Health Care. Business Combinations 12/6/2018. GAAP and Tax Implications THOUGHTWARE THOUGHTWARE

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1 THOUGHTWARE Health Care THOUGHTWARE Business Combinations GAAP and Tax Implications Tracy Young Partner Little Rock Kevin Horn Partner Little Rock December 12,

2 Agenda GAAP Implications Primarily from NFP Hospital Perspective Sources of GAAP Practical Implications Tax Implications 3 Business Combinations - GAAP Sources of GAAP ASC Topic , Health Care Entities Business Combinations (also refers to ASC Topic ) ASC Topic , Health Care Entities Consolidation (also refers to ASC Topic ) Health Care Entities Accounting & Auditing Guide, Chapter 12: The Reporting Entity and Related Entities 4 2

3 Business Combinations Guidance applies when a NFP entity combines with one or more other NFPs, business or NFP activity What constitutes a business? An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. Additional guidance on what a business consists of is presented in paragraphs through Business Combinations What constitutes a NFP activity? An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits, other than goods or services at a profit or profit equivalent, as a fulfillment of an entity s purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not-for-profit entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit business entity. 6 3

4 Business Combinations Merger or Acquisition? Merger - A transaction or other event in which the governing bodies of two or more not-for-profit entities cede control of those entities to create a new not-for-profit entity. Acquisition - A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer s financial statements. 7 Business Combinations If a Merger,... Apply carryover method Essentially, the combination of assets and liabilities in separate financial statements of merging entities as of merger date 8 4

5 Business Combinations If an Acquisition,... Apply acquisition method Identify the acquirer (who has control as defined in ASC ) Identify the acquisition date (date when control is obtained) Recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree Recognize goodwill acquired or a contribution received, including consideration transferred Determining what is part of the acquisition transaction 9 Acquisition - Control How is control demonstrated? See ASC Direct or indirect majority voting interest of NFP entity Sole corporate membership Control through contract or affiliation? Consolidation is encouraged if both the following are met: One NFP entity controls another through an economic interest (but not via majority voting interest) Consolidation would be meaningful 10 5

6 Economic Interest A NFP's interest in another entity that exists if any of the following criteria are met: The other entity holds or utilizes significant resources that must be used for the unrestricted or restricted purposes of the NFP, either directly or indirectly by producing income or providing services The NFP is responsible for the liabilities of the other entity 11 Business Combinations Recognition of identifiable assets acquired, liabilities assumed - needs to be measured at fair value Receivables no separate allowance recorded; should be recorded at fair value PP&E how to determine fair value? Need for an appraisal? Most other items are generally at fair value (cash, investments, payables, etc.); however, need to consider 12 6

7 Business Combinations Goodwill Excess of the consideration transferred over the net of the fair value of assets acquired and liabilities assumed at the acquisition date 13 Business Combinations Contribution received inherent contribution A contribution that results if an entity voluntarily transfers assets (or net assets) or performs services for another entity in exchange for either no assets or for assets of substantially lower value and unstated rights or privileges of a commensurate value are not involved Recognized as a separate credit to the statement of operations and changes in net assets 14 7

8 ASC Topic , Disclosures If NFP Entity is a Public Entity (i.e., conduit bond obligor) and Combination is a Merger Disclose the performance indicator as if the merger occurred at the beginning of the period (supplemental pro-forma info) Combination is an Acquisition Disclose the performance indicator of the acquiree since the acquisition date Disclose the performance indicator as if the acquisition occurred at the beginning of the period and prior period if comparable (supplemental proforma info) 15 ASC Topic , Disclosures thank goodness! If impracticable, disclose that fact and state why disclosures are not practicable Impracticability as defined in ASC , if ANY of the following exist: After making every reasonable effort to do so, the entity is unable to apply the requirement Retrospective application requires assumptions about management's intent in a prior period that cannot be independently substantiated Retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that both: Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application Would have been available when the financial statements for that prior period were issued 16 8

9 More Disclosure Considerations Qualitative factors of combination (such as expected synergies from combining operations of the acquiree and the acquirer) Amount of consideration transferred Acquisition date fair-value of each major financial class of assets acquired and liabilities assumed Amount of goodwill Reasons why inherent contribution was received 17 More Disclosure Considerations If the date of an acquisition is after the reporting date but before the financial statements are issued or available for issue, the NFP acquirer shall disclose the information required in the previous slides However, if not available or accounting is incomplete, describe which disclosures could not be made and the reason why they could not be made 18 9

