Standard Changes for Consolidating Entities

November 17, 2016

An accounting standard update from FASB known as 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, is on the horizon.

The exposure draft of this standard has been through the comment period, which likely means the issuance is not far off. The update is intended to correct a prior update that left practitioners asking the question whether a nonprofit entity that is a general partner should consolidate a for-profit limited partnership, or a similar entity.

Typically, a nonprofit general partner would consolidate a for-profit limited partnership or similar entity unless a stated exception exists which would be:

A general partner or a limited partner that reports its partnership interest at fair value. Or, they are entities in industries, such as construction or extractive, in which it is appropriate for a general partner to use the pro-rata method of consolidation for its investment in a limited partnership.

A nonprofit general partner is presumed to control a limited partnership; regardless, of the extent of their ownership interests unless that presumption is overcome. The presumption would be overcome if the limited partners have substantive kick-out rights or substantive participating rights. Kick-out rights represent the rights underlying the limited partners or partners’ ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause. On the other hand, participating rights allow the limited partners or non-controlling shareholders to block or participate in certain significant financial and operating decisions of the limited partnership or corporation that are made in the ordinary course of business. Participating rights do not require the holders of such rights to have the ability to initiate action.

We will follow the progress of this update. If you have any questions in the meantime, please contact us at 301.231.6200.