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While some NFPs operate as independent legal entities, others carry out their activities in conjunction with one or more related entities. For example, fundraising is often conducted by legally-separate foundations. Universities might have affiliates engaged in investing, real estate management, or healthcare. Health systems are typically comprised of multiple entities that can be either for-profit or not-for-profit. When such relationships have certain characteristics, consolidated financial statements must be prepared that aggregate the related organizations into a single financial reporting entity.
ASC 958-810 and ASC 954-810 provide NFP-specific guidance on consolidation matters, supplementing the general consolidation guidance in ASC 810-10. When evaluating legal control of other entities, NFPs exclusively use a voting-interest model (that is, a model based on voting rights), and therefore disregard the guidance in the variable interest entity subsections of ASC 810-10 (see NP 9). The manner in which the voting interest model is applied differs depending on whether the relationship involves another NFP or a for-profit entity. The approach for evaluating consolidation of other NFPs is discussed at NP 5.2.1; consolidation of ownership interests in for-profit entities is discussed in NP 9, which addresses accounting for investments.
Other topics in this section include:
  • Evaluating the consolidation of special-purpose entity lessors (see NP 5.2.3) and other relationships where legal control is not present (see NP 5.2.4)
  • Reporting noncontrolling interests (sometimes called minority interests) in for-profit and not-for-profit subsidiaries (see NP 5.2.5)
  • Consolidated financial statement presentation matters (see NP 5.2.6)

See AAG-NFP Chapter 3 and AAG-HCO Chapter 12 for additional commentary on consolidation topics.

5.2.1 Evaluating consolidation of other NFPs

ASC 958-810-25-1 through ASC 958-810-25-6 set forth the unique model used for evaluating consolidation in relationships with other NFPs. ASC 954-810-15-2(f) requires NFP HCOs to use this model. The model focuses primarily on whether the reporting NFP has voting control over another NFP’s board as evidenced by provisions included in the other NFP’s governing documents (articles of incorporation and bylaws). For background information on how NFP corporations are organized and governed, see NP
The glossary in ASC 958-810-20 defines the concept of “control” used in evaluating consolidation.

Excerpt from ASC 958-810-20

Control: The direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.

Control that requires consolidation can be evidenced by either:
  • Possession of a controlling financial interest which arises through sole corporate membership or ownership of a majority voting interest (which could be direct or indirect)
  • Holding a majority voting interest in the board of another NFP through means other than sole corporate membership or ownership, in addition to having an “economic interest” in that entity. The economic interest concept (discussed in NP is used in lieu of the notion of “financial interest” that is present in ownership relationships involving for-profit entities.

If an NFP is controlled by other means (for example, through contract or affiliation agreement) and an economic interest also exists, consolidation is permitted but not required, as discussed in ASC 958-810-25-4. The consolidation requirements are summarized in Figure NP 5-1.
Figure NP 5-1
ASC 958-810’s requirements for consolidating other NFPs
Additional guidance
Reporting NFP is the sole corporate member of another NFP
Consolidate unless control does not rest with the sole corporate member.
If the sole corporate member does not have control, consolidation is prohibited. See NP
Reporting NFP owns, directly or indirectly, a majority voting interest in an NFP
Consolidate unless control does not rest with the majority owner.
If the majority owner does not have control, consolidation is prohibited. See NP
Reporting NFP controls another NFP through having a majority voting interest in its board and has an economic interest in the other NFP
Consolidate unless control does not rest with the holder of the majority voting interest.
If majority voting interest holder does not have control, consolidation is prohibited. See NP
Reporting NFP controls another NFP through means other than sole corporate membership or majority voting interest (e.g., through contract or affiliation agreement) and has an economic interest in the other NFP
If consolidation would be meaningful, it is permitted but not required.
If consolidated statements are not presented, notes to the financial statements should disclose
(a) the identification of the other entity and the nature of its relationship with the reporting entity,
(b)  summarized financial data of the other entity, and
(c) the related party disclosures required by ASC 850‑10‑50.
Reporting NFP has control over another NFP or an economic interest in another NFP, but not both
Consolidation is prohibited.
Notes to the financial statements should provide the related party disclosures required by ASC 850-10-50. See ASC 958-810-25-5 and ASC 958-810-50-3. Governance of NFP corporations

