In January 2017, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) 2017-02, Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity.
ASUs released in 2015 regarding consolidations created uncertainty about when a not-for-profit entity (NFP) that is a general partner should consolidate a for-profit partnership or similar legal entity. (An example of a similar legal entity would be a limited liability company where the managing member is the functional equivalent of the general partner.) With the release of ASU 2017-02, the FASB eliminates diversity in practice and provides clear consolidation guidance to the parties involved. NFP general partners are now able to refer directly to the Not-For-Profit Entities section of the Codification (Subtopic 958-810) for consolidation guidance.
Under current guidance, NFP general partners are presumed to control a for-profit partnership, regardless of their ownership interest, unless that presumption is overcome. If the presumed control is not overcome, the NFP general partner is required to consolidate the for-profit limited partnership. The presumption is overcome if the limited partner has either substantive kick-out rights or substantive participating rights. If applicable, kick-out rights and substantive participating rights are typically described in the limited partnership agreement (or operating agreements for limited liability companies).
The substantive kick-out right is the ability of the limited partner to dissolve the limited partnership or otherwise remove the general partner without cause by a simple majority vote, and that vote is accomplished with no significant barriers.
Examples of substantive participating rights include the following: (1) selecting, terminating, and setting the compensation of management responsible for implementing the limited partnership’s policies and procedures; and (2) establishing operating and capital decisions of the limited partnership, including budgets, in the ordinary course of business.
The release of ASU 2017-02 did not change the general guidance surrounding presumption of control and what is needed to overcome that presumption.
ASU No. 2017-02 is effective for NFPs for fiscal years beginning after December 15, 2016. Early adoption is permitted. NFPs that have adopted ASU 2015-02 are required to adopt the amendments of ASU 2017-02 retrospectively to all relevant periods, beginning with the fiscal year in which ASU 2015-02 was initially applied.
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