E.6 NFP and Health Care Entities
As discussed in Section
3.4.1, an NFP11 is not required to determine whether to consolidate a legal entity under the VIE
model. An NFP that qualifies for the scope exception in ASC 810-10-15-17(a) would instead
apply ASC 958-810 and ASC 954-810 for NFP and health care entities, respectively.
Considerations related to applying those subsections are discussed below. In addition, the
AICPA Audit and Accounting Guides
Not-for-Profit Entities (Chapter 3) and Health Care Entities (Chapter 12)
provide interpretive guidance on those subsections.
E.6.1 Overview
ASC 958-810
05-1
This Subtopic provides guidance on the following:
-
Reporting relationships between a not-for-profit entity (NFP) and another NFP that potentially result in consolidation
-
Reporting relationships with special-purpose entity lessors (either for-profit entities or NFPs)
-
Reporting a noncontrolling interest in an acquiree
-
Reporting relationships between an NFP and a for-profit entity that is other than a limited partnership or similar legal entity (incremental guidance only).
-
Reporting relationships between an NFP that is a general partner or a limited partner and a for-profit limited partnership or similar legal entity.
The consolidation considerations for NFPs depend on whether the NFP’s
relationship is with another NFP (see Section E.6.2), an SPE lessor (see Section E.6.3), or a for-profit entity (see Section E.6.4). ASC 958-810 also provides guidance on
presenting and disclosing noncontrolling interests (see Section E.6.5.1).
E.6.2 Reporting Relationships Between an NFP and Another NFP
The following flowchart (reproduced from ASC 958-810-55-3) can be used to analyze relationships
between one or more NFPs:
ASC 958-810-55-3
E.6.2.1 Nature of the Relationship Between One or More NFPs
ASC 958-810
05-2 An NFP may be related to one or more other
NFPs in numerous ways, including any of the following:
-
Ownership
-
Control
-
Economic interest.
05-4 The
nature of the relationship between the entities
determines the following:
-
Whether the financial statements of an NFP and those of another NFP should be consolidated
-
Whether the other NFP should be reported using a method similar to the equity method (see Subtopic 958-20)
-
The extent of the disclosure that should be required, if any.
As discussed in ASC 958-810, NFPs may be related through ownership, control, or an economic interest.
The nature of the relationship determines whether one NFP should consolidate another NFP or report
its interest in the NFP by using a method similar to the equity method under ASC 958-20.
E.6.2.1.1 Ownership
ASC 958-810
05-3
Because NFPs may exist in various legal forms,
ownership of NFPs may be evidenced in various
ways. Examples include:
-
Corporations issuing stock
-
Corporations issuing ownership certificates
-
Membership corporations issuing membership certificates
-
Joint ventures
-
Partnerships.
A parent corporation typically owns stock in a for-profit entity, whereas a sole corporate member holds (all)
membership rights in an NFP.
ASC 958-810-05-3 indicates that evidence of an NFP’s ownership of another NFP can include stock
or ownership certificates in an NFP corporation as well as interests in NFP joint ventures or NFP
partnerships. Some NFPs may also be structured as membership corporations. In a membership
corporation, the corporate decision making that is typically granted to the NFP’s board of directors is
granted to the corporate members identified in the NFP’s articles of incorporation. When a membership
corporation consists of a single member, that single member is referred to as the sole corporate
member and is generally considered equivalent to a sole shareholder since it typically has the unilateral
power to appoint and terminate the NFP’s board and dissolve the NFP.
E.6.2.1.2 Control
ASC 958-810-20 defines control as the “direct or indirect ability to determine the direction of
management and policies through ownership, contract, or otherwise.” As discussed below, an NFP may
have control over another NFP through a majority voting interest or a majority voting interest in the
board, as the sole corporate member, or through other means, such as a contract.
E.6.2.1.3 Economic Interest
ASC 958-810-20 defines the term “economic interest” as follows:
ASC 958-810 — Glossary
Economic
Interest
A not-for-profit entity’s
(NFP’s) interest in another entity that exists if
any of the following criteria are met:
-
The other entity holds or utilizes significant resources that must be used for the purposes of the NFP, either directly or indirectly by producing income or providing services.
-
The NFP is responsible for the liabilities of the other entity.
See paragraph 958-810-55-6 for
examples of economic interests.
In addition, ASC 958-810-55-6 provides some examples of economic interests, including the assignment
of significant functions to another entity or residual interests held by an NFP in another NFP. However,
the determination of whether an NFP has an economic interest in another NFP involves significant
judgment and requires consideration of the facts and circumstances.
ASC 958-810
55-6 The
following are examples of economic interests:
-
Other entities solicit funds in the name of and with the expressed or implied approval of the NFP, and substantially all of the funds solicited are intended by the contributor or are otherwise required to be transferred to the NFP or used at its discretion or direction.
-
An NFP transfers significant resources to another entity whose resources are held for the benefit of the NFP.
-
An NFP assigns certain significant functions to another entity.
-
An NFP provides or is committed to provide funds for another entity or guarantees significant debt of another entity.
-
An NFP has a right to or a responsibility for the operating results of another entity. Or upon dissolution, an NFP is entitled to the net assets, or is responsible for any deficit, of another entity.
Example E-7
Church P is a religious NFP corporation with over 1,000 local churches in the United States. Under P’s corporate
structure, P is a legal entity, and each local church is a separate legal entity. To ensure that each local church is
operating in accordance with P’s mission as a nonprofit organization, P supports the professional development
of ministry leaders at the local churches as well as the growth and development of local church programs. In
exchange, P is entitled to 10 percent of the general offerings that each local church receives. As a result of P’s right to 10 percent of the offerings received by each local
church, P has an economic interest in each local church.
Example E-8
Foundation F is an NFP formed by School S, an NFP university, to provide estate planning services, planned
giving services, and trust administration for individuals with multiple charitable interests. Foundation F has
historically served as a conduit for donors to contribute to S and holds approximately $30 million in donations
provided by outside donors specifically for the benefit of S. These amounts cannot be used for any other
purpose by F. In addition, F and S entered into a gift agreement under which F would transfer funds from F to S
over future years. The gift agreement is irrevocable, binding on and enforceable against F and S, and designed
to provide S with both up-front payments and a steady stream of funds. The gift is restricted to specific
purposes and is to be added to existing funds held by F for the benefit of S. Since F is committed to providing
funds to S through the gift agreement as well as holding amounts for the benefit of S, S has an economic
interest in F.
E.6.2.2 Consolidation Framework for an NFP’s Relationship With Another NFP
ASC 958-810
25-1 A
relationship with another not-for-profit entity
(NFP) can take any one of the following forms, which
determines the appropriate reporting:
-
A controlling financial interest through direct or indirect ownership of a majority voting interest or sole corporate membership in the other NFP (see the following paragraph)
-
Subparagraph not used
-
Control of a related but separate NFP through a majority voting interest in the board of that NFP by means other than ownership or sole corporate membership and an economic interest in that other NFP (see paragraph 958-810-25-3)
-
An economic interest in the other NFP combined with control through means other than those listed in (a) through (c) (see paragraph 958-810-25-4)
-
Either an economic interest in the other NFP or control of the other NFP, but not both (see paragraph 958-810-25-5).
Under ASC 958-810-25-1, an NFP’s relationship with another NFP may take a number
of different forms, including those noted above.
E.6.2.2.1 Controlling Financial Interest Through a Majority Voting Interest or Sole Corporate Membership
ASC 958-810
25-2 An NFP with a
controlling financial interest in another NFP
through direct or indirect ownership of a majority
voting interest or sole corporate membership in
that other NFP shall consolidate that other NFP,
unless control does not rest with the majority
owner or sole corporate member (for example, if
the subsidiary is in legal reorganization or
bankruptcy), in which case consolidation is
prohibited, as discussed in paragraph
810-10-15-10. Sole corporate membership in an NFP,
like ownership of a majority voting interest in a
for-profit entity, shall be considered a
controlling financial interest, unless control
does not rest with the sole corporate member (for
instance, if the other [membership] entity is in
bankruptcy or if other legal or contractual
limitations are so severe that control does not
rest with the sole corporate member).
25-2A In
some situations, certain actions require approval
by a supermajority vote of the board. Such voting
requirements might overcome the presumption of
control by the owner or holder of a majority
voting interest. For related implementation
guidance, see paragraph 958-810-55-4A.
