Christian Heuer
Mary Ann K. Travers

At a Glance

  • Accounting Standard Codification Topic 958 (formerly Financial Accounting Standards Board Statement No. 164), Not-for-Profit Entities: Mergers and Acquisitions, applies to mergers and acquisitions as early as Jan. 1, 2010, for calendar-year entities.
  • Not-for-profit organizations need to move to fair value accounting, with a focus on the valuation of intangible assets.
  • Noncompliance could cause a hospital's auditors to issue a qualified report, which could lead to difficulties obtaining bank and bond financing.

After a brief period of sluggishness, the pace of mergers and acquisitions in the healthcare industry is expected to pick up steam. Unrelenting cost pressures are making some organizations vulnerable and more receptive to overtures from stronger rivals.

Although the healthcare sector has seen some upward adjustment in Medicare reimbursement rates, the long-term reality is a tighter rein on reimbursements due to public consensus that costs have spun out of control. Assuming effective postmerger integration, combined organizations can eliminate duplicative services in the same region, restrain rising costs for an aging populace, and refine treatment regimens for improved healthcare outcomes.

Finance executives for not-for-profit entities who are planning mergers and acquisitions will need to start using the acquisition method for business combinations, as outlined in Accounting Standard Codification (ASC) Topic 958 (formerly known as Financial Accounting Standards Board [FASB] Statement No. 164), Not-for-Profit Entities: Mergers and Acquisitions (April 2009).

Improving the Relevance of Financial Reporting

The new standards stand in stark contrast to former accounting practices for not-for-profits but resemble guidelines for-profit companies have been following for several years. Acquisitive not-for-profits will have to look at each asset-including intangibles-and record those at fair value.

The not-for-profit community is generally dissatisfied with the new rules and effort required. The objections might be summarized as, "We're a mission-based entity and shouldn't be thrown into the same pot as for-profit providers."

The FASB, however, instituted this guidance after years of study and also provided for mergers in limited circumstances. The objective, according to a summary statement from the board, is to "improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity provides in its financial reports" (ASC 958).

About 10 years ago, for-profit entities were not pleased when a similar rule (FASB Statement No. 141, Business Combinations) took effect and changed the rules for accounting for business combinations. The FASB excluded not-for-profits from FASB Statement No. 141 and the revised rule, 141(R) (ASC 805), pending issuance of ASC 958. The new statement takes into account the unique features of not-for-profits and their combinations.

ASC 958, which includes fair value accounting, is intended to raise the reporting standards for combinations of not-for-profit entities to the level of the for-profit community. Fair value accounting is more detailed and current and is generally perceived as more comprehensive and exacting than cost-based accounting. The methodology also harmonizes with the global trend toward international financial reporting standards.

Summary of ASC 958

ASC 958 is effective for:

  • Mergers for which the merger date is on or after the beginning of an initial reporting period that starts on or after Dec. 15, 2009
  • Acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period that begins on or after Dec. 15, 2009

ASC 958 explains how not-for-profits determine whether a combination is a merger or an acquisition and provides guidance on disclosure requirements. The carryover accounting method applies to mergers, whereas the acquisition method is to be used for acquisitions.

The 200-page statement also amends ASC 350, Goodwill and Other Intangible Assets , making annual testing of goodwill and intangible assets for impairment applicable to not-for-profit entities. Goodwill and certain intangible assets with indefinite lives are now subject to an impairment test at least annually. (Additional details about these statements can be found at

Noncompliance with the new guidelines is inadvisable. A qualified report from external auditors noting that an organization is not meeting the standards could limit its ability to obtain bank financing, weaken bond-financing options, affect existing bond and loan covenants, or raise questions from board members, donors, and others.

In addition, healthcare executives and valuators need to be mindful of the similarities and differences between accounting fair value and fair market value under the Stark Law, named for Rep. Fortney Hillman "Pete" Stark, Jr. (D-Calif.), who sponsored the initial bill. Related bills have since been passed. The Stark Law and antikickback ordinances affect all healthcare entities accepting payments from federally funded programs such as Medicaid and Medicare. Running afoul of these regulations can raise the risks of penalties, including large fines, exclusion from federal programs, and, in egregious cases, criminal convictions and prison terms.

Comprehensive Asset Valuation, Including Intangibles

In an acquisition, careful valuation of both tangible and intangible assets is essential. Consider, for example, the substantial real estate holdings of a large urban health system. Most CFOs are familiar with the appraisal process and methodologies for valuations of land, buildings, and equipment. The valuation of intangible assets, however, is less well understood.

When planning acquisitions, buyers need to consider a wide array of intangibles, which are treated as separate assets on the acquirer's balance sheet. Intangible assets can include trade names or documents such as certificates of need, licenses, and contracts. Another intangible might be a well-documented process to improve clinical outcomes for diabetic patients, which could be increasingly valuable given aging populations with rising healthcare costs.

Some categories of intangible assets that organizations need to consider include essential documents, technology and software, intellectual property, noncompete agreements, contracts, and practices and procedures.

