The unique characteristics of cooperatives require that issues like control, valuation, and tax implications are all addressed before a business combination moves forward.


Accounting for Cooperative Business Combinations

  • Jim Halvorsen
  • 9/28/2016
Cooperatives Build a Better World
CLA thanks its cooperative clients during National Cooperative Month.

The cooperative landscape continues to change throughout the country as agribusiness organizations consolidate. Historically, consolidation has been a result of distressed cooperatives or privately held businesses looking to combine with a stronger company. Today’s environment is much different — cooperatives with strong balance sheets are consolidating to improve customer service, reduce overhead, upgrade technology, or address leadership changes as management ages. One of the first questions that should be asked early in the process of a cooperative merger is, “What impact will this combination have on my cooperative’s balance sheet?” To answer this question, the management and board of directors for both cooperatives will need to consider several factors.

Who is the acquirer?

Each business combination has an acquirer and an acquiree. In general, the cooperative maintaining control is considered the acquirer. This is typically the cooperative whose relative size is larger than the other combining entity or entities. However, this can be difficult to determine. Some factors that influence the determination of the acquirer include:

  • Voting rights of the combined entity
  • Makeup of the governing body of the combined entity
  • Makeup of senior management of the combined entity

Identifying the acquirer is an essential because whichever company is the acquiree will need to have their assets and liabilities adjusted to fair value for the business combination. This results in the fixed assets being depreciated as if they were purchased at fair value.

How to value assets acquired and liabilities assumed

Accounting standards state that the acquirer will measure the assets acquired and the liabilities assumed at their acquisition-date fair values. Fair value is the price that would be received to sell an asset, or the price paid to transfer a liability in an orderly transaction between market participants. That said, there are many factors that can influence fair value. Generally speaking, the hard physical assets of the acquiree are generally written up to a higher value as a result of the fair value calculations. All assets and liabilities should be formally evaluated by management to determine their appropriate fair value as defined by the accounting standards. An outside perspective is useful under these circumstances because most owners see their property as more valuable than the market would.

What is the impact of “blue sky” on the transaction?

In addition to determining the fair value of tangible assets, intangible (“blue sky”) assets like customer lists, goodwill, brand recognition, or trademarks must be assigned value as well. Often, business valuation experts must be brought in to determine the value of intangible assets. Private company standards have been adopted in certain circumstances that allow companies to elect to not recognize noncompetition agreements and customer related intangible assets that are not capable of being sold or licensed independently from other assets.

For cooperatives, while it is important to explore the value of intangible assets, only rarely does blue sky impact a transaction.

Unique to cooperative transactions

One of the unique aspects of combining two cooperatives is that there is no monetary exchange. Generally speaking, the members of the cooperatives each end up with the same value of member equity they had prior to the transaction. However, the value of the member equity can be adjusted as a part of the negotiating process. This generally occurs in situations where the acquiree is in financial distress. Any adjustments to member equity is generally included in the final merger agreement.

Because there is no cash exchanged in the transaction, there is typically a remaining credit balance after all of the adjustments are recorded (assets, blue sky, liabilities, and member equity at fair value). Industry practice is that this amount essentially becomes part of your members’ equity. Cooperatives that have been through mergers will often set this aside in an account titled “acquisition equity.”

When addressing business acquisitions, the Financial Accounting and Standards Board has made it clear that bargain purchases are going to be rare. So in the cooperative industry, the increase in the value of the assets is really looked at as additional equity being exchanged for the value of the assets.

How we can help

When discussing business combinations, it helps to have someone involved who is familiar with the accounting rules specific to cooperative mergers. Without the proper consideration of accounting rules, income tax standards, patronage implications and the unique quality of a merger of cooperatives, the board, management, and membership base may not understand the transaction’s final numbers — or the implications of those numbers. As a board and management team, it is important to have accountants familiar with cooperatives get involved early to discuss the various aspects of this complicated process.