10 Examples of Transactions - How would these be reported/recognized in financial statements? NFP Hospital A acquires NFP Hospital B or FP Hospital B (asset acquisition standard purchase agreement) NFP Hospital A becomes sole member of another NFP Hospital B (no consideration changes hands revise by-laws) What to do with hospital facilities in leasing arrangements with city/county and NFP Hospital A subleases facilities to NFP Hospital B? NFP Hospital A enters into a management agreement with NFP Hospital B (supplies C-suite management and other supporting functions) NFP Hospital A acquires physician practice 19 Tax Issues of Purchasing or Selling a Business P R E S E N TED B Y: K E V I N H O R N & TRACY YOUNG 10

11 1 Deal Structure: Asset Sale vs. Stock Sale WHAT I LL COVER TODAY 2 Valuation Issues 3 Entity Issues 4 Transaction Costs HOW WILL THE SALE BE STRUCTURED? The purchaser can buy: A. The assets of the business B. The Stock/Ownership Interest of the business C.Partner with another business - Tax implications for the seller - Assumption of business liabilities - Basis of assets (depreciable) vs. stock (non-depreciable) - Tax benefits (NOL C/F, Credit C/F, etc.) - Intangibles 11

12 HOW WILL THE SALE BE STRUCTURED? Asset Deal Buyer Perspective Advantages Fresh start basis Depreciable/Amortizable Assets Used assets okay for 100% bonus Intangibles 180 months Typically forms new entity No prior baggage Asset purchase agreement specifies assets bought and sold Easy to include/exclude liabilities Disadvantages May Cost buyer more Some legal risk may not be separate Sales Tax Payroll Tax HOW WILL THE SALE BE STRUCTURED? Asset Deal Seller Perspective Advantages Easy to exclude assets to be retained May fetch larger purchase price Qualified business deduction Potential - 20%? Ordinary portion only Disadvantages Gain is likely part ordinary income 37% Federal for individuals maximum Less 20% QBD if applicable (29.6%) 6.9% Arkansas for individuals Could result in double taxation Potential 56.8% (Corp + Individual + NIIT & Ark) 12

13 VALUATION ISSUES Allocation of Purchase Price Section 1060 Requirements Form 8594: Asset Acquisition Statement Under Section

14 Calculations for Tax Purposes Accrued Payroll, Bonuses, Vacation, Wages, Commissions, Professional Fees Deferred Compensation Asset/Liability Liabilities that are paid by buyer may not be deductible by seller at closing Bulk Sale and Sales Tax Inventory Sold for Resale? Sales Tax Requirements vary by State Escheat Unclaimed Assets (Un-cleared Checks) OTHER TAX CONSIDERATIONS ENTITY ISSUES Purchase of Entity Stock Prior Accounting Methods stay intack May be required to change e.g. cash basis Net operating losses may be limited due to Sec 382 Long-Term Exempt Rate times stock value currently 2.51% No basis step-up May be desirable when contracts are not assignable to other entity 14

15 ENTITY ISSUES Purchase of Entity Stock Managing Tax Risks May need to file 3115 to change Prior tax risks go with owner from government s prospective Escrow needed? ENTITY ISSUES Hybrid Approach Stock Purchase treated as Asset Acquisition - 338(h)(10) or 336(e) Seller legally sold stock Seller sold assets for tax then liquidated Then seller entity reincarnates S-corp seller eliminates double tax C-corp parent of seller eliminates double tax Less attractive for C-corp owned by individuals Step-up in basis for buyer like an asset purchase Keep legal entity in-tact for other non-tax purposes 15

16 Transaction Costs A. Inherently Facilitative vs. Other B. Bright-line Date A. Compensation TYPES OF TRANSACTION COSTS B. Legal C. Investment Bankers D. HSR E. Debt Financing Costs 16

17 Questions? Thank You! Kevin G. Horn Tracy Young 17

18 BKD Thoughtware Webinars, seminars & articles Many are CPE-eligible PDMs Populate bullets with most relevant webinars, articles, videos, etc