Fall 2012 issue of Horizons

NOT-FOR-PROFIT

Not-For-Profit Consolidation Rules Require Careful Analysis by David Duckwitz, CPA

A s the operation of nonprofit entities becomes increasingly complex, such entities will sometimes acquire an ownership interest in a for-profit entity or become related to other nonprofit organizations. In situations such as these, a determination should bemade as towhether the nonprofit entity should consolidate the activities of the acquired or related entity in its financial statements. Fortunately, U. S. generally accepted accounting principles (GAAP) contains a framework which stipulates how this determination is made. However, this

framework is complex and the rules differ depending on whether the related entity is a for-profit entity or a nonprofit entity.

For-Profits For-profit entities should be consolidated when the nonprofit organization has a controlling financial interest in the for-profit entity. That controlling financial interest generally consists of the direct or indirect ownership of a majority voting interest although a general partner in a limited partnership can also have a controlling financial interest regardless of its percentage ownership.

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