The carryover method of accounting

When there is a merger of nonprofit entities, a new nonprofit entity is created. A merger occurs when the existing entities cede control to a new nonprofit. The carryover method is used to account for this event. Under the carryover method, the assets and liabilities of the merged entities are combined as of the merger date; this is the date on which the merger transaction becomes effective.

There are several adjustments required to the combination of the assets and liabilities of the merging entities in order to create properly merged financial statements. The adjustments are:

  • Contract modifications. If a merger transaction will alter the terms of a contract, adjust the classification of the impacted asset or liability to match the state of the altered contract.
  • Reclassifications. If the entities are using different methods to account for their assets and liabilities, adjust the impacted items to reflect a consistent method of accounting. This does not mean that the merged entity can revise accounting options that were restricted to the initial acquisition or recognition of an item. For example, if the fair value option was originally taken for an asset, this option cannot be revoked by the merged entity.
  • Intra-entity transactions. If there were any transactions between the merging entities prior to the merger transaction, remove these intra-entity transactions from the merged assets, liabilities, and net assets.

When accounting for a merger, it is not permissible to recognize any new assets or liabilities, such as internally-developed intangible assets, which may be allowed under an acquisition transaction.

A merged entity is considered a new entity, so it does not report any activities prior to the merger date. The beginning financial statements of the entity incorporate the adjustments just noted for the effects of contract modifications, reclassifications, and intra-entity transactions.

In general, the new entity resulting from a merger transaction under the carryover method shall disclose information in its financial statements that allow readers to evaluate the nature and financial effect of the transaction.  To do so, the following disclosures are needed:

  • The name and description of the entities that were merged
  • The date of the merger
  • The reasons for the merger
  • For each merged entity, the amounts on the merger date of each major class of assets, liabilities, and net assets, as well as the nature and amounts of any other significant assets or liabilities not recognized; examples are conditional promises receivable and payable.
  • The nature and amount of any significant adjustments made to eliminate intra-entity transactions or to standardize accounting policies.
  • If the new entity is publicly-held, and the merger does not occur at the beginning of its fiscal year, disclose revenue and changes in all types of net assets as though the merger had taken place at the beginning of the year. If the entity is also providing comparative information for prior years, this additional information is to be provided for the prior years. If it is impracticable to provide this additional information, explain why.