Where a non-profit organization controls another non-profit organization, it must provide certain disclosures in the financial statements.
Control of non-profit organizations is defined in the same way as it is for for-profit organizations: the independent ability to make the key operating, investing and financing decisions of the other organization. When one organization has the right to appoint the majority of the other organization’s board of directors, it is presumed that such control exists. Where there is the ability to appoint the majority of the board of the organization, the presumption of control would have to be overcome with strong evidence. Control may be shown to exist in other ways, for examples:
there is a strong economic interest in the other organization. For example, the other organization may only be permitted to raise funds and transfer them to the reporting organization. Or the other organization’s charter, which may only be altered with the consent of the reporting organization, only permits it to perform activities of economic benefit to the reporting organization.
the two organizations’ purposes are intertwined and they have shared objectives.
In reporting the results of controlled non-profits, the reporting organization has the option of consolidating the other’s results with its own results, or providing certain note disclosures. (4450.14)
In either case, the reporting organization must disclosure the following:
- the policy used to report the activities of the controlled organization
- the relationship of the reporting entity with the controlled organization
- the controlled organization’s purpose, intended community of service, income tax status (ie non-profit) and legal form (eg corporation)
- the nature and extent of any economic interest in the controlled organization (4450.15)
If the reporting organization chooses to consolidate a controlled organization, it would aggregate on a line by line basis the financial statement results of the combining entities, eliminating any transactions between the entities, as if the combining entities where actually always one organization. Consideration should be made of the relevant recommendations of CICA Handbook section 1600 when applying consolidation techniques.
Where an organization chooses not to consolidate the results of a controlled organization, additional disclosures are required. However, these requirements are reduced where the reporting organization controls a large number of individually immaterial organizations. In all other cases, where the reporting organization does not perform a consolidation, the following information must be disclosed for each controlled organization (or for each group of similar controlled non-profit organizations):
- the total assets, liabilities, and net assets at the reporting date
- revenues (including gains), expenses (including losses) and cash flows from operating, financing and investing activities
- details of any restrictions, by major category, on the resources of the controlled organization
- significant differences in accounting policies from those followed by the reporting organization (4450.22)
These disclosures may be too onerous where the organization is reporting on a group of a large number of immaterial organizations. In this case the reporting organization may forego consolidation and the disclosures described in the above paragraph, provided the notes explain the reasons for not disclosing this information. The number of organizations required to allow this exception is not defined, although the Handbook does talk about "dozens" of organizations. The justification for following this exception should focus on the impracticality, or the cost versus the benefit of following the standard recommendations. (4450.26)