ASU 2017-02  was issued in January 2017 by the FASB to clarify when a not-for-profit entity (NFP) that is a general partner or limited partner should consolidate a for-profit limited partnership or similar legal entity.

Currently GAAP requires an NFP that is a general partner of a for-profit limited partnership or similar legal entity to apply the consolidation guidance in Subtopic 810-20 unless the partnership interest is reported at fair value in accordance with certain other guidance.

ASU 2015-02 was issued in February 2015 which amended this guidance in Subtopic 810-10 and eliminated Subtopic 810.20.  This amended guidance presumes that an entity would first follow the variable interest entity (VIE) consolidation guidance before applying general consolidation guidance.   Generally NFPs are not within the scope of VIE consolidation guidance and this new guidance had less for-profits partnership consolidated with their NFP general partners.

ASU 2017-02 was issued to address this confusion.  Below is a summary of the clarifications:

  • Similar legal entity is defined as an entity such as a limited liability company that has governing provisions that are functional equivalent of limited partnership.
  • Consolidation guidance in Subtopic 810-20 is retained and moved to Subtopic 958-810.
  • NFP that are general partners would continue to be presumed to have control of a for-profit limited partnership, regardless of the extent of their ownership interest, unless the presumption is overcome.
  • If the limited partners have either substantive kick-out rights or substantive participating rights, the presumption would be overcome.
  • The kick out rights must be exercisable by a simple majority vote of limited partners’ voting interest or a lower threshold to be considered substantive.
  • Evaluating the threshold, the limited partners’ voting interest should exclude voting interest held by the general partners, parties under common control with the general partners, and other parties acting on behalf of the general partners.
  • The general guidance in Subtopic 810-10 was also added to ASU 2017-02 on when a NFP limited partners should consolidate a limited partnership.

This is effective for NFPs with fiscal years beginning after December 15, 2016, and intern periods with the fiscal periods within fiscal years beginning after December 15, 2017.   Early adoption is permitted.

NFPs that have not adopted ASU 2015-02 are required to adopt the amendments in this Update at the same time and should apply the same transition method elected for the application of ASU 2015-02.

NFPs that have already adopted ASU 2015-02 are required to retroactively apply these amendments to all relevant periods beginning with the fiscal year in which the amendments in ASU 2015-02 initially were applied.