Appendix E — Industry-Specific Guidance

E.5 P&U Entities

E.5.1 Overview

Reporting entities in the P&U industry apply the same consolidation requirements as reporting entities in other industries. However, the consolidation analysis may be particularly challenging in the P&U context. This section supplements the main chapters of this publication by discussing topics that apply to P&U reporting entities in their evaluation of whether they are required to consolidate a legal entity.

E.5.2 Identification of Variable Interests

Only a holder of a variable interest can consolidate a VIE. Accordingly, as long as the legal entity being evaluated does not qualify for a scope exception, the reporting entity must determine whether its interest in a legal entity is a variable interest. Examples of potential variable interests include equity interests, debt interests, PPAs, derivative instruments, management agreements, and other operating or contractual arrangements. The determination of whether an interest is a variable interest is often complicated and should focus on the purpose and design of the legal entity being evaluated and the risks to which the legal entity was designed to be exposed. For more information about identifying variable interests, see Chapter 4.

E.5.2.1 PPAs and Tolling Arrangements

Performing the variable-interest assessment for PPAs and tolling arrangements can be particularly challenging. A reporting entity must first determine whether the arrangement is considered an operating lease under ASC 8426 or a derivative under ASC 815 and, accordingly, whether the arrangement (1) qualifies for the scope exception in ASC 810-10-55-39 for an operating lease (see Section E.5.2.1.2) or (2) is a derivative that creates (rather than absorbs) variability (see Section E.5.2.3).

If the arrangement does not meet the definition of an operating lease (or there are other elements embedded in the operating lease) or the arrangement is not a derivative that creates (rather than absorbs) variability, the determination of whether a PPA or tolling agreement is a variable interest should focus on the purpose and design of the legal entity being evaluated and the risks to which the legal entity was designed to be exposed, such as raw-material price risk, operations risk, credit risk, and electricity price risk. The evaluation should take into account the nature of the pricing in the PPA or tolling arrangement (fixed, market, cost-reimbursement, etc.) as well as any features related to the underlying plant (puts, calls, residual value guarantees).

Further, the nature of the generating facility could affect the evaluation. That is, a fixed-price forward contract to purchase electricity from a fossil-fuel facility that has not yet been generated will typically be viewed as a contract to purchase an asset (electricity) that the legal entity does not currently own because of the legal entity’s exposure to raw material price risk and O&M risk in producing the electricity. In accordance with ASC 810-10-55-27, a contract to buy an asset that is not currently owned by a legal entity at a fixed price will usually increase the legal entity’s variability (rather than absorb it). In contrast, a fixed-priced forward contract to buy electricity from a renewable energy facility that has limited exposure to raw material price risk or O&M risk would typically be evaluated in a manner similar to an interest in a legal entity that currently owns the asset, because the entity has limited exposure to raw material price risk or O&M risk. Under ASC 810-10-55-28, a fixed-price contract for the legal entity to sell and for the counterparty to buy an asset owned by a legal entity is more likely to absorb variability of the legal entity.

The reporting entity should also consider any other contracts it holds, as well as those held by its related-party group, when evaluating whether a PPA or tolling arrangement is a variable interest.

Views have differed historically on the approach a reporting entity should use to assess variability, which has somewhat hindered comparability between reporting entities. Specifically, reporting entities will apply either a cash flow approach (the legal entity’s variability arises from fluctuations in its cash flows) or a fair value approach (the source of a legal entity’s variability arises from fluctuations in the fair value of the legal entity’s net assets).

The example below illustrates how particular PPAs, tolling agreements, or similar arrangements should be evaluated in a reporting entity’s determination of whether such contracts are variable interests.

Example E-3

A legal entity (PowerCo) is created to hold a generating facility and is funded by two unrelated equity holders and one unrelated debt holder.
PowerCo uses the proceeds from the equity contributions and debt to purchase the generating facility.
As a condition of lending, the debt holder requires PowerCo to enter into a 20-year forward contract to sell 100 percent of its output to a third party.
PowerCo holds the title to the facility, which has a useful life of 40 years.

