ASC

ASC 958-20

Financially Interrelated Entities

958 Not-for-Profit Entities

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In brief

IntermediateNot-for-profitRecognitionPresentationConsolidation

ASC 958-20 governs accounting by two NFPs that are "financially interrelated" — one entity can influence the other's operating and financial decisions AND one has an ongoing, residual economic interest in the other's net assets (958-20-15-2). When a donor transfers assets to a recipient entity (e.g., a fundraising foundation) for a financially interrelated specified beneficiary and the recipient is not a trustee, the recipient recognizes contribution revenue on receipt (958-20-25-1) and the beneficiary recognizes an interest in the recipient's net assets, adjusted for its share of changes in those net assets in a manner similar to the equity method (958-20-25-2; 35-1). Transfers in which the resource provider names itself or an affiliate as beneficiary and expects no repayment are "equity transactions" reported as a separate line in the statement of activities (958-20-25-4; 45-1).

Key points (7)
  • Two entities are financially interrelated only if BOTH criteria in 958-20-15-2 are met: ability to influence the other's operating and financial decisions (e.g., affiliates, considerable board representation, limiting bylaws, policymaking agreement) and an ongoing economic interest in the other's net assets that is residual in nature (958-20-55-2A).
  • If the recipient entity and specified beneficiary are financially interrelated and the recipient is not a trustee, the recipient recognizes a contribution received when it receives the donor's assets (958-20-25-1, per 958-605-25-27).
  • The beneficiary recognizes its interest in the recipient entity's net assets (958-20-25-2) and adjusts that interest for its share of the change in the recipient's net assets (958-20-35-1) — a method similar to the equity method in Subtopic 323-10 (958-20-60-1).
  • A transfer is an equity transaction only if the resource provider specifies itself or an affiliate as beneficiary, the provider and recipient are financially interrelated, and no repayment of the transferred assets is expected (958-20-25-4); the recipient reports it as a separate line item in its statement of activities (958-20-45-1).
  • If the provider names itself, it reports the equity transaction as an interest in the recipient's net assets (958-20-25-5); if it names an affiliate, the provider reports a separate line in its statement of activities and the affiliate reports the interest (958-20-25-6, 45-2).
  • If the provider names itself or an affiliate but the financially-interrelated or no-repayment conditions of 958-20-25-4(b)-(c) fail, the transfer is an asset to the provider and a liability to the recipient (958-20-25-7, per 958-605-25-33).
  • The beneficiary's interest in the recipient's net assets is eliminated when both are included in consolidated financial statements (958-20-45-3; 810-10-45-1), and transferors in equity transactions must give the 958-605-50-6 disclosures (958-20-50-1).

For students. This is the classic "university/hospital foundation" fact pattern: the foundation books contribution revenue while the supported NFP books an equity-method-like interest in the foundation's net assets — so the gift appears in two sets of financial statements unless consolidated. Students often forget that BOTH the influence and the ongoing *residual* economic interest tests must be met (an economic interest under 958-810 is not automatically enough), and confuse an "equity transaction" (reciprocal, financially interrelated) with an "equity transfer."

financially interrelated entitiesrecipient entityspecified beneficiaryongoing economic interest in net assetsresidual rightsequity transactioninterest in net assets (equity-method-like)implied time restriction

Machine-generated study aid for ASC 958-20. Check the source paragraphs below.

