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7.1 Voting interest model—chapter overview
Publication date: 31 Jul 2023
us Consolidation guide
This chapter describes the voting interest entity consolidation models for corporations and limited partnerships. It also describes the consolidation by contract model. The voting interest entity consolidation models for corporations and limited partnerships are not the same. Therefore, entities that are not clearly corporations or limited partnerships, such as limited liability companies and trusts, should determine whether their governing provisions as described in their governing documents make them more like a corporation or a limited partnership in deciding which model to apply.
The voting interest entity model (referred to as the “VOE” model) requires the reporting entity to have a controlling financial interest in an entity. A controlling financial interest is generally based on the concept that a reporting entity should have the unilateral right to make the significant financial and operating decisions of an entity without regard to probability.
The voting interest entity model applies to all entities that are not variable interest entities (VIEs). That is, the voting interest model applies after an investor considers whether it has a variable interest in a VIE and determines that the investee is not a VIE. If an entity is not a VIE under ASC 810-10-15-14, the following consolidation guidance under ASC 810 should be considered to determine the appropriate consolidation model depending on the type of entity or arrangement:
- Corporations and similar entities, see CG 7.2
- Limited partnerships (LPs) and similar entities, see CG 7.3
- Entities controlled by contract, see CG 7.4
- Research and development arrangements, see CG 8.3.1
Figure CG 7-1 summarizes the voting interest consolidation model.
Figure CG 7-1
Summarized voting interest consolidation model
To apply the VOE model it is important to understand the type of legal entity being evaluated for consolidation and evaluate the governance of that legal entity to determine whether the reporting entity holds a controlling financial interest in the legal entity.
7.1.1 Limited liability companies and other similar legal entities
Certain legal entities such as limited liability companies (LLCs), limited liability partnerships, and others have characteristics of both corporations and partnerships. Therefore, a reporting entity with an interest in a similar legal entity would need to first determine whether the governing provisions of the entity are the functional equivalent of a limited partnership or a corporation.
For example, a reporting entity with an interest in an LLC will need to determine whether the LLC has governing provisions that are the functional equivalent of an LP or a corporation in order to determine whether it has a controlling financial interest in the LLC. A detailed analysis of the LLC’s formation and governing documents should be performed to understand the LLC’s governance structure and determine whether it is the functional equivalent of an LP or a corporation.
ASC 810-10-05-3 states that for LLCs with managing and non-managing members, a managing member is the functional equivalent of a general partner, and a nonmanaging member is the functional equivalent of a limited partner. In this case, a reporting entity with an interest in an LLC (which is not a VIE) would likely apply the consolidation model for LPs if the managing member has the right to make the significant operating and financial decisions of the LLC. Alternatively, some LLCs are governed by a board of members which makes all the significant operating and financial decisions. In this case, we believe a reporting entity with an interest in an LLC (which is not a VIE) would follow the consolidation model for majority owned subsidiaries (corporations). In other cases, an LLC has both a managing member and a board of members. A reporting entity would need to assess the rights of both the managing member and board of members to determine who is responsible for making the significant operating and financial decisions of the LLC. In practice we have seen cases including the following:
- The managing member is responsible for making the significant operating and financial decisions while the board of members is responsible for activities that would be deemed protective rights, or
- The significant operating and financial decisions are shared between the managing member and the board of members, or
- The managing member is responsible for day-to-day operations while the board of members is responsible for significant operating and financial decisions of the LLC.
As described above, the reporting entity would need to perform a careful analysis to determine whether the governance of the LLC is the functional equivalent of an LP or a corporation.
The guidance in ASC 323-30-35-3 (dealing with specific ownership accounts for each investor) addresses whether an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a noncontrolling investment in an LLC should be accounted for at fair value (or using the measurement alternative) or by using the equity method. While this guidance can be used to help assess whether an entity’s governance provisions are the functional equivalent of a corporation or partnership for purposes of assessing whether an investor has a controlling financial interest in an LLC, it should not be the only factor in making that assessment. Refer to EM guide for further discussion about the equity method of accounting.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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