC 958-805), Not-for-ProfitEntities: Mergers and Acquisitions: This standard distinguishes the difference between amerger or an acquisition.

Key concepts:

• Mergers are accounted for on “carryover basis," similar to pooling accounting underAccounting Principles Board (APB) Opinion 16 Business Combinations, (ASC 958-805)(APB 16).

• Acquisitions are accounted for on an “acquisition basis “ similar to SFAS 141(R)• Acquisitions are accounted for on an acquisition basis, similar to SFAS 141(R).

• Determining factor of a merger: Ceding of control by the governing bodies of two (ormore) organizations to a new organization. The governing board of the new entitymust be newly formed, but establishing a new legal entity is not a requirement.

• Other factors such as relative size, relative dominance of the process and of thecombined entity, and relative financial health can be considered in judging whethercontrol has been ceded, but are not themselves determinants of a merger vs. anacquisitionacquisition .

• All other combinations are acquisitions.

27

Accounting For A MergerAccounting For A Merger

• For mergers, we now use the carryover basis of accounting, whichg , y g,adds the historical financial data of the merging entities as of themerger date (not, as under APB 16, as of the beginning of thefiscal year in which the merger occurs).fiscal year in which the merger occurs).

• Financial statements of the period of the merger include datap gonly since the date of the merger (except that for a publiccompany (FASB Staff Position (FSP) No. 126-1, (ASC 825),Applicability of Certain Disclosure and Interim ReportingApplicability of Certain Disclosure and Interim ReportingRequirements for Obligors for Conduit Debt Securities), pro formadisclosure is required as if the merger had occurred at thebeginning of the fiscal year)beginning of the fiscal year).

28

A ti  F  A M  (C t )Accounting For A Merger (Cont.)• Conform accounting policies except, because this is not a “fresh-start,“ a merger

is not an event that permits the election of accounting options that are restrictedto the entity’s initial acquisition or recognition of an item (or the reversal of aprevious election). Thus, for example, one merging entity’s election of the fairvalue option (Statement of Financial Accounting Standards No 159 (ASC 825) Thevalue option (Statement of Financial Accounting Standards No. 159, (ASC 825) TheFair Value Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115), for a particular financial asset or liabilitypermits neither the new entity’s election of the fair value option for otherfinancial assets or liabilities nor reversal of a previous election of this option.

• Eliminate effects of any intra-entity transactions

• All reclassifications, adjustments and other changes needed to effect a mergerare rolled into opening balances.

• Since the successor organization after a merger is a new entity, there is no priorperiod statement of activity or cash flows (an “opening“ balance sheet may be

t d if d i d)presented if desired).

29

A ti  F  A  A i itiAccounting For An AcquisitionIdentifiable assets and liabilities (and any non-controlling interest) ofh d b h h f l d fthe acquired entity are brought in at their fair values at date of

acquisition.

• Exceptions specific to non-profits: Collections are accountedfor in accordance with the policy of the acquirer; conditionalpledges are not recorded; no value is attributed to donorrelationships.p

• Exception for leases: Leases are classified (operating vs.capital) according to their terms at lease inception, unlessthey have been modified.

If the value of the acquired assets exceeds the sum of the acquiredliabilities plus any consideration, then the difference is recorded asan inherent contribution and reported as a separate credit in thean inherent contribution and reported as a separate credit in thestatement of activities

30

A ti  F  A  A i iti  (C t )Accounting For An Acquisition (Cont.)• If the sum of the liabilities plus consideration exceeds the assets,

h d ff d d d llthe difference is recorded as goodwill, except:• If the entity is predominantly supported by contributions

and/or investment return, then the goodwill is written offimmediately as a separate charge in the statement ofimmediately as a separate charge in the statement ofactivities (“predominantly supported by“ means thatcontributions and investment return are expected to besignificantly more than the total of all other revenues).

• Any non-controlling interests are accounted for in accordancewith Statement of Financial Accounting Standards No. 160,Noncontrolling Interest in Consolidated Financial Statements,(ASC 810), (SFAS 160).(ASC 810), (SFAS 160).

31

Accounting for An Acquisition (Cont.)Accounting for An Acquisition (Cont.)

• Acquisition-related costs are period expenses except for debt issuance costsAcquisition related costs are period expenses, except for debt issuance costs.

• Statement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets (ASC 350) (SFAS 142) is made fully effective for not-for-profitentities (goodwill is no longer amortized; rather it is tested for impairment)entities (goodwill is no longer amortized; rather, it is tested for impairment).