958-20-00Status

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958-20-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
Affiliate Amended Maintenance Update 2018-12 (PDF) 09/10/2018
Conditional Contribution Added Accounting Standards Update No. 2018-08 06/21/2018
Contribution Amended Accounting Standards Update No. 2018-08 06/21/2018
Contribution Amended Accounting Standards Update No. 2010-07 01/28/2010
Donor-Imposed Condition Added Accounting Standards Update No. 2018-08 06/21/2018
Donor-Imposed Restriction Added Accounting Standards Update No. 2016-14 08/18/2016
Economic Interest Amended Accounting Standards Update No. 2016-14 08/18/2016
Equity Transfer Added Accounting Standards Update No. 2016-14 08/18/2016
Financial Asset (2nd def.) Amended Accounting Standards Update No. 2016-19 12/14/2016
Net Assets with Donor Restrictions Added Accounting Standards Update No. 2016-14 08/18/2016
Net Assets without Donor Restrictions Added Accounting Standards Update No. 2016-14 08/18/2016
Performance Indicator Added Accounting Standards Update No. 2016-14 08/18/2016
Temporarily Restricted Net Assets Superseded Accounting Standards Update No. 2016-14 08/18/2016
Unrestricted Net Assets Superseded Accounting Standards Update No. 2016-14 08/18/2016
958-20-45-1 Amended Accounting Standards Update No. 2016-14 08/18/2016
958-20-55-2B Added Accounting Standards Update No. 2016-14 08/18/2016
958-20-55-5 Amended Accounting Standards Update No. 2016-14 08/18/2016
958-20-55-6 Amended Accounting Standards Update No. 2016-14 08/18/2016
958-20-55-10 through 55-13
 Amended Accounting Standards Update No. 2016-14 08/18/2016
958-20-55-16 Amended Accounting Standards Update No. 2016-14 08/18/2016
958-20-55-17 Amended Accounting Standards Update No. 2016-14 08/18/2016

958-20-05Overview and Background

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958-20-05-1
This Subtopic provides guidance for certain transactions between two not-for-profit entities (NFPs) if the relationship between them has both of the following characteristics:
  1. a
    One of the entities has the ability to influence the operating and financial decisions of the other.
  2. b
    One of the entities has an ongoing economic interest in the net assets of the other.
958-20-05-2
In some cases, the relationship between the financially interrelated entities requires consolidation, as discussed in Subtopic 958-810.

958-20-15Scope and Scope Exceptions

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Overall Guidance

958-20-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 958-10-15, with specific qualifications noted below.

Entities

958-20-15-2
The guidance in this Subtopic applies to entities that are financially interrelated. A recipient entity and a specified beneficiary are financially interrelated entities if the relationship between them has both of the following characteristics:
  1. a
    One entity has the ability to influence the operating and financial decisions of the other. The ability to exercise that influence may be demonstrated in several ways, including the following:
    1. 1
      The entities are affiliates.
    2. 2
      One entity has considerable representation on the governing board of the other entity.
    3. 3
      The charter or bylaws of one entity limit its activities to those that are beneficial to the other entity.
    4. 4
      An agreement between the entities allows one entity to actively participate in policymaking processes of the other, such as setting organizational priorities, budgets, and management compensation.
  2. b
    One entity has an ongoing economic interest in the net assets of the other. If the specified beneficiary has an ongoing economic interest in the net assets of the recipient entity, the beneficiary's rights to the assets held by the recipient entity are residual rights; that is, the value of those rights increases or decreases as a result of the investment, fundraising, operating, and other activities of the recipient entity. Alternatively, but less common, a recipient entity may have an ongoing economic interest in the net assets of the specified beneficiary. If so, the recipient entity's rights are residual rights, and their value changes as a result of the operations of the beneficiary.

Transactions

958-20-15-3
The guidance in this Subtopic applies to the following types of transactions:
  1. a
    Transactions in which an entity—the donor—makes a contribution by transferring assets to a not-for-profit entity (NFP) or charitable trust—the recipient entity—that accepts the assets from the donor and agrees to use those assets on behalf of or transfer those assets, the return on investment of those assets, or both to a financially interrelated entity—the beneficiary—that is specified by the donor
  2. b
    Transfers that take place in a similar manner to (a) but are not contributions for either of the following reasons:
    1. 1
      The entity that transfers the assets to the recipient entity—the resource provider—is related to the beneficiary in a way that causes the transfer to be reciprocal.
    2. 2
      Conditions imposed by the resource provider or the relationships between the parties make the transfer of assets to the recipient entity revocable or repayable.
958-20-15-4
The guidance in this Subtopic applies to transfers addressed by the preceding paragraph of cash and other assets, including securities, land, buildings, use of facilities or utilities, materials and supplies, intangible assets, services, and unconditional promises to give those items in the future.

958-20-25Recognition

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Contributions Received for a Financially Interrelated Beneficiary

958-20-25-1
Pursuant to paragraph 958-605-25-27, if a recipient entity and a specified beneficiary are financially interrelated entities and the recipient entity is not a trustee, the recipient entity shall recognize a contribution received when it receives assets (financial or nonfinancial) from the donor that are specified for the beneficiary. For example, a foundation that exists to raise, hold, and invest assets for the specified beneficiary or for a group of affiliates of which the specified beneficiary is a member generally is financially interrelated with the not-for-profit entity or entities (NFPs) it supports and recognizes contribution revenue when it receives assets from the donor. See Examples 1 through 3 (paragraphs
958-20-55-3 through 55-17
) for illustrations of this guidance.

