It is very common for not for profit organizations to have affiliated or controlled entities, including subsidiaries, sister organizations, joint ventures and foundations. Organizations might have created a controlled entity to mitigate risk, optimize tax opportunities, achieve greater efficiency, diversify, or respond to legal considerations.

Not-for-profits with controlled entities may be required to produce consolidated financial statements, which compile the financial information of every related entity into one document. This allows for a comprehensive look at the scope and detail of an organization’s operations and finances.

However, determining whether a not-for-profit must produce consolidated statements can be a complex process, dependent upon the terms of the relationships between the entities and the not for profit organization.

Consolidated Financial Statements, Explained

Consolidated financial statements are single statements that group together all key accounting statements for the organization and its affiliates. These include Statement of Financial Position, the Statement of Activities, the Statement of Functional Expenses, and the Statement of Cash Flows. By consolidating these statements, interested parties such as board members, donors, staff, IRS and auditors will have a clear look at an organization’s financial performance in one place without having to analyze multiple documents.

Not-for-profits that submit consolidated financial statements also need to document all inter-entity transactions between their consolidated entities and eliminate all associated revenue and expenses, and assets and liabilities to avoid double-counting. Consolidated financial statements must not have any inter-entity balances, such as loans and receivables. This way, the consolidated financial statements present a single entity, without overstating balances.

Is a Consolidated Statement Necessary?

There are two primary factors regarding whether a not-for-profit must consolidate financial statements: control and economic interest. If an organization has control of an affiliated entity, and if their financial interests are tied to one another, then financial statements must be consolidated. If both of these considerations are met, a consolidated statement will be required.

Control can be either direct or indirect. In direct control, the not-for-profit is the sole member of another entity. Indirect control means the not-for-profit has majority voting interest in another entity. This might mean a collective board of directors overseeing all of the entities, or the not-for-profit has the ability to have majority control over the board. Organizations in these circumstances should refer to their bylaws for guidance on the appropriate roles, decision-making processes, and responsibilities for navigating consolidated statements.

Economic interest exists if an affiliated entity produces income or provides services on behalf of the not for profit organization, or if the organization is responsible for the entity’s liabilities.

A common example of when consolidated reports are required are for organizations that have the same board of directors, such as a not-for-profit with a related foundation. If the board has majority voting interest over the entity, and economic interest is present, the financial statements would need to be consolidated.

This helpful flowchart from the Financial Accounting Foundation can offer insight into whether a not-for-profit needs to consolidate statements.

Dembo Jones regularly helps clients determine whether they need to consolidate financial statements and supports them in the consolidation process. Contact us to explore how we can help.