The table below outlines how to assess whether a PPA, tolling agreement, or similar arrangement between the Utility and PowerCo in the example above is a variable interest. These contracts are analyzed from the purchaser’s perspective (first column). The second column describes other arrangements entered into between the legal entity (PowerCo) and either a third party or the purchaser. Assume that the guidance on derivatives in ASC 810-10-25-35 and 25-36 does not apply and that the contract is not an operating lease. Ultimately, whether a contract is a variable interest will depend on individual facts and circumstances, including the risk profile of the production facility (i.e., renewable energy versus fossil-fuel plants).

Table E-1 Assessing Whether PPAs, Tolling Agreements, or Similar Arrangements Are Variable Interests


Type of Contract (Purchaser)	Existing Contracts for Fuel and Other Materials	Is the Purchaser’s Contract a Variable Interest?
Fixed-price forward contract to purchase electricity	Market-price forward contract to purchase fuel from a third-party provider	No. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and fuel price risk. The role of the fixed-price forward contract is not to transfer any portion of those risks from the equity and debt investors to the purchaser since the price paid under the forward contract does not change as a result of changes in operating costs, fuel prices, or default by the purchaser. Those risks are designed to be borne by the equity and debt investors.
Fixed-price forward contract to purchase electricity	Fixed-price forward contract to purchase fuel from a third-party provider	No. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and fuel price risk. The role of the fixed-price forward contract to purchase electricity is not to transfer any portion of those risks to the purchaser since the price paid under the forward contract does not change as a result of changes in operating costs, fuel prices, or default by the purchaser. Those risks are designed to be borne by the equity and debt investors and the counterparty to the fixed-price raw material supply contract.
Fixed-price forward contract to purchase electricity	Fixed-price forward contract to purchase fuel from the purchaser	Yes. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and the fuel price risk. The role of the fixed-price forward contracts held by the purchaser, when these contracts are evaluated together, transfers the fuel price risk from the equity and debt investors to the purchaser. This arrangement is equivalent to the purchaser entering into a variable-price forward contract that is designed to reimburse the legal entity for changes in fuel prices.
Fixed-price forward contract to purchase electricity	Renewable energy PPA — no fuel costs	Some reporting entities have concluded that fixed-price PPAs for renewable energy contracts do not represent variable interests under the cash flow approach. That is, the fixed-price PPA does not absorb the variability in production costs such as O&M costs or the credit risk of the purchaser. Rather, such variability is absorbed by the equity and debt investors. However, others have concluded that these contracts do represent a variable interest under the fair value approach. This conclusion is based on the fact that renewable energy resources have significantly lower variable production costs than traditional fossil-fuel generating units (i.e., they have a lower variable O&M cost profile and no fuel costs). Accordingly, by analogy to the guidance in ASC 810-10-55-28, the fixed-price-per-unit contract would absorb variability related to the underlying assets of the entity (e.g., the windmill or solar panels) if there are changes in commodity prices.*
Tolling arrangement in which the purchaser provides fuel to the legal entity at no cost or transfer of title and purchases 100 percent of the output at a specified charge per unit (conversion cost)	Agreement to provide fuel included in the tolling arrangement	Yes. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and fuel price risk.** The role of the tolling arrangement transfers the fuel price risk from the equity and debt investors to the purchaser. Changes in the fuel prices will be borne by the purchaser. This arrangement is equivalent to the purchaser’s entering into a variable-price forward contract that is designed to reimburse the legal entity for changes in fuel prices.
Variable-price forward contract to purchase electricity — reimburses legal entity for costs of fuel and O&M	Market-price forward contract to purchase fuel from a third-party provider	Yes. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and fuel price risk. The role of the variable-price forward contract is to transfer the fuel price risk and some portion of operating risk from the equity and debt investors to the purchaser. Changes in the fuel prices and O&M costs will be borne by the purchaser.
Variable-price forward contract to purchase electricity — reimburses legal entity for costs of fuel and O&M	Market-price forward contract to purchase fuel from the purchaser	Yes. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and fuel price risk. The role of the variable-price forward contract is to transfer the fuel price risk and some portion of operating risk from the equity and debt investors to the purchaser. Changes in the fuel prices and O&M costs will be borne by the purchaser.
Variable-price forward contract to purchase electricity — reimburses the legal entity for costs of fuel and O&M. A component of the variable-price forward contract is considered an operating lease	Market-price forward contract to purchase fuel from a third-party provider	Yes. The legal entity is designed to be subject to operating risk, credit risk of the purchaser, and fuel price risk. Although a component of the variable-price forward contract is considered an operating lease, the role of the remaining, nonlease components of the arrangement is to transfer fuel price risk and some portion of operating risk from the equity and debt investors to the purchaser. Changes in the fuel prices and O&M costs will be borne by the purchaser.
* PPAs for renewable energy that are ostensibly fixed-price-per-unit contracts often have features designed to absorb cash flow variability. For example, construction overrun contingencies or tax contingencies that can change the fixed price per unit of the facility’s output would absorb variability in the cash flows of the legal entity. It is important for a reporting entity to ensure that the PPA truly is a fixed-price-per-unit contract before concluding that the arrangement does not absorb cash flow variability. In addition, regardless of whether the PPA for renewable energy represents a variable interest, given the noncontrollable risks (i.e., risks for which there are no related activities) in a typical renewable structure, the off-taker often will conclude that it does not have power over the most significant activities since the power over the controllable risks (such as O&M) frequently rests with the owner-operator. This conclusion will depend on the particular terms of each arrangement. See Section E.5.4. ** Although the legal entity does not take title to the fuel in a tolling arrangement, the legal entity must produce electricity, which requires fuel. By supplying the legal entity with fuel at no cost, the reporting entity is implicitly absorbing fuel price risk associated with producing the electricity. This concept is consistent with the SEC’s speech on “activities around the entity” — see Section 4.3.10.1.

