3. Amend paragraph 958-810-05-1, with a link to transition paragraph 958-810-65-2, as follows:
Not-for-Profit Entities—Consolidation
Overview and Background
958-810-05-1 This Subtopic provides guidance on the following:
a. Reporting relationships between a not-for-profit entity (NFP) and another NFP that potentially result in consolidation
b. Reporting relationships with special-purpose entity lessors (either for-profit entities or NFPs)
c. Reporting a noncontrolling interest in an acquiree
d. Reporting relationships between an NFP and a for-profit entity that is other than a limited partnership or similar legal entity (incremental guidance only).
e. Reporting relationships between an NFP that is a general partner or a limited partner and a for-profit limited partnership or similar legal entity.
4. Amend paragraph 958-810-15-4, with a link to transition paragraph 958-810-65-2, as follows:
Scope and Scope Exceptions
> Other Considerations
958-810-15-4 Additional guidance for reporting relationships between NFPs and for-profit entities
resides is located
in the following locations in the Codification:
a. An NFP with a controlling financial interest
in a for-profit entity
through direct or indirect ownership of a majority voting interest
in a for-profit entity that is other than a limited partnership or similar legal entity in that entity
shall apply the guidance in the General Subsections of Subtopic 810-10. However, in accordance with paragraph 810-10-15-17, NFPs are not subject to the Variable Interest Entities Subsections of that Subtopic.
b. An NFP that is a general partner
or a limited partner of a for-profit limited partnership or a similar
legal entity (such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership) shall apply the guidance in
paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I Subtopic 810-10 unless that partnership interest is reported at fair value in conformity with the guidance described in (e).
However, the guidance in those paragraphs does not apply to the following:
1. A general partner or a limited partner that reports its partnership interest at fair value in accordance with (e)
2. Entities in industries, such as the construction or extractive industries, in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership (see paragraph 810-10-45-14).
c. An NFP that owns 50 percent or less of the voting stock in a for-profit
business
entity shall apply the guidance in Subtopic 323-10 unless that investment is reported at fair value in conformity with the guidance described in (e).
d. An NFP with a more than
a
minor
noncontrolling interest in a for-profit real estate partnership, limited liability company, or similar
legal entity shall,
subject to the fair value exceptions in item (e),
report for its noncontrolling interests in such entities using the equity method in accordance with the guidance in Subtopic 970-323 unless that interest is reported at fair value in conformity with the guidance described in (e).
An NFP shall apply the guidance in paragraph 970-810-25-1 to determine whether its interests in a general partnership are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraphs
958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I 970-810-25-1 through 25-3
to determine whether its interests in a for-profit
limited partnership, limited liability company, or similar
legal entity are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraph 323-30-35-3 to determine whether a limited liability company should be viewed as similar to a partnership, as opposed to a corporation, for purposes of determining whether noncontrolling interests in a limited liability company or a similar
legal entity should be accounted for in accordance with Subtopic 970-323 or Subtopic 323-10.
e. An NFP may be required to report an investment described in (c) at fair value in conformity with paragraph 958-320-35-1, or may be permitted to make an election in accordance with paragraph 825-10-25-1. In addition, NFPs other than those within the scope of Topic 954 may be permitted to report
an investment
the investments described in (b), (c), or (d) at fair value in conformity with Section 958-325-35.
In addition, amend the following pending content for paragraph 958-810-154, with no additional link to transition:
Pending Content:
Transition Date: (P) December 16, 2017; (N) December 16, 2018 | Transition Guidance: 825-10-65-2
958-810-15-4 Additional guidance for reporting relationships between NFPs and for-profit entities
resides is located
in the following locations in the Codification:
a. An NFP with a controlling financial interest
in a for-profit entity
through direct or indirect ownership of a majority voting interest
in a for-profit entity that is other than a limited partnership or similar legal entity in that entity
shall apply the guidance in the General Subsections of Subtopic 810-10. However, in accordance with paragraph 810-10-15-17, NFPs are not subject to the Variable Interest Entities Subsections of that Subtopic.
b. An NFP that is a general partner
or a limited partner of a for-profit limited partnership or a similar
legal entity (such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership) shall apply the guidance in
paragraphs 958-810-2511 through 25-29 and 958-810-55-16A through 55-16I Subtopic 810-10 unless that partnership interest is reported at fair value in conformity with the guidance described in (e).
However, the guidance in those paragraphs does not apply to the following:
1. A general partner or a limited partner that reports its partnership interest at fair value in accordance with (e)
2. Entities in industries, such as the construction or extractive industries, in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership (see paragraph 810-10-45-14).
c. An NFP that owns 50 percent or less of the voting stock in a for-profit
business
entity shall apply the guidance in Subtopic 323-10 unless
that
the investment
is measured at fair value in accordance with applicable GAAP, including is reported at fair value in conformity with
the guidance described in (e).
If the NFP is unable to exercise significant influence, the NFP shall apply the guidance for equity securities in Topic 321.
d. An NFP with a more than a minor
noncontrolling interest in a for-profit real estate partnership, limited liability company, or similar
legal entity shall
, subject to the fair value exceptions in item (e)
, report
for
its noncontrolling interests in such entities using the equity method in accordance with the guidance in Subtopic 970-323 unless that interest is reported at fair value in
conformity
accordance with
applicable GAAP, including the guidance described in (e).
An NFP shall apply the guidance in paragraph 970-810-25-1 to determine whether its interests in a general partnership are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraphs
958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I 970-810-25-1 through 25-3
to determine whether its interests in a for-profit
limited partnership, limited liability company, or similar
legal entity are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraph 323-30-35-3 to determine whether a limited liability company should be viewed as similar to a partnership, as opposed to a corporation, for purposes of determining whether noncontrolling interests in a limited liability company or a similar
legal entity should be accounted for in accordance with Subtopic 970-323 or Subtopic 323-10.
e.
An NFP that is not within the scope of Topic 954 on health care entities may elect to report the investments described in (b) through (d) and paragraph 958-325-15-2 at fair value, with changes in fair value reported in the statement of activities, provided that all such investments are measured at fair value. An NFP may be required to report an investment described in (c) at fair value in conformity with paragraph 958-321-35-1, or may be permitted to make an election in accordance with paragraph 825-10-25-1. In addition, NFPs other than those within the scope of Topic 954 may be permitted to report an investment described in (b), (c), or (d) at fair value in conformity with Section 958-325-35.
5. Add paragraphs 958-810-25-11 through 25-29 and their related headings, with a link to transition paragraph 958-810-65-2, as follows:
Recognition
> Control of Limited Partnerships and Similar Legal Entities
958-810-25-11 The guidance in this paragraph and paragraphs 958-810-25-12 through 25-29 and 958-810-55-16A through 55-16I addresses the potential consolidation of limited partnerships and similar legal entities. A similar legal entity is an entity (such as a limited liability company) that has governing provisions that are the functional equivalent of a limited partnership. In those entities, a managing member is the functional equivalent of a general partner, and a nonmanaging member is the functional equivalent of a limited partner. Throughout those paragraphs, any reference to a limited partnership includes limited partnerships and similar legal entities.
> > General Partners or Limited Partners That Control a Limited Partnership
958-810-25-12 The general partners in a {add glossary link}limited partnership{add glossary link} are presumed to control that limited partnership regardless of the extent of the general partners' ownership interest in the limited partnership. [Content amended as shown and moved from paragraph 810-20-25-3]
958-810-25-13 If a limited partnership has multiple general partners, the determination of which, if any, general partner within the group controls and, therefore, shall consolidate the limited partnership is based on an analysis of the relevant facts and circumstances. In situations involving multiple general partners, entities under common control are considered to be a single general partner for purposes of applying the guidance in
paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I this Subtopic
.
[Content amended as shown and moved from paragraph 810-20-25-1]
958-810-25-14 The assessment of whether the rights of the limited partners
shall
overcome the presumption of control by the general partners is a matter of judgment that depends on facts and circumstances. The general partners do not control the limited partnership if the limited partners have either of the following:
a.
The substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause (as distinguished from with cause)
Substantive {add glossary link to voting interest entity definition}kick-out rights{add glossary link to voting interest entity definition}
b. Substantive {remove glossary link to participating rights and add glossary link to voting interest entity definition}participating rights{remove glossary link to participating rights and add glossary link to voting interest entity definition}. [Content amended as shown and moved from paragraph 810-20-25-5]
958-810-25-15 If, based on the preceding evaluation,
the limited partners
possess
have substantive kick-out rights
or substantive participating rights,
the presumption of control by the general partners
would be
is overcome and each of the general partners
would
shall account for its investment in the limited partnership using the equity method of accounting. Topic 323 provides guidance on the equity method of accounting.
[Content amended as shown and moved from paragraph 810-20-25-10]
958-810-25-16 If one limited partner directly or indirectly owns more than 50 percent of a limited partnership's kick-out rights through voting interests, then that limited partner shall be deemed to have a controlling financial interest in the limited partnership and shall consolidate the limited partnership. However, if noncontrolling limited partners have substantive participating rights, then the limited partner with a majority of kick-out rights through voting interests does not have a controlling financial interest.
958-810-25-17 The
following
guidance
in paragraphs 958-810-25-19 through 25-29 shall be considered in evaluating whether rights held by the limited partners overcome the presumption of control by the general partners.
[Content amended as shown and moved from paragraph 810-20-25-7]
958-810-25-18 The assessment of limited
Limited partners' rights and their
impact
effect on
whether the presumption of control o
f the limited partnership
by the general partners
is overcome and on whether one limited partner has a controlling financial interest in a limited partnership shall be
made
assessed when an investor
(or investors)
first becomes a
general
partner
(or partners)
and shall be reassessed at each reporting period thereafter for which financial statements of the
general
partner(s) are prepared.
[Content amended as shown and moved from paragraph 810-20-25-6]
> > > > >
Substantive Kick-Out Rights
958-810-25-19 The determination of
All relevant facts and circumstances shall be considered in determining whether
the
{remove glossary link}kick-out rights{remove glossary link} are substantive
shall be based on a consideration of all relevant facts and circumstances
. Substantive kick-out rights
shall
must have both of the following characteristics:
a. The kick-out rights can be exercised by a single limited partner or a vote of a simple majority
(see Example 1 [paragraph 810-20-55-10])
(see Example 2 in paragraph 958-810-55-26) or a lower percentage of the limited partners' voting interests held by parties other than the general partners, entities under common control with the general partners or a general partner, and other parties acting on behalf of the general partners or a general partner. A kick-out right that contractually requires a vote in excess of a simple majority (such as a supermajority) of the limited partners' voting interests to remove the general partners may still be substantive if the general partners could be removed in every possible voting scenario in which a simple majority of the limited partners' voting interests vote for removal. That is, there is no combination of the limited partners' voting interests that represents at least a simple majority of the limited partners' voting interests that cannot remove the general partners
(see Example 2, Case D in paragraph 958-810-55-30) (see Example 1, Case D [paragraph 810-20-55-14]).
All relevant facts and circumstances shall be considered in assessing whether other parties, including, but not limited to, those defined as related parties in Topic 850, may be acting on behalf of the general partners in exercising their voting rights as limited partners. Similarly, in assessing whether a single limited partner has the ability to remove the general partners, consideration shall be given to whether other parties, including, but not limited to, those defined as related parties in
that
Topic
850, may be acting with the limited partner in exercising their kick-out rights.
b. The limited partners holding the kick-out rights must have the ability to exercise those rights if they choose to do so; that is, there are no significant barriers to the exercise of the rights. Barriers include, but are not limited to, the following:
1. Kick-out rights subject to conditions that make it unlikely they will be exercisable, for example, conditions that narrowly limit the timing of the exercise
2. Financial penalties or operational barriers associated with dissolving (liquidating) the limited partnership or replacing the general partners that would act as a significant disincentive for dissolution (liquidation) or removal
3. The absence of an adequate number of qualified replacement general partners or the lack of adequate compensation to attract a qualified replacement
4. The absence of an explicit, reasonable mechanism in the limited partnership agreement or in the applicable laws or
regulations,
regulations by which the limited partners holding the rights can call for and conduct a vote to exercise those rights
5. The inability of the limited partners holding the rights to obtain the information necessary to exercise them. [Content amended as shown and moved from paragraph 810-20-25-8]
958-810-25-20 For purposes of applying the
preceding paragraph
guidance in paragraph 958-810-25-19, the limited partners' unilateral right to withdraw from the partnership in whole or in part (withdrawal right) that does not require dissolution or liquidation of the entire limited partnership
would
shall not
be deemed a kick-out right overcome the presumption that the general partners control the limited partnership (that is, the withdrawal right is not deemed to be a kick-out right)
. The requirement to dissolve or liquidate the entire limited partnership upon the withdrawal of a limited partner or partners
shall not be required to
does not have to be contractual for a withdrawal right to be considered as a potential kick-out right.
[Content amended as shown and moved from paragraph 810-20-25-9]
> > > > >
Substantive Participating Rights
958-810-25-21 Participating rights are different from
{remove glossary link to protective rights and add glossary link to voting interest entity definition}protective rights{remove glossary link to protective rights and add glossary link to voting interest entity definition}. Limited partners'
protective
rights that are only protective in nature do not overcome the presumption that the general partners control the limited partnership. Limited partners' rights, individually or in the aggregate, that provide the limited partners with the right to effectively participate in
certain significant
financial and operating decisions that
would be expected to be
are made in the ordinary course of the limited partnership's business
while
, while being protective of the limited partners'
investment
investment, overcome the presumption that the general partners control the limited partnership.
[Content amended as shown and moved from paragraph 810-20-25-12]
958-810-25-22 Limited partners' rights (whether granted by contract or by law) that would allow limited partners to effectively participate in the following actions of the limited partnership shall be considered substantive participating rights and
, therefore, would
overcome the presumption that the general partners control the limited partnership:
a. Selecting, terminating, and setting the compensation of management responsible for implementing the limited partnership's policies and procedures
b. Establishing operating and capital decisions of the limited partnership, including budgets, in the ordinary course of business.
These rights are considered illustrative of substantive participating rights but are not necessarily an all-inclusive list. [Content amended as shown and moved from paragraph 810-20-25-13]
958-810-25-23 The rights described in paragraph
810-20-25-13
958-810-25-22 are participating rights because, in the aggregate,
the rights
they allow the limited partners to effectively participate in
the
certain significant financial and operating decisions that occur as part of the ordinary course of the limited partnership's business and are significant factors in directing and carrying out the activities of the limited partnership.
In evaluating the limited partners' rights to determine if they are substantive, participation means the ability of the limited partners to approve or block actions proposed by the general partners. That is, the general partners must have the limited partners' agreement to take the actions outlined above in order for the rights to be substantive participating rights. Participation does not require the ability of the limited partners to initiate actions.
[Content amended as shown and moved from paragraph 810-20-25-16]
958-810-25-24 Rights held by the limited partners to remove the general partners from the partnership shall be evaluated as kick-out rights
pursuant to
in accordance with paragraph
958-810-25-19 810-20-25-8
. Rights of the limited partners to participate in the termination of management (for example, management is outsourced to a party other than the general partner) or the individual members of management of the limited partnership may be substantive participating rights.
[Content amended as shown and moved from paragraph 810-20-25-14]
958-810-25-25 Individual rights, such as the right to veto the termination of management responsible for implementing the limited partnership's policies and procedures (if management is outsourced—via contract with a third party—by the general partners), shall be assessed based on the facts and circumstances to determine if they are substantive participating rights in and of themselves. The likelihood that the veto right will be exercised by the limited partners shall not be considered when assessing whether a limited
partner
partner's right is a substantive participating right.
[Content amended as shown and moved from paragraph 810-20-25-17]
958-810-25-26 However, limited
Limited partners' rights that appear to be participating rights but that by themselves are not substantive
would
do not overcome the presumption of control by the general partners in the limited partnership.
[Content amended as shown and moved from paragraph 810-2025-18]
> > > > > >
Factors to Consider in Determining Whether Limited Partners' Participating Rights Are Substantive
958-810-25-27The following factors shall be considered in evaluating whether limited partners'
participating rights
that appear to be participating
are substantive
rights−that is, whether these factors
such that the rights provide for effective participation in
certain significant decisions related to the limited partnership's ordinary course of business:
a. The limited partnership agreement shall be considered to determine at what level decisions are made
—by
(that is, by the general partners or by the limited partnership as a
whole
whole).—and
Also, the rights at each level also shall be considered. In all situations, any matters that can be put to a vote of the limited partnership shall be considered to determine if
whether the limited partners, individually or in the aggregate, have substantive participating rights by virtue of their ability to vote on matters submitted to a vote of the limited partnership.
Determination of
Determining whether matters that can be put to a vote of the limited partners, or the vote of the limited partnership as a whole, are substantive shall be based on a consideration of all relevant facts and circumstances.
b. Relationships between the general partners and the limited partners (other than investment in the common limited partnership) that are of a related-party nature, as defined in Topic 850, shall be considered in determining
if
whether the participating rights of the limited partners are substantive. For example, if the limited partner in a limited partnership is a member of the immediate family of the general partners of the limited partnership, then the rights of the limited partner likely would not overcome the presumption of control by the general partners.
c. Certain limited partners' rights may deal with operating or capital decisions that are not significant to the ordinary course of business of the limited partnership. Limited partners' rights related to items that are not considered significant for directing and carrying out the activities of the limited partnership's
ordinary course of business are not substantive participating rights and
would
do not overcome the presumption of control by the general partners. Examples of such limited partners' rights include the following decisions:
1. Location of the limited partnership's headquarters
2. Name of the limited partnership
3. Selection of auditors
4. Selection of accounting principles for purposes of separate reporting of the limited partnership's operations.
d. Certain limited partners' rights may provide for the limited partners to participate in
certain significant
financial and operating decisions that
would be expected to be
are made
in certain business activities
in the ordinary course of business; however, the existence of such limited partners' rights shall not overcome the presumption that the general partners have control if it is remote that the event or transaction that requires the limited partners' approval will occur.
e. General partners who have a contractual right to buy out the interest of the limited partners in the limited partnership for fair value or less shall consider the feasibility of exercising that contractual right when determining if the participating rights of the limited partners are substantive. If such a buyout is prudent, feasible, and substantially within the control of the general partners, the general partners' contractual right to buy out the limited partners demonstrates that the participating right of the limited partners is not a substantive right. The existence of such call options, for purposes of this Subtopic, negates the participating rights of the limited partners to approve or veto an action of the general partners rather than creates an additional ownership interest for the general partners. It would not be prudent, feasible, and substantially within the control of the general partners to buy out the limited partners if, for example, either of the following conditions exists:
1. The limited partners control technology that is critical to the limited partnership.
2. The limited partners are the principal source of funding for the limited partnership. [Content amended as shown and moved from paragraph 810-20-25-20]
> > > > >
Protective Rights
958-810-25-28 Limited partners' rights (whether granted by contract or by law) that
would
allow the limited partners to block the following limited
partnership
partnership's actions
would be
are considered protective rights and
would
do not overcome the presumption of control by the general partners:
a. Amendments to the limited partnership agreement
b. Pricing on transactions between the general partners and the limited partnership and related self-dealing transactions
c. Liquidation of the limited partnership in the context of Topic 852 on reorganizations initiated by the general partners or a decision to cause the limited partnership to enter bankruptcy or other receivership
d. Acquisitions and dispositions of assets that are not expected to be undertaken in the ordinary course of business. (Limited partners' rights relating to acquisitions and dispositions that are expected to be made in the ordinary course of the limited partnership's business are participating rights. Determining whether such rights are substantive requires judgment in light of the relevant facts and circumstances.)
e. Issuance or repurchase of limited partnership interests.
These are illustrative of some, but not all, of the protective rights that often are provided to limited partners. [Content amended as shown and moved from paragraph 810-20-25-19]
958-810-25-29 Paragraphs
958-810-55-16A through 55-16I 810-20-55-1 through 55-9
provide additional guidance on assessing limited
partner
partners' protective
rights and substantive participating rights.
[Content amended as shown and moved from paragraph 810-20-25-21]
6. Add paragraph 958-810-45-2 and its related heading, with a link to transition paragraph 958-810-65-2, as follows:
Other Presentation Matters
> Additional Useful Information for Limited Partnerships
958-810-45-2 An entity has financial statement and disclosure alternatives that may provide additional useful information. For example, an entity may highlight the effects of consolidating a {add glossary link}limited partnership{add glossary link} by providing consolidating financial statements or separately classifying the assets and liabilities of the limited partnership(s) on the face of the balance sheet. [Content amended as shown and moved from paragraph 810-20-45-1]
7. Amend paragraph 958-810-55-4 and add paragraphs 958-810-55-16A through 55-16I and their related headings and 958-810-55-26 through 55-32 and their related headings, with a link to transition paragraph 958-810-65-2, as follows:
Implementation Guidance and Illustrations
> Implementation Guidance
> > Flowcharts
> > > Relationship with a For-Profit Entity
958-810-55-4 The following flowchart and related footnote indicate the order in which an NFP applies the guidance elsewhere in the Codification to determine the accounting for its relationship with a for-profit entity.
*According to paragraph 323-30-35-3, a limited liability company that maintains a specific ownership account for each investor—similar to a partnership capital account structure—should be viewed as similar to an investment in a {add glossary link}limited partnership{add glossary link} for purposes of determining whether a noncontrolling investment in a limited liability company should be accounted for using the cost method or the equity method.
In addition, amend the following pending content for paragraph 958-810-554, with no additional link to transition:
Pending Content:
Transition Date: (P) December 16, 2017; (N) December 16, 2018 | Transition Guidance: 825-10-65-2
958-810-55-4 The following flowchart and related footnote indicate the order in which an NFP applies the guidance elsewhere in the Codification to determine the accounting for its relationship with a for-profit entity.
*According to paragraph 323-30-35-3, a limited liability company that maintains a specific ownership account for each investor—similar to a partnership capital account structure—should be viewed as similar to an investment in a {add glossary link}limited partnership{add glossary link} for purposes of determining whether a noncontrolling investment in a limited liability company should be accounted for in accordance with the guidance in Topic 321 or the equity method.
> > Assessing Limited Partner
Partners' Protective Rights and Substantive Participating Rights
958-810-55-16A The following implementation guidance is intended to facilitate the understanding of how to assess whether the rights of the limited partners should be considered
protective
{add glossary link to voting interest entity definition}protective rights{add glossary link to voting interest entity definition} or
{add glossary link to voting interest entity definition}participating rights{add glossary link to voting interest entity definition} participating
and, if participating
rights, whether the rights are substantive. Although this guidance illustrates possible assessments of individual limited partners' rights, the evaluation of limited partners' rights should consider all of the factors identified in paragraph
958-810-25-27 810-20-25-20
to determine whether the limited partners' rights, individually or in the aggregate, provide for the limited partners to effectively participate in significant decisions that would be expected to be made in the
ordinary course of business.
[Content amended as shown and moved from paragraph 810-20-55-1]
> > > Approval of Acquisitions and Dispositions
958-810-55-16B The rights of the limited partners relating to the approval of acquisitions and dispositions of assets that are expected to be undertaken in the ordinary course of business may be substantive
{remove glossary link}participating rights{remove glossary link}. Rights related only to acquisitions that are not expected to be undertaken in the ordinary course of business usually are
{remove glossary link}protective{remove glossary link} and
would
do not overcome the presumption of control the general partners in the limited partnership.
Whether
Determining whether the right to approve the acquisition or disposition of assets is in the ordinary course of business should be based on an evaluation of the relevant facts and circumstances. In addition, if approval by the limited partners is necessary to incur additional indebtedness to finance an acquisition that is not in the limited partnership's ordinary course of business, then the approval by the limited partners
would be
is considered a protective right.
[Content amended as shown and moved from paragraph 81020-55-2]
> > > Approval for Incurring Additional Indebtedness
958-810-55-16C Existing facts and circumstances should be considered in assessing whether the rights of the limited partners relating to a limited partnership incurring additional indebtedness are protective or participating rights. For example, if it is reasonably possible or probable that the limited partnership will need to incur the level of borrowing that requires limited partner approval in its ordinary course of business, the rights of the limited partners
would be
are viewed as substantive participating rights.
[Content amended as shown and moved from paragraph 810-20-55-3]
> > > Rights Relating to Dividends and Other Distributions
958-810-55-16D The rights of the limited partners relating to dividends or other distributions may be protective or participating and should be assessed in light of the available facts and circumstances. For example, rights to block customary or expected dividends or other distributions may be substantive participating rights, while rights to block extraordinary distributions
would be
are protective rights.
[Content amended as shown and moved from paragraph 810-20-55-4]
> > > Rights Relating to Partnership-Specific Action
958-810-55-16E The rights of the limited partners relating to a limited partnership's specific action (for example, to lease property) in an existing business may be protective or participating and should be assessed in light of the available facts and circumstances. For example, if the limited partnership had the ability to purchase, rather than lease, the property without requiring the approval of the limited partners, then the rights of the limited partners to block the limited partnership from entering into a
{add glossary link}lease
{add glossary link} would
are not
be
substantive
participating rights.
[Content amended as shown and moved from paragraph 810-20-55-5]
> > > Rights Relating to Negotiation of Collective-Bargaining Agreements
958-810-55-16F The rights of the limited partners relating to a limited partnership's negotiation of collective-bargaining agreements with unions may be protective or participating and should be assessed in light of the available facts and circumstances. For example, if a limited partnership does not have a collective-bargaining agreement with a union or if the union does not represent a substantial portion of the limited partnership's work force, then the rights of the limited partners to approve or veto a new or broader collective-bargaining agreement are not substantive participating rights. [Content amended as shown and moved from paragraph 810-20-55-6]
> > > Rights to Block Action of General Partner
958-810-55-16G Provisions that govern what will occur if the limited partners block the action of the general partners need to be considered to determine whether the rights of the limited partners to block have substance. For example, if both of the following circumstances exist, then the rights of the limited partners to block the approval of the operating and capital budgets do not allow the limited partners to effectively participate and, thus, are not substantive participating rights:
a. The limited partnership agreement provides that if the limited partners block the approval of operating and capital budgets, then the budgets simply default to last year's budgets adjusted for inflation.
b. The limited partnership operates in a mature business for which year-to-year operating and capital budgets would not be expected to vary significantly. [Content amended as shown and moved from paragraph 810-20-55-7]
> > > Rights Relating to the Initiation of a Lawsuit
958-810-55-16H Limited partners' rights relating to the initiation or resolution of a lawsuit may be considered protective or participating depending on the available facts and circumstances. For example, if lawsuits are a part of, or are expected to be a part of, the limited partnership's ordinary course of business, as is the case for some insurance entities, then the limited partners' rights may be considered substantive participating rights. [Content moved from paragraph 810-20-55-8]
> > > Right to Veto Annual Operating and Capital Budgets
958-810-55-16I The limited partners have the right to veto the annual operating and capital budgets for the first X years of the limited partnership. Based on the facts and circumstances, during the first X years of the limited partnership, this right may be a substantive participating right. However, following Year X there is a significant change in the exercisability of the limited partners' right (for example, the veto right terminates). As of the beginning of the period following Year X
, since that right no longer exists
, the presumption that the general partners control the partnership
no longer is overcome because that right no longer exists would not be overcome
.
[Content amended as shown and moved from paragraph 81020-55-9]
> Illustrations
> > Example 1
2: Limited Partnerships and Similar Legal Entities—Simple Majority Threshold for the Application of Kick-Out Rights
958-810-55-26 This Example illustrates the guidance in paragraphs
958-810-25-19 through 25-20 810-20-25-8 through 25-10
. To illustrate the application of the simple majority threshold, consider the following Cases A, B, and C in which the
{add glossary link}limited partnership
{add glossary link} agreement requires a simple majority of the limited partners' voting interests to remove the general partner and Case D in which a supermajority of the limited partners' voting interests is required for such removal:
a. Three equal-interest limited partners (Case A)
b. Two equal-interest limited partners (Case B)
c. One hundred equal-interest limited partners (Case C)
d. Required limited partner voting percentages greater than 50 percent (Case D). [Content amended as shown and moved from paragraph 810-20-55-10]
> > > Case A: Three Equal-Interest Limited Partners
958-810-55-27 Assume that a limited partnership has 3 limited partners, none of which have any relationship to the general partners, and that each holds an equal amount of the limited partners' voting interests (33.33 percent). In this Case, applying the simple majority requirement in the partnership agreement would require a vote of no more than two of the three limited partners to remove the general partners. Accordingly, a provision that entitles any individual limited partner to remove the general partner or a provision that requires a vote of two of the limited partners to remove the general partner would meet the requirements of paragraph
810-20-25-8(a)
958-810-25-19(a) for a substantive
{add glossary link to voting interest entity definition}kick-out right
{add glossary link to voting interest entity definition}. However, if a vote of all three limited partners is required to remove the general partner, the right would not meet the requirements of that paragraph for a substantive kick-out right because the required vote is greater than a simple majority of the limited partners' voting interests.
[Content amended as shown and moved from paragraph 810-20-55-11]
> > > Case B: Two Equal-Interest Limited Partners
958-810-55-28 Consider the same facts as in Case A, except that there are two limited partners that each hold an equal interest. In this Case, a simple majority of the limited partners' voting interests would require a vote of both limited partners, so a provision entitling any individual limited partner to remove the general partner or a provision that requires a vote of both limited partners to remove the general partner would meet the requirements of paragraph
958-810-25-19(a) 810-20-25-8(a)
for a substantive kick-out right.
[Content amended as shown and moved from paragraph 810-20-55-12]
> > > Case C: One Hundred Equal-Interest Limited Partners
958-810-55-29 Consider the same facts as in Case A, except that there are 100 limited partners that each hold an equal interest. In this Case, a simple majority of the limited partners' voting interests would require a vote of 51 limited partners
; therefore,
so a
provision that requires a vote of less than 52 limited partners to remove the general partner would meet the requirements of paragraph
958-810-25-19(a) 810-20-25-8(a)
for a substantive kick-out right. However, if a vote of 52 or more limited partners is required to remove the general partner, that provision would not meet the requirements of that paragraph for a substantive kick-out right because the required vote is greater than a simple majority of the limited partners' voting interests.
