Nonprofit Advisor ▲

U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s
January 2010
Vol. 3 • No. 1

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Upcoming Changes Understanding

Charitable Donations
Treatment of Mergers and of Inventory and
Acquisitions for Not-for-Profits Other Property
By Matt Duvall By Kerry Duvall

In light of the
hardships many
organizations are
facing due to the
recent economic cri-
sis, there has been a
trend toward con-
solidation. In the
Matt Duvall
not-for-profit com-
munity specifically, these financial
pressures have led to an increase in
merger and acquisition activity.
It is timely that the FASB has intro-
duced SFAS No. 164 specifically to
address mergers and acquisitions
involving not-for-profit organiza-
tions. The objective of SFAS No. 164
is to improve the quality and rele-
vance of information disclosed
about combinations in not-for-profit
financial reports.
Prior to the introduction of SFAS
No. 164, not-for-profit organizations
accounted for mergers and acquisi-
tions by applying accounting stan-
dards that were geared toward for-
profit businesses. The FASB con-
cluded that these standards were
not sufficient for not-for-profit enti-
ties because of the fundamental dif-
ference that combinations by not-
for-profit entities tend to focus on
the furtherance of their mission ben-
efiting the public rather than maxi-
mizing the profit of shareholders.
SFAS No. 164 distinguishes between
a merger and an acquisition as fol-
lows: A merger is a combination in
which the governing boards of two
or more not-for-profit organizations
cede control of those organizations
to create a new not-for-profit organ-
ization. An acquisition, however, is
a combination in which one not-for-
profit organization obtains control
of one or more not-for-profit activi-
ties or businesses.
The distinction between a merger
and an acquisition is an important
first step since SFAS No. 164 calls
for different accounting treatments
for each. If the combination is
classified as a merger, the newly cre-
ated organization must apply the
carryover method. Applying the car-
ryover method is done by combin-
ing the assets and liabilities recog-
nized in the financial statements of
each merging organization as of the
merger date; there are no additional
assets or liabilities recognized and
no fair value adjustment is made.
SFAS No. 164 notes that a merging
continued on page 2
I
f your organiza-
tion is a 501(c)(3),
don’t forget that
there are special
rules applicable to
in-kind donations
from “C” corpora-
tion donors. Typi-
Kerry Duvall cally, when a com-
pany contributes inventory to a chari-
table organization, the tax deduction
is limited to the company’s basis in
the property (generally, the amount
you paid for it). However, when the
donor is a “C” corporation and the
contributed property is inventory,
there is an increased deduction that
you are allowed if you meet specific
requirements.
Requirements
In order to qualify for the increased
deduction, the donation must be
made to a 501(c)(3) organization and
must meet four requirements:
continued on page 2
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UHY LLP brings specialists in nonprofit solutions in accounting and tax.

 January 2010
Vol. 3 • No. 1

Understanding charitable
donations of inventory
and other property
continued from page 1
1. The use of the property is related
to the organization’s exempt pur-
pose and must be used for the
care of the ill, needy or infants.
2. The property is not transferred to
the organization in exchange for
money, other property or services.
3. The taxpayer receives from the
organization a written statement
representing that its use and dis-
position of the property will be in
accordance with #1 and #2 above.
4. If the property is subject to the
Federal Food, Drug, and Cosmetic
Act, such property must fully satis-
fy the requirements of The Act for
180 days prior to the contribution
date. (Also, any donation of food
inventory must meet the definition
of apparently wholesome food.)
Calculation of deduction
Instead of deducting the corpora-
tion’s basis in the inventory, the cor-
poration may deduct the lower of
1) the basis in the property plus half
of the ordinary income that would
have been recognized if the proper-
ty were sold at fair market value on
the contribution date, or 2) twice the
basis of the property.
To illustrate this point, let’s assume
Corporation X purchased inventory
for $1,000 and, as of the date of the
contribution, the fair market value of
the inventory was $5,000. If the prop-
erty were sold in the corporation’s
normal course of business, the corpo-
ration would pay income tax on a
gain of $4,000. However, assume that
instead of selling the property, the
corporation donated it to Charity Y.
Based on these facts, the corporation
would be entitled to a deduction of
$2,000 (the lower of either $3,000,
basis plus half of the ordinary
income, or $2,000, twice the basis).
It’s important to note here that the
deduction is still limited to 10 per-
cent of corporate taxable income.
If you have any questions regarding
this deduction, please contact Kerry
at (410) 720-5220.

Treatment of mergers
and acquisitions for
not-for-profits
continued from page 1
entity that does not follow GAAP
(Generally Accepted Accounting
Principles) must first prepare finan-
cial statements in accordance with
GAAP before the newly created
organization recognizes the assets
and liabilities.
The carryover method applied to
mergers is fairly straightforward
when compared to the acquisition
method called for when the combina-
tion is determined to be an acquisi-
tion. The acquisition method pre-
scribed by SFAS No. 164 is similar to
the acquisition method found in FASB
Accounting Standards Codification
(ASC) 805, formerly known as SFAS
No. 141(R), with the main exception
being the treatment of goodwill.
The acquisition method requires the
identification of the acquirer and for
the acquirer to recognize the identi-
fiable assets acquired, the liabilities
assumed and any non-controlling
interest in the acquiree at the fair
value as of the acquisition date.
This is the point where SFAS No. 164
departs from the requirements under
FASB Accounting Standards Codifica-
tion (ASC) 805. The FASB recognized
that some not-for-profit organiza-
tions are solely operated by contribu-
tions and returns on investments.
These organizations may not recog-
nize a component of goodwill as a
result of the combination. Rather, the
acquirer is to recognize an amount
shown as “Excess of Liabilities over
Assets” in its statement of activities
equal to the amount that would have
otherwise been recognized as good-
will in the statement of financial
position. For not-for-profit organiza-
tions that operate on support from
fees for service, the recognition of
goodwill is similar to that required
under FASB Accounting Standards
Codification (ASC) 805.
Significant financial statement dis-
closures intended to enable users of
financial statements to evaluate the
nature and financial effect of the
combination are required for both
mergers and acquisitions.
SFAS No. 164 becomes effective for
mergers for which the merger date is
on or after the beginning of an initial
reporting period beginning on or after
December 15, 2009, and for acquisi-
tions for which the acquisition date is
on or after the beginning of the first
annual reporting period beginning on
or after December 15, 2009. At that
time, the pronouncement will be for-
mally incorporated into the FASB
Accounting Standards Codification.

The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal,
state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken
or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals.
UHY Advisors, Inc., provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc.,
and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc., and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent
CPA firm that performs attest services. UHY Advisors, Inc., and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.