ASC 810-20: Control and Consolidation of Partnerships

Accounting Standards Codification (ASC) 810 provides guidance for determining when a reporting entity has a controlling financial interest in another entity, requiring the consolidation of its financial statements. When control exists, the reporting entity must combine the other entity’s assets, liabilities, revenues, and expenses with its own. This process presents the parent entity and its controlled subsidiaries as a single economic unit.

While ASC 810 covers various entities, its rules are particularly important for legal structures that are not corporations, such as limited partnerships and limited liability companies. In these entities, control is not always determined by majority voting shares but rather by contractual agreements that define the rights and responsibilities of the different parties. The standards provide a framework for analyzing these rights to ascertain who directs the entity’s most significant activities and is therefore required to consolidate.

The VIE Model as the Primary Test

The first step in any consolidation analysis for a partnership or similar entity is to determine if it is a Variable Interest Entity (VIE). A VIE is an entity in which equity investors do not have sufficient resources at risk to finance its activities without additional financial support, or where the equity investors lack the typical characteristics of a controlling financial interest.

If an entity is determined to be a VIE, the consolidation decision is based on which party is the “primary beneficiary.” The primary beneficiary is the party that has two characteristics. The first is the power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The second is the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant.

The party that meets both of these criteria is deemed to have a controlling financial interest and must consolidate the VIE. This model focuses on the economic substance of the relationship rather than just the legal form of ownership.

Handling Non-VIE Partnerships

In the less common scenario where a partnership is determined not to be a VIE, the consolidation analysis follows a different path. For most for-profit business entities, control of a non-VIE partnership is assessed based on the voting interests of the partners, similar to how control is evaluated for corporations. A different, more specialized framework exists for a very narrow set of circumstances. This guidance, which involves a presumption of control by a general partner (GP), was reinstated specifically for not-for-profit entities that act as a general partner in a for-profit limited partnership. In this limited case, the not-for-profit GP is presumed to have control unless the limited partners hold substantive rights that can overcome that presumption.

Consolidation Procedures and Required Disclosures

Once a reporting entity concludes that it has a controlling financial interest in another entity, it must consolidate that entity in its financial statements. The consolidation procedures are initiated at the date control is obtained and continue as long as control is maintained.

The initial step in consolidation is to measure the assets, liabilities, and any noncontrolling interests of the newly controlled entity at their fair values on the acquisition date. Any excess of the consideration transferred over the fair value of the net assets acquired is recognized as goodwill.

A key element of post-consolidation accounting is the treatment of the noncontrolling interest, which represents the portion of the subsidiary’s equity that is not owned by the controlling parent entity. The consolidated net income must be allocated between the parent and the noncontrolling interest holders. This allocation is presented on the face of the income statement, showing how much of the total profit or loss is attributable to each party.

Financial statement disclosures are also mandated to provide users with a clear understanding of the consolidation. The reporting entity must disclose its consolidation policy and provide a description of the consolidated entity and the nature of its business. It is also required to disclose any significant judgments and assumptions made in determining that it holds a controlling financial interest. Furthermore, disclosures must describe any restrictions on the consolidated entity’s assets and on the settlement of its liabilities.