Beneficiary's Recognition of Interest in a Financially Interrelated Recipient Entity

958-20-25-2
If a beneficiary and a recipient entity are financially interrelated entities, the beneficiary shall recognize its interest in the net assets of the recipient entity. See Examples 1 through 3 (paragraphs
958-20-55-3 through 55-17
) for illustrations of this guidance. Recognizing an interest in the net assets of the recipient entity and adjusting that interest for a share of the change in net assets of the recipient entity is similar to the equity method, which is described in Subtopic 323-10.

Equity Transactions

958-20-25-4
A transfer of assets to a recipient entity is an equity transaction if all of the following conditions are present:
  1. a
    The resource provider specifies itself or its affiliate as the beneficiary.
  2. b
    The resource provider and the recipient entity are financially interrelated entities.
  3. c
    Neither the resource provider nor its affiliate expects payment of the transferred assets, although payment of investment return on the transferred assets may be expected.
958-20-25-5
If a resource provider specifies itself as beneficiary, it shall report an equity transaction as an interest in the net assets of the recipient entity (or as an increase in a previously recognized interest) (see paragraph 958-20-25-2).
958-20-25-6
If a resource provider specifies an affiliate as beneficiary of an equity transaction, the resource provider shall report an equity transaction as a separate line in its statement of activities, and the affiliate named as beneficiary shall report an interest in the net assets of the recipient entity (see paragraph 958-20-25-2).
958-20-25-7
If the resource provider specifies itself or its affiliate as the beneficiary and any of the conditions in paragraph 958-20-25-4(b) and 958-20-25-4(c) are not met, the transfer shall be accounted for as an asset by the resource provider and as a liability by the recipient entity, in accordance with paragraph 958-605-25-33.

958-20-35Subsequent Measurement

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958-20-35-1
If the beneficiary has recognized an interest in the net assets of the recipient entity pursuant to paragraph 958-20-25-2, it shall adjust that interest for its share of the change in net assets of the recipient entity.

958-20-45Other Presentation Matters

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Equity Transactions

958-20-45-1
A recipient entity shall report an equity transaction as a separate line item in its statement of activities. Paragraph 958-20-55-2B describes the difference between an equity transfer and an equity transaction. See paragraph 954-220-45-2 for guidance on how to present equity transfers for not-for-profit, business-oriented health care entities that present a performance indicator.
958-20-45-2
A resource provider shall report an equity transaction as a separate line in its statement of activities if it specifies an affiliate as beneficiary. See paragraph 958-20-25-4 for the conditions that determine if a transfer is an equity transaction.

Beneficiary's Interest in the Net Assets of a Recipient Entity

958-20-45-3
If the beneficiary and the recipient entity are included in consolidated financial statements, the beneficiary's interest in the net assets of the recipient entity shall be eliminated in accordance with paragraph 810-10-45-1.

958-20-50Disclosure

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958-20-50-1
If a not-for-profit entity (NFP) transfers assets to a recipient entity in an equity transaction (see paragraph 958-20-25-4), it shall disclose the information required by paragraph 958-605-50-6 for each period for which a statement of financial position is presented.

958-20-55Implementation Guidance and Illustrations

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958-20-55-1
This Section, which is an integral part of the requirements of this Subtopic, provides general guidance to be used by a not-for-profit entity (NFP) in reporting relationships with financially interrelated entities.

Implementation Guidance

958-20-55-2
The flowchart in paragraph 958-605-55-74 depicts the process of applying the requirements of Sections 958-20-15 and 958-20-25.
958-20-55-2A
Although most of the relationships described in the definition of economic interest used in Subtopic 958-810 are potentially ongoing economic interests in the net assets of another, some do not meet the criterion in paragraph 958-20-15-2(b). Only economic interests that are both ongoing and residual interests in the net assets are ongoing economic interests in the net assets of another.
958-20-55-2B
An equity transaction differs from an equity transfer in that an equity transaction, as described in paragraph 958-20-25-4, involves a financially interrelated party either as a third party in a transfer from an entity to one of its affiliates or as a counterparty in a transfer from an entity to itself. In addition, an equity transaction, unlike an equity transfer, is reciprocal; the NFP or its affiliate named as the beneficiary receives an ongoing economic interest in the assets held by the recipient entity. See paragraph 954-220-45-2 for guidance on how to present equity transfers for not-for-profit, business-oriented health care entities that present a performance indicator.