55-4A
This paragraph provides implementation guidance on
the application of paragraph 958-810-25-2A to
situations in which certain actions require
approval by a supermajority vote of the board.
That paragraph states that such voting
requirements might overcome the presumption of
control by the owner or holder of a majority
voting interest. An NFP shall exercise judgment in
evaluating such situations. If supermajority
voting requirements exist—for example, a specified
supermajority of the board is needed to approve
fundamental actions such as amending the articles
of incorporation or dissolving the entity, an NFP
shall consider whether those voting requirements
have little or no effect on the ability to control
the other entity’s operations or assets or,
alternatively, whether those voting requirements
are so restrictive as to call into question
whether control rests with the holder of the
majority voting interest. The guidance in
paragraphs 810-10-25-2 through 25-14 may be
helpful in considering whether the inability of
the majority voting interest to unilaterally
approve certain actions due to supermajority
voting requirements is substantial enough to
overcome the presumption of control.
When an NFP has a controlling financial interest in another NFP through either direct or indirect
ownership of a majority of the voting interest or through a sole corporate membership, consolidation is
required unless control does not rest with the majority owner or sole corporate member (for instance,
if the other (membership) entity is in bankruptcy, or other legal or contractual limitations are so severe
that control does not rest with the sole corporate member). See Sections D.1.3.2 and D.3 for further
discussion of instances in which the holder of a majority voting interest lacks control. NFPs should
also consider specific voting requirements (e.g., supermajority) that may overcome the presumption
of control. The guidance in ASC 810-10-25-2 through 25-14 on the effect of noncontrolling rights on
consolidation may help NFPs determine whether the presumption of control by the majority voting
interest holder or sole corporate member has been overcome. See Section D.2 for more information
about the effect of noncontrolling rights on consolidation.
Example E-9
NFP X is the sole corporate member of NFP Y and has the power to select and appoint all five directors on Y’s
board. No other NFP retains corporate membership rights over Y; thus, all control rests solely with X. NFP X and
Y do not hold any economic interests in each other. Therefore, X should consolidate Y in accordance with ASC
958-810-25-2, which states, “Sole corporate membership in an NFP, like ownership of a majority voting interest
in a for-profit entity, shall be considered a controlling financial interest, unless control does not rest with the
sole corporate member.”
Example E-10
Assume the same facts as in the example above except that NFP X only has the
power to select and appoint three out of five directors on NFP Y’s board.
NFP Z has the power to select and appoint the remaining two directors on
Y’s board. A unanimous vote of all five directors on Y’s board is needed
to approve fundamental actions, including selecting, terminating, and
setting the compensation of management and establishing operating and
capital decisions (including budgets). NFP X determines that these
unanimous voting requirements related to the fundamental actions of Y
restrict X’s ability to control Y’s operations. Therefore, control does
not rest with X as the sole corporate member in Y.
E.6.2.2.2 Majority Voting Interest in the Board
ASC 958-810
25-3 In
the case of control of a related but separate NFP
through a majority voting interest in the board of
the other NFP by means other than ownership or
sole corporate membership and an economic interest
in that other NFP, consolidation is required,
unless control does not rest with the holder of
the majority voting interest, in which case
consolidation is prohibited. An NFP has a majority
voting interest in the board of another entity if
it has the direct or indirect ability to appoint
individuals that together constitute a majority of
the votes of the fully constituted board (that is,
including any vacant board positions). Those
individuals are not limited to the NFP’s own board
members, employees, or officers. For
implementation guidance on a majority voting
interest in the board of another entity, see
paragraph 958-810-55-5.
55-5 A
majority voting interest in the board of another
entity, as referred to in paragraph 958-810-25-3,
is illustrated by the following example. Entity B
has a five-member board, and a simple voting
majority is required to approve board actions.
Entity A will have a majority voting interest in
the board of Entity B if Entity A has the ability
to appoint three or more of Entity B’s board
members. If three of Entity A’s board members,
employees, or officers serve on the board of
Entity B but Entity A does not have the ability to
require that those members serve on the Entity B
board, Entity A does not have a majority voting
interest in the board of Entity B.
Generally, a majority voting interest in an NFP will result when the NFP’s articles of incorporation grant
the right to appoint a majority of its fully constituted governing board (including any vacant board
positions) to another NFP. However, if a majority of an NFP’s board consists of another NFP’s board
members, employees, or officers, that NFP would not have a majority voting interest in the board if it
lacked the ability to require that those members serve on the NFP’s board.
When control by an NFP of a related but separate NFP is through (1) a majority voting interest in the
board of the NFP by means other than ownership or sole corporate membership and (2) an economic
interest in the other NFP, consolidation is required unless control does not rest with the holder of the
majority voting interest in the board. This requirement is similar to that related to a majority voting
interest or sole corporate membership discussed in Section E.6.2.2.1, except that it involves voting
interests conveyed through means other than ownership (either direct or indirect). The guidance in
ASC 810-10-25-2 through 25-14 on the effect of noncontrolling rights on consolidation may help an
NFP determine whether the presumption of control by the holder of the majority voting interest in the
board has been overcome (see ASC 958-810-55-4A and Section E.6.2.2.1). See Section D.2 for further
discussion of the effect of noncontrolling rights on consolidation.
Paragraph 3.78 of Not-for-Profit Entities provides the following example
of control by a majority voting interest in the board of another NFP:
An NFP may be related to another NFP that performs political
activities that the reporting entity does not wish to perform, perhaps because
performing those activities may threaten the reporting entity’s tax exempt status,
the reporting entity is precluded from conducting such activities, or for other
reasons. For example, a membership entity may establish and sponsor a political
action committee (PAC) whose mission is to further the interests of the membership
entity. The resources held by the PAC are used for the purposes of the membership
entity and the governing board of the PAC is appointed by the board of the
membership entity. In the circumstances described, both control and economic
interest are present and the PAC should be consolidated. Control through a majority
voting interest in the board of the PAC exists because the governing board of the
PAC is appointed by the board of the membership entity. An economic interest exists
because the PAC holds significant resources that must be used for the purposes of
the membership entity.
E.6.2.2.3 Control by Other Means
ASC 958-810
25-4
Control of a related but separate NFP in which the
reporting entity has an economic interest may take
forms other than majority ownership interest, sole
corporate membership, or majority voting interest
in the board of the other entity; for example,
control may be through contract or affiliation
agreement. In circumstances such as these,
consolidation is permitted but not required.
Consolidation is encouraged if both of the
following criteria are met:
-
The reporting entity controls a separate NFP in which it has an economic interest and that control is not control through either of the following means:
-
A controlling financial interest in the other NFP through direct or indirect ownership of a majority voting interest
-
A majority voting interest in the board of the other NFP.
-
-
Consolidation would be meaningful.
When an NFP holds both (1) an economic interest (see Section E.6.2.1.3) in another NFP and (2) control
through means other than a majority ownership interest, sole
corporate membership, or a majority voting interest in the board, consolidation is
permitted but not required. Other means of control may include a contract or
affiliation agreement (see Section
D.3.4 for further discussion of situations in which an entity may be
controlled through a contract). Consolidation is encouraged in these circumstances if
it would be meaningful. Such determination involves judgment and requires
consideration of the facts and circumstances. The indicators in paragraph 3.118 of
Not-for-Profit Entities used to help an NFP determine whether to consolidate
a for-profit entity can also help it determine whether to consolidate another NFP.
Considerations related to this determination include, but are not limited to, the
following:
-
“The size of the for-profit subsidiary in relation to the NFP parent.”
-
“The activities of the for-profit subsidiary in relation to the mission of the NFP parent.”
-
Other quantitative and qualitative considerations relevant to the financial statement users.
E.6.2.2.4 Control or an Economic Interest, but Not Both
ASC 958-810
25-5 The
existence of control or an economic interest, but
not both, precludes consolidation.
Consolidation is prohibited if an NFP holds either an economic interest in
another NFP or control of the other NFP, but not both. However, there
may be certain scenarios in which an NFP should consolidate a legal
entity when it holds an economic interest and does not have direct
control of that legal entity’s board. It is important to view the
ownership interests and rights to the residual interest as indicators of
indirect control when direct control of the board is not present. An NFP
is presumed to have indirect control, and should therefore consolidate a
legal entity, if the NFP possesses the following:
-
An ownership interest of 100 percent of the legal entity or the right to the residual interest in it.