NFPs that incorporate under state laws are run by boards of directors, trustees, or regents that have legal authority and ultimate accountability for the actions of the corporation. Like a business corporation, an incorporated NFP must have articles of incorporation (sometimes referred to as a corporate charter or certificate of incorporation) and bylaws.
Unlike a business corporation, a nonprofit corporation does not have owners. However, in some cases, the articles of incorporation or bylaws will provide for a membership structure that resembles the shareholder structure of investor-owned corporations. “Members” of an NFP corporation have significant rights with respect to corporate governance provided under the articles, bylaws, or state law (for example, to vote for directors, or to approve fundamental corporate decisions, such as amending articles and bylaws, acquisitions, or dissolution). Unlike shareholders in business entities, however, they do not obtain financial benefits such as dividend rights or the ability to share in profits.
This type of membership should not be confused with other member relationships unrelated to governance that provide certain benefits, such as admission to exhibits, newsletters, or gift shop discounts, to supporters or donors.
Under some membership structures, an individual or corporation will be named in the articles or bylaws as the single voting member (“sole member”). A sole member’s rights are similar to a sole shareholder of a business corporation. A sole member has the exclusive right to elect and remove directors, enabling it to replace board members who would vote against the sole member’s interests. The sole member structure is often used to establish controlled NFP subsidiaries or to effect a transfer of control in an NFP acquisition (by amending the articles or bylaws of an acquiree to name the acquirer as its sole member).
If an NFP is not legally organized with a membership structure, its board might be independent and self-perpetuating (that is, board members vote for their own replacements). Alternatively, the articles of incorporation or bylaws might provide another entity with the right to appoint some or all of the NFP’s board members (“appointment rights”). The latter approach can be used to establish a controlled NFP subsidiary over which the parent has exclusive board appointment rights or to effect a transfer of control in an NFP acquisition (by amending the articles or bylaws of the acquiree to provide the acquirer with a majority of the appointment rights).
Most states prohibit NFPs from issuing stock. In the few states that allow stock to be issued, the nature of the shares differs from corporate stock in that they do not provide the shareholder with a financial interest in the entity. Instead, they provide holders with a mechanism for exercising voting powers related to election of directors and proposals for fundamental corporate changes (similar to rights of members in a membership structure NFP). NFP controlling financial interests

Under the voting interest model, consolidation generally is appropriate when one entity has a controlling financial interest in another. Typically, the holder of a controlling financial interest in an entity has a unilateral right to make significant financial and operating decisions for that entity. According to ASC 958-810, two situations can give rise to a controlling financial interest in an NFP: sole corporate membership and ownership of a majority voting interest.
As discussed in NP, some NFP corporations have a single voting member (“sole member”). If the sole member is a corporate entity, it is referred to as a sole corporate member. A sole corporate member generally holds powers equivalent to those of a sole shareholder, such as the ability to appoint and terminate the NFP’s board or dissolve the organization. ASC 958-810-45-3A states that a sole corporate member generally would possess a controlling financial interest that requires consolidation, unless control does not rest with the sole corporate member. Question NP 5-1 illustrates some of those situations.
Question NP 5-1
NFP A is the sole corporate member of NFP B. Could there be a situation when NFP A would not be required to consolidate NFP B?
PwC response
Maybe. If NFP B’s articles of incorporation designate NFP A as its sole corporate member, consolidation by NFP A is required unless control does not rest with NFP A. For example, if NFP B’s articles of incorporation or bylaws provide approval or veto rights to a party other than NFP A that are so restrictive as to call into question whether control rests with NFP A, then consolidation by NFP A may not be appropriate. Additionally, ASC 958-810-25-2 indicates that the presumption of control by the sole corporate member might be overcome when the entity is in legal reorganization or bankruptcy, or when the entity is subject to other legal or contractual limitations that severely restrict the powers that the sole corporate member would otherwise have the ability to exercise.

