Under the Financial Accounting Standards Board’s ASC-805, Business Combinations, such combinations generally involve five basic steps.
- Determine if acquisition accounting rules apply. The 2018 merger of Bon Secours Health system in Marriottsville, Maryland, with Mercy Health in Cincinnati, for example, was accounted for as a merger, and thus their balance sheets continue to be recorded at their historical basis. Meanwhile, CommonSpirit Health (the newly created health system formed by Catholic Health Initiatives and Dignity Health) qualified as an acquisition.
- Determine the consideration transferred. This can be a challenging step because some not-for-profit mergers involve minimal cash consideration but long-term capital commitments or agreements to adhere to certain faith-based care principles. Many transactions today involve contingent payments or clawbacks, which are recorded at fair value rather than face value.
- Allocate the consideration transferred to the identifiable tangible and intangible assets. Any residual is recorded as goodwill and any deficit as a bargain purchase (a scenario with its own unique challenges).
- Perform a weighted-average-returns analysis (WARA). This analysis involves assigning market rates of return to each asset identified and deriving the weighted average based on the makeup of the fair value opening balance sheet.
- Reconcile the WARA with the internal rate of return on the acquisition and with a market-based weighted average cost of capital. Spreads among the three rates should be minimal.
 Bon Secours Mercy Health Notes to Consolidated Financial Statements for the four months ended
Dec. 31, 2018.
 CommonSpirit Health Unaudited Pro Forma Quarterly Report for the three- and nine-month periods ended March 31, 2019.