Two Tell-Tale Signs that Your Not-for-Profit May Need to Consolidate Its Financial Statements– March 14, 2019 by Joe DiFranco

Not-for-profit organizations can have many different types of related entities or interests in other entities. However, have you ever considered if these related entities or other interests should be consolidated into your not-for-profit’s financial statements? Whether the related entity is for-profit or another not-for-profit, it is important to consider the respective consolidation criteria. You might find that consolidation is required.
The most important question to ask is:  “Does my not-for-profit have the ability to influence the operating and financial decisions of this related entity?” Or, said another way, does my not-for profit have a controlling financial interest or economic interest and control in the related entity? If your answer is yes to either one, you may be required to consolidate your statements. 

1. Controlling Financial Interest

Consolidation is required if a not-for-profit has a controlling financial interest or is the sole member in another entity, resulting in a majority voting interest — whether through direct or indirect ownership in the entity.
For example, in the case of a for-profit related entity, your organization would have a controlling financial interest if it owns stock or is the sole member of that entity. In the case of a related entity that is another not-for-profit, a controlling financial interest would mean your organization has a majority voting interest of that entity’s board, or the ability to appoint board members that would in effect give your organization a majority voting interest. This is the case even if the mission statement of that not-for-profit is different from yours. 

2. Economic Interest and Control

In certain instances it is not clear, or sometimes even impossible to determine, if your not-for-profit has a controlling financial interest in a related entity. This is especially common when dealing with an entity that is another not-for-profit. When a controlling financial interest cannot be determined, you must analyze whether your organization has an economic interest and control of another entity.
These definitions are broken into two parts. First, economic interest is broadly defined and exists if a not-for-profit meets any of the following criteria: 

  1. Is responsible for the related entity’s liabilities
  2. Has rights to the operating results of the related entity
  3. Raises funds on behalf of the other entity and has the ability to direct how those funds are to be used 

If your not-for-profit does in fact have economic interest in the related entity, then you need to consider if it also has control of that entity. Your organization has control if it has the ability to direct management and policies through contracts, membership agreements or otherwise. If your not-for-profit is found to have both an economic interest and control of the related entity, then it must consolidate that entity into its financial statements.
It’s important to evaluate your organization each year for any changes regarding related entities and interests in related entities. While it’s a best practice do so at least annually, when circumstances change or transactions occur with related entities throughout the year, be sure to consider if that new relationship could trigger consolidation requirements.
Please contact a member of your service team, or contact Joe DiFranco at for further discussion. 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.