In the few states that permit issuance of nonprofit stock or shares, ownership of shares provides a mechanism for shareholders to vote on certain corporate matters such as election of directors and fundamental corporate changes. Generally, a majority voting interest exists when a stockholder owns over 50% of a corporation’s voting shares. An NFP shareholder that owns more than 50% of the voting shares would be able to veto any decisions made by the board and thus, would have a controlling financial interest that results in consolidation, unless control does not rest with the majority owner.
ASC 958-810-25-2A indicates that actions that require approval by a supermajority vote of the board might overcome the presumption of control by the owner of a majority voting interest. ASC 958-810-55-4A provides considerations when evaluating control, and indicates that the guidance in ASC 810-10-25-2 through ASC 810-10-25-14 may be helpful in evaluating whether a majority voting interest holder can exercise control. Majority voting interest coupled with economic interest

According to ASC 958-810-25-3, consolidation is required if an NFP controls a majority voting interest in the board of another NFP (through means other than those discussed in NP and also has an economic interest in that NFP.

ASC 958-810-25-3

In the case of control of a related but separate NFP through a majority voting interest in the board of the other NFP by means other than ownership or sole corporate membership and an economic interest in that other NFP, consolidation is required, unless control does not rest with the holder of the majority voting interest, in which case consolidation is prohibited. An NFP has a majority voting interest in the board of another entity if it has the direct or indirect ability to appoint individuals that together constitute a majority of the votes of the fully constituted board (that is, including any vacant board positions). Those individuals are not limited to the NFP’s own board members, employees, or officers. For implementation guidance on a majority voting interest in the board of another entity, see paragraph 958-810-55-5.

In this situation, a majority voting interest arises when an NFP’s articles of incorporation provide another organization with the right to appoint a majority of its governing board. The “right to appoint” is the key determinant of whether a majority voting interest exists. The meaning of “right to appoint” is explained in ASC 958-810-55-5.

ASC 958-810-55-5

A majority voting interest in the board of another entity… is illustrated by the following example. Entity B has a five-member board, and a simple voting majority is required to approve board actions. Entity A will have a majority voting interest in the board of Entity B if Entity A has the ability to appoint three or more of Entity B’s board members. If three of Entity A’s board members, employees, or officers serve on the board of Entity B but Entity A does not have the ability to require that those members serve on the Entity B board, Entity A does not have a majority voting interest in the board of Entity B.

The evaluation of whether a “majority voting interest” exists is made in relation to the NFP’s fully constituted board (including any vacant board positions). For example, if vacancies on the board of Entity B cause Entity A to temporarily possess a majority voting interest in Entity B, that circumstance, in and of itself, would not automatically trigger consolidation by Entity A.
ASC 958-810-25-2A indicates that actions that require approval by a supermajority vote of the board might overcome the presumption of control by the holder of a majority voting interest. ASC 958-810-55-4A provides considerations when evaluating control, and indicates that the guidance in ASC 810-10-25-2 through ASC 810-10-25-14 may be helpful in evaluating whether a majority voting interest holder can exercise control.
With this type of majority voting interest, an economic interest must also exist in order for consolidation to be required. If no economic interest exists, consolidation is prohibited by ASC 958-810-25-5. Economic interest is defined and described in ASC 958-810-20.

Excerpt from ASC 958-810-20

Economic interest: A not-for-profit entity’s (NFP’s) interest in another entity that exists if any of the following criteria are met:

  1. The other entity holds or utilizes significant resources that must be used for the purposes of the NFP, either directly or indirectly by producing income or providing services.
  2. The NFP is responsible for the liabilities of the other entity.

In addition, the guidance in ASC 958-810-55-6 provides NFP-specific examples of “economic interests.”

ASC 958-810-55-6

The following are examples of economic interests:

  1. Other entities solicit funds in the name of and with the expressed or implied approval of the NFP, and substantially all of the funds solicited are intended by the contributor or are otherwise required to be transferred to the NFP or used at its discretion or direction.
  2. An NFP transfers significant resources to another entity whose resources are held for the benefit of the NFP.
  3. An NFP assigns certain significant functions to another entity.
  4. An NFP provides or is committed to provide funds for another entity or guarantees significant debt of another entity.
  5. An NFP has a right to or a responsibility for the operating results of another entity. Or upon dissolution, an NFP is entitled to the net assets, or is responsible for any deficit, of another entity.