Exception: SFAS 142 does not apply to:

a. The formation of a joint venture

b Th i i i f h d i i h b ib. The acquisition of assets that do not constitute either a business or a non-profit activity

c. A combination between entities under common control

d A t i hi h t f fit tit bt i t l f th titd. An event in which a not-for-profit entity obtains control of another entitybut does not consolidate that entity, as permitted or required by AICPA SOPNo. 94-3

• Various descriptive quantitative and qualitative (why the merger/acquisitionVarious descriptive, quantitative and qualitative (why the merger/acquisitionoccurred) disclosures are required.

32

Fair Value UsageFair Value Usage

The consideration transferred in an acquisition by a not-for-profit entity shall be

Level 1: Observable inputs that reflect quoted prices for

identical assets or liabilities in active

markets and assumesq y p ymeasured at fair value, which shall be calculated as the sum of the acquisition-datefair values of the assets transferred by the acquirer and the liabilities incurred by theacquirer.

The acquirer shall measure the identifiable assets acquired, the liabilities assumed,d ll h h d f l

markets and assumes the reporting entity can access the markets at the measurement date

Level 2: Inputs other and any non-controlling interest in the acquiree at their acquisition-date fair values.

Fair value is the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurementdate (paragraph 5 of FASB Statement No. 157 (ASC 820), Fair Value Measurements).

pthan quoted market

prices included within level 1 that are

observable either directly or indirectly

Market participants are buyers and sellers in the principal (or most advantageous)market for the asset or liability that are:

a. Independent of the reporting entity; that is, they are not related parties

b. Knowledgeable, having a reasonable understanding about the asset or

Level 3: Unobservable inputs reflect the

reporting entity's own assumptions about market participant

assumptions used inliability and the transaction based on all available information, includinginformation that might be obtained through due diligence efforts that areusual and customary

c. Able to transact for the asset or liability

assumptions used in pricing an asset or

liability

d. Willing to transact for the asset or liability; that is, they are motivated butnot forced or otherwise compelled to do so

33

F i  V l  Of C id tiFair Value Of Consideration

• Acquisition date is the date that effective control is achieved.q

• If the initial accounting for an acquisition is incomplete by the endof the reporting period, the acquirer reports provisional amounts.The acquirer will retrospectively adjust amounts until the acquirerThe acquirer will retrospectively adjust amounts until the acquirerreceives information it was seeking about facts and circumstancesthat existed as of the acquisition date or learns the information isunobtainable, but in no cases shall this exceed one year. This isthe measurement period.p

• Contingent consideration is recognized at fair value as part ofacquisition consideration.

• Acquisition-related costs are expensed.

34

F i  V l  Of C id ti  (C t )Fair Value Of Consideration (Cont.)

• Pre-existing relationship between the acquirer and the acquiree that effectivelyg p q q ysettled; it is measured at:

a. For a pre-existing noncontractual relationship (such as a lawsuit), fair value

b. For a pre-existing contractual relationship, the lesser of:

1) The amount by which the contract is favorable or unfavorable from theperspective of the acquirer when compared with pricing for currentmarket transactions for the same or similar items (an unfavorablecontract is a contract that is unfavorable in terms of current marketterms It is not necessarily a loss contract in which the unavoidable coststerms. It is not necessarily a loss contract in which the unavoidable costsof meeting the obligations under the contract exceed the economicbenefits expected to be received under it.)

2) (2) The amount of any stated settlement provisions in the contractavailable to the counterparty to whom the contract is unfavorableavailable to the counterparty to whom the contract is unfavorable.

If (2) is less than (1), the difference is included as part of the acquisition accounting.

35

What Is Goodwill?What Is Goodwill?

An asset representing the future economic benefits arising fromother assets acquired in a business combination or an acquisition bya not-for-profit entity that are not individually identified and

t l i d [P h 3(j) f St t t 141(R)]separately recognized [Paragraph 3(j) of Statement 141(R)]

36

Identifying Intangible Assets And Goodwill

The acquirer shall recognize separately from goodwill the identifiable intangible assetsThe acquirer shall recognize separately from goodwill the identifiable intangible assetsacquired. The asset is identifiable if:

• It is separable. That is, it is capable of being separated or divided from theentity and sold, transferred, licensed, rented or exchanged, eithery , , , g ,individually or together with a related contract, identifiable asset, orliability, regardless of whether the entity intends to do so; or

• Arises from contractual or other legal rights, regardless of whether thoserights are transferable or separable from the entity or from other rights andobligations (paragraph 3(k) of SFAS 141(R))

Exceptions

• Donor relationships

• Collections

• Conditional promises to givep g

• Assembled and trained workforce

37

Identifying Intangible Assets And Goodwill (Cont.)

