Say your not-for-profit hospital just merged with a neighboring tax-exempt institution. How would you book the combination? As a purchase or a pooling of interests?
Often the answer is open to interpretation because existing accounting guidelines were written for investor-owned companies. Not-for-profit healthcare organizations have been forced to read between the lines.
But a new statement issued by the Healthcare Financial Management Association's Principles and Practices Board attempts to make sense of the accounting profession's for-profit-based pronouncements. Principles and Practices Board Statement No. 20, titled "Healthcare Mergers, Acquisitions, Collaborations," interprets existing accounting literature and applies it to not-for-profit healthcare combinations and collaborations. Based on generally accepted accounting principles, the statement also speaks to transactions between not-for-profits and for-profits.
"The rules have always been there," says Maribess L. Miller, a partner in the Dallas office of Coopers & Lybrand and chairwoman of the P&P board. "It's not like we created any new GAAP."
Rather, she says the board's interpretations are designed to make not-for-profit healthcare accounting treatment more consistent.
Over the past year, the P&P board pored over comments generated by an exposure draft issued last July (Sept. 16, 1996, p. 52). Members of the Financial Accounting Standards Board and the healthcare committee of the American Institute of Certified Public Accountants also were consulted.
The resulting 15-page document defines and explains accounting treatments for various healthcare transactions and describes how to record those deals.
For example, the section on poolings states, "Results of operations should be combined from the beginning of the (quarter) in which the combination occurs." Miller says healthcare providers often misinterpret existing guidance. Instead of restating results, they mistakenly record combined earnings from the date of the transaction.
On the other hand, if the deal is a purchase, it is legitimate to record results from the date of acquisition.
The P&P board says issues of "control" are key to choosing the appropriate accounting method:
When one organization acquires another and there is a payment, a change in legal title to the assets or an assumption of liabilities, the purchase method applies.
Under a pooling of interests, ownership interests are united without any monetary consideration.
In a joint venture, a group of businesses establishes a business or project for the group's mutual benefit. One investor may have a greater interest as long as no single investor controls the venture.