Nonprofit organizations sometimes have relationships with other entities that are affiliated in some way. How do you know when you should consolidate two or more nonprofit organizations? Under accounting standards, there are two elements that are required to be present to consolidate:
- Control. Organization A must clearly have control over Organization B. To have control, Organization A must have the direct or indirect ability to appoint individuals that together constitute a majority of the votes of the Board of Organization B.
- Economic interest. Economic interest is a bit less “black and white” than the control element. Economic interest exists if one organization:
- Holds or uses significant resources for the other organization to directly or indirectly produce income for or provide services to it, or
- Is responsible for the liabilities of the other entity
For example, if Organization B was a “supporting organization” (which is a status defined by the IRS) to Organization A, meaning its reason for existence was to solicit donations or provide services to support Organization A, then the “economic interest” element would be present. An economic interest would also exist if Organization B’s dissolution clause in its Articles of Incorporation stated that upon dissolution, all assets would be distributed to Organization A. Another example – economic interest would exist if Organization A guaranteed debt for Organization B.
If there is not a requirement for consolidation under accounting standards, you are allowed to issue combined financial statements if it would be more meaningful to the users of the financial statements.
Steven Taylor, CPA