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 guidance in paragraph 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 ASU 2017-02, 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. This ASU amends the consolidation guidance in Subtopic 958-810 to maintain current practice. Therefore, under the amendments, a not-for-profit entity that is a general partner continues 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 is overcome if the limited partners have either substantive kick-out rights or substantive participating rights. To be substantive, the kick-out rights must be exercisable by a simple majority vote of the limited partners’ voting interests or a lower threshold.
ASU 2017-02 is effective for not-for-profit entities for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If a not-for-profit entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
An entity that has not yet adopted the amendments in ASU 2015-02 is required to adopt the ASU 2017-02 amendments at the same time it adopts ASU 2015-02 and to apply the same transition method elected for the application of ASU 2015-02. An entity that already has adopted ASU 2015-02 is required to apply the ASU 2017-02 amendments retrospectively to all relevant prior periods beginning with the fiscal year in which the ASU 2015-02 amendments initially were applied.