Stack of papers

The FASB voted 5 to 2 to add a project to its technical agenda to provide guidance on how a for-profit sponsor should evaluate whether it consolidates a not-for-profit entity (NFP) such as a charitable foundation or political action committee.

There is no guidance in GAAP on this issue, and there are differences among entities in how the consolidation determination is made, according to board discussions on Oct. 21, 2020.

“I do think we could clarify practice. It is an area where I think there is no existing GAAP on how to think about a for-profit consolidating a charitable foundation so we have some people looking to a voting interest model, some looking to not-for-profit guidance, and some of those views almost feel like some type of hybrid variable interest entity analysis even though I think people acknowledge that these are scoped out of VIE accounting,” FASB Vice Chairman James Kroeker said. “So I think taking this could just reduce the diversity of discussion that happens in practice. I think we can do it on a relatively streamlined basis,” he said.

Board leanings were that the for-profit sponsor does not have a controlling financial interest even if it is the sole corporate member or has the majority of voting rights because those voting rights do not stem from shares that provide “ownership rights” and U.S. federal tax laws limit the ability of the NFP to generate monetary benefits for the sponsoring for-profit entity.

The powers of the board of directors of a charitable foundation are similar to the limited powers and responsibilities of a trustee, which generally would not consolidate a trust, the discussions indicated.

Four differences cropped up

The board received an agenda request in May that pointed to accounting differences among companies in how the consolidation determination is made in practice, board discussions indicated. Four views are used in practice:

  • The power to control an NFP subsidiary constitutes controlling financial interest in accordance with Topic 810, Consolidation.
  • Controlling financial interest under Topic 810 requires an ownership interest representing a residual or other economic interest in an NFP’s net assets.
  • For-profit entities should analogize to the guidance on economic interest in Subtopic 958-810, Not-for-Profit Entities—Consolidation, and interpret it narrowly.
  • For-profit entities should analogize to the guidance on economic interest in Subtopic 958-810 and interpret it broadly.

The board favored the view that states “controlling financial interest under Topic 810, Consolidation, requires an ownership interest representing a residual or other economic interest in an not-for-profit’s net assets.”

Not all in favor of project

Harold Schroeder and Marsha Hunt. Schroeder, who dissented against adding a project, felt that the issue was not sufficiently pervasive to warrant standard-setting and there was room for more research by staff on the topic. “I’m concerned that we’re heading down a path of ‘inquiries equal problem equal we need to go find a solution,’” Schroeder said.

Hunt said financial statement preparers are not widely concerned about the accounting rules. “And as I thought about the accounting, I think I feel very strongly that these types of organizations such as the foundations do not belong on a for-profit’s financial statements. Those are not assets that are available to pay dividends, they are not assets that are available to generate sales. A lot of these organizations there are very specific tax requirements so once those assets have left the for-profit entity they’re not available to come back. So I felt strongly it is not appropriate to consolidate these.”

Other discussions

Separately, the board voted 5 to 2 add a project to its technical agenda that addresses the lack of transparency about a reporting entity’s use of suppler finance programs by specifying disclosures that they should provide.

In addition, the board considered but voted against adding project on the following, believing the issues were not pervasive, or were being addressed elsewhere, or changes would do more harm than good:

  • Change the accounting for cryptocurrency;
  • Change diluted earnings per share (EPS) accounting; and
  • Amend or provide additional guidance on the application of the discount rate guidance on the rate implicit in the lease in Topic 842, Leases.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

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