Reporting collaborative activities: A complex issue for nonprofits
More and more not-for-profits are joining forces to better serve their clients and cut costs. But such relationships can come with complicated financial reporting obligations.
Starting with the simplest
For accounting purposes, the simplest relationship between nonprofits may be a collaborative arrangement. These are typically contractual agreements in which two or more organizations are active participants in a joint operating activity — for example, a hospital that’s jointly operated by two nonprofit health care organizations.
Costs incurred and revenues generated from transactions with third parties should be reported, on a gross basis on the statement of activities, by the nonprofit that’s considered the “principal” for that specific transaction. Generally, the principal is the entity that has control of the goods or services provided in the transaction. But you should follow Generally Accepted Accounting Principles (GAAP) for your particular situation.
Payments between participants are presented according to their nature (following accounting guidance for the type of revenue or expense the transaction involves). Participants also must make certain disclosures, such as the nature and purpose of the arrangement and each organization’s rights and obligations.
Mergers and acquisitions require more
In a more complicated arrangement, two organizations may form a new legal entity. A merger takes place when the boards of directors of both nonprofits cede control of themselves to the new entity. The assets and liabilities of the organizations are combined as of the merger date.
Another option is for the board of one organization to cede control of its operations to another entity to enable a cooperative activity — but without creating a new legal entity. This is considered an acquisition, and the remaining organization (the acquirer) must determine how to record it based on the current value of the assets and liabilities of the organization acquired.
If there’s an excess of value, it should be recorded as a contribution. If the value is lower, the difference is generally recorded as goodwill. But, if the operations of the acquired organization are expected to be predominantly supported by contributions and returns on investments, the difference should be recorded as a separate charge in the acquirer’s statement of activities.
Proceed with caution
Of course, this is only the tip of the iceberg. Although the benefits of collaborating with other nonprofits are usually clear, financial reporting rules are anything but. We can help you comply with your reporting obligations.