We believe the examples are indicative of situations where a separate organization’s activities are an extension of the reporting NFP’s activities or where the reporting NFP participates in financial risks and rewards associated with the separate organization.

5.2.2 Evaluating consolidation of NFP joint ventures

NFPs may pursue a variety of approaches to combining or coordinating their services, operations, and resources. For example, two or more NFPs might sponsor formation of a new legal entity through which they will collaboratively provide a new service or program or carry out an essential function. Often, such arrangements are informally referred to as “not-for-profit joint ventures.”
In evaluating the accounting and financial reporting for participation in such ventures (including potential consolidation), substance must be considered over form. As discussed in NP 1, several NFPs might band together to form an NFP corporation that exists solely to benefit its participants or members in a manner similar to a cooperative (see Question NP 1-2). Or, they might choose to establish the venture in a stock corporation, partnership, limited partnership, or limited liability company that provides each participant with an equity ownership interest (see Question NP 1-4).
In situations where the venture provides its participants with ownership interests (or the functional equivalent of ownership interests), it would not meet the GAAP definition of an NFP for accounting purposes despite the fact that its purpose is to carry out a nonprofit activity. Therefore, in evaluating whether consolidation of the venture is required, a participant would consider the guidance discussed in NP 9 for equity interests in for-profit business entities, which differs based on the structure of the investment.
If the venture is not conducted in a separate legal entity, it would be accounted for based on the guidance in ASC 808, Collaborative Arrangements. ASC 808-10-45-1 states that revenues generated and costs incurred by the participants should be reported in the appropriate line items in each participant’s statement of operations pursuant to the guidance in the “Principal versus Agent Considerations” in ASC 606-10-55-36 through ASC 606-10-55-40. A line item such as “collaboration revenue” or “collaborative expenses” would be used to report “sharing” payments made between the venture participants. AAG-NFP 3.141 illustrates this guidance.

5.2.3 Evaluating consolidation of special purpose entities

NFPs may carry out certain activities, such as leasing, through for-profit entities that exist primarily to benefit the NFP (i.e., special purpose entities (SPEs)), but which are not required to be consolidated under the guidance discussed in NP 5.2.2 for equity interests. Often, SPEs are used in an effort to achieve off balance sheet treatment of certain assets and liabilities.
When evaluating SPE leasing entities for consolidation, NFPs apply different requirements than business entities. Business entities utilize the variable interest entity subsections of ASC 810-10, which are not applicable to NFPs. NFPs apply the guidance in ASC 958-810-25-8 through ASC 958-810-25-10, Not-for-Profit Entities: Consolidation—Special-Purpose Leasing Entities, which largely predates the variable interest entity guidance. Under that guidance, an NFP lessee must consolidate an SPE lessor if all three of the following conditions exist:
  • Substantially all of the SPE’s activities involve assets that are to be leased to a single lessee
  • The expected substantive residual risks, substantially all the residual rewards of the leased asset(s), and the obligation imposed by the underlying debt of the SPE directly or indirectly reside with the lessee
  • The SPE’s owner of record has not made an initial substantive residual equity capital investment that is at risk during the entire lease term. This criterion is deemed to be met if the majority owner(s) of the lessor is (are) not an independent third party, regardless of the level of capital investment.

If the SPE’s owner made a substantive residual equity capital investment that will be at risk during the entire lease term, the NFP does not have to consolidate the SPE. To qualify as “substantive,” an investment must represent an equity interest in legal form, must be subordinate to all debt interests, and must represent the residual equity interest during the entire term of the lease. Further, according to AAG-HCO 12.55 and AAG-NFP 3.105, the AICPA believes that the minimum acceptable investment to qualify as “substantive” would be equal to 3% of the assets owned by the SPE. A greater level of investment may be necessary depending on the facts and circumstances, including the credit risk associated with the lessee and market risk factors associated with the leased property. For example, the cost of borrowed funds for the transaction might be indicative of the risk associated with the transaction and whether an equity investment greater than 3% is needed.
In some build-to-suit lease transactions, the lease or related construction agreement provides that the SPE will construct, or cause to be constructed, the property that is to be leased. When SPEs are established for both the construction and subsequent lease of the asset, consolidation by the lessee should begin at the beginning of the construction arrangement, rather than at the beginning of the lease term, if the conditions requiring consolidation are met.
See ASC 958-810-55-7 through ASC 958-810-55-16 for additional guidance on applying these requirements.
Consolidation by NFPs of SPEs used in activities other than leasing is not explicitly addressed in the codification. However, during the FASB’s deliberations on the SPE leasing guidance for NFPs, they noted that nothing precludes an NFP from applying the SPE leasing guidance by analogy to other SPE situations. We believe that accounting for non-lease transactions by analogy to leasing guidance is a reasonable approach. AAG-HCO 12.59 observes that NFP HCOs typically analogize to the SPE leasing guidance.