-
Representation on the board of the legal entity when no party directly controls the board.
See Section D.1.3.1, which discusses control in the absence of a majority voting interest, for additional
factors to consider in the determination of substantive control of a legal entity.
E.6.3 SPE Lessors
ASC 958-810
25-8
Notwithstanding the guidance in this
Subtopic, an NFP that is engaged in leasing transactions
with a special-purpose-entity (SPE) lessor shall
consider whether it should consolidate such lessor.
Specifically, such an NFP shall consolidate an SPE
lessor if all of the following conditions exist:
-
Substantially all of the activities of the SPE involve assets that are to be leased to a single lessee.
-
The expected substantive residual risks and substantially all the residual rewards of the leased asset(s) and the obligation imposed by the underlying debt of the SPE reside directly or indirectly with the lessee through means such as any of the following:
-
The lease agreement
-
A residual value guarantee through, for example, the assumption of first-dollar-of-loss provisions
-
A guarantee of the SPE’s debt
-
An option granting the lessee a right to do either of the following:
-
To purchase the leased asset at a fixed price or at a defined price other than fair value determined at the date of exercise
-
To receive any of the lessor’s sales proceeds in excess of a stipulated amount.
-
-
-
The owner (or owners) of record of the SPE has not made an initial substantive residual equity capital investment that is at risk during the entire lease term. This criterion shall be considered met if the majority owner (or owners) of the lessor is not an independent third party, regardless of the level of capital investment.
25-10 If all of the conditions in paragraph
958-810-25-8 exist, the assets, liabilities, results of operations, and cash
flows of the SPE shall be consolidated in the lessee’s financial statements.
This conclusion shall be applied to SPEs that are established for both the
construction and subsequent lease of an asset for which the lease would meet
all of the conditions in paragraph 958-810-25-8. In those cases, the
consolidation by the lessee shall begin at lease inception rather than the
beginning of the lease term. [For related implementation guidance, see
paragraphs] 958-810-55-7 through 55-16.
An NFP that is engaged in leasing transactions with an SPE lessor must apply the consolidation guidance
in ASC 958-810 to determine whether it should consolidate the SPE lessor.
An NFP is required to consolidate an SPE lessor if all of the following three conditions are met:
- Substantially all the activities of the SPE involve assets that are to be leased to a single lessee (see Section E.6.3.1).
- The expected substantive residual risks and substantially all the residual rewards of the leased asset(s) and the obligation imposed by the underlying debt of the SPE reside directly or indirectly with the lessee (see Section E.6.3.2).
- The SPE’s owner or owners of record have not made an initial substantive residual equity capital investment that is at risk during the entire lease term. This criterion would be considered met if the majority owner or owners of the lessor are not independent third parties, regardless of the level of capital investment (see Section E.6.3.3).
ASC 958-840 also contains guidance on NFP transactions with SPE lessors related to leases that do not
meet all three conditions for consolidation.
Note that in February 2016, the FASB issued ASU 2016-02 (ASC 842), which
requires a lessee to account for most leases on its balance sheet, including those leases
that have historically been accounted for as operating leases. ASC 842 changes the
definition of certain terms in ASC 958-810, such as lease term, and therefore reporting
entities should determine the effect of the adoption of ASC 842 on their application of
the consolidation guidance on SPE lessors. See Deloitte's Roadmap Leases for further
discussion.
E.6.3.1 Substantially All the Activities of the SPE Involve Assets to Be Leased to a Single Lessee
ASC 958-810
55-8
This implementation guidance addresses the
application of paragraph 958-810-25-8(a) to a
transaction involving all of the following
characteristics:
-
An SPE is formed to acquire two separate properties that are to be leased to two unrelated lessees.
-
The two asset acquisitions are financed with the proceeds from two nonrecourse borrowings that do not contain cross-collateral provisions; that is, in the event of default, each borrowing is collateralized only by a pledge of the respective assets leased to a single lessee and an assignment of the respective lease payments under the related lease.
-
The SPE has no assets other than the leased properties and the related leases.
55-9 The
use of nonrecourse debt with no cross-collateral
provisions effectively segregates the cash flows and
assets associated with the two leases and,
therefore, in substance, creates two SPEs. For
purposes of applying the provisions of paragraph
958-810-25-8, each lessee would be considered to
have satisfied the condition in paragraph
958-810-25-8(a). For either lessee to be in a
position of not satisfying that condition, the
assets of the SPE (subject to the two leases) would
need to be commingled such that, in the event of
default, both lenders to the SPE would have equal
rights (that is, pari passu) to the cash flows and
assets related to both leases of the SPE. In this
regard, the amounts of the cash flows from each
lease and the fair values of the individual assets
subject to the leases must represent more than a
minor amount (that is, more than 10 percent) of the
aggregate cash flows from all leases and the
aggregate fair value of all assets of the SPE,
respectively.
The “substantially all” threshold is high and is applied in a manner similar to the business scope
exception discussed in Section 3.4.4.7 and the VIE determination discussed in Section 5.4.2. A reporting
entity should consider both quantitative and qualitative factors in evaluating whether substantially all
the activities of the SPE involve assets that are to be leased to a single lessee. As the guidance above
demonstrates, there may be circumstances in which the condition in ASC 958-810-25-8(a) is satisfied
even when there are multiple properties in a single SPE lessor with multiple lessees.
E.6.3.2 Expected Substantive Residual Risks — Substantially All the Residual Rewards of the Leased Asset(s) and the Obligation Imposed by the Underlying Debt of the SPE Reside Directly or Indirectly With the Lessee
This condition may be satisfied as a result of any of the following:
- The lease agreement.
- A residual value guarantee through, for example, the assumption of first-dollar-of-loss provisions.
- A guarantee of the SPE’s debt.
- An option granting the lessee a right to do either of the following:
- Purchase the leased asset at a fixed price or at a defined price other than fair value determined as of the date of exercise.
- Receive any of the lessor’s sales proceeds in excess of a stipulated amount.
E.6.3.3 SPE Owner Has Not Made an Initial Substantive Residual Equity Capital Investment at Risk During the Entire Lease Term
ASC 958-810
25-9 To
satisfy the at-risk requirement in item (c) in the
preceding paragraph, an initial substantive residual
equity capital investment shall meet all of the
following conditions:
-
It represents an equity interest in legal form.
-
It is subordinate to all debt interests.
-
It represents the residual equity interest during the entire lease term.
55-10
This implementation guidance addresses the level at
which an entity should apply the conditions in
paragraph 958-810-25-8 to a transaction having all
of the following characteristics:
-
Sponsor forms an SPE, SPE A.
-
SPE A acquires property with the proceeds from nonrecourse debt and leases the property to Lessee A.
-
SPE A has no other activities and the terms of the lease satisfy the condition in paragraph 958-810-25-8(b), which discusses the residual risks and rewards associated with the leased assets and related debt.
-
The sponsor owns 100 percent of SPE A’s voting common stock.
-
The sponsor contributes the common stock of SPE A to capitalize another SPE (SPE B) that is formed to own and lease assets to Lessee B.
-
The other assets of SPE B are financed entirely with nonrecourse debt and are subject to a lease, the terms of which also satisfy the condition in paragraph 958-810-25-8(b).
Thus, SPE B, which is wholly owned by the sponsor, becomes the parent of SPE A.
55-11
Consistent with the implementation guidance in
paragraph 958-810-55-8 that addresses multiple
properties within a single SPE, the conditions set
forth in paragraph 958-810-25-8 shall be applied at
the lowest level at which the parties to a
transaction create an isolated entity, whether by
contract or otherwise. Therefore, in the situation
described in the preceding paragraph, the test for
compliance with the condition in paragraph
958-810-25-8(a) should be applied to the parent-only
financial statements of SPE B.
55-12 In
the transaction described in paragraph
958-810-55-10, assume the assets of SPE B will
include the common stock of SPE A and the assets
leased to Lessee B. Ownership of the stock of
another SPE that is engaged in leasing property
would not constitute an activity contemplated by the
condition in paragraph 958-810-25-8(a). Accordingly,
in this situation, the lessee shall consider that
condition to be satisfied in evaluating the
activities of SPE B. In addition, the sponsor’s
contribution of the stock of SPE A to capitalize SPE
B shall not be considered an initial substantive
residual equity capital investment, as contemplated
by the condition in paragraph 958-810-25-8(c),
because a sponsor’s investment shall not be used to
capitalize more than one SPE for purposes of
applying that condition.