Goodwill is measured as the excess of (a) over (b) below:Goodwill is measured as the excess of (a) over (b) below:

a. The aggregate of:

1. The consideration transferred measured at its acquisition-1. The consideration transferred measured at its acquisitiondate fair value

2. The fair value of any non-controlling interest in theiacquiree

3. In an acquisition achieved in stages, the acquisition-datefair value of the acquirer’s previously held equity interestq p y q yin the acquiree

b. The net of the acquisition-date amounts of the identifiablet i d d th li biliti d d iassets acquired and the liabilities assumed measured in

accordance with this statement38

Identifiable Intangible AssetsIdentifiable Intangible Assets Marketing-related

• Trademarks, trade names, service Artistic-related

• Plays, operas, ballets marks, collective marks, certification marks

• Trade dress (unique color, shape, package design)

• Books, magazines, newspapers, other literary works

• Musical works such as compositions, song lyrics advertising jinglespackage design)

• Newspaper mastheads• Internet domain names• Non-competition agreements

song lyrics, advertising jingles • Pictures, photographs• Video and audiovisual material

including motion pictures or filmsNon competition agreements including motion pictures or films, music videos, television programs

39

Identifiable Intangible Assets (Cont.)Identifiable Intangible Assets (Cont.) Contract-based

• Licensing, royalty, stand-still agreements

Customer- and donor-related• Donor lists• Order or production backlogagreements

• Advertising, construction, management, service or supply contracts

• Order or production backlog• Customer contract and related

customer relationships• Non-contractual customer

• Lease agreements (whether the acquiree is the lessee or the lessor) C t ti it

Non contractual customer relationships

Technology based• Patented technology

• Construction permits • Franchise agreements • Operating and broadcast rights

Employment contracts

• Computer software and mask works

• Unpatented technology • Employment contracts • Use rights such as drilling, water,

air, timber cutting and route authorities

• Databases, including title plants• Trade secrets such as secret

formulas, processes, recipes

40

I  T  S  I  F i  V l  D i iItems To Support In Fair Value Determination Controls over the process used to determine fair value measurements including, for example, controls over data and the

segregation of duties between those committing the entity to the underlying transactions and those responsible forsegregation of duties between those committing the entity to the underlying transactions and those responsible forundertaking the valuations

The expertise and experience of those persons determining the fair value measurements

The role that information technology has in the process

Th f i i i f i l di l (f l h h h The types of accounts or transactions requiring fair value measurements or disclosures (for example, whether the accountsarise from the recording of routine and recurring transactions or from non-routine or unusual transactions)

The extent to which the entity’s process relies on a service organization to provide fair value measurements or the data thatsupports the measurement. When an entity uses a service organization, the auditor considers the requirements of SAS No. 70,Service Organizations (AICPA, Professional Standards, vol. 1, AU sec. 324), as amended.Service Organizations (AICPA, Professional Standards, vol. 1, AU sec. 324), as amended.

The extent to which the entity engages or employs specialists in determining fair value measurements and disclosures

The significant management assumptions used in determining fair value

The documentation supporting management’s assumptions

The process used to develop and apply management assumptions, including whether management used available marketinformation to develop the assumptions

The process used to monitor changes in management’s assumptions

The integrity of change controls and security procedures for valuation models and relevant information systems, includingg y g y p y , gapproval processes

The controls over the consistency, timeliness and reliability of the data used in valuation models

41

Valuation Processiligence Gather Relevant 

Company DataInterview Key Management An

alysis Analyze Financial 

Performance and ForecastsDetermine e Re

port Summarize Facts

Describe Assumptions and AnalysisO tline Methodolog

Due D

ManagementResearch Industry and Economic FactorsSearch Databases for 

A Determine Appropriate Valuation Method(s)Prepare Models and Supporting Schedules Pr

epare Outline Methodology 

Selection and ApplicationDescribe Conclusion

Market Data Supporting Schedules

42

Goodwill AcquiredGoodwill Acquired

Recognized as goodwill as of the acquisition date if the combined entity is supportedRecognized as goodwill as of the acquisition date if the combined entity is supportedby resources other than contributions and returns on investments