Illustrations

958-20-55-3
This Example illustrates the guidance in paragraphs 958-20-15-2 and
958-20-25-1 through 25-2
.
958-20-55-4
Corporation sends dental supplies to University Foundation to be used by students in University's dental clinic. University Foundation's bylaws state that it is organized for the purpose of stimulating voluntary financial support from alumni and other donors for the benefit of University, especially for addressing the long-term academic priorities of University. As with most gifts it receives, University Foundation can choose the timing of the distribution to University and can place additional limitations on the distribution if those limitations are consistent with Corporation's restrictions. University does not control University Foundation.
958-20-55-5
University Foundation recognizes the fair value of the dental supplies (nonfinancial assets) as an increase in assets and as contribution revenue that increases net assets with donor restrictions because there are donor-imposed restrictions and because University and University Foundation are financially interrelated entities (see paragraph 958-20-25-1). University can influence the financial and operating decisions of University Foundation because the bylaws of University Foundation limit its activities to those that benefit University (see paragraph 958-20-15-2(a)). University has an ongoing economic interest in the net assets of University Foundation because the results of University Foundation's activities accrue to the benefit of University (see paragraph 958-20-15-2(b)). When University Foundation distributes the dental supplies to University, it reduces its assets and recognizes an expense and the expiration of the restriction.
958-20-55-6
Periodically, in conjunction with preparing its financial statements, University recognizes the change in its interest in the net assets of University Foundation, which would include the gift of nonfinancial assets received by the foundation (see paragraph 958-20-25-2). Because payments from University Foundation are due in future periods, the increase (or decrease) in University's interest would be classified as a change in net assets with donor restrictions to reflect the time restriction. When the dental supplies and other assets are distributed to it, University would recognize the assets received and decrease its interest in the net assets of University Foundation.
958-20-55-7
If, instead, University controlled University Foundation, University would be able to access at will any assets held by University Foundation. Implying a time restriction on the gifts held by University Foundation would be inappropriate. When recognizing the change in its interest in University Foundation, University would report the resulting net assets in the same net asset classifications as University Foundation.
958-20-55-8
This Example illustrates the guidance in paragraphs 958-20-15-2 and
958-20-25-1 through 25-2
.
958-20-55-9
Corporation transfers cash to Healthcare Foundation and requests that Healthcare Foundation use the gift to provide healthcare benefits to the community. Healthcare Foundation's bylaws state that it is organized for the purpose of stimulating voluntary financial support from donors for the benefit of Hospital, Nursing Home, and Walk-in Clinic, all of which are located in the community. Hospital, Nursing Home, Walk-in Clinic, and Healthcare Foundation are affiliates that are controlled by Healthcare System.
958-20-55-10
Healthcare Foundation would recognize cash and contribution revenue that increases net assets without donor restrictions because Corporation did not specify a beneficiary for its gift. Healthcare Foundation can choose how to distribute the gift among the three affiliates (see paragraphs
958-605-55-76 through 55-77
).
958-20-55-11
Periodically, in conjunction with preparing their financial statements, Hospital, Nursing Home, and Walk-in Clinic recognize the changes in their interests in the net assets of Healthcare Foundation (see paragraph 958-20-25-2). When measuring its interest in Healthcare Foundation, each affiliate would include only the net assets of Healthcare Foundation that are restricted to that affiliate's use. None of them would include in their individual interest the net assets resulting from the gift received from Corporation because Healthcare Foundation can choose how to distribute the gift among the three affiliates. Healthcare System's financial statements would include the net assets resulting from the gift received from Corporation, as well as other changes in the net assets of Healthcare Foundation, in its interest in the net assets of the foundation. (An interest in the net assets of an affiliate would be eliminated if that affiliate were included in the consolidated financial statements of the interest holder.)
958-20-55-12