Payments to Equity Owners of an SPE During the Lease Term
55-13
The characterization of any payments made by the
SPE-lessor to its owners of record shall be based on
the SPE’s GAAP basis financial statements. That is,
distributions of the SPE-lessor’s GAAP basis change
in net assets shall be considered a return on equity
capital, but any distribution in excess of
previously undistributed GAAP change in net assets
shall be considered a return of equity capital,
which would reduce the amount of the equity capital
investment that is at risk. If the amount of the
equity capital investment is reduced below the
minimum amount required as a result of a
distribution in excess of previously undistributed
GAAP change in net assets, the owner of record would
have to make an additional investment to continue to
avoid the condition in paragraph 958-810-25-8(c). An
owner of record would not be required to make an
additional equity capital investment if residual
equity capital is reduced below the minimum amount
required because of losses recorded by the SPE in
accordance with generally accepted accounting
principles.
Fees Paid to Owners of Record of an SPE
55-14 Paragraph 842-10-30-5(e) states that, for a
lessee, lease payments include fees that are paid by the lessee to the
owners of the special-purpose entity for structuring the lease transaction.
Paragraph 842-10-30-5(e) states that such fees shall be included as part of
lease payments (but shall not be included in the fair value of the
underlying asset) for purposes of applying the criterion in paragraph
842-10-25-2(d). With respect to the SPE and the application of the guidance
in paragraph 958-810-25-8, the fees paid by the lessee to the owners of the
SPE shall be considered a return of the owners’ initial equity capital
investment. To the extent that the fees reduce the equity capital investment
below the minimum amount required, the owners of record would not be
considered to have a substantive residual equity capital investment that is
at risk during the entire term of the lease.
Source of Initial Minimum Equity Investment
55-15 If
the source of the funds used to make the initial
minimum equity investment in an SPE lessor is
financed with nonrecourse debt that is
collateralized by a pledge of the investment, the
investment shall not meet the at-risk requirement in
paragraph 958-810-25-8(c). Similarly, that at-risk
requirement shall not be met if the owners purchased
residual insurance or obtained a residual guarantee
in an amount that would ensure recovery of their
equity investment. If the initial minimum equity
investment is financed with recourse debt from a
party not related to the lessee, the owners
(borrowers) shall have other assets at risk to
support the borrowing to avoid the condition in
paragraph 958-810-25-8(c). Thus, if the loans were
full recourse loans and if the fair value of the
residual equity investment serves as collateral for
the debt, the lessor-owner shall be considered at
risk to the extent that the owners of record are
liable for any decline in the fair value of the
residual interest and have, and are expected to
continue to have during the term of the lease, other
significant assets, in addition to and of a value
that exceeds their equity investment, that are at
risk.
Payment to Owners of Record of an SPE Before the Lease Term
55-16 In
some build-to-suit lease transactions involving
SPEs, the lease or related construction agreement
provides that the SPE will construct, or cause to be
constructed, the property that is to be leased. The
terms of the construction or lease agreements
provide that payments are to be made by the SPE to
the owners of record during the construction period,
which, in some cases, may be several years. Such
payments generally are made to provide the owners of
record with a cash yield on their equity capital
investments. Payments made by the SPE to the owners
of record of the SPE during the construction period
shall be deemed to be a return of their initial
equity capital investment as opposed to a return on
their equity capital investment. To the extent that
those payments reduce the equity capital investment
below the minimum amount required under paragraph
958-810-25-8, the owners of record of the SPE shall
not be considered to have made an initial
substantive residual equity capital investment that
is at risk during the entire lease term.
To evaluate whether this condition is satisfied, an NFP must first determine whether the SPE owner’s
residual equity capital investment is at risk. The SPE owner’s residual equity capital investment is at risk if
(1) it is legal-form equity, (2) it is subordinate to all debt interests, and (3) it represents the residual equity
interest during the entire lease term. The NFP should consider the source of the funds used by the SPE
owner to make the initial minimum equity investment in an SPE lessor as well as any other agreements
entered into by the SPE owner. For instance, if the SPE owner’s investment is financed with nonrecourse
debt collateralized by a pledge of the investment, or if the SPE owner purchased residual insurance
or obtained a residual guarantee in an amount that would ensure recovery of its equity investment, the investment would not meet the at-risk requirement. In addition, if the source of funds is recourse
debt from a party unrelated to the lessee, the SPE owner must have other assets at risk to support the
borrowing.
Paragraph 3.110 of Not-for-Profit Entities provides the following
guidance on the minimum acceptable investment that would qualify as an initial,
substantive, residual equity capital investment:
FinREC believes
that 3% is the minimum acceptable investment to qualify as an initial, substantive,
residual equity capital investment. A greater investment may be necessary depending on
the facts and circumstances, including the credit risk associated with the lessee and
market risk factors associated with the leased property. For example, the cost of
borrowed funds for the transaction might be indicative of the risk associated with the
transaction and whether an equity investment greater than 3% is needed. Additional
information about the application of the preceding criteria and guidance for
consolidation of the SPE is located in FASB ASC 958-810.
Any payments made by the SPE-lessor to its owners of record that are considered returns of investment
(on the basis of the SPE’s GAAP-basis financial statements) would reduce the amount of the equity
capital investment at risk. Fees paid by the lessee to the owners of the SPE for structuring the lease
transaction, and payments made by the SPE to the owners of record during the construction period
(in some build-to-suit lease transactions), are deemed returns of investment and therefore would also
reduce the amount of the equity capital investment at risk. If the amount of the equity capital investment
is reduced below the minimum amount required as a result of these returns of investment, the owners
of record would not be considered to have a substantive residual equity capital investment at risk during
the entire term of the lease unless the owners make an additional investment.
E.6.4 Reporting Relationships Between NFPs and For-Profit Entities
ASC 958-810
15-4 Additional guidance for reporting relationships
between NFPs and for-profit entities resides in the following locations in the
Codification:
-
An NFP with a controlling financial interest through direct or indirect ownership of a majority voting interest in a for-profit entity that is other than a limited partnership or similar legal entity shall apply the guidance in the General Subsections of Subtopic 810-10. However, in accordance with paragraph 810-10-15-17, NFPs are not subject to the Variable Interest Entities Subsections of that Subtopic.
-
An NFP that is a general partner or a limited partner of a for-profit limited partnership or a similar legal entity (such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership) shall apply the guidance in paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I. However, the guidance in those paragraphs does not apply to the following:
-
A general partner or a limited partner that reports its partnership interest at fair value in accordance with (e)
-
Entities in industries, such as the construction or extractive industries, in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership (see paragraph 810-10-45-14).
-
-
An NFP that owns 50 percent or less of the voting stock in a for-profit entity shall apply the guidance in Subtopic 323-10 unless the investment is measured at fair value in accordance with applicable GAAP, including the guidance described in (e). If the NFP is unable to exercise significant influence, the NFP shall apply the guidance for equity securities in Topic 321.
-
An NFP with a more than minor noncontrolling interest in a for-profit real estate partnership, limited liability company, or similar legal entity shall report its noncontrolling interests in such entities using the equity method in accordance with the guidance in Subtopic 970-323 unless that interest is reported at fair value in accordance with applicable GAAP, including the guidance described in (e). An NFP shall apply the guidance in paragraph 970-810-25-1 to determine whether its interests in a general partnership are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I to determine whether its interests in a for-profit limited partnership, limited liability company, or similar legal entity are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraph 323-30-35-3 to determine whether a limited liability company should be viewed as similar to a partnership, as opposed to a corporation, for purposes of determining whether noncontrolling interests in a limited liability company or a similar legal entity should be accounted for in accordance with Subtopic 970-323 or Subtopic 323-10.
-
An NFP that is not within the scope of Topic 954 on health care entities may elect to report the investments described in (b) through (d) and paragraph 958-325-15-2 at fair value, with changes in fair value reported in the statement of activities, provided that all such investments are measured at fair value.
ASC 958-810-55-4 contains a flowchart (included below), which can be used to
analyze relationships between NFPs and for-profit entities.
