Joint Ventures and For-Profit Entities

Question: If we own 50 percent or more of a joint venture and the proceeds are rolled into our consolidated financial statements, should we require the venture to report community benefit?

Recommendation: If the hospital or system owns more than 50 percent, it is not accounting for the entity using the equity method. That means revenues and expenses are consolidated in with the hospital and community benefits should be as well.

The inclusion of a joint venture in consolidated financial reporting for not-for-profits is determined based on control — therefore, if an organization has control the joint venture would be consolidated. Control implies responsibility on how the joint venture carries out the mission, and it should be included in the joint venture documents that the joint venture must meet the needs of the underserved. Since meeting the needs of the underserved is driven by the organization and a community benefit, the joint venture community benefit activities should be included in the hospital's community benefit.

On another level there is the "matching" principle in accounting which says if we are including the revenues and expenses (consolidating) of the joint venture, then the community benefit should also be included. Otherwise as you look at community benefit as a percent of net revenues or as a percent of operating expenses, you will have the joint venture in the denominator (either revenues or expenses) but not have the joint venture's community benefit in the numerator possibly creating a distortion.

(Updated November 2015)

Please Take Note: The information provided does not constitute legal or tax advice. The material is provided for informational/educational purposes only. Please consult with counsel regarding your organization's particular circumstances.