By: Rick Shields, CPA, CFE, Principal

Not-for-profit (NFP) organizations often operate in an environment of affiliates with the assumption that all entities are part of one overall unit. This may be correct, however, as with many aspects of accounting, it is not as simple as it may seem on the surface. Below is an introductory discussion of concepts and guidance in this area.

Common Misconceptions of Consolidation

Here are some examples where consolidation is often assumed to be required without sufficient analysis.

• Common board members mean consolidate.
  • Surprisingly, this is not even a consideration for consolidation among NFP organizations. Two entities can have exactly the same board members and not consolidate, while two entities can have completely different board members and consolidate.
  • For consolidation, the determining factor for board composition is how the board members are determined regardless of the individuals comprising each board.
• Common board members and common management mean consolidate.
  • The addition of common management to common board members does not impact the determination of whether to consolidate.
• One NFP determines a simple majority voting interest in another NFP means consolidate.
  • This criterion, referred to as “control”, does not by itself satisfy the requirements for consolidation.
• One NFP provides material financial assistance to another means consolidate.
  • This criterion, referred to as “economic interest”, does not by itself satisfy the requirements for consolidation.
• Consolidation is an option, not a requirement.
  • This is incorrect from both perspectives –
    • If the criteria for consolidation are met, it is a requirement.
    • If the criteria for consolidation are not met, it is not an option.
  • Consolidated entities can still publish stand-alone financial statements if they want to.
    • Subsidiary entities can publish stand-alone financial statements. However, the “parent” entity cannot publish stand-alone financial statements.
    • The distinction between the above scenarios is that the financial transactions of the parent are not part of the subsidiary, but the financial transactions of the subsidiary are part of the parent. Thus, the parent cannot exclude a subsidiary’s financial balances and results from its financial statements.
    • In order to address the above, consolidated financial statements can include supplemental schedules with separate columns for each entity.

When Consolidation is a Definite Yes

As mentioned above, consolidation involves a “parent” entity and subsidiary entities. Thus, it is necessary to establish that there is a parent entity to have consolidation. To be a parent, an NFP must have a “controlling financial interest” in another NFP (not just “control”). Here are some examples:

• One NFP is the “sole corporate member” of another NFP.
• • This is an automatic requirement for consolidation, but it would have to be expressly stated in the articles of incorporation and cannot be assumed regardless of an entity’s understanding or intent.
• One NFP determines the entire board of another NFP.
  • This is another automatic requirement for consolidation. It generally found in the bylaws.
  • It is important to distinguish between this scenario as compared to when an NFP determines a simple majority of the board of another NFP.
• The charter or bylaws of one NFP stipulates that its sole purpose is to raise funds to subsidize a related NFP.
  • This is an automatic requirement for consolidation. The funds raised by the subsidiary are for the purpose of supporting the parent rather than any independent operations of the subsidiary.
• A contract between two or more NFP entities gives operational control to one of the parties to the contract.
  • Consolidation is required. The contract establishes a parent entity independent of other considerations.
• One NFP determines a simple majority voting interest in another NFP and provides material financial assistance (economic control) to another NFP.
  • Consolidation is required. The criteria of “control” and “economic interest” are both met.
• One NFP provides the sole source of financial assistance to another and the other could not reasonably be expected to continue if funding ceased.
  • Consolidation is required. The subsidiary entity’s existence is dependent on the parent. It cannot operate independently.

When Consolidation is a Definite No

Here are some examples of when related NFPs would not consolidate. Each of these examples assumes that none of the above criteria for automatic consolidation are applicable.

• Neither entity determines a simple majority of the board of the other.
  • The lack of determination of a simple majority of another’s board means a lack of “control” which is a criterion for consolidation. Both entities operate independently in terms of governance.
• Neither entity provides material financial assistance to the other.
  • The lack of financial assistance means a lack of “economic interest” which is a criterion for consolidation. Both entities operate independently in terms of finances.

When Consolidation is a Definite…. Maybe

Consolidation among NFP entities is often a multilayered analysis that may not yield a clear conclusion even with knowledge of all the facts and circumstances. Here are some examples:

• One NFP controls a supermajority of the board of an affiliate.
  • This situation requires judgment. Typically, a supermajority is 67% or more and is often the threshold for changing bylaws and amending articles of incorporation. If the bylaws stipulate that one entity controls 67% or more of a board and changing the bylaws requires a vote of 67% or more, then a controlling financial interest may be established because the controlling entity would have the ability to change the bylaws without the support of the other board members.
• A national organization has agreements with local chapters that provides for the assessment of fees and operational oversight of the chapters, but the national organization does not control the boards of the local chapters.
  • Judgement is required to determine the following:
    • Are the assessments paid to the national organization such that the local chapters require financial assistance from the national organization in order to operate?
    • Does operational oversight by the national organization extend to the level of monitoring day-to-day activities of the chapters such that the chapters do not operate with any reasonable amount of autonomy?

Need More Guidance?

NFP consolidation requirements are complex and do not follow the same accounting guidance as other corporations and organizations.  Guidance surrounding consolidation requirements specific to NFP entities can be found in Financial Accounting Standards Board Accounting Standards Codification 958-810.

If you have any questions about whether to consolidate your affiliates, please contact your local Blue & Co. advisor.