Advantages of adopting the accounting alternatives
There are two cases where an organization that implements these accounting alternatives will likely realize only minimal cost savings. The cases are as follows.
Two types of intangible assets (certain CRIs and all NCAs) are assumed into goodwill. This approach reduces the number of assets to be valued and likely will result in minimal changes because the overall purchase price allocation will still need to be performed, including:
- The valuation of any other separately identifiable assets.
- The final reconciliation of weighted average returns analysis, weighted average cost of capital and internal rate of return.
A transaction has an NCA term of less than 10 years and implies minimal goodwill except for the existence of the NCA. In this case, a full NCA valuation will likely be required to demonstrate a shorter amortization period for goodwill. More significant cost savings are likely in the following cases:
- When impairment testing is performed at the entity level, thereby removing the need to perform essentially separate purchase price allocations for each reporting unit acquired
- In a case where a not-for-profit with multiple reporting units can test goodwill at the entity level
- When testing is to be performed only when a triggering event occurs, as opposed to annually
Disadvantages of adopting the accounting alternative
There also are circumstances where adopting the accounting alternative would not be the best choice, including the following.
Increasing expenses and shrinking assets. The amortization of goodwill under the accounting alternative will result in a shrinking balance sheet and higher amortization expense. This may affect lending relationships, the public’s perception of the strength of the organization and other facets of the organization.
A limited universe of potential buyers. An acquisition by a buyer that has not or cannot adopt the accounting alternative would be challenging because the acquired entity would need to restate its financial statements and test goodwill for impairment retrospectively. Limiting the universe of potential suitors may not be in the best interest of many health systems. Both the direction and the pace of merger and acquisition transactions in healthcare suggest that acquisitions among not-for-profits or those involving not-for-profits will continue. A transaction between two not-for-profits (like this year’s merger of Dignity Health and Catholic Health Initiatives to form Chicago-based CommonSpirit Health) could have been derailed had the two systems followed different accounting paths. Similarly, a transaction like HCA Healthcare’s recent acquisition of the not-for-profit Mission Health in Asheville, North Carolina, could have suffered had Mission Health followed the accounting alternatives.
Uncertainty about how investors will react. Just as public business entities are precluded from implementing the alternatives, presumably in the interest of investors in publicly traded securities, municipal bond issuers may need to preclude themselves from implementation to assure investors that do not welcome issuers adopting the accounting alternatives.
(See the sidebar for a checklist an fiance leader can use to ass accounting alternatives.)
Fair value accounting rules continue to evolve, and the FASB continues to examine accounting for goodwill and intangibles. Not-for-profit organizations, especially municipal bond issuers, should consider the accounting alternatives carefully. Because access to capital has become a major factor in determining an organization’s long-term survival, it is important for not-for-profit boards to consider the potentially chilling effect adoption of the accounting alternatives may have on debt issuances or potential buyers. However, reducing complexity and costs may work well for many organizations, as four years of experience in the for-profit world have shown.
 See FASB ASU 2019-06, Intangibles — Goodwill and other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities, May 2019.
 See FASB ASU 2010-07 — Not-for-Profit Entities (Topic 958): Not-for-Profit Entities: Mergers and Acquisitions, January 2010; see also, Heuer, C., and Travers, M.A.,“Valuing Goodwill: Not-for-Profits Prepare for Annual Impairment Testing,” hfm, February 2011, and Heuer, C., and Travers, M.A., “FASB Issues New Accounting Standards for Business Combinations,” hfm, June 2010.
 Accredo Health, Incorporated SEC Form 10-K/A for the fiscal year ended June 30, 2004.
 A triggering event is described by FASB in Topic 350 as an event “that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount.” Organizations must make an accounting policy decision to test for goodwill impairment at the entity level or reporting unit level.