Nonprofit Consolidation

Nonprofit Consolidation

Written by Matt Neu

October 18, 2022

There may be circumstances when your nonprofit organization needs to evaluate its relationship with another organization to determine if financial statement consolidation of the two entities is necessary. Consolidated financial statements present the financial position, change in net assets and cash flows of multiple entities as a single entity. Slightly different requirements apply whether an organization is evaluating a for-profit entity or a nonprofit entity for consolidation. In this article, we will focus on the latter.

Two factors to consider when reviewing a relationship to another nonprofit entity for consolidation purposes are:1) control and 2) economic interest.

Control is defined as “the direct or indirect ability to determine the direction of an organization’s management and policies”. The most common form of control is through a majority voting interest of the other entity’s board. If the organization has the same/similar board members (more than half) of the other entity, control is presumed. However, control only exists if your organization has the ability to appoint the individuals that together constitute the majority of the votes of the other entity’s board. Without this ability, the criteria of control would not be met.

An economic interest in another entity is the other factor in assessing consolidation. Two of the more common ways an economic interest can exist is (1) when an entity holds or uses significant resources to produce income or provide services to an organization or (2) if an organization is responsible for another entity’s liabilities.

Additionally, control and an economic interest can exist between entities through affiliation agreements, contracts or by other means.

After control and an economic interest in another organization has been assessed, a determination can be made if consolidation is required, optional or not permitted:

  • If you determined that you have both control and an economic interest in another nonprofit and that controlling interest is through a majority vote, consolidation would be required.
  • If you determined that you have both control and an economic interest in another nonprofit and that controlling interest is through a contract or affiliation agreement, consolidation is permitted, but not required.
  • If you determined you have either control or economic interest, but not both, consolidation is not permitted.

A very common scenario we see for consolidation is when a nonprofit has a separate foundation. The board or executive committee of the nonprofit will be the board of the foundation. Since there is a majority voting interest in the foundation as well as an economic interest, the foundation would need to be consolidated into the nonprofits financials statements.

Please contact your Hawkins Ash CPAs representative if you have questions related to nonprofit consolidation.

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Matt Neu
I am a senior manager in the Manitowoc, WI, office where I provide audit services to nonprofit organizations, commercial entities, governmental entities and employee benefit plans. In addition, I work with compilation and review engagements. I joined Hawkins Ash CPAs in 1999 and am a member of the Employee Benefit Plan and Nonprofit Service Groups.

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