ASC 958-810
55-4 The
following flowchart and related footnote indicate the
order in which an NFP applies the guidance elsewhere in
the Codification to determine the accounting for its
relationship with a for-profit entity.
As discussed below, ASC 958-810-15-4 specifies that NFPs should also apply other relevant ASC
guidance on reporting relationships between NFPs and for-profit entities.
E.6.4.1 NFP With a Controlling Financial Interest in a For-Profit Entity
An NFP with a controlling financial interest in a for-profit entity through direct or indirect ownership of a
majority voting interest in that entity should apply the voting interest entity model in the same manner
as any for-profit entity. Under the voting interest entity model, a controlling financial interest typically
exists when a reporting entity owns more than 50 percent of the outstanding voting shares of another
entity. However, there are exceptions to this general principle. See Appendix D for more information
about the application of the voting interest entity model.
E.6.4.2 NFP That Is a General Partner of a For-Profit Limited Partnership or a Similar Entity
In response to questions from stakeholders on when NFPs that are general
partners should consolidate for-profit limited partnerships (or similar
entities), the FASB issued ASU 2017-02 in January 2017. The ASU:
-
Amends the consolidation guidance in ASC 958-810 to retain the accounting under which an NFP that is a general partner is presumed to control a for-profit limited partnership or similar entity, regardless of the extent of the general partner’s ownership interest, unless the limited partners are able to exercise substantive kick-out or participating rights. The definitions of substantive kick-out and participating rights are consistent with those used in the definition of voting interest entity in ASC 810-10 (see Section 2.4, Section 2.6, and Appendix D for more information).
-
Adds new guidance to ASC 958-810 on when an NFP limited partner should consolidate a for-profit limited partnership. Under the new guidance, a limited partner that owns, either directly or indirectly, more than 50 percent of the limited partnership kick-out rights is deemed to have a controlling financial interest and must consolidate the limited partnership. However, if noncontrolling limited partners have substantive participating rights, a limited partner with a majority of kick-out rights would not have a controlling financial interest.
E.6.4.3 NFP That Owns 50 Percent or Less of the Voting Stock in a For-Profit Business Entity
An NFP that owns 50 percent or less of the voting stock in a for-profit business entity should apply ASC
323-10 unless it reports the investment at fair value (see Section E.6.4.5).
E.6.4.4 NFP With More Than a Minor Interest in a For-Profit Real Estate Partnership, Limited Liability Company, or Similar Entity
ASC 958-810-15-4(d) discusses the accounting for NFPs with more than a minor interest in a for-profit
real estate partnership, limited liability company, or similar entity. To determine whether their interests
are considered more than minor, many NFPs refer to ASC 323-30-S99-1, which reflects the SEC staff’s
understanding that practice generally has viewed investments of more than 3 percent to 5 percent to be
more than minor.
If an NFP has more than a minor interest in a for-profit real estate partnership, limited liability company,
or similar entity, it should determine whether it holds a controlling financial interest or a noncontrolling
interest in the for-profit real estate entity. ASC 970-810-25-1 through 25-3 provide the guidance below
to help NFPs make this determination.
ASC 970-810
General Partnerships
25-1 A
general partnership that is controlled, directly or
indirectly, by an investor is, in substance, a
subsidiary of the investor. Paragraph 810-10-15-8
states that the usual condition for a controlling
financial interest is ownership of a majority voting
interest, and, therefore, as a general rule
ownership by one entity, directly or indirectly, of
over 50 percent of the outstanding voting shares of
another entity is a condition pointing toward
consolidation. However, if partnership voting
interests are not clearly indicated, a condition
that would usually indicate control is ownership of
a majority (over 50 percent) of the financial
interests in profits or losses (see paragraphs
970-323-35-16 through 35-17). Paragraph 810-10-15-8
states that the power to control may also exist with
a lesser percentage of ownership, for example, by
contract, lease, agreement with other stockholders,
or by court decree. The power to control may also
exist with a lesser percentage of ownership by
agreement with other partners.
25-2 On
the other hand, the majority interest holder may not
control the entity if one or more of the other
partners have substantive participating rights that
permit those other partners to effectively
participate in certain significant financial and
operating decisions that are made in the ordinary
course of business. The determination of whether the
rights of the other partners are substantive
participating rights shall be evaluated in
accordance with the guidance for substantive
participating rights in paragraphs 810-10-25-2
through 25-14. If the other partners have
substantive participating rights, the presumption of
control by the majority interest holder is overcome.
A controlling investor shall account for its
investment under the principles of accounting
applicable to investments in subsidiaries.
Accordingly, interentity profits and losses on
assets remaining within the group shall be
eliminated. A noncontrolling investor in a general
partnership shall account for its investment by the
equity method and should be guided by the provisions
of Topic 323.
Limited Partnerships
25-3 If
a limited partnership does not meet the conditions
in paragraph 810-10-15-14 and, therefore, is not a
variable interest entity, limited partners shall
evaluate whether they have a controlling financial
interest according to paragraph 810-10-15-8A. The
guidance in Subtopic 810-10 on consolidation shall
be used to determine whether any limited partners
control the limited partnership:
-
If no single partner controls the limited partnership, the general and limited partners shall apply the equity method of accounting to their interests, except for instances when a limited partner’s interest is so minor that the limited partner may have virtually no influence over partnership operations and financial policies (see paragraph 323-30-S99-1).
-
Subparagraph superseded by Accounting Standards Update No. 2015-02.
-
If a single limited partner controls the limited partnership, that limited partner shall consolidate the limited partnership and apply the principles of accounting applicable for investments in subsidiaries in Topic 810.
In accordance with the guidance above, if the for-profit real estate entity is a
general partnership, an NFP should apply the voting interest entity model to determine
whether it holds a controlling financial interest in the general partnership (see
Appendix D). Similarly,
if the for-profit real estate entity is a limited partnership, an NFP should apply the
voting interest entity model to determine whether any of the limited partners control
the limited partnership (see Appendix D).
If an NFP does not have a controlling financial interest in the for-profit real
estate entity, the NFP should first apply ASC 323-30-35-3 to determine whether it should
consider an interest in a limited liability company as an interest in a partnership
instead of a corporation. ASC 323-30-35-3 specifies that “[a]n investment in a limited
liability company that maintains a specific ownership account for each investor —
similar to a partnership capital account structure — shall be viewed as similar to an
investment in a limited partnership for purposes of determining whether a noncontrolling
investment in a limited liability company shall be accounted for in accordance with the
guidance in Topic 321 or the equity method.”
If an NFP has a noncontrolling interest in a partnership or a limited liability
company that is similar to a partnership under ASC 323-30-35-3, the NFP should use the
equity method in accordance with ASC 970-323 to report such noncontrolling interest
except when it elects to report the interest at fair value under ASC 825-10 (see
Section E.6.4.5).
If an NFP has a noncontrolling interest in a limited liability company that is
similar to a corporation, the NFP should use the equity method in accordance with ASC
323-10 to report the noncontrolling interest except when it elects to report such
interest at fair value under ASC 825-10 (see Section
E.6.4.5).
E.6.4.5 Reporting an NFP’s Investment at Fair Value
If consolidation is not required, an NFP with an investment in a for-profit entity could (1) be required to carry its investment
at fair value (if it is an equity security with a readily determinable fair value or any debt security) or (2)
elect the fair value option in accordance with ASC 825-10-25-1.
E.6.5 Presentation and Disclosures for NFPs
E.6.5.1 Presentation of Noncontrolling Interests
ASC 958-810
25-6 An
interest by an NFP in another NFP may be less than a
complete interest. For example, an NFP may appoint
80 percent of the board of the other NFP. For NFPs
other than those within the scope of Topic 954, if
the conditions for consolidation in paragraphs
958-810-25-2, 958-810-25-3, or 958-810-25-4 are met,
the basis of that consolidation would not reflect a
noncontrolling interest for the portion of the board
that the reporting entity does not control, because
there is no ownership interest other than the
interest of the reporting entity.
