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18.5 Voting interest entities (VOEs)
Publication date: 30 Sep 2023
us Financial statement presentation guide
A reporting entity with a financial interest in another entity should first determine whether the entity is a VIE. Reporting entities applying the VIE model would follow the presentation and disclosure requirements as discussed in FSP 18.4, in addition to those in FSP 18.3.
If the entity is not a VIE (or qualifies for one of the scope exceptions in ASC 810-10-15-17), the reporting entity would apply the VOE model. Reporting entities applying the VOE model would follow the general consolidation presentation and disclosure principles in FSP 18.3 and consider the disclosure requirements included in the following sections, depending upon the legal form of the entity. See CG 7 for additional information on the VOE model.
18.5.1 Corporations
If a reporting entity owns an interest in a legal entity that (1) is not a VIE (or qualifies for one of the scope exceptions in ASC 810-10-15-17), and (2) has a governance structure that operates like a corporation (i.e., it is governed by a board of directors (or equivalent) appointed or approved by its stockholders or owners), consolidation of the investee is generally required if the reporting entity owns greater than 50 percent of the investee’s outstanding voting shares (or interests).
Despite owning a majority of a corporation’s outstanding voting shares, in certain circumstances a reporting entity may conclude that consolidation is not appropriate. This might occur when the minority equity investors have substantive participating rights. See CG 3.4.2 for additional information on participating rights and their impact on the VOE model.
In such instances, the reporting entity should consider disclosing the following:
- The noncontrolling rights that allow the minority investors to effectively participate in decisions made in the ordinary course of business, the frequency with which such rights can be exercised, and why they are substantive
- The dispute resolution process if the majority investor and minority investors are unable to reach an agreement
Example FSP 18-2 illustrates potential disclosure considerations when substantive participating rights prevent a majority investor from consolidating a voting interest entity.
EXAMPLE FSP 18-2
Disclosure considerations when substantive participating rights prevent a majority investor from consolidating a voting interest entity
Disclosure considerations when substantive participating rights prevent a majority investor from consolidating a voting interest entity
FSP Corp owns 60% of VOE Corp’s outstanding equity, with the remaining 40% owned by ABC Corp. Through its 60% equity interest, FSP Corp can appoint a majority of VOE Corp’s board members.
FSP Corp determines that VOE Corp is not a VIE. Accordingly, FSP Corp applies the voting interest entity model to determine whether it should consolidate VOE Corp.
Although FSP Corp owns a majority of VOE Corp’s equity, it determined that it does not have a controlling financial interest in VOE Corp since ABC Corp can veto the hiring, firing, and compensation of VOE Corp’s Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer.
What disclosures, if any, should FSP Corp consider in its consolidation footnote?
Analysis
FSP Corp should consider disclosing the existence of the participating right held by ABC Corp and the judgments made in concluding that this right (1) is substantive, and (2) provides ABC Corp with the ability to block key decisions made in the ordinary course of business.
FSP Corp’s specific disclosures should provide transparency into the judgments made when concluding that it should not consolidate VOE Corp, despite its majority ownership interest.
18.5.2 Partnerships
A reporting entity with an interest in a partnership first determines whether the partnership is a VIE or qualifies for one of the scope exceptions in ASC 810-10-15-17. Assuming the partnership is not a VIE, the reporting entity would apply the VOE model and follow the general presentation and disclosures covered in FSP 18.3. In addition, a reporting entity should consider presenting additional information to investors about consolidated partnerships or similar entities that are not VIEs. This additional information could be conveyed by: (1) providing consolidating financial statements, or (2) separately by classifying the partnership’s assets and liabilities on the reporting entity’s consolidated balance sheet. Other presentation alternatives may be acceptable.
If a reporting entity is the general partner of a partnership that is a VOE (or an entity with a governance structure that is the functional equivalent of a limited partnership) and is not consolidating the partnership, it should consider disclosing the reason why. The disclosure may include the nature of substantive kick-out, liquidation, or participating rights held by the limited partners, as well as the specific factors considered when determining that such rights are substantive (e.g., such rights are exercisable by a simple majority of the limited partners unrelated to the general partner). See CG 7.3.2 and CG 7.3.1 for additional information on participating and kick-out rights.
In practice, kick-out and liquidation rights are most commonly granted to limited partners in a limited partnership. When limited partners have been granted liquidation rights, the reporting entity (general partner) should consider disclosing the following:
- The limited partners' mechanism to call a vote to liquidate the limited partnership
- The frequency with which such rights can be exercised
- That the liquidation right can be exercised without cause
- The vote required to liquidate the limited partnership, including whether the vote is cast on an absolute basis or instead is based on the relative magnitude of the limited partners' capital accounts
- Whether the general partner and its related parties are excluded from the vote
- Whether the limited partners are subject to operational or financial barriers that would prevent them from exercising such rights (e.g., a significant termination penalty payable to the general partner upon dissolution of the limited partnership, absent cause)
If the limited partners have been granted participating rights, the reporting entity (general partner) may consider disclosure of the following:
- The noncontrolling rights that allow the limited partners to effectively participate in decisions made in the ordinary course of business
- The frequency with which such rights can be exercised
- Whether the exercise of such rights is subject to any operational barriers
- The dispute resolution process if the general partner and limited partners are unable to reach an agreement
Example FSP 18-3 illustrates potential disclosure considerations when substantive kick out rights prevent a general partner from consolidating a limited partnership.
EXAMPLE FSP 18-3
Disclosure considerations when substantive kick out rights prevent a general partner from consolidating a limited partnership
Disclosure considerations when substantive kick out rights prevent a general partner from consolidating a limited partnership
FSP Corp is the general partner of VOE LP. FSP Corp determines that VOE LP is not a VIE because a simple majority of the limited partners, unrelated to FSP Corp, were granted the right to liquidate VOE LP without cause at any time (and no other VIE criteria were met). Since FSP Corp can be removed as the GP at any time, it does not have a controlling financial interest in VOE LP and would not consolidate VOE LP.
What information should FSP Corp disclose with respect to its involvement with VOE LP?
Analysis
Although not required by ASC 810-20, FSP Corp should consider disclosing the key judgments made when determining that the liquidation right prevents FSP Corp, as general partner, from unilaterally controlling VOE LP.
Such disclosures may include the following:
- A description of the mechanism that allows the limited partners to exercise the liquidation right
- Whether any barriers exist that would prevent the limited partners from exercising their vote (e.g., termination penalties)
See FSP 18.5.2 for additional factors that a reporting entity should consider disclosing.
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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