Fall 2012 issue of Horizons

NOT-FOR-PROFIT

A majority voting interest in the board of the separate nonprofit is possessed if the nonprofit organization has the ability to appoint members of the board that comprise a majority of the votes of the full board. In scenarios where a nonprofit organization with an economic interest in a separate nonprofit has control of that separate nonprofit through means other than majority ownership or a majority voting interest in the board, such as through a contractual arrangement, consolidation of the separate nonprofit is permitted but not required. If the decision is made not to present consolidated financial statements, additional disclosures including summarized financial data of the separate nonprofit are required. Consolidation is prohibited in situations in which the nonprofit organization does not possess both an economic interest and control of the separate nonprofit. In circumstances such as this, an entirely different analysis must be performed to determine if the nonprofit organization should consolidate the SPE lessor. Consolidation of the SPE lessor is required if all of the following conditions are met: ∙ Substantially all of the SPE lessor’s activities involve assets that are leased to a single lessee. ∙ The risks and rewards of the leased asset and the obligation related to the underlying debt of the SPE lessor reside with the lessee. ∙ The owner of the SPE lessor has not made a substantive capital investment. This condition is considered met if the owner of the SPE lessor is not an independent third party regardless of the amount of the capital investment. Special Purpose Entity Lessors For various reasons, nonprofit organizations sometimes engage in leasing transactions with a special-purpose entity (SPE) lessor.

Other Nonprofits A nonprofit organization’s relationship with another nonprofit can take various legal forms. The form of the relationship ultimately determines whether consolidation is appropriate. A nonprofit organization that directly or indirectly owns a majority voting interest in another nonprofit entity should consolidate that entity unless control does not rest with the majority owner in which case consolidation is prohibited. In situations where there is not direct or indirect ownership, but there is control or an economic interest in the other nonprofit, further analysis is required. If the nonprofit organization controls a related but separate nonprofit entity, in which it does not have an ownership interest, through a majority voting interest in the board of the separate nonprofit and has an economic interest in the separate nonprofit, consolidation is required.

page 18 | horizons Fall 2012