Essential documents. Many healthcare organizations own valuable legal documents such as certificates of need, provider numbers, or Joint Commission accreditation, without which the organization's ability to serve patients would be severely restricted.

The value can rise due to expansion constraints imposed by regulations at multiple levels. Some states, for example, restrict the provision of certain services to providers possessing a certificate of need. If a hospital acquires a provider that possesses a certificate of need in an area the state has designated sufficiently covered, that certificate generally carries greater value than it would in a region viewed as capable of supporting additional providers.

Another example: A home care provider wanting to expand from a base of private-pay patients cannot receive Medicare reimbursement without having the necessary documentation. If the home care provider acquires an entity possessing a provider number, value could be allocated to the acquirer's Medicare number.

A hospital's ability to contract with federal and private payers is highly dependent on its accreditation status. For example, most private payers will not contract with a hospital until full accreditation (most commonly by the Joint Commission) has been obtained. Hence, a buyer of an accredited hospital incurs significant cost savings (in terms of both direct costs and opportunity costs) as compared with purchasing (or constructing) an unaccredited facility.

Technology and software. Electronic efficiency can free up resources, improve the quality of care, and enhance the patient experience. Wide bandwidth on the Internet speeds the development of sending images and a wide range of documents for review or processing offshore. In addition, there is an increasing push at the national level for electronic medical records, and technological sophistication can affect reimbursement rates.

Fair value accounting considers the value of wider commercialization. Take the example of a small health maintenance organization (HMO) that has created efficient solutions to administer its own plan. It may now own proprietary technology and software that can be applied more broadly by the acquiring organization to devise solutions for managing ambulatory surgical centers. Although the HMO may not use the technology for this purpose, the acquirer might be able to license it to others and generate profits from commercialization.

Intellectual property. An established trademark or brand can reassure existing patients and attract new ones. Trademarks may have international scope (Mayo Clinic), national cachet (St. Jude Children's Research Hospital), regional renown (UCLA Medical Center), or signify high quality in a specialty area (Fresenius Medical Care for dialysis).

In addition, physicians and research teams can amass an impressive portfolio of patented procedures and devices, and the entity sponsoring the research typically owns the patents. A comprehensive valuation explores the commercialization potential.

Copyrights are frequently overlooked. Healthcare entities may own the rights to articles if based on research conducted at their entity and written by physicians in their employ. Published articles can strengthen a brand and have commercial value due to reprints or for reuse in textbooks and marketing materials.

Noncompete agreements. When a hospital buys a group physician practice, an agreement might restrict physicians from starting a new practice in the same region for a given number of years. Such covenants can add value to the acquiring organization.

The agreements need to be structured carefully, however, and contract enforceability is more likely when provisions apply more narrowly to owners of the practice being sold, rather than to all employees (less enforceable). In addition, determining whether a noncompete agreement with physicians is reasonable requires close scrutiny in certain states. For example, Colorado, Delaware, and Massachusetts have statutes prohibiting noncompete clauses in physician contracts.

The value of a noncompete agreement can vary widely. Consider a health system's acquisition of a dialysis clinic versus an internal medicine practice. With dialysis patients visiting several times a week, nephrologists and the center's employees form close relationships with patients. Nephrologists also have higher billable charges per patient. A higher value, therefore, would seem to apply for a noncompete agreement with an experienced nephrologist who has a well-established patient base than for a noncompete agreement with a primary care physician.

Contracts. If a buyer acquires a contract that is particularly favorable, accounting standards require that a portion of the purchase price be allocated to such a contract. Before attributing value to leases and other contracts, however, the valuator should confirm that the Stark Law and antikickback statutes are not violated. For example, below-market leases for space and equipment might have value but be considered illegal kickbacks.

Practices and procedures. Proven, well-documented procedures can result in extra value. For example, an innovative and effective approach for treating sleep problems could be viewed as intellectual property separate from the assets of the laboratory delivering the care.

Internally developed training also represents an intangible asset. Highly effective compliance training for employees, for example, can reduce risk and thereby increase the value of an entity in a highly regulated industry.

Depending on the healthcare entity and business combination considerations, additional intangible assets might call for valuation under ASC 958.

Plan Now to Comply

After some years of subdued merger and acquisition activity, talk of acquisition is heating up. "The deep recession has pushed more independent hospitals to the brink of selling at prices that are hitting new lows," according to a report in The Nashville Post (Oct. 15, 2009).

Not-for-profit health systems need to plan now for a smooth transition to ASC 958 and adopt ASC 350 as it applies to the not-for-profit sector. It is easy to procrastinate, but correcting mistakes takes longer than getting it right from the start. Failure to meet the new standards could result in auditor issuance of a qualified report, which, in turn, can damage a not-for-profit's ability to obtain and maintain financing and lead to questions from board members and the community. CFOs of not-for-profit healthcare organizations in an acquisition mode in particular should make ASC 958 part of their organization's procedures going forward.

Christian Heuer, CFA, ASA, CBA, is with Crowe Horwath LLP, Nashville, Tenn. (

Mary Ann Travers, ASA, is a partner, Crowe Horwath LLP, Oak Brook, Ill. (

Publication Date: Tuesday, June 01, 2010

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