Investors in Limited Partnerships Should Reassess Consolidation by First Quarter 2016
By Amy Stutzman, Director, Opportune Tulsa
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”) which significantly changes the consolidation requirements in ASC 810, particularly for limited partnerships common in the energy industry. ASU 2015-02 is effective for public entities beginning with the first quarter of 2016, so public entities should begin implementing the new guidance now if they haven’t already started. For non-public entities, ASU 2015-02 is effective for annual periods beginning after December 15, 2016, and interim periods beginning after December 15, 2017. Early adoption is permitted for all entities.
Under ASU 2015-02, there is no longer a presumption that a general partner should consolidate a limited partnership. Limited partnerships will be variable interest entities (VIEs), unless the limited partners have either substantive kick-out or participating rights. As a result, we expect more partnerships will be VIEs and more investors will have to provide extensive disclosures regarding the existence of and their exposure to VIEs, even if the investor determines that it does not need to consolidate a VIE. ASU 2015-02 also amends the effects that 1) fees paid to a decision maker, for example general partner management and performance fees, and 2) variable interests held by related parties have on the consolidation analysis. For limited partnerships that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights. Implementing ASU 2015-02 may require significant effort. Companies should consider the following:
- Updating their record of legal entities;
- Identifying variable interests in those legal entities including fees, equity interests and related party interests;
- Updating documentation and reassessing conclusions regarding VIEs and consolidation under ASU 2015-02; and
- Updating financial statement disclosures based on the outcome of reassessment.