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32.3 Presentation
Publication date: 12 Nov 2019
us Financial statement presentation guide
In order to apply the appropriate presentation and disclosure requirements, a reporting entity should first determine its identity as an LP or LLC.
Question FSP 32-1 addresses the characteristics a reporting entity should consider to determine if the entity is an LP or LLC.
Question FSP 32-1
What are some of the characteristics a reporting entity should consider to help it determine its identity as an LP or LLC?
What are some of the characteristics a reporting entity should consider to help it determine its identity as an LP or LLC?
PwC response
While there is limited guidance on LPs in the FASB codification, ASC 272 includes guidance on LLCs. As discussed in ASC 272-10-05-02, an LLC generally has the following characteristics:
- It is an unincorporated association of two or more persons.
- Its members have limited personal liability for the obligations or debts of the entity.
- It is classified as a partnership for federal income tax purposes.
Once a reporting entity has determined its identity as an LP or LLC, it should adhere to the appropriate presentation and disclosure requirements.
32.3.1 Basis of accounting — LPs and LLCs that are partnerships
The SEC staff has indicated in FRP 405 that LPs (or LLCs that report as partnerships) that are SEC registrants should present US GAAP-basis financial statements as their primary financial statements using Form 10-K, except in certain circumstances (based on the size of the offering) as specified by Rule 502(b) of Regulation D. This is even if their accounting records are maintained under a separate basis of accounting.
ASC 205-10-45-1A indicates that a full set of financial statements includes: balance sheet, income statement, statement of comprehensive income, statement of cash flows, and statement of changes in owners’ equity (see FSP 32.3.4).
If a reporting entity that does not present US GAAP-basis financial statements wishes to issue securities under Regulation D, an exception under Rule 502(b) of that regulation may apply. Although it would be unusual, an LP may be permitted to prepare financial statements on a federal income tax basis if it cannot obtain US GAAP financial statements without unreasonable expense or effort.
32.3.2 Basis of accounting — LLCs that are not partnerships
LLCs that do not report as partnerships should provide a complete set of financial statements including a balance sheet, income statement, statement of cash flows, statement of changes in members’ equity (may be an individual statement, combined with the income statement, or in the footnotes), and footnotes.
An LLC’s financial statements should clearly indicate that the financial statements presented are those of an LLC in the heading of each statement. Although ASC 272 does not explicitly include a statement of comprehensive income, practice indicates that reporting entities include the statement consistent with the requirements of ASC 205. Based on ASC 205, we believe a statement of comprehensive income should be presented to comply with US GAAP (see FSP 4).
32.3.3 Comparative financial statements
LLCs and partnerships that are SEC registrants are subject to the comparative financial statement requirements of S-X 3-01(a) (discussed in FSP 1.2.1). Presentation of comparative financial statements is encouraged for LLCs and partnerships that are not subject to SEC regulations, but not required under US GAAP.
32.3.4 Owners' or members’ equity
The presentation of equity of an LLC and a partnership is similar given the parallels in the structure, principally the multiple owners (known as members and partners) in the reporting entity. The equity section of the balance sheet should be titled members’ equity (LLCs) or owners’ equity (partnerships) in contrast to shareholders’ or stockholders’ equity for a corporation.
Similar to reporting entities that have multiple classes of common or preferred stock (see FSP 5), LLCs and partnerships report the amounts of each class of members’ equity separately, either on the face of the balance sheet within the equity section or within the footnotes. Each member class’ rights, preferences, and privileges should be disclosed.
ASC 505-10-S99-5 (SAB Topic 4.F) clarifies the presentation of members’ equity.
Facts: There exist a number of publicly held partnerships having one or more corporate or individual general partners and a relatively larger number of limited partners. There are no specific requirements or guidelines relating to the presentation of the partnership equity accounts in the financial statements. In addition, there are many approaches to the parallel problem of relating the results of operations to the two classes of partnership equity interests.
Question: How should the financial statements of limited partnerships be presented so that the two ownership classes can readily determine their relative participations in both the net assets of the partnership and in the results of its operations?
Interpretive Response: The equity section of a partnership balance sheet should distinguish between amounts ascribed to each ownership class. The equity attributed to the general partners should be stated separately from the equity of the limited partners, and changes in the number of equity units authorized and outstanding should be shown for each ownership class. A statement of changes in partnership equity for each ownership class should be furnished for each period for which an income statement is included.
The income statements of partnerships should be presented in a manner which clearly shows the aggregate amount of net income (loss) allocated to the general partners and the aggregate amount allocated to the limited partners. The statement of income should also state the results of operations on a per unit basis.
If the LP maintains separate accounts for varying components within an individual members’ equity account, it should present the balance within each component on the face of the balance sheet or in the footnotes. Examples of such components are undistributed earnings, earnings available for withdrawal, and unallocated capital.
Despite the limited economic risk for a participating member inherent in an LLC because of its legal structure, the results of the LLC’s operations could cause some members to have a liability balance. The LLC should report this deficit. Further, both an LP and an LLC should disclose the legal limitations on liabilities for each member, whether in a net deficit position or not.
32.3.4.1 Capital contributions
After an LLC’s formation, members may make contributions to grow the business or to infuse additional cash because of liquidity issues. When a member makes a cash contribution, it is classified in members’ equity on the balance sheet.
Often, a member will issue a note to an LLC as a promise to contribute additional capital. The transaction may be a sale of capital stock or a contribution to paid-in capital. ASC 505-10-45-2 generally does not permit this note receivable to be presented as an asset, except in very limited circumstances.
An entity may receive a note, rather than cash, as a contribution to its equity. The transaction may be a sale of capital stock or a contribution to paid-in capital. Reporting the note as an asset is generally not appropriate, except in very limited circumstances in which there is substantial evidence of ability and intent to pay within a reasonably short period of time, for example, as discussed for public entities in paragraph 210-10-S99-1 (paragraphs 27 through 29), which requires a deduction of the receivable from equity. However, such notes may be recorded as an asset if collected in cash before the financial statements are issued or available to be issued (as discussed in Section 855-10-25).
ASC 310-10-S99-2 (SAB Topic 4.E) provides similar guidance. The SEC staff notes that a receivable may be considered an asset when cash is received before the financial statements are issued.
Excerpt from ASC 310-10-S99-2
The staff will not suggest that a receivable from an officer or director be deducted from stockholders’ equity if the receivable was paid in cash prior to the publication of the financial statements and the payment date is stated in a note to the financial statements.
32.3.5 Other presentation considerations
The partnership should also present actual cash distributions per partnership unit.
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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