45-1
Noncontrolling interests in the equity (net assets)
of consolidated subsidiaries shall be reported as a
separate component of the appropriate class of net
assets in the consolidated statement of financial
position of a not-for-profit entity (NFP). That
amount shall be clearly identified and described
(for example, as noncontrolling ownership
interest in subsidiaries) to distinguish it
from the components of net assets of the parent,
which includes the parent’s controlling financial
interest in its subsidiaries. See paragraphs
958-810-50-4 through 50-5 for additional guidance on
the requirement related to disclosure of
noncontrolling interests either on the face of the
statement of activities or in the notes. The effects
of donor-imposed restrictions, if any, on a
partially owned subsidiary’s net assets shall be
reported in accordance with Subtopics 958-205 and
958-220. Example 1 (see paragraphs 958-810-55-17
through 55-25) illustrates the reporting
requirements.
If the conditions for consolidation discussed in Section E.6.2.2.1, Section E.6.2.2.2, or Section E.6.2.2.3 are met, an NFP would not reflect a
noncontrolling interest in its consolidated financial statements for the portion of the
board of directors the NFP does not control, because the NFP is the only entity that
holds an ownership interest.
When noncontrolling interests of consolidated subsidiaries are required to be presented, they should
be clearly identified and included as a separate component of net assets in the NFP’s consolidated
financial statements. ASC 958-810-55-17 through 55-25 illustrate how an NFP may present and disclose
noncontrolling interests in accordance with ASC 958-810.
The effects of donor-imposed restrictions on a partially owned subsidiary’s net assets should also be
reported. ASC 958-810-20 defines a donor-imposed restriction as follows:
ASC 958-810 — Glossary
Donor-Imposed
Restriction
A donor stipulation (donors include
other types of contributors, including makers of
certain grants) that specifies a use for a
contributed asset that is more specific than broad
limits resulting from the following:
-
The nature of the not-for-profit entity (NFP)
-
The environment in which it operates
-
The purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association.
Some donors impose restrictions that
are temporary in nature, for example, stipulating
that resources be used after a specified date, for
particular programs or services, or to acquire
buildings or equipment. Other donors impose
restrictions that are perpetual in nature, for
example, stipulating that resources be maintained in
perpetuity. Laws may extend those limits to
investment returns from those resources and to other
enhancements (diminishments) of those resources.
Thus, those laws extend donor-imposed
restrictions.
Paragraphs 3.113 and 3.114 of Not-for-Profit Entities emphasize that the
determination of whether net assets are restricted as a result of donor-imposed
stipulations (or other restrictions) should be made from the perspective of the NFP
reporting entity as a whole and should take into account the existence of separate
consolidated entities. Because the consolidated entity may serve a broader purpose than
the separate subsidiary, “[a]ll or a portion of a subsidiary’s net assets without donor
restrictions might need to be reported as net assets with donor restrictions in the
consolidated financial statements.” Conversely, it may also be true, albeit less likely,
that “all or a portion of a subsidiary’s net assets with donor restrictions might need
to be reported as net assets without donor restrictions in the consolidated financial
statements.”
Paragraphs 3.22, 3.113, and 3.114 of Not-for-Profit Entities contain the
following examples, which demonstrate the concepts discussed above:
3.22 [A] voluntary health and welfare entity has a broad
mission of helping low income families and is the parent of an NFP that has a mission
of running a day care and after-school care center for children in the county. The
subsidiary NFP received a gift of a small office building subject to the donor’s
restriction that it be used for providing day care or after-school care or for the
administrative support of those programs. In the separate financial statements of the
subsidiary, those assets are not separately reported as restricted assets because the
use of the assets is no narrower than the nature of the NFP and the purposes specified
in its articles of incorporation and bylaws. However, when the subsidiary NFP is
consolidated with its voluntary health and welfare entity parent, the office building
would be reported separately with related disclosures because the donor-imposed
restriction to use the building for day care, after-school care, or the administrative
support of those two programs is narrower than the broad mission of helping low income
families of the reporting entity. . . .
3.113 [A] membership association has a subsidiary foundation that has as its
sole mission to provide scholarships. Donors make contributions to the subsidiary with
the intent that the subsidiary use the contributions to support its mission without
restriction, including granting scholarships and incurring fund-raising and general
and administrative expenses. The gifts to the subsidiary are therefore classified as
increases in net assets without donor restrictions in the separately issued financial
statements of the subsidiary. However, when the subsidiary’s financial statements are
consolidated with those of the membership association, the classification of the net
assets of the subsidiary would be changed to reflect that they are net assets with
donor restrictions from the perspective of the consolidated financial statements.
Likewise, investment income on donor-restricted endowment funds of the subsidiary
would be reported as net assets with donor restrictions in the consolidated financial
statements if they were required to be used for scholarships, even if an appropriation
had released the time restriction.
3.114 [A]n NFP adoption agency has a subsidiary whose mission is to raise funds
for various children’s causes, including adoption, foster care, and parental training.
If donors restrict their contributions for adoption services, the subsidiary
classifies them as increases in net assets with donor restrictions. However, when the
subsidiary’s financial statements are consolidated with those of the adoption entity,
the classification of the net assets of the subsidiary would be changed to reflect
that they are without donor restrictions from the perspective of the reporting entity,
which remains primarily an adoption agency.
E.6.5.2 Disclosures for Noncontrolling Interests
ASC 958-810
50-1 If
consolidated financial statements are presented, the
reporting entity (parent) shall disclose any
restrictions made by entities outside of the
reporting entity on distributions from the
controlled not-for-profit entity (NFP) (subsidiary)
to the parent and any resulting unavailability of
the net assets of the subsidiary for use by the
parent.
50-4 An
NFP (parent) that has one or more consolidated
subsidiaries with a noncontrolling interest shall
provide a schedule of changes in consolidated net
assets attributable to the parent and the
noncontrolling interest either in notes to the
consolidated financial statements or on the face of
financial statements, if practicable. That schedule
shall reconcile beginning and ending balances of the
parent’s controlling interest and the noncontrolling
interests for each class of net assets for which a
noncontrolling interest exists during the reporting
period.
50-5 The
schedule required by the preceding paragraph shall,
at a minimum, include:
-
A performance indicator, if the entity is a not-for-profit, business-oriented health care entity (see Section 954-10-15)
-
Amounts of discontinued operations
-
Subparagraph superseded by Accounting Standards Update No. 2015-01.
-
Changes in ownership interests in a subsidiary, including investments by and distributions to noncontrolling interests acting in their capacity as owners, which shall be reported separate from any revenues, expenses, gains, or losses and outside any measure of operations, if reported
-
An aggregate amount of all other changes in net assets without donor restrictions and net assets with donor restrictions for the period.
50-6
Paragraph 958-810-55-25 illustrates the required
disclosures using a reconciling schedule in notes to
the consolidated financial statements.
An NFP that presents consolidated financial statements and has one or more consolidated subsidiaries with a noncontrolling interest must provide the disclosures discussed above. ASC 958-810-55-17 through 55-25 illustrate how an NFP may present and disclose noncontrolling interests in accordance with ASC 958-810.
E.6.5.3 Disclosures Required When Consolidated Financial Statements Are Not Presented
ASC 958-810
50-2 If,
as described in paragraph 958-810-25-4, an NFP (the
reporting entity) controls a related but separate
NFP through a form other than majority ownership
interest, sole corporate membership, or majority
voting interest in the board of the other entity and
has an economic interest in that other NFP, the
reporting entity shall disclose all of the following
information if it does not present consolidated
financial statements:
-
Identification of the other NFP and the nature of its relationship with the reporting entity that results in control
-
Summarized financial data of the other NFP, which shall include the following information:
-
Total assets, liabilities, net assets, revenue, and expenses
-
Resources that are held for the benefit of the reporting entity or that are under its control.
-
-
The disclosures required by paragraphs 850-10-50-1 through 50-6.
50-3 The
existence of control or an economic interest, but
not both, as described in paragraph 958-810-25-5,
requires the disclosures in paragraphs 850-10-50-1
through 50-6. (The existence of an economic interest
does not necessarily cause the entities to be
related parties. However, the disclosures in those
paragraphs are required if an economic interest
exists.)
If an NFP holds both (1) an economic interest in another NFP and (2) control through means other than
a majority ownership interest, sole corporate membership, or a majority voting interest in the board (see
Section E.6.2.2.3), it must disclose the quantitative and qualitative information required by ASC 958-810-50-2 if it does not present consolidated financial statements.
If an NFP holds either an economic interest in another NFP or control of the other NFP, but not both
(see Section E.6.2.2.4), it must disclose the information required by ASC 850-10-50-1 through 50-6.
