Limited Partnerships—To Consolidate or Not to Consolidate, That is the Question

By: Lee Klumpp CPA, CGMA

The Financial Accounting Standards Board (FASB) has added a project entitled Clarifying When a Not-For-Profit Entity That Is a General Partner Should Consolidate a For-Profit Limited Partnership (or Similar Entity), to its agenda. Its objective is to clarify when a nonprofit entity that is a general partner should consolidate a for-profit limited partnership into its financial statements.

This project was added to the agenda because the FASB issued its Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, in February 2015. Since the issuance of that ASU, FASB staff have received feedback from various stakeholders indicating that the guidance fails to make clear when a nonprofit that is a general partner should consolidate a for-profit limited partnership or similar entity.

Prior to the issuance of ASU 2015-02, Accounting Standards Codification (ASC) Subtopic 958-810, Not-for-Profit Entities—Consolidation, provided that a nonprofit entity that is a general partner of a for-profit limited partnership or a similar entity should apply the consolidation guidance in Subtopic 810-20, Consolidation: Control of Partnerships and Similar Entities, unless that partnership interest is reported at fair value in conformity with certain other guidance. The problem is that ASU 2015-02 eliminated Subtopic 810-20 and instead referred a nonprofit that is a general partner of a for-profit limited partnership or a similar entity to the consolidation guidance in ASC Subtopic 810‑10.

In subsequent feedback from stakeholders, the FASB learned the guidance in the General Subsections of ASC Subtopic 810-10, as amended, is written only in the context of when a limited partner should consolidate. Specifically, paragraph 810-10-15-8A states that “the usual condition for a controlling financial interest, as a general rule, is ownership by one limited partner, directly or indirectly, of more than 50 percent of the limited partnership’s kick-out rights through voting interests.” To use the guidance in that paragraph, it is appropriate for the nonprofit first to navigate through the Variable Interest Entities (VIE) Subsections of Subtopic 810-10 before applying the General Subsections. However, that is a problem because nonprofits are scoped out of the VIE guidance, unless the guidance is being used to circumvent those subsections. As a result, when a nonprofit that is a general partner navigates directly to the General Subsections of Subtopic 810-10, the guidance fails to make clear when the general partner should consolidate.

At the March 30, 2016 FASB meeting, the staff presented and the board discussed outreach performed on alternatives that would address when a nonprofit general partner should consolidate a for-profit limited partnership (or similar entity).

The board decided to maintain current practice for nonprofits that are general partners by reinstating the consolidation guidance that previously existed in ASC Subtopic 810-20, Consolidation: Control of Partnerships and Similar Entities, and including it in ASC Subtopic 958-810. Because the board decided to reinstate the consolidation guidance that previously existed in Subtopic 810-20, the board decided not to supersede the guidance related to special-purpose-entity (SPE) lessors from Subtopic 958-810 and agreed not to perform further outreach on the SPE guidance.

Additionally, the board decided to provide transition guidance because some entities may have early-adopted the amendments in ASU 2015-02. Those nonprofits that have adopted the amendments in ASU 2015-02 should apply the proposed amendments using a modified retrospective approach by recording a cumulative-effect adjustment to net assets (equity) as of the beginning of the fiscal year of adoption, or they would apply the amendments retrospectively. Nonprofits that have not yet adopted the amendments in ASU 2015-02 would apply the proposed amendments using the same effective date and transition provisions in ASU 2015-02.

The FASB directed the staff to draft a proposed ASU with a comment period of 60 days. At the time of this article the exposure draft had not yet been released by the FASB.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com