Working with another nonprofit? Here’s how to divide up financial reporting.

Sometimes, nonprofit organizations will work with other companies to accomplish things better together. With these arrangements, both companies can save money and do their job more efficiently. Working with other companies is often a great idea, but it is critical that your accounting departments know how to accurately report these collaborations to the government. Reporting obligations vary based on how these ventures are structured, and knowing the difference helps when it is time for nonprofit audit services to be performed.

Collaborative agreements

From an accounting standpoint, the easiest business relationship for nonprofits may be a collaborative arrangement. Here, there typically is a contractual agreement where cooperating organizations carry on shared operations.

With these agreements, one nonprofit is typically considered the “principal.” Reporting obligations for the principle include costs to the organization and revenue received from transactions with third parties on a gross basis in a statement of activities. For tax purposes, the principal organization is the one with control over goods or services provided through the agreement. When there are payments between cooperating organizations, they are reported according to their “nature” according to accounting rules for the type of revenue or expenses for that transaction. All participants in joint ventures also have to disclose the purpose of the collaboration to stakeholders.

Mergers and Acquisitions

Sometimes, simply carrying out a joint venture is insufficient for the principal nonprofit to accomplish its goals. In this situation, sometimes the Board of another not-for-profit will turn over control of its operations to the principal. Generally, this is done in the name of cooperation. From a regulatory standpoint, this is considered an acquisition, although no new legal entity is formed. With acquisitions, the acquiring company must determine the fair market value of the acquired nonprofit’s assets and liabilities. One way to do this is through a California Nonprofit Audit of the acquired entity.

Once your accountants have determined the fair market value of the acquisition, they should look at the price paid for the other organization. If the net asset value is more than the price paid, then the difference is considered a contribution. For situations where the acquiring NPO pays more than this figure, record the difference as goodwill. Finally, if the acquired company’s operations will be mostly paid for through contributions and return on investments, record this difference as a separate charge in the acquirer’s statement of activities.

Let’s look on the other side of the coin. Nonprofits that are acquired by another entity should be prepared for the acquiring organization to consolidate operations effective on the “acquisition” date. Sometimes, however, the nonprofits will continue to generate separate financial statements. If that’s your company, you should work together to determine if there should be a new basis for reporting assets and liabilities to match the acquirer.

Finally, in some situations your organization might decide to form a new legal entity as part of the merger. Here, the assets and liabilities of both companies are combined effective the date of the merger.

No matter the type of collaboration, there will be a change in financial reporting for all entities. Be sure to speak with your tax accountant to understand the differences.