Consolidating Not-for-Profit Entities

The rules for consolidating nonprofit entities

How would you respond to the question, “how do I know when a not-for-profit entity should consolidate a related not-for-profit entity?”

Here’s a brief overview.

Key Consolidation Issue

The main key in determining whether a not-for-profit should consolidate another entity is control.

FASB defines control as the direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.

Consolidation Decision

The FASB Codification addresses not-for-profit (NFP) consolidations as follows:

  • Consolidation is required for 1. through 3. below.
  • Consolidation is permitted but not required for 4. below.
  • Consolidation is not permitted for 5. below.

Controlling Financial Interest

1. 958-810-25-2 – The reporting entity is the sole corporate member of the related NFP
2. 958-810-25-2 – The reporting entity has a controlling financial interest through direct or indirect ownership of a majority voting interest in the other NFP

Control Combined with an Economic Interest

3. 958-810-25-3 – The reporting entity controls another NFP through a majority voting interest in its board and has an economic interest in that other entity (e.g., reporting entity appoints 3 of the 5 voting members of the related NFP)
4. 958-810-25-4 – The reporting entity controls an NFP through a form other than majority ownership, sole corporate membership, or majority voting interest in the board of the other entity and has an economic interest in that other entity (control may be established by contract or an affiliation agreement)

Other

5. 958-810-25-5 – If the reporting entity does not have both control of and an economic interest in the related NFP, then consolidation is not permitted.

Note – There are additional rules for consolidating for-profit entities into NFP financial statements.

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