5.2.4 Evaluating other relationships involving potential consolidation

Figure NP 5-2 highlights other situations that, while occurring less frequently, may lead to potential consolidation and the reference to where specific guidance can be found.
Figure NP 5-2
Consolidation in other situations
NFP sponsors and provides funding for a research and development arrangement
Apply guidance in ASC 810-30, Research and development arrangements
Contractual management relationship with a for-profit entity
Apply guidance in the “Consolidation of Entities Controlled by Contract” subsections of ASC 810-10-25 and ASC 810-10-55 to determine whether the arrangement conveys a controlling financial interest. Contractual management relationships with NFP entities would be evaluated under the framework discussed in NP 5.2.1 for relationships with NFP entities.
Ongoing standard setting
In September 2017, the FASB issued an exposure draft, Consolidation (Topic 812): Reorganization. Among other things, the exposure draft proposes to eliminate the guidance in ASC 810-30 for research and development arrangements. It would also move the guidance in the “Consolidation of Entities Controlled by Contract” subsection of ASC 810 to ASC 958-810 because that guidance applies only to NFPs. As of the publication of this guide, no timeframe has been established for issuance of a final standard.

5.2.5 Reporting noncontrolling interests in subsidiaries

When an NFP consolidates a less-than-wholly-owned subsidiary, the portion owned by others is referred to as the noncontrolling interest (NCI). ASC 958-810 tailors general GAAP guidance for reporting NCIs (contained in ASC 810-10-45-15 through ASC 810-10-45-21) to the NFP reporting model. The presentation of a noncontrolling interest in the equity section of the balance sheet is discussed at NP 2.5.3. Disclosure of the changes in consolidated net assets attributable to the parent and the noncontrolling interest is discussed at NP 3.6.
Under ASC 810-10-45-23, if a parent’s ownership interest in a consolidated subsidiary changes during a reporting period (for example, if a parent purchases additional ownership interests from noncontrolling shareholders, or sells some of its interest to noncontrolling shareholders), that activity is accounted for as an equity transaction.

Excerpt from ASC 810-10-45-23

Changes in a parent’s ownership interest in a subsidiary while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent.

ASC 958-810-55-21 through ASC 958-810-55-22 illustrate how an NFP parent would account for equity transactions. In the statement of activities, equity transactions should be reported separate from revenues, expenses, gains, or losses and outside a measure of operations (if one is reported), according to ASC 958-810-50-5(d). For an NFP HCO, such activity is excluded from the performance indicator, consistent with the requirement for business entities to exclude such amounts from consolidated net income. That display is illustrated in ASC 958-810-55-24. Noncontrolling interests in NFP subsidiaries

The guidance in ASC 958-810 and ASC 954-810 differ with respect to the recognition of noncontrolling interests in other NFPs (such as when an NFP parent has a less-than-complete voting interest in the board of an NFP subsidiary—for example, if the parent controls five of seven board seats, and another NFP controls the other two seats). ASC 954-810-45-3B permits NFP HCOs to recognize a noncontrolling interest if such interest is represented by an economic interest whereby the noncontrolling interest would share in the operating results or residual interest upon dissolution.

ASC 954-810-45-3B

When consolidated financial statements are required or permitted by Section 958-810-25, a noncontrolling interest shall be provided if such interest is represented by an economic interest whereby the noncontrolling interest would share in the operating results or residual interest upon dissolution.

