United States

Proposal: Consolidation of for-profit limited partnership by not-for-profit entity

FINANCIAL REPORTING INSIGHTS  | 

In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. After the ASU was issued, questions arose as to the application of the ASU to the consolidation of a for-profit limited partnership (or similar entity) by a not-for-profit entity that is a general partner.

Accounting Standards Codification (ASC) Subtopic 958-810 requires a not-for-profit entity that is a general partner of a for-profit limited partnership (or similar entity) to apply the consolidation guidance in ASC 810-20, unless that partnership interest is reported at fair value under other guidance. ASU 2015-02 eliminated the guidance in ASC 810-20, and requires a not-for-profit entity that is a general partner of a for-profit limited partnership (or similar entity) to apply the guidance in ASC 810-10.

ASC 810-10 (as amended by ASU 2015-02) is limited to providing guidance on when a limited partner should consolidate an entity. The specific paragraph (ASC 810-10-15-8A) discusses consolidation by a limited partner that owns (directly or indirectly) more than 50 percent of the limited partnership’s kick-out rights. That paragraph is applied once an entity has considered the guidance in the Variable Interests Entities subsection of ASC 810-10. However, not-for-profit entities generally are not within the scope of the Variable Interests Entities subsection of ASC 810-10. Accordingly, in situations in which a not-for-profit entity that is a general partner applies the General Subsections of ASC 810-10, the guidance is unclear as to when the general partner should consolidate.

To clarify the consolidation guidance for not-for-profit entities, the FASB recently issued a proposed ASU, Not-for-Profit Entities – Consolidation (Subtopic 958-810): Clarifying When a Not-for-Profit Entity That Is a General Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity. If finalized, this proposed ASU would amend the consolidation guidance in Subtopic 958-810 to maintain current practice. Therefore, under the proposed amendments, a not-for-profit entity that is a general partner would continue to be presumed to control a for-profit limited partnership, regardless of the extent of its ownership interest, unless that presumption is overcome. The presumption would be overcome if the limited partners have either substantive kick-out rights or substantive participating rights. To be substantive, the kick-out rights would have to be exercisable by a simple majority vote of the limited partners’ voting interests or a lower threshold.

With respect to transition, if the entity was a general partner in a limited partnership that had early adopted ASU 2015-02 and it resulted in a deconsolidation, the proposed ASU would allow the entity to adopt the revisions either retrospectively or via a modified retrospective method. Either way, the entity would “unwind” the deconsolidation that occurred under ASU 2015-02. An entity that has not yet adopted the amendments in ASU 2015-02 would be required to adopt the proposed ASU at the same time it adopts ASU 2015-02 and to apply the same transition method elected for the application of ASU 2015-02.

The proposed ASU is available for comment until October 3, 2016.