E.5.2.1.1 Determining Whether a PPA Is a Lease Agreement

It is not uncommon for PPAs and tolling arrangements to qualify as leases for accounting purposes. ASC 842 indicates that a lease is a contract — or part of a contract — in which a supplier conveys to a customer “the right to control the use of identified property, plant, or equipment . . . for a period of time in exchange for consideration.” The evaluation of whether a contract is (or contains) a lease under ASC 842 focuses on whether (1) there is an identified asset and (2) the customer has the right to both obtain substantially all of the economic benefits of its use and direct its use. Further, the right to control the use of a specified asset is conveyed if the customer will obtain all but an insignificant amount of the output or other utility of the asset during the term of the arrangement.

Currently there is diversity in practice related to how to evaluate whether a PPA is a lease under ASC 842 as a result of differing views about how to interpret the term “output.” For example, questions have been raised regarding whether an “output” should include both physical and intangible outputs (e.g., renewable energy credits [RECs], which represent rights for environmental benefits). A PPA may also contain a lease (i.e., there may be an embedded lease) under ASC 842. See Sections 3.2 and 3.4 of Deloitte’s Roadmap Leases for further discussion.

E.5.2.1.2 Operating Lease Scope Exception

ASC 810-10-55-39 indicates that most arrangements that qualify as operating leases (i.e., the lease does not transfer substantially all of the risks and rewards of ownership) do not absorb variability in the fair value of the VIE’s net assets. Accordingly, a lessee under a PPA or tolling arrangement that is considered an operating lease may not be considered to hold a variable interest in a VIE lessor entity.

However, it is important to remember that the exception for operating leases only applies to the lease element of an arrangement. Therefore, PPAs that qualify as operating leases may still contain variable interests to the extent that other elements (e.g., fixed-price put or call options, dismantlement/decommissioning obligations) exist in the lease. Other common features embedded in an operating lease include management or service arrangements, the obligation to absorb the variable costs of production, and raw material supply arrangements (e.g., a fuel-tolling arrangement). Reporting entities must understand the terms of the lease arrangement and identify all embedded features.