If Healthcare Foundation, Hospital, Nursing Home, and Walk-in Clinic entered into an agreement that specified how gifts without donor restrictions to Healthcare Foundation should be divided, each affiliate would also include its share of Healthcare Foundation's net assets without donor restrictions, computed in accordance with that agreement, when it measured its interest in Healthcare Foundation. Similarly, if Healthcare System directed that gifts without donor restrictions to Healthcare Foundation be distributed to the three affiliates in accordance with a specified formula, each affiliate would include its share of net assets without donor restrictions, computed in accordance with that formula, when it measured its interest in Healthcare Foundation.
958-20-55-13
If Corporation had specified that its gift be used for the benefit of Walk-in Clinic rather than giving without restriction, Healthcare Foundation would recognize contribution revenue that increases net assets with donor restrictions because Hospital, Nursing Home, Walk-in Clinic, and Healthcare Foundation are financially interrelated entities (see paragraph 958-20-15-2). Their relationship meets both requirements of paragraph 958-20-25-1. Hospital, Nursing Home, and Walk-in Clinic can influence the financial and operating decisions of Healthcare Foundation because all four NFPs are under common control and the bylaws of Healthcare Foundation limit its activities to support of its three affiliates (see paragraph 958-20-15-2(a)). Hospital, Nursing Home, and Walk-in Clinic each have an ongoing economic interest in the net assets of Healthcare Foundation because their rights to the assets held by Healthcare Foundation are residual rights in an ongoing relationship (see paragraph 958-20-15-2(b)). Walk-in Clinic would include the net assets resulting from the gift received from Corporation in its interest in the net assets of Healthcare Foundation.
958-20-55-14
This Example illustrates the guidance in paragraphs 958-20-15-2 and
958-20-25-1 through 25-2
.
958-20-55-15
Individual transfers cash to Arts Foundation and specifies that the money be used to support the expenses of the ballet. Arts Foundation's bylaws state that it is organized for the purpose of stimulating voluntary financial support from donors for the benefit of Community Ballet and Community Theater. At the time Arts Foundation was created, the three NFPs entered into an agreement that specifies that if a donor does not specify the NFP to which the gift should be transferred, the gift will be split equally between Community Ballet and Community Theater. The agreement also specifies that representatives from the three NFPs will meet annually and determine campaign priorities for the next year and the costs of operating Arts Foundation will be equally split between Community Ballet and Community Theater. Arts Foundation is not controlled by Community Ballet, Community Theater, or Individual.
958-20-55-16
Arts Foundation would report assets and contribution revenue that increases net assets with donor restrictions because there are donor-imposed restrictions and because Community Ballet and Arts Foundation are financially interrelated entities (see paragraph 958-20-25-1). Community Ballet has the ability to influence the operating and financial decisions of Arts Foundation because the agreement allows Community Ballet to participate in the policymaking processes of Arts Foundation (see paragraph 958-20-15-2(a)). The agreement also establishes Community Ballet's rights as residual rights because it specifies how the revenues and expenses of Arts Foundation will be shared (see paragraph 958-20-15-2(b)). When Arts Foundation distributes assets to Community Ballet, it reduces its assets and recognizes an expense.
958-20-55-17
Periodically, in conjunction with preparing their financial statements, Community Ballet and Community Theater recognize the changes in their interests in the net assets of Arts Foundation (see paragraph 958-20-25-2). Community Ballet would include the net assets resulting from the gift received from Individual in its interest in the net assets of Arts Foundation because Individual specified that the gift be used to support the ballet and Arts Foundation's bylaws limit it to supporting Community Ballet. Community Ballet would also include in its interest all other gifts restricted to its benefit and its share of net assets without donor restrictions because of the agreement among the three organizations that gifts to Arts Foundation that are not donor-restricted should be split equally between Community Ballet and Community Theater. Because payments from Arts Foundation are due in future periods, the increase (or decrease) in Community Ballet's interest would be classified as a change in net assets with donor restrictions to reflect the time restriction. When assets are distributed to Community Ballet, it recognizes the assets received and decreases its interest in the net assets of Arts Foundation.

958-20-60Relationships

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Investments—Equity Method and Joint Ventures

958-20-60-1
For the procedures required to report an interest in the net assets of a recipient entity using a method similar to the equity method, see Subtopic 323-10.

Related Party Disclosures

958-20-60-2
For a definition of a related party and the required disclosures of material related party transactions, see Topic 850.

Related subtopics