If a noncontrolling interest in the net assets of the consolidated entity is recognized by an NFP HCO, the presentation and disclosure provisions of ASC 958-810 described in NP 5.2.5 should be applied.
For all other NFPs, ASC 958-810-25-6 precludes reporting noncontrolling interests in NFP subsidiaries.

ASC 958-810-25-6

An interest by an NFP in another NFP may be less than a complete interest. For example, an NFP may appoint 80 percent of the board of the other NFP. For NFPs other than those within the scope of Topic 954, if the conditions for consolidation in paragraphs 958-810-25-2, 958-810-25-3, or 958-810-25-4 are met, the basis of that consolidation would not reflect a noncontrolling interest for the portion of the board that the reporting entity does not control, because there is no ownership interest other than the interest of the reporting entity.

5.2.6 Presentation of consolidated entities in NFP financial statements

FSP 18 addresses presentation and disclosure matters broadly applicable to consolidated financial statements. It discusses matters such as elimination of intra-entity transactions, differing fiscal periods, and changes in fiscal periods. It also addresses preparation of combined (as opposed to consolidated) financial statements and presentation of nonhomogeneous subsidiaries.
One presentation consideration that is unique to NFPs relates to the display of donor-restricted net assets in consolidated financial statements. When individual NFP financial statements are aggregated in consolidation, the amounts ascribed to components of net assets in the consolidated financial statements might differ from the classifications of net assets reflected in the individual financial statements of the constituent entities.
For example, at an individual entity level, unrestricted gifts from donors can be used for any purposes consistent with the donee’s nature and the purposes specified in its articles of incorporation or bylaws. Therefore, those gifts are reported as net assets without donor restrictions in the donee’s separate financial statements. But if the donee’s financial statements roll up into financial statements of a consolidated entity that has a broader purpose, the donee’s “unrestricted” gifts (as well as any unrestricted investment return that has been appropriated for spending from an endowment) and net assets may need to be displayed as donor-restricted to reflect that the resources can only be used for the narrower purposes stipulated by the donors. This concept is discussed in AAG-NFP 3.107 through AAG-NFP 3.109. Note that net assets attributable to a subsidiary entity's exchange transactions (for example, fees or ticket sales) would not need to be similarly segregated in consolidation, as they do not arise from contributions.
In addition to considering legal restrictions imposed by donors, ASC 958-810-50-1 requires that consolidated financial statements disclose any other restrictions imposed by entities outside of the reporting entity on the parent’s ability to receive distributions from the subsidiary, or limitations on the NFP parent’s ability to use the subsidiary’s assets. Similar considerations apply when aggregating net assets of sister corporations in combined financial statements. Example NP 5-1 illustrates the reporting of restrictions on net assets in consolidation.
Restrictions on net assets in consolidation
A membership association (Parent) has an educational subsidiary (Subsidiary) whose mission is to provide scholarships. Donors make unrestricted contributions to the educational subsidiary with the intent that the subsidiary use the contributions to support its mission. These gifts are classified as increases in net assets without donor restrictions in the subsidiary’s stand-alone financial statements.
At the balance sheet date, the net asset balances for the Parent and the Subsidiary on a standalone basis are as follows:
Net assets
Without donor restrictions
With donor restrictions
$500 of Subsidiary’s net assets without donor restrictions is associated with unspent gifts. What amounts should the consolidated financial statements reflect in each of the net asset categories?
In addition to the Parent’s $800 in net assets with donor restrictions, the consolidated financial statements should reflect $500 of Subsidiary’s net assets as donor-restricted, because they can only be used to provide scholarships. The presentation would be as follows:
Net assets
Without donor restrictions
With donor restrictions

5.2.7 Specialized industry accounting principles in consolidation

NFPs may encounter recognition and measurement differences when consolidating subsidiaries that follow specialized industry accounting principles. For example, an NFP health care system within the scope of ASC 954 might have an insurance subsidiary whose standalone financial statements are prepared in accordance with ASC 944. ASC 810-10-25-15 provides that the specialized industry principles applied by the subsidiary are typically retained in consolidation, assuming those principles are appropriate at the subsidiary level.

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