The following column is written by Andrew D. Galbraith, CFA, MBA, director with HealthCare Appraisers.
With the increase in acquisition activity in the healthcare industry, buyers need to be aware of the rule governing purchase accounting. Accounting Standard Codification 805 - Business Combinations ("ASC 805"), previously known as Statement of Financial Accounting Standard 141r (revised 2007), requires the valuator to determine the value of the enterprise, which would include the fair value of identifiable assets acquired and liabilities assumed as of the acquisition date. ASC 805 is typically required in mergers and in the context of transactions involving a transfer of a controlling interest in an acquisition.
ASC 805 was effective for the first annual reporting period beginning after December 15, 2008. Prior to the revision, Statement of Financial Accounting Standard 141 governed business combinations and was effective for fiscal years beginning after December 15, 2001.
Under ASC 805, the value of the assets acquired is measured at fair value as of the acquisition date. ASC 805 further requires the following:
- Determination of the consideration paid in the transaction (including contingent consideration);
- Identification and valuation of assets acquired and liabilities (including contingent liabilities) assumed in the transaction; and
- Consideration of bargain purchase gains or losses.
In January 2010, Accounting Standard Update 2010-07, Not-for-Profit Entities: Mergers and Acquisitions, was issued to codify the guidance originally issued in May 2009. As a result, controlling interest acquisitions completed by nonprofit entities need to conform with the standards set forth in ASC 805, with additional guidance unique to nonprofits as described in Accounting Standard Codification 958 - Not for Profit Investments. Many nonprofits are required to file audited financial statements with regulatory bodies and, as such, should be aware of the recent change to their reporting requirements.
FMV Pitfall
The healthcare industry has recently experienced an increase in transactions in which hospitals have acquired a controlling interest in physician practices, ambulatory surgery centers, and imaging centers. For-profit and nonprofit businesses in healthcare are required to record acquisition related assets and liabilities at "fair value" on their balance sheet in compliance with financial reporting standards as outlined by the Financial Accounting Standards Board. Fair value varies from the regulatory definition of "fair market value" healthcare practitioners are familiar with, and care should be taken to ensure fair value measurements meet current financial reporting requirements.
For more information, contact Mr. Galbraith of HealthCare Appraisers at (303) 688-0700 or agalbraith@hcfmv.com.
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