Not-for-profits sometimes team up with other entities to boost efficiency, save money and better serve both organizations’ constituencies. This can be a smart move — so long as your accounting staff knows how to report the activities of the two organizations. How you handle reporting depends on the nature of your new relationship.
The simplest relationship between nonprofits for accounting purposes may be a collaborative arrangement. These typically are contractual agreements in which two or more organizations actively participate in a joint operating activity.
The nonprofit that’s considered the “principal” for the transaction should report costs incurred and revenues generated from transactions with third parties on a gross basis in a statement of activities. The principal is usually the entity that has control of the goods or services provided in the transaction. Payments between participants are presented according to their “nature,” following accounting guidance for the type of revenue or expense the transaction involves. Participants in collaborative arrangements also must make certain financial statement disclosures, such as the purpose of the arrangement.
Another collaborative option is for the board of one organization to cede control of its operations to another entity as part of its decision to engage in a cooperative activity. This is an acquisition, and no new legal entity is created. The remaining organization is considered the acquirer and must determine how to record the acquisition based on the fair value of the acquired nonprofit’s assets and liabilities.
If the value of the assets net of the liabilities received is greater than the amount paid in the acquisition, the difference should be recorded as a contribution. If the value is lower than the price paid by the acquirer, the difference is generally recorded as goodwill. But, if the operations of the acquired organization are expected to be predominantly supported by contributions and return on investments, the difference should be recorded as a separate charge in the acquirer’s statement of activities.
If it’s your nonprofit that cedes control of its operations to another entity, that organization may need to consolidate your organization (including the cooperative activity) beginning on the “acquisition” date. If your nonprofit will present separate financial statements, you must determine whether to establish a new basis for reporting assets and liabilities based on the other entity’s basis.
Finally, what if your organization merges with another and forms a new legal entity? In such situations, the two entities’ assets and liabilities are combined as of the merger date.
Financial reporting practices must change when you collaborate with another entity. But these rules can be complicated, so contact us with your questions.