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In accordance with ASC 323-30-25-1, investors in partnerships, unincorporated joint ventures, and limited liability companies (LLCs) should generally account for their investment using the equity method of accounting by analogy if the investor has the ability to exercise significant influence over the investee. However, there may be situations when significant influence does not exist but the equity method of accounting applies.

1.3.1 Investments in general partnerships

A general partnership interest in assets, liabilities, earnings, and losses accrues directly to the individual partners. No “corporate veil” exists between the partners and the related investment. General partners in a general partnership usually have the inherent right, absent agreements in partnership articles to the contrary, to influence the operating and financial policies of a partnership.
An interest in a general partnership usually provides an investor with the ability to exercise significant influence over the operating and financial policies of the investee. As such, assuming an investor does not hold a controlling financial interest, a general partnership interest is generally accounted for under the equity method of accounting.

1.3.2 Limited partnerships and unincorporated joint ventures

Generally, interests in a limited partnership or unincorporated joint venture when the investor does not have a controlling financial interest would be accounted for under the equity method of accounting by analogy. ASC 323-30-S99-1 describes the SEC staff’s view on the application of the equity method to investments in limited partnerships.
This guidance requires a limited partner to apply the equity method of accounting to its investment unless the limited partner’s interest is so minor that the limited partner has virtually no influence over the operating and financial policies of the partnership.
An ownership interest greater than 3-5% in certain partnerships, unincorporated joint ventures, and limited liability companies is presumed to provide an investor with the ability to influence the operating and financial policies of the investee. This differs from the threshold of 20% of outstanding voting securities presumed to create influence for an investment in common stock or in-substance common stock of a corporation. See EM 2.1 for further discussion.
See EM 1.3.3 for guidance on whether a limited liability company should be viewed as a limited partnership or a corporation for purposes of determining whether the equity method of accounting is appropriate.

1.3.3 Investments in limited liability companies

Limited liability companies frequently have characteristics of both corporations and partnerships. Investors must determine whether a limited liability company should be viewed as similar to a corporation or a partnership for purposes of determining whether its investment should be accounted for under the equity method of accounting.
Per ASC 323-30-35-3, a noncontrolling investment in a limited liability company that maintains a specific ownership account (similar to a partnership capital account structure) for each investor should be viewed similarly to an investment in a limited partnership when determining whether the investment provides the investor with the ability to influence the operating and financial policies of the investee.
An investment in a limited liability company that does not maintain specific ownership accounts for each investor should be viewed similar to an investment in a corporation when determining whether to apply the equity method of accounting.

1.3.4 Investments in joint ventures

ASC Master Glossary

Joint venture: An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.

Joint ventures are often used to create alliances to enter new markets or expand business operations while sharing risks and expertise with other investors. Joint ventures are not limited by the type or legal form of the entity and can be formed as corporations, partnerships, and limited liability companies. The most distinctive characteristic of a joint venture is the concept of joint control. Refer to EM 6 for discussion around identifying and accounting for a joint venture.

1.3.5 Trusts that maintain specific ownership accounts

Other entities, such as trusts, can take a variety of forms, and may maintain specific ownership accounts. When evaluating investments in these entities, it is often appropriate to analogize to the guidance for limited liability companies (EM 1.3.3) to determine what level of ownership requires the use of the equity method of accounting. Investors should consider all relevant facts and circumstances.

1.3.6 Investments in low income housing tax credit partnerships

Companies, particularly financial institutions, may invest in limited partnerships or limited liability companies that operate qualified affordable housing projects or invest in entities that operate qualified affordable housing projects. These investors earn federal tax credits as the principal return for providing capital to facilitate the development, construction, and rehabilitation of low-income rental property. Typically, an investor will account for its interest using the equity method by analogy as the investor will have a more than minor interest in the limited liability entity. Per ASC 323-740, investors in these entities may be eligible, subject to meeting a number of criteria, to elect to recognize the return they receive as a component of income taxes in the income statement under the proportional amortization method, rather than apply the equity method of accounting.
In order to be eligible for the election (see TX 3.3.6), the investor cannot have the ability to exercise significant influence over the operating and financial policies of the entity. This is evaluated using the indicators of significant influence for determining eligibility for the equity method of accounting (see EM 2.2). However, the general presumptions on voting stock ownership levels are not applicable for this evaluation (see EM 2.1). Therefore, care should be taken when evaluating the existence of significant influence for these entities.
Investors that do not qualify for the proportional amortization method (or do not elect to apply it) would account for their investments in these partnerships under the equity method if the investor has a more than minor interest in the investee.
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