Question

Promoting Education through Research (PER) is a nongovernmental not-for-profit organization that is trying to determine whether other organizations with which it has relationships should be included in PER's consolidated financial statements. Based on the FASB Codification, which of the following entities should be consolidated with PER?

A) PER owns 60% of the voting stock in a closely held public corporation that conducts research related to the effect of technology on brain function.
B) PER has a contract with a local state university to conduct seminars/classes on the relationship between demographic characteristics and learning. The contracts account for 15% of PER's revenue.
C) PER officers sit in the board of another NFP organization that is involved in student testing. PER officers hold three of the seven seats on the board, PER has no financial relationship with the NFP organization
D) All of the above.

Answer 1

Only the entity where PER owns 60% of the voting stock should be consolidated with PER's financial statements, as this indicates control per FASB guidelines. Entities with contractual relationships or board presence without financial control are not typically consolidated.

Step-by-step explanation:

A nongovernmental not-for-profit organization like Promoting Education through Research (PER) should refer to Accounting Standards Codification (ASC) for the rules about the consolidation of entities. Generally, an entity is consolidated if there's control, which could come through ownership, such as a majority voting interest, or when certain criteria showing the ability to direct the significant activities of the other entity are met. Looking at the scenarios provided:

• (A) PER owns 60% of the voting stock in a closely held public corporation. Given that ownership usually implies control, this entity should likely be consolidated.
• (B) Having a contractual relationship with another entity, like the local state university, doesn't constitute control for consolidation purposes, especially when the contracts represent a minority of PER's revenue (15%).
• (C) Even though PER officers hold a significant presence on the board of another NFP, without a financial relationship, this presence alone does not usually result in consolidation.

Therefore, based on the given information and without additional details indicating further control or financial entanglement, only entity (A), the closely held public corporation, should be consolidated with PER's financial statements according to FASB guidelines.