Measured as the excess of (a) over (b):

(a) The aggregate of:( ) gg g

(1) The consideration transferred measured at its acquisition-date fair value,

(2) The fair value of any non-controlling interest in the acquiree; and

(3) In an acquisition achieved in stages the acquisition date fair value of the(3) In an acquisition achieved in stages, the acquisition-date fair value of theacquirer’s previously held equity interest in the acquiree

(b) The net of the acquisition-date amounts of the identifiable assets acquired

and the liabilities assumedand the liabilities assumed

However, if the combined entity is predominately supported by contributions andreturn on investments, then the excess of (a) over (b) is recognized as a separatecharge in the statement of activities as of the acquisition date rather than asgoodwill.

43

G d ill A i d (C t )Goodwill Acquired (Cont.)• Consider all relevant qualitative and quantitative factors in

d h d f h d fdetermining the expected nature of the predominant source ofsupport

• If no consideration is transferred, then the goodwill or the separatecharge would be the excess of liabilities assumed over assetsacquired.

44

Transition For Previously Recognized GoodwillTransition For Previously Recognized Goodwill

• For combined entities predominately supported by contributionsd ff l dand returns on investments, write off previously recognized

goodwill by a separate charge in the statement of activities at theacquisition date

• For combined entities not predominately supported bycontributions and returns on investments: 1) establish thereporting units [Paragraph 54 of Statement 142] and 2) perform ap g [ g p ] ) ptransitional goodwill impairment evaluation [Paragraphs 55-58 ofStatement 142]

45

G d ill A d Oth  I t ibl  A tGoodwill And Other Intangible Assets

SFAS No.142 has been amended to apply to not-for-profit entities forgoodwill and other intangible assets acquired in an acquisition by a

t f fit titnot-for-profit entity.

46

Wh  I  M  b  “P d i l  S d”?What Is Meant by “Predominately Supported”?

SFAS 164 defines “predominately supported” to mean thatcontributions and returns on investments are expected to bei ifi tl th th t t l f ll th fsignificantly more than the total of all other sources of revenue.

47

What is a Contribution?What is a Contribution?

Statement of Financial Accounting Standards No. 116, (ASC 605)S AS 6 A f C b R d d C b(SFAS 116) Accounting for Contributions Received and Contributions

Made defines a contribution as an unconditional transfer of cash orother assets to an entity or a settlement or cancellation of itsliabilities in a voluntary non-reciprocal transfer by another entityy p y yacting other than as an owner.

An inherent contribution is made if an entity voluntarily transfersy yassets (or net assets) or performs services for another entity inexchange either for no assets or for assets of substantially lowervalue, and unstated rights or privileges of a commensurate valueare not involved.are not involved.

48

C t ib ti  R i dContribution Received

Recognize as a separate credit in the statement of activities as of the Recognize as a separate credit in the statement of activities as of the acquisition date

Measured as the excess of (b) over (a)

(a) The aggregate of: (a) The aggregate of:

(1) The consideration transferred measured at its acquisition-date fair value,

(2) The fair value of any non-controlling interest in the acquiree, and (2) The fair value of any non controlling interest in the acquiree, and

(3) In an acquisition achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree

(b) The net of the acquisition-date amounts of the identifiable assets (b) The net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed.

If no consideration is transferred, then the excess amount would be the excess of assets acquired over liabilities assumed.

49

C id ti  T f dConsideration TransferredIn acquisitions by not-for-profit entities

• Measured at the acquisition-date fair value• The sum of the assets transferred and the liabilities incurred

Forms:• Cash

Oth t• Other assets• A business or a non-profit activity of the acquirer• Contingent consideration

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R l  G idRelevant GuidanceSFAS 164 (ASC 958-805): Statement of Financial Accounting Standards No. 164, Not-for-ProfitSFAS 164 (ASC 958 805): Statement of Financial Accounting Standards No. 164, Not for ProfitEntities: Mergers and Acquisitions

FASB Staff Position (FSP) No. SFAS 126-1 (ASC 825): Applicability of Certain Disclosure and InterimReporting Requirements for Obligors for Conduit Debt Securities

SFAS 141(R) (ASC 805): Statement of Financial Accounting Standards No. 141(R), BusinessCombinations

SFAS 142 (ASC 350): Statement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assetsta g ble ssets