E.5.2.1.3 Finance Leases

Finance leases (including PPAs and tolling arrangements) are not eligible for the operating lease scope exception, and often the features that trigger finance lease accounting (e.g., bargain purchase options, residual value guarantees) will absorb variability. Further, just because an arrangement is a finance lease does not minimize the relevance of, or negate the need for, the consolidation analysis. Accordingly, a lessee reporting entity that enters into a finance lease would still need to assess whether it is required to consolidate the lessor. If the reporting entity is required to consolidate the lessor, any other assets or obligations of the lessor would be included in the reporting entity’s consolidated financial statements. See Section 4.3.9.2 for additional discussion.

E.5.2.1.4 Avoided Cost Pricing

It is not uncommon for a utility to purchase power from qualifying facilities under avoided-cost pricing structures in accordance with the Public Utility Regulatory Policies Act and the Energy Policy Act. Since avoided cost is generally a measure of the utility’s marginal cost to produce the same amount of energy through construction of a new plant and does not permit direct reimbursement for any of the generator’s actual costs of production, avoided-cost pricing will generally not absorb risk of the generator; however, there may be exceptions. Relevant considerations include the fuel source and operating profile of the utility’s marginal unit compared with the fuel source and operating profile of the generator and the reset period for the price schedule. In circumstances in which (1) the fuel source and operating profile of the utility’s marginal unit closely mirror that of the generator and (2) the reset period on the pricing is frequent (e.g., monthly), it may be appropriate to conclude that the PPA is absorbing variability in the legal entity. The use of a correlation analysis may be helpful to the reporting entity in making this determination.

E.5.2.1.5 Curtailment Rights

There have been questions about the effects of voluntary or economic curtailment clauses on the assessment of whether a PPA is a variable interest. Specifically, entities have asked whether the off-taker would absorb variability in the legal entity if the penalty pricing for economic curtailment was the same as the pricing that would have been due had the unit generated power. This type of penalty pricing would not, in and of itself, make a PPA a variable interest, because the off-taker is not absorbing incremental cash flow variability in curtailment scenarios.

E.5.2.2 Renewable Energy Credits

If a reporting entity concludes that RECs are an output of a specified asset and that the overall arrangement (including the benefits from the RECs) should be accounted for as a lease, the lessee would not be required to separately evaluate whether the right to receive the RECs is a separate variable interest (see Section E.5.2.1.1). See Section 3.4.1.1 of Deloitte’s Roadmap Leases for further discussion.

However, if the reporting entity concludes that the RECs are not an output of the specified asset in its evaluation of whether the arrangement is a lease, or if the sale of the RECs is not part of a lease arrangement, the reporting entity should assess the obligation to purchase the RECs separately to determine whether the right is a variable interest.

E.5.2.3 Derivative Instruments

During the development of the by-design approach, the FASB debated whether certain derivative instruments, such as interest rate swaps and foreign currency swaps, should be considered variable interests in a legal entity by the counterparty to the derivative. From an economic standpoint, these types of derivatives could be viewed as both creating and absorbing variability in a legal entity. For example, in an interest rate swap in which the legal entity pays a fixed rate and receives a variable rate, the counterparty is absorbing fair value variability and creating cash flow variability for the legal entity. Although it would be atypical for such an instrument to give the counterparty power over the legal entity, the principles in ASC 810-10-25-35 and 25-36 provide a framework for the counterparties to conclude that many of these instruments are not variable interests in the legal entity, which permits the counterparties to avoid further analysis of whether the legal entity is a VIE as well as the disclosures required by variable interest holders in a VIE.

Under ASC 810-10-25-35 and 25-36, even if a derivative instrument absorbs variability, it may be considered a creator of variability (i.e., not a variable interest) as long as it does not absorb all or essentially all of the variability from a majority of the legal entity’s assets and it possesses the following two characteristics:

“Its underlying is an observable market rate, price, index of prices or rates, or other market observable variable (including the occurrence or nonoccurrence of a specified market observable event).” (See Section 4.3.3.2 for a discussion of the meaning of the term “observable market.”)
“The derivative counterparty is senior in priority relative to other interest holders in the legal entity.”

Questions have been raