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A separate analysis is required for applying Characteristic 2 to limited partnerships and similar entities due to the unique purpose and design of limited partnerships as compared to corporations. Entities that are determined to be “similar” to limited partnerships would also be subject to this guidance. For example, some entities may be similar to a limited partnership if they have a governance structure that is the functional equivalent of a limited partnership’s governance structure.

Excerpt from ASC 810-10-15-14(b)(1)

ii. For limited partnerships, partners lack that power if neither (01) nor (02) below exists. The guidance in this subparagraph does not apply to entities in industries (see paragraphs 910-810-45-1 and 932-810-45-1) 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).
01. A simple majority or lower threshold of limited partners (including a single limited partner) with equity at risk is able to exercise substantive kick-out rights (according to their voting interest entity definition) through voting interests over the general partner(s).
A. For purposes of evaluating the threshold in (01) above, a general partner’s kick-out rights held through voting interests shall not be included. Kick-out rights through voting interests held by entities under common control with the general partner or other parties acting on behalf of the general partner also shall not be included.
02. Limited partners with equity at risk are able to exercise substantive participating rights (according to their voting interest entity definition) over the general partner(s).
03. For purposes of (01) and (02) above, evaluation of the substantiveness of participating rights and kick-out rights shall be based on the guidance included in paragraphs 810-10-25-2 through 25-14C.

Understanding the principle behind this guidance requires consideration of the differences between a limited partnership and a traditional corporation. A corporation’s shareholders generally have voting rights that provide them with the power to direct the entity’s most significant activities. Although the corporation’s management team executes the day-to-day decisions, the voting rights held by the corporation’s shareholders allow the shareholders to limit or constrain the management team’s decision-making authority.
In contrast, the general partner of a limited partnership often unilaterally directs the activities of a limited partnership that most significantly impact the entity’s economic performance. Although the limited partners generally lack voting rights consistent with those rights typically held by corporate shareholders, they may have other rights that allow them to effectively constrain the general partner’s decision making authority. Determining whether these rights exist is critical to assessing whether a limited partnership or similar entity is a VIE under Characteristic 2.
The limited partnership (or similar entity) would not be a VIE under Characteristic 2 if the limited partners are able to exercise power in either of the following ways:
  • A simple majority or lower threshold of limited partners (including a single limited partner) with equity at risk can exercise substantive kick-out rights
  • Limited partners with equity at risk can exercise substantive participating rights

Any of these rights, if present, are considered analogous to voting rights held by corporate shareholders that provide those shareholders with power over the entity being evaluated for consolidation. In other words, for a limited partnership (or similar entity) to be a voting interest entity, the limited partners (or members of a limited liability company that is similar to a limited partnership) must have, at minimum, substantive kick-out or participating rights.

4.4.5.1 Evaluating whether an entity is similar to a limited partnership

To understand whether an entity’s governance structure is similar to a limited partnership, an analysis should be performed based on the facts and circumstances specific to that entity’s formation and governing documents. For example, a limited liability company that is governed by a managing member, as opposed to a board of managers, may be similar to a limited partnership. The evaluation of a limited liability company should consider whether a managing member has sole decision-making authority, similar to the rights held by the general partner of a limited partnership.
Question CG 4-3 addresses whether the separate requirement for limited partnerships and similar entities should be applied when evaluating whether a trust is a VIE under Characteristic 2.
Question CG 4-3
Should the separate requirement described in ASC 810-10-15-14(b)(1)(ii) for limited partnerships and similar entities be applied when evaluating whether a trust is a VIE under Characteristic 2?
PwC response
It depends. If the trust is governed by a single trustee that has been granted all day-to-day decision-making abilities, then application of the separate requirement for limited partnerships and similar entities may be appropriate. In that situation, the trustee may be acting in a capacity that is no different from a general partner of a limited partnership.
If the trust is governed by a board of trustees that has the legal ability to make decisions and bind the trust, and the trustee is simply acting as an agent of the trust’s board, then application of the separate requirement applicable to limited partnerships and similar entities may be inappropriate.
Determining whether a trust is governed by a single trustee or a governing body that is similar to a board of directors requires a review of the trust’s governing documents. If a board of trustees exists, it is important to understand whether the board’s decision-making rights are limited to advising the trustee as opposed to having the legal authority to bind the trust. If the board’s role is limited to advising the trustee (i.e., it cannot bind the trust), then application of the separate requirement for limited partnerships and similar entities may be appropriate.
A limited liability company may be governed by a board of members as opposed to a managing member. Much like a corporation’s board of directors, the entity’s board of members votes on all significant decisions impacting the limited liability company’s activities. An evaluation of the limited liability company might consider whether the members have capital accounts similar to limited partners of a limited partnership. This analysis would also take into account what decision-making rights have been granted to the members and how their voting rights are exercised.
Example CG 4-12 demonstrate the determination of whether a limited liability company is similar to a limited partnership.
EXAMPLE CG 4-12
Determining whether a limited liability company is similar to a limited partnership
Company A established a limited liability company (LLC Corp) for the purpose of raising third-party capital to invest in private companies. LLC Corp’s objective is to obtain controlling positions in private companies, improve the performance of the businesses, and liquidate its position within seven years. The third-party investors are issued member interests in LLC Corp in exchange for their capital contributions. Each member has a separate capital account, and LLC Corp’s profits and losses are allocated among the members based on their proportionate ownership of the LLC’s member interests.
LLC Corp is presided over by Company A (the Managing Member). In accordance with LLC Corp’s governance agreements, Company A makes all decisions related to LLC Corp’s investment strategy and makes decisions pertaining to the acquisition and disposition of LLC Corp’s investments. Company A established an independent committee (the Investment Committee) comprised of certain members to advise Company A. The Investment Committee generally cannot bind LLC Corp as its role is advisory in nature. However, the Investment Committee can vote on transactions involving Company A and its affiliates when a conflict of interest may exist. The members of LLC Corp are not otherwise able to exercise any voting rights.
For purposes of applying Characteristic 2, should LLC Corp be evaluated as a limited partnership or as a corporation?
Analysis
We believe that if a managing member has the right to make the significant decisions of the LLC, the LLC would be considered to have governing provisions that are the functional equivalent of a limited partnership. This is the case even if the non-managing members have participating rights or kick-out rights. While the ASC guidance states that a managing member of an LLC is the functional equivalent of a general partner, we believe the managing member should also have the right to make the significant decisions of the LLC to be considered the functional equivalent of a limited partnership (versus a managing member who may be more of an operations manager without the right to make the significant decisions of the entity).
In this example, LLC Corp should be evaluated as a limited partnership for purposes of applying Characteristic 2, as the governance agreements provide the managing member with the right to make all the significant decisions of the LLC.
Company A is the only party authorized to make decisions and to bind LLC Corp, similar to a general partner of a limited partnership. Although the Investment Committee exists, it does not operate in a manner similar to a corporation’s board of directors. The Investment Committee exists solely to advise Company A and cannot bind the LLC, and its ability to vote on transactions involving Company A and its affiliates is protective in nature and exists solely to prevent self-dealing.
In addition, LLC Corp’s members have capital accounts as opposed to ownership units, which also indicates that LLC Corp has attributes that are like a partnership.

4.4.5.2 Kick-out rights

The mere existence of kick-out rights does not necessarily demonstrate that the limited partners have power over the limited partnership (or similar entity). The kick-out rights must be substantive to demonstrate that the group of at-risk equity investors (i.e., the limited partners) has power. Kick-out rights will be considered substantive only when they are exercisable by a simple majority vote of the entity’s limited partners (exclusive of the general partner, parties under common control with the general partner, and other parties acting on behalf of the general partner) or a lower threshold (as low as a single limited partner) based on the limited partners’ relative voting rights. A limited partner’s voting rights are often determined by its relative capital account balance.
The substance of kick-out rights granted to an entity’s limited partners may be called into question when there are economic or operational barriers to exercising such rights that must be overcome, for example:
  • Conditions that make it unlikely that the rights will be exercised
  • Financial penalties or operational barriers that the limited partners would face upon exercise of kick-out rights
  • An inadequate number of qualified replacements for the current decision maker, or when the level of compensation paid to the decision maker is inadequate to attract a qualified replacement
  • The lack of an explicit mechanism, by matter of contract or law, to allow the holder to exercise the rights or to obtain the information necessary to exercise the rights

Question CG 4-4 addresses the effect of a general partner in a limited partnership having the right to participate in a vote to kickout the general partner on the limited partnership’s status as a voting interest entity under Characteristic 2.
Question CG 4-4
Does the ability of a general partner and/or its related parties to participate in a vote to kick out the general partner of a limited partnership cause the limited partnership to be a VIE under Characteristic 2?
PwC response
It depends. If a simple majority (or lower threshold) of the unrelated limited partners lack the substantive right to remove the general partner, then the entity would be considered a VIE under Characteristic 2 (assuming the limited partners do not have substantive participating rights). For example, assume an entity has 12 limited partners, 10 of which are unrelated to the general partner and each holds an equal amount of the limited partnership’s kick-out rights through voting interests. If the partnership agreement requires a simple majority of the 10 unrelated limited partners to remove the general partner, the limited partners would not lack power and the entity would not be a VIE under Characteristic 2.
On the other hand, if the partnership agreement required a vote of a simple majority of all 12 limited partners (i.e., 7 limited partners) to remove the general partner, this kick-out right would not be substantive. In this case, the kick-out right lacks substance because it requires a higher percentage (70% or 7 of 10 limited partners) than a simple majority of the unrelated limited partners (6 of 10 limited partners would be a simple majority) to effect the removal of the general partner. Assuming the limited partners do not have any substantive participating rights, the limited partners would lack power and the entity would be a VIE under Characteristic 2.
Impact of kick-out rights on Characteristic 2
The following examples illustrate the impact of kick-out rights on the assessment of whether an entity is a VIE under Characteristic 2 for limited partnerships.
EXAMPLE CG 4-13
Simple majority kick-out rights exercisable by a single limited partner
A limited partnership has three independent limited partners, A, B, and C, none of which have any relationship with the general partner. Limited partners A, B, and C hold 70%, 20%, and 10% of the limited partnership’s kick-out rights through voting interests, respectively. The partnership agreement requires a simple majority vote of the kick-out rights through voting interests to remove the general partner. There are no barriers to exercising the kick-out rights, and the limited partners do not have any substantive participating rights. Assume the limited partnership would not be a VIE under any other characteristic.
Is the limited partnership a VIE under Characteristic 2?
Analysis
No. In this example, the partnership agreement requires a simple majority vote of the limited partnership’s kick-out rights through voting interests to remove the general partner and the general partner cannot vote. As the limited partners are not related to the general partner, the kick-out right provided by the partnership agreement is consistent with the kick-out requirements in ASC 810-10-15-14(b)(1)(ii). Limited partner A with 70% (70%/100%) of the kick-out rights through voting interest is able to unilaterally remove the general partner. Therefore, the limited partners would not lack the power to direct the significant activities of the limited partnership. Since none of the other VIE criteria are met, the limited partnership would be considered a voting interest entity.
Under the voting interest model, limited partner A has a controlling financial interest and would consolidate the entity as it can unilaterally exercise its kick-out rights through voting interests to remove the general partner and none of the other limited partners have any substantive participating rights.
EXAMPLE CG 4-14
Kick-out rights exercisable by the limited partners
A limited partnership has three independent limited partners, none of which have any relationship with the general partner. Each limited partner holds an equal amount of the limited partnership’s kick-out rights through voting interests (33.3%). The partnership agreement requires a simple majority vote of the kick-out rights through voting interests to remove the general partner. There are no barriers to exercising the kick-out rights, and the limited partners do not have any substantive participating rights. Assume the limited partnership would not be a VIE under any other characteristic.
Is the limited partnership a VIE under Characteristic 2?
Analysis
No. In this example, the partnership agreement requires a simple majority of the limited partners to remove the general partner and the general partner cannot vote. As the limited partners are not related to the general partner, the kick-out right provided by the partnership agreement is consistent with the kick-out requirements in ASC 810-10-15-14(b)(1)(ii). Therefore, the limited partners would not lack the power to direct the significant activities of the limited partnership. Since none of the other VIE criteria are met, the limited partnership would be considered a voting interest entity.
Under the voting interest model, as no single limited partner has a simple majority of the kick-out rights through voting interests to unilaterally remove the general partner, none of the limited partners (nor the general partner) would consolidate the entity.
EXAMPLE CG 4-15
Kick-out rights exercisable by the general partner and the limited partners
A limited partnership has three independent limited partners, A, B, and C, none of which have any relationship with the general partner. Limited partners A, B, and C hold 40%, 25%, and 25% of the limited partnership’s kick-out rights through voting interests. The general partner does not have any kick-out rights through its general partner interest, but holds a 10% limited partner interest which includes kick-out rights through this voting interest. The partnership agreement requires a simple majority vote of the kick-out rights through voting interests to remove the general partner. There are no barriers to exercising the kick-out rights, and the limited partners do not have any substantive participating rights. Assume the limited partnership would not be a VIE under any other characteristic.
Is the limited partnership a VIE under Characteristic 2?
Analysis
Yes. In this example, the partnership agreement requires a simple majority of the limited partners to remove the general partner. However, ASC 810-10-15-14(b)(1)(ii) requires that kick-out rights through voting interests held by the general partner and its related parties be disregarded when performing the simple majority kick-out test. Therefore, further analysis is required to determine if the kick-out right is consistent with ASC 810-10-15-14(b)(1)(ii).
In order to determine if the kick-out rights are consistent with ASC 810, the reporting entity must determine whether there is a substantive difference between the partnership’s kick-out right and the simple majority requirement under ASC 810.
The smallest possible combination of limited partners that comprise a simple majority of the kick-out voting rights under ASC 810 would be limited partners B and C or 55% (50%/90%) of the independent limited partners. However, under the partnership agreement, limited partners B and C would not be able to remove the general partner since their contractual kick-out rights would only be 50% (50%/100%) and would not meet the simple majority threshold required by the partnership agreement to remove the general partner. Therefore, the limited partners would lack the power to direct the significant activities of the limited partnership and the entity would be considered a VIE. In addition, as the limited partners do not have any substantive participating rights, the general partner would consolidate the entity.
EXAMPLE CG 4-16
Kick-out rights exercisable by the general partner and the limited partners
A limited partnership has four independent limited partners, none of which have any relationship with the general partner. The four independent limited partners A, B, C, and D each hold 20% of the limited partnership’s kick-out rights through voting interests. The general partner does not have any kick-out rights through its general partner interest, but holds a 20% limited partner interest which includes kick-out rights through this voting interest. The partnership agreement requires a simple majority vote of the kick-out rights through voting interests to remove the general partner. There are no barriers to exercising the kick-out rights, and the limited partners do not have any substantive participating rights. Assume the limited partnership would not be a VIE under any other characteristic.
Is the limited partnership a VIE under Characteristic 2?
Analysis
No. In this example, the partnership agreement requires a simple majority of the limited partners to remove the general partner. However, ASC 810-10-15-14(b)(1)(ii) requires that kick-out rights through voting interests held by the general partner and its related parties be disregarded when performing the simple majority kick-out test. Therefore, further analysis is required to determine if the kick-out right is consistent with ASC 810-10-15-14(b)(1)(ii).
In order to determine if the kick-out rights are consistent with ASC 810, the reporting entity must determine whether there is a substantive difference between the partnership’s kick-out right and the simple majority requirement under ASC 810.
The smallest possible combination of limited partners that comprise a simple majority of the kick-out rights through voting interests under ASC 810 would be any three of the independent limited partners or 75% (60%/80%). Any three of the independent limited partners would also be able to remove the general partner since their kick-out rights through voting interests would be 60% (60%/100%) and would meet the simple majority threshold required by the partnership agreement to remove the general partner. Therefore, the limited partners would not lack the power to direct the significant activities of the limited partnership. Since none of the other VIE criteria are met, the limited partnership would be considered a voting interest entity.
Under the voting interest model, as no single limited partner has a simple majority of the kick-out rights through voting interests to unilaterally remove the general partner, none of the limited partners (nor the general partner) would consolidate the entity.
EXAMPLE CG 4-17
Supermajority kick-out rights exercisable by a single limited partner
A limited partnership has three independent limited partners, A, B, and C, none of which have any relationship with the general partner. Limited partners A, B, and C hold 70%, 20%, and 10% of the limited partnership’s kick-out rights through voting interests, respectively. The partnership agreement requires a vote of at least 67% of the kick-out rights held by the limited partners through voting interests to remove the general partner. There are no barriers to exercising the kick-out rights, and the limited partners do not have any substantive participating rights. Assume the limited partnership would not be a VIE under any other characteristic.
Is the limited partnership a VIE under Characteristic 2?
Analysis
No. In this example, the partnership agreement requires a supermajority vote of the limited partnership’s kick-out rights through voting interests to remove the general partner. Therefore, further analysis is required to determine if the kick-out right is consistent with ASC 810-10-15-14(b)(1)(ii).
In order to determine if the kick-out rights are consistent with ASC 810, the reporting entity must determine whether there is a substantive difference between the partnership’s kick-out right and the simple majority requirement under ASC 810.
Limited partner A would be able to remove the general partner since its kick-out rights through voting interests would be 70% (70%/100%) and would exceed the threshold required by the partnership agreement of 67% (67%/100%) to remove the general partner. Limited partner A’s kick-out rights through voting interests would also meet the simple majority requirement under ASC 810. Therefore, the limited partners would not lack the power to direct the significant activities of the limited partnership. Since none of the other VIE criteria are met, the limited partnership would be considered a voting interest entity.
Under the voting interest model, limited partner A has a controlling financial interest and would consolidate the entity as it can unilaterally exercise its kick-out rights through voting interests to remove the general partner and none of the other limited partners have any substantive participating rights.


See ASC 810-10-55-4N to ASC 810-10-44-4W for additional illustrative implementation guidance for assessing kick-out rights for limited partnerships.

4.4.5.3 Participating rights

Substantive participating rights held by limited partners would also demonstrate that the partnership is a voting interest entity under Characteristic 2. A participating right allows the holder to veto or block a significant decision of an entity being evaluated for consolidation.
Unlike a kick-out right, a participating right does not convey power since it does not allow the holder to initiate the action or decision. A participating right allows the holder to prevent another party from exercising power over a decision or significant activity of the potential VIE.
Determining whether a participating right is substantive requires consideration of the decisions or activities that the holder of the participating right may block (veto). The threshold, or level of decisions or activities the holder must be able to block (veto) to demonstrate that a participating right is substantive varies depending upon the nature of the entity and the consolidation model being applied.
Participating rights over a limited partnership or similar entity are evaluated differently than other entities when determining whether Characteristic 2 is present. The threshold established by the voting interest model to assess whether a participating right is substantive should be applied when determining whether a limited partnership or similar entity is a VIE under Characteristic 2. ASC 810-10-25-5 defines a participating right as the right to block or participate in significant financial and operating decisions that are made in the ordinary course of business. As such, a limited partnership or similar entity would not be a VIE under Characteristic 2 if the limited partners have the ability to block at least one significant operating or financial decision made in the ordinary course of business.

4.4.5.4 Evaluating the impact of liquidation rights

A partnership’s governing documents often provide its limited partners with the right to liquidate the partnership without cause. Kick-out rights include both removal and liquidation rights. Liquidation rights provide the holder with the ability to effectively remove the entity’s decision maker by dissolving the entity.
The outcome for the decision maker will be the same regardless of whether it is kicked out or the entity is liquidated (i.e., it will be stripped of its ability to exercise power).
If the group of at-risk equity investors has the ability to liquidate a partnership, that liquidation right must be substantive to demonstrate that Characteristic 2 is not present. Specifically, reporting entities should consider whether the limited partners would be subject to financial or operational barriers that would act as a disincentive to exercising the liquidation right. In addition, the reporting entity should consider whether a reasonable mechanism exists to allow the unrelated limited partners to exercise the right.
Liquidation rights would not be substantive when operational or financial barriers exist that would disincentivize the unrelated limited partners from exercising the right. A liquidation right would not be substantive if the unrelated limited partners lack an explicit mechanism to exercise the liquidation right, for example, when they are unable to obtain the identities of the other limited partners to convene a general meeting and/or when they lack the ability to call a general meeting.

4.4.5.5 Evaluating the impact of redemption rights

With very limited exceptions, redemption rights held by the limited partners of a partnership should not be considered equivalent to kick-out or participation rights. A redemption right differs from a kick-out or liquidation right legally and economically.
Legally, an investor’s redemption of its interest does not provide the holder with the ability to remove the decision maker. Rather, it provides the investor with the ability to liquidate its investment without impacting the decision maker’s ability to make ongoing decisions. In other words, a redemption right is simply a liquidity feature inherent in the investor’s equity interest as opposed to a right to remove the decision maker.
There may be instances when a limited partnership or similar entity has a single investor who has the right to redeem its interest at any time. We believe the facts and circumstances of those situations should be carefully considered to determine whether the single investor’s ability to redeem its interest should be viewed as a substantive liquidation right. If the redemption of the investor’s interest would result in a liquidation of the entity, or the termination of all substantive operating activity within the entity, then that redemption right may be no different than a liquidation right.
Example CG 4-18 illustrates the determination of whether a redemption right represents an in-substance liquidation right.
EXAMPLE CG 4-18
Determining whether a redemption right represents an in-substance liquidation right
Company A established a limited liability company (LLC Corp) for the purpose of raising third-party capital to invest in liquid publicly listed securities. LLC Corp’s objective is to acquire and hold undervalued securities and then to dispose of them on an opportunistic basis.
A single investor, Company B, which is unrelated to Company A, holds 99.9% of LLC Corp’s member interests. Company B acquired its 99.9% member interest in exchange for cash. Company A, LLC Corp’s managing member, holds the remaining 0.1% equity interest, which it acquired in exchange for a nominal cash contribution. LLC Corp is similar to a limited partnership from both a governance and ownership perspective (i.e., not governed by a board of directors and its members have separate capital accounts).
Company B has the ability to redeem its interest in LLC Corp at any time. If Company B redeems its interest and LLC Corp has no other members, Company A is required to wind down LLC Corp’s operations. Company B is not otherwise able to liquidate LLC Corp or replace Company A as LLC Corp’s managing member.
Does Company B’s ability to redeem its interest represent an in-substance liquidation right?
Analysis
Yes. Since Company B is the sole member of LLC Corp, and LLC Corp is required to wind down its operations if Company B exercises its redemption right, this is no different than Company B having the ability to unilaterally liquidate LLC Corp. Because Company B has the ability to strip Company A of its decision making rights as managing member of LLC Corp upon exercising its redemption right, Characteristic 2 is not present and LLC Corp is not a VIE under ASC 810-10-15-14(b)(1))(i).

4.4.5.6 Outsourced decision making arrangements – LP’s

In some cases, determining whether power is held by the general partner or another party can be challenging. This is particularly true when there are separate management contracts held by the general partner’s related parties. In such instances, the following questions should be considered:
  • What is the ownership structure of/relationship between the general partner (managing member) and the related party that holds the investment management agreement (i.e., are the entities commonly controlled)? In the event that the general partner and the related party are under common control, and the substance of the arrangement is that the investment decisions are effectively made by the general partner (due to the common control relationship of the related party and the general partner), it could be inferred that the significant decision-making rights reside with the general partner.
  • Does the general partner have the legal right to sell/transfer its decision-making rights to an unrelated entity? If the general partner transfers its general partnership interest to a third party, the right to appoint the manager automatically also transfers to the third party. This would be indicative of the decision-making rights residing in the GP interest.
  • Does the general partner have the legal right to terminate the investment management agreement? If the general partner has the legal right to terminate the management agreement at any time and at its sole discretion, the general partner has most likely retained the substantive decision-making rights over the limited partnership. All factors, including penalties associated with early termination, should be considered to determine whether or not the termination right is substantive.
If, after considering the factors described above, it is determined that the outsourced decision maker has substantive decision-making rights (as opposed to the general partner), the limited partners must have substantive kick-out or participating rights over the outsourced decision maker. Otherwise, Characteristic 2 will be present and the limited partnership will be a VIE.
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