SFAS 116 (ASC 958-605): Statement of Financial Accounting Standards No. 116, Accounting forContributions Received and Contributions Made

SFAS 160 (ASC 810): Statement of Financial Accounting Standards No. 160, Noncontrolling Interestin Consolidated Financial Statements

SOP 94-3 (ASC 958-810): AICPA Statement of Position 94-3, Reporting of Related Entities by Not-for-Profit Organizations

APB Opinion 16 (ASC 958 805): Accounting Principles Board Opinion No 16 Business CombinationsAPB Opinion 16 (ASC 958-805): Accounting Principles Board Opinion No. 16, Business Combinations

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POTENTIAL RISKS TO A NON‐Lee Klumpp, BDO USA

PROFIT’S TAX EXEMPTION

Issues To Look For In A Not‐For‐Profit Combination

• Issues related to monetary contributions to any political campaign

• Non-profit corporation can only engage in political lobbying in No p o t co po at o ca o ly e gage pol t cal lobby g limited amounts.

• Non-profit cannot distribute its profits to directors, officers or membersmembers.

• Unpaid income taxes on profits unrelated to its state purpose or activities

• Amount of “substantial” profits from unrelated activities

• Do not revoke any of the organization’s tax-exempt status or EIN numbers until you’re absolute sure that the not for profit numbers until you re absolute sure that the not-for-profit business combination is complete.

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LEADING AN ORGANIZATION Dan McCormick, McCormick Group

INTO MERGER CONSIDERATIONCONSIDERATION

S i  Th  E l iStarting The Exploration

I. Assemble an exploration team

II. Set reasonable expectations

A Outcome – timing – ultimate relationshipA. Outcome timing ultimate relationship

III. Get the parties in a room

A. CEO to CEO – volunteer to volunteer – third-party consultant to help

B. Informal exploration with no expectation other than determining real interests

IV. Think about how you are “showing up”

A. Be aware of the dominance of the large and the tyranny of the small small

“It’s not the strongest of the species that survives, nor the most intelligent but the one most responsive to change.” - Charles Darwin

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R bl  E iReasonable Expectations

I. It’s all about your mission and how to advance your impact on what you are trying to achieve.

II. Formal engagements are entered into for three primary reasons:

A. To acquire new skills, abilities and capacities

B. To develop, with a partner, new skills and abilities that are impossible or difficult to achieve on your ownimpossible or difficult to achieve on your own

C. Preserve resources in a way that allows for impact on your mission to continue and thrive

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A bl  A  E l i  TAssemble An Exploration TeamI. CEO and two volunteer leaders is an optimal make-up of an initial p p

team.

II. Set up a meeting with potential partners and ask them to bring the same type of team.same type of team.

A. Sometimes, volunteer-to-volunteer is a better way to start.

III. Keep the discussion at a very high level.

A. Talk about the vision of what might come from a discussion about a deep formal collaboration of merger.

B. Remember, you are seeking agreement to continue to meet and B. Remember, you are seeking agreement to continue to meet and explore, not to get closure on any concept, principal or negotiation point.

IV Don’t expect rip-roaring acceptance of the idea concept or notionIV. Don t expect rip-roaring acceptance of the idea, concept or notion.

A. NPOs are fiercely independent. 57

H  T  S  Th  Di iHow To Start The Discussion

I. It’s not your neighbors collaboration/merger.

A. Our frame of reference is for-profit mergers that we know about or have experienced.

B. NPO mergers are very different and can be formed to address “your” critical needs.

1. Legacy concerns can be met.

2. Protection of people and programs can easily be accomplished.

II. Be open to lots of options

A. Think of it as the design of something new, not negotiating to protect A. Think of it as the design of something new, not negotiating to protect the old.

B. It doesn’t have to be competitive or contentious.“Change is the process by which the future invades our lives.” – Alvin Toffler

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Why Some Strategic Relationships Fail

I. Leadership changes

II. Conditions change

III. Rarely equal involvement (somebody gives or gets more)

IV. No real lock on long-term commitment

V. It’s more like dating than a true partnership

“The twenty‐first century will be the age of alliances.  In these complex times, no organization can succeed on its own.”

Harvard Business Professor and AuthorJames Austin, The Collaboration Challenge:g

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Lee Klumpp, BDO USADan McCormick, McCormick Group

COMMENTARY ON EMPLOYEE 

pW. Marshall Sanders, Alston & Bird

BENEFITS, HR ISSUES