E.6.5.4 Disclosures Required When an NFP Consolidates a For-Profit Entity
ASC 958-810 does not provide specific presentation and disclosure requirements
for an NFP that has a controlling financial interest in a for-profit entity. Paragraph
3.118 of Not-for-Profit Entities states that in determining the relevance of the
for-profit subsidiary and the presentation and disclosures that would be most meaningful
to financial statement users, an NFP should consider the following factors:
-
The size of the for-profit subsidiary in relation to the NFP parent. The larger the for-profit subsidiary is in relation to the NFP, the more likely it is that discrete information about the for-profit subsidiary would be meaningful to financial statement users.
-
The activities of the for-profit subsidiary in relation to the mission of the NFP parent. The more marginal the activities of the for-profit subsidiary are to the mission of the NFP, the more likely it is that discrete information about the for-profit subsidiary would be meaningful to financial statement users.
-
The need for creditors to have separate information about the for-profit subsidiary, including information about guarantees of the for-profit subsidiary’s debt or limitations on transferring cash to or from the subsidiary. If the assets of a for-profit subsidiary are encumbered (for example, by mortgages, contracts, or other matters), it may be meaningful to include discrete information about the for-profit subsidiary’s total assets, equity, and changes in equity, similar to the disclosures required to be reported by business entities pursuant to FASB ASC 280.
In addition, paragraphs 3.121 through 3.126 of Not-for-Profit Entities
provide the following three examples (not all-inclusive) of ways an NFP may present
information related to for-profit subsidiaries:
Example A
3.121 NFP Trade
Association creates a wholly owned for-profit subsidiary (For-Profit Training
Facility) to provide continuing professional education to its members. For-Profit
Training Facility subsidiary incurs debt in order to build a classroom building. The
debt is secured solely by a mortgage on For-Profit Training Facility’s assets. NFP
Trade Association’s mission includes providing training to its members. Although
members could obtain training from other service providers, the training is integral
to NFP Trade Association’s overall mission.
3.122 It may be most meaningful to report For-Profit Training
Facility’s assets, liabilities, revenues, expenses, and cash flows as part of the
overall activities of NFP Trade Association, without discrete information presented on
the face of the financial statements about For-Profit Training Facility. However, the
notes to the financial statements would include any material disclosures that relate
only to the For-Profit Training Facility, such as to disclose any collateral-based
debt for which the For-Profit Training Facility is obligated or any assets restricted
solely for the use of the Facility.
Example B
3.123 NFP College
creates a wholly owned for-profit subsidiary, For-Profit Day Care Center, that
operates a day care center for the benefit of its students and faculty. The College
does not use the day care center as a teaching resource for its students. For-Profit
Day Care Center has no outstanding debt.
3.124 Because the day care center provides services to students, but is
peripheral and incidental to the mission of the college, it may be most meaningful to
report the assets, liabilities, activities, and cash flows of For-Profit Day Care
Center in a manner similar to an auxiliary operation in the college’s financial
statements. (Auxiliary operations typically are reported on the statement of
activities with one line for total revenues and one line for total expenses; the
statement of financial position and statement of cash flows do not separate
information associated with auxiliary operations.) Alternatively, it may be meaningful
to present the operations of the day care center separately on the statement of
activities.
Example C
3.125 NFP Community Organization received a
contribution of 100% of the voting common stock of a For-Profit Plastics Company. The
terms of the contribution agreement state that For-Profit Plastics Company’s net
income may be used for NFP Community Organization’s general operations. NFP Community
Organization is not involved in the day-to-day management of For-Profit Plastics
Company.
3.126 If For-Profit Plastics
Company is material to NFP Community Organization’s financial statements, it may be
meaningful to report the assets, liabilities, activities, and cash flows of For-Profit
Plastics Company separately from those of NFP Community Organization. Acceptable
methods of doing so include, but are not limited to, presenting (a)
consolidating financial statements, or (b) consolidated financial statements
with note disclosure of the assets, liabilities, net assets, activities, and cash
flows of For-Profit Plastics Company.
E.6.6 Health Care Entities
ASC 954-810
05-2 An
integrated health care system typically consists of
multiple related entities, operating both for-profit
entities and not-for-profit entities (NFPs). A
not-for-profit parent entity may be the sole corporate
member or, through other means, it may control other
entities such as a not-for-profit hospital, a
not-for-profit medical foundation that contracts with a
for-profit physician group, or other not-for-profit
providers such as a long-term care center, a substance
abuse center, a surgery center, or an outpatient clinic.
The system also may own stock in various for-profit
ventures such as health maintenance organizations or
insurance entities that may or may not provide patient
care. Fundraising typically is accomplished through a
separate foundation. Foundations, auxiliaries, guilds,
and similar entities frequently assist and, in many
instances, are related to the health care entity.
05-3 The
rights and powers of the controlling entity may vary
depending on the legal structure of the controlled
entity and the nature of control. The majority owner of
a for-profit entity’s voting stock or the sole corporate
member of an NFP may not only have the ability to
determine the direction of the controlled entity but
also have the proportionate right to (or the
responsibility for) operating results and a residual
interest in the net assets upon dissolution. However, in
other situations, the rights of the controlling party
may be more limited. For example, in the case of a sole
general partner in a limited partnership, the limited
partners — and not the general partner — may be entitled
to the net assets upon dissolution.
45-1
Whether the financial statements of a reporting health
care entity and those of one or more other for-profit
entities or not-for-profit entities (NFPs) shall be
consolidated, whether those other entities shall be
reported using the equity method, and the extent of
disclosure that is be required (if any) if consolidated
financial statements are not presented, shall be based
on the nature of the relationship between the entities.
See paragraphs 954-810-15-2 through 15-3.
Applying the consolidation rules to health care entities may be complex because, as described above, an
integrated health care system generally consists of several related entities that may be NFPs or for-profit
entities. See Sections E.6.6.1 and E.6.6.2 for a discussion of how to determine the correct accounting
model to apply.
E.6.6.1 Accounting Model for a Reporting Entity That Is an Investor-Owned Health Care Entity
ASC 954-810
15-2 If
the reporting entity is an investor-owned health
care entity, this Subtopic provides consolidation
guidance for reporting relationships with other
entities in addition to the guidance in the
following locations:
-
Pursuant to paragraph 810-10-15-3(a), if an investor-owned health care entity has an interest in an entity, it must determine whether that entity is within the scope of the Variable Interest Entities Subsections of Subtopic 810-10 pursuant to paragraph 810-10-15-14. If that entity is within the scope of the Variable Interest Entities Subsections, the investor-owned health care entity shall first apply the guidance in those Subsections. Paragraph 810-10-15-17 provides specific exceptions to applying the Variable Interest Entities Subsections.
-
Pursuant to paragraph 810-10-15-3(b), if the investor-owned health care entity has an interest in an entity that is not within the scope of the Variable Interest Entities Subsections of Subtopic 810-10 and is not within the scope of the Subsections mentioned in paragraph 810-10-15-3(c), it shall use only the guidance in the General Subsections of Subtopic 810-10 to determine whether that interest constitutes a controlling financial interest.
-
Pursuant to paragraph 810-10-15-3(c), if the investor-owned health care entity has a contractual management relationship with another entity (for example, a physician practice) and that other entity is not within the scope of the Variable Interest Entities Subsections of Subtopic 810-10, it shall use the guidance in the Consolidation of Entities Controlled by Contract Subsections of Subtopic 810-10 to determine whether the arrangement constitutes a controlling financial interest.
-
Subparagraph superseded by Accounting Standards Update No. 2015-02.
-
Pursuant to Section 810-30-15, if the investor-owned health care entity is a sponsor in a research and development arrangement, it shall apply the guidance in Subtopic 810-30.
The table below summarizes the guidance above on determining which accounting
model to apply when a reporting entity is an investor-owned health care entity (not an
NFP) that has a reporting relationship with another entity.