[Content amended as shown and moved from paragraph 810-20-55-13]
> > > Case D: Required Limited Partner Voting Percentages Greater Than 50 Percent
958-810-55-30 In this Case, consider the following situations based on a limited partnership agreement that requires a vote of
66.6
66.66 percent of the limited partners' voting interests to remove the general partner:
a. Equal-interest limited partners (Case D1)
b. Limited partners with unequal interests (Case D2). [Content amended as shown and moved from paragraph 810-20-55-14]
> > > > Case D1: Equal-Interest Limited Partners
958-810-55-31 There are 3 independent limited partners that each hold an equal percentage (33.33 percent) of the limited partner voting interest. A vote of 2 of the 3 limited partners represents
66.7
66.66 percent of the limited partners voting interests, which also represents the smallest possible combination of voting interests that is at least a simple majority of the limited partners' voting interests. Assuming there are no barriers to the exercise of the
{remove glossary link}kickout rights{remove glossary link}, the kick-out rights in this
situation
Case meet the simple majority requirement and
therefore
, therefore, represent substantive kick-out rights that overcome the presumption of control by the general partners.
[Content amended as shown and moved from paragraph 810-20-55-15]
> > > > Case D2: Limited Partners with Unequal Interests
958-810-55-32 There are 3 independent limited partners that hold 45 percent (Limited Partner 1), 25 percent (Limited Partner 2), and 30 percent (Limited Partner 3) of the limited partners' voting interests, respectively. To remove the general partners, a vote of Limited Partner 1 in combination with either Limited Partner 2 or Limited Partner 3 would be a simple majority of the limited
partners
partners' voting interests and would satisfy the
66.6
66.66 percent contractual requirement. In contrast, a vote to exercise the kick-out right by Limited Partner 2 and Limited Partner 3 also would represent a simple majority of the limited partners
partners' voting interests; however
,
but their
55 percent voting interests
(55 percent)
would not meet the
contractually required threshold of
66.6
66.66 percent to remove the general partners. Accordingly, the kick-out right in this
situation
Case would be assessed as nonsubstantive because the smallest possible combination (Limited Partner 2 and Limited Partner 3) that represents at least a simple majority of the limited
partners
partners' voting interests cannot remove the general partners. Assuming the limited partners do not possess substantive participating rights, the presumption of control by the general partners would not be overcome.
[Content amended as shown and moved from paragraph 810-20-55-16]
8. Add paragraph 958-810-65-2 and its related heading as follows:
> Transition Related to Accounting Standards Update No. 2017-02, Not-for-Profit Entities—Consolidation (Subtopic 958-810): 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
958-810-65-2 The following represents the transition and effective date information related to Accounting Standards Update No. 2017-02, Not-for-Profit Entities — Consolidation (Subtopic 958-810): 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:
a. The pending content that links to this paragraph shall be 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.
b. A not-for-profit entity that has not yet adopted the pending content that links to paragraph 810-10-65-7 shall adopt the pending content that links to this paragraph at the same time that it adopts the pending content that links to paragraph 810-10-65-7 and shall apply the same transition method elected for the pending content that links to paragraph 810-10- 65-7. If a not-for-profit entity elects to apply the pending content that links to paragraph 810-10-65-7 retrospectively, it shall apply the pending content that links to this paragraph retrospectively to only the same number of periods for which it will retrospectively apply the pending content that links to paragraph 810-10-65-7.
c.A not-for-profit entity that has adopted the pending content that links to paragraph 810-10-65-7 shall adopt the pending content that links to this paragraph retrospectively to all relevant prior periods beginning with the fiscal years in which the pending content that links to paragraph 810-10- 65-7 was initially applied. The entity shall recognize the cumulative effect of initially applying the pending content that links to this paragraph as an adjustment to the opening balance of net assets as of the beginning of the first year restated.
d. Earlier adoption is permitted, including adoption in an interim period. If a not-for-profit entity adopts the pending content that links to this paragraph in an interim period, any adjustments shall be reflected as of the beginning of the fiscal year that includes that interim period.
e.If a not-for-profit entity already has adopted the pending content that links to paragraph 810-10-65-7, it shall provide the disclosures in paragraphs 250-10-50-1 through 50-2 (excluding the disclosure in paragraph 250-10- 50-1(b)(2)) in the period in which the entity adopts the pending content that links to this paragraph but only if adopting the pending content results in a change in accounting principle. If a not-for-profit entity adopts the pending content that links to this paragraph at the same time that it adopts the pending content that links to paragraph 810-10-65-7, no additional disclosures are required other than those already described in paragraph 810-10-65-7(l).