Nonprofits Get Clarity about Applying Partnership Consolidation Rules


FASB issued new rules Jan. 12 that bring clarity and direction for not-for-profit organizations to determine when their need to consolidate – or not – their interest in a limited liability partnership or similar legal entity. 

“Similar legal entity” means it is a limited liability company that has governing provisions that are the functional equivalent of a limited partnership.

In those entities, a managing member is the functional equivalent of a general partner, and a non-managing member is the functional equivalent of a limited partner.

Social Service Type Organizations.

The new accounting standard is most relevant to social service type organizations that provide housing to its program participants--for example, housing for the homeless or senior citizens, Lee Klumpp, Assurance Director and Accounting and Auditing Technical Leader for BDO’s National Nonprofit Industry Group told Bloomberg BNA.

Specifically, it is applicable to housing partnerships that are formed as LLPs or legal equivalent.  These partnerships often use programs under the U.S. Department of Housing and Urban Development (HUD) or IRC Section 42 to finance these projects.

“A lot of times the not-for-profit social service organization owns only a small interest--one-to-two percent,” Klumpp explained. “And the general partner or the managing member of an LLP or equivalent owns the majority of the interest in the LLP or legal equivalent,” he said.

Many of these transactions are structured that way so that the general partner maintains control over operations of the project.  In this scenario the general partners end up consolidating the partnership into their financial statements, said Klumpp.  In many cases limited partner is invested in the projects only for the tax benefits and are not involved in the operations of the project, he said.

Filling a Void in GAAP.

The new standard is titled: Accounting Standards Update No. 2017-02, Not-for-Profit Entities—Consolidation (Subtopic 958-810), Clarifying When a Not-for-Profit Entity That is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity.

ASU 2017-02 fills a void in generally accepted accounting principles left by the issuance of ASC 2015-02, Consolidation (ASC 810): Amendments to the Consolidation Analysis. ASC 2015-02 would require a company to look at variable interest entity (VIE) guidance under which not-for-profits are excluded.

The new standard affirms that a not-for-profit entity that is a general partner would be presumed to control a limited partnership, regardless of the extent of their ownership interest, unless the limited partner is able to exercise substantive kick-out or participating rights.

Substantive Kick-out Rights.


The term kick-out rights refer to rights underlying a limited partner’s ability to remove the general partner without cause. Participating rights allow limited partners to block or participate in certain significant financial and operating decisions of the limited partnership that are made in the ordinary course of business.

To be substantive, the kick-out rights must be exercisable by a simple majority vote of the limited partners’ voting interests or a lower threshold. For purposes of evaluating that threshold, the limited partners’ voting interests should exclude voting interests held by the general partners, parties under common control with the general partners, and other parties acting on behalf of the general partners.

The rules are effective for fiscal years after Dec. 15, 2016 and interim periods within annual periods beginning after Dec. 15, 2017. 

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