Table E-2
Investor-Owned Health Care Entities
Reporting Relationship | Accounting Model |
Interest in an entity that does not qualify for any
of the scope exceptions in ASC 810-10-15-17 to
application of the VIE model (see Section 3.4) | |
Interest in an entity that qualifies for one of the
scope exceptions in ASC 810-10-15-17 to application
of the VIE model (see Section 3.4) | Apply the voting interest entity model (see Appendix D) |
Contractual management relationship with another
entity (e.g., a physician practice) not within the scope
of the VIE guidance | Apply the contract-controlled entity model to determine whether the arrangement
represents a controlling financial interest (see Section D.3.4) |
Sponsor in a research and development arrangement | Apply ASC 810-30 (see Section
D.3.3) |
E.6.6.2 Accounting Model for a Reporting Entity That Is an NFP Business-Oriented Health Care Entity
ASC 954-810
15-3 If
the reporting entity is a not-for-profit
business-oriented health care entity, this Subtopic
provides consolidation guidance for reporting
relationships with other entities in addition to the
guidance in the following locations:
a. Pursuant to paragraph 810-10-15-17,
not-for-profit business-oriented health care entities are not subject to
the Variable Interest Entities Subsections of Subtopic 810-10 unless the
not-for-profit entity is used by a business entity in a manner similar
to a VIE in an effort to circumvent the provisions of those
Subsections.
b. If the not-for-profit, business-oriented
health care entity has an investment in a for-profit entity, it shall
use the guidance in the General Subsections of Subtopic 810-10 to
determine whether that interest constitutes a controlling financial
interest.
c. If the not-for-profit, business-oriented
health care entity has a contractual management relationship with
another entity (for example, a physician practice), it shall use the
guidance in the Consolidation of Entities Controlled by Contract
Subsections of Subtopic 810-10 to determine whether the arrangement
constitutes a controlling financial interest.
d. Subparagraph superseded by Accounting
Standards Update No. 2015-02.
dd. If the not-for-profit, business-oriented
health care entity is the general partner or limited partner of a
for-profit limited partnership or similar legal entity (such as a
limited liability company that has governing provisions that are the
functional equivalent of a limited partnership), it shall apply the
guidance in paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A
through 55-16I.
e. If the not-for-profit, business-oriented
health care entity is a sponsor in a research and development
arrangement, it shall apply the guidance in Subtopic 810-30.
f. If the not-for-profit, business-oriented
health care entity has a relationship with another not-for-profit entity
that involves control, an economic interest, or both, it shall apply the
guidance in Subtopic 958-810.
g. If the not-for-profit, business-oriented
health care entity is engaged in leasing transactions with a
special-purpose-entity (SPE) lessor, it shall consider whether it should
consolidate the lessor in accordance with the guidance in paragraphs
958-810-25-8 through 25-10.
h. Except where it elects to report such
interests at fair value in accordance with the Fair Value Option
Subsections of Subtopic 825-10, a not-for-profit, business-oriented
health care entity that owns 50 percent or less of the common voting
stock of an investee and can exercise significant influence over
operating and financial policies shall apply the guidance in Subtopic
323-10.
i. Except where it elects to report such
interests at fair value in accordance with the
Fair Value Option Subsections of Subtopic 825-10,
a not-for-profit, business-oriented health care
entity shall report noncontrolling interests in
for-profit real estate partnerships, limited
liability entities, and similar entities over
which the reporting entity has more than a minor
interest under the equity method in accordance
with the guidance in Subtopic 970-323. A
not-for-profit, business-oriented health care
entity shall apply the guidance in paragraph
970-323-25-2 to determine whether its interest in
a for-profit partnership, limited liability
entity, or similar entity is a controlling
interest or a noncontrolling interest. A
not-for-profit, business-oriented health care
entity shall apply the guidance in paragraph
323-30-35-3 to determine whether a limited
liability entity should be viewed as similar to a
partnership, as opposed to a corporation, for
purposes of determining whether a noncontrolling
interest in a limited liability entity or a
similar entity should be accounted for in
accordance with Subtopic 970-323 or Subtopic
323-10.
NFPs are not subject to the VIE guidance (see Section 3.4.1). The following table summarizes how a
business-oriented health care NFP reporting entity that has a reporting relationship
with another entity can determine which accounting model to apply:
Table E-3 NFP
Business-Oriented Health Care Entities
Reporting Relationship | Accounting Model |
Investment in a for-profit entity | Apply the voting interest entity model (see Appendix D) |
Contractual management relationship with another
entity (e.g., a physician practice) | Apply the contract-controlled entity model to determine whether the arrangement
represents a controlling financial interest (see Section D.3.4) |
Sponsor in a research and development arrangement | Apply ASC 810-30 (see Section
D.3.3) |
Relationship with another NFP that involves control,
an economic interest, or both | Apply ASC 958-810 (see Section
E.6.2) |
Engaged in leasing transactions with an SPE lessor | Apply ASC 958-810-25-8 through 25-10 (see Section E.6.3) |
Ownership of 50 percent or less of the common
voting stock of an investee and ability to exercise
significant influence over operating and financial
policies | Apply ASC 323-10 except when electing to report such interest at fair value in
accordance with ASC 825-10 (see Section E.6.4.3) |
Noncontrolling interests in for-profit real estate
partnerships, limited liability entities, and similar
entities over which the NFP has more than a minor
interest |
See Section E.6.4.4 |
E.6.6.3 Presentation and Disclosures for a Reporting Health Care Entity
ASC 954-810
45-2
Paragraph 958-810-25-2A explains that, in some
situations, certain actions require approval by a
supermajority vote of the board. That paragraph
states that such voting requirements might overcome
the presumption of control by the owner or holder of
a majority voting interest. (For related
implementation guidance, see paragraph
958-810-55-4A.) Pursuant to paragraph
810-10-15-17(a) a not-for-profit, business-oriented
health care entity is not subject to the Variable
Interest Entities Subsections of Subtopic 810-10,
except that it may be a related party for purposes
of applying paragraphs 810-10-25-42 through 25-44.
Also, if a not-for-profit, business-oriented health
care entity is used by business entities in a manner
similar to a variable interest entity (VIE) in an
effort to circumvent the provisions of the Variable
Interest Entities Subsections of Subtopic 810-10,
that not-for-profit entity shall be subject to the
Variable Interest Entities Subsections of that
Subtopic.
45-3A A
parent corporation typically owns stock in a
for-profit entity, whereas a sole corporate member
holds membership rights in a not-for-profit entity.
Sole corporate membership in a not-for-profit
entity, like ownership of a majority voting interest
in a for-profit entity, shall be considered a
controlling financial interest, unless control does
not rest with the sole corporate member (for
instance, if the other [membership] entity is in
bankruptcy or if other legal or contractual
limitations are so severe that control does not rest
with the sole corporate member).
45-3B
When consolidated financial statements are required
or permitted by Section 958-810-25, a noncontrolling
interest shall be provided if such interest is
represented by an economic interest whereby the
noncontrolling interest would share in the operating
results or residual interest upon dissolution. (See
presentation and disclosure requirements in Sections
958-810-45 and 958-810-50, respectively.)
45-3C
Not-for-profit, business-oriented health care
entities shall not report an investment in an entity
at fair value, as described in paragraph
958-325-35-6, if that entity is required to be
consolidated.
Medical Malpractice Claims
45-4 In
general, a trust fund, whether legally revocable or
irrevocable, shall be included in the financial
statements of the health care entity. A portion of
the fund equal to the amount of assets expected to
be liquidated to pay malpractice claims classified
as current liabilities shall be classified as a
current asset; the balance of the fund, if any,
shall be classified as a noncurrent asset. Revenues
and administrative expenses of the trust fund are
included in the statement of operations. In some
circumstances, the foregoing may not be possible
(for example, if a common trust fund exists for a
group of health care entities; if the health care
entity is part of a common municipality
risk-financing internal service fund; or if the
legal, regulatory, or indenture restrictions prevent
the inclusion of a trust fund in a health care
entity’s financial statements).
50-1 The
existence of the trust fund and whether it is
irrevocable shall be disclosed in the financial
statements.
Noncontrolling Interests
50-2 A
not-for-profit, business-oriented health care entity
shall include the performance indicator in the
schedule required by paragraphs 958-810-50-4 through
50-5. Paragraph 958-810-55-25 illustrates the
required disclosure using a reconciling schedule in
notes to the consolidated financial statements.
Much of the above guidance on presentation and disclosures for health care entities is consistent with
ASC 958-810 (see Section E.6.5).
Footnotes
11
See Section
3.4.1.1 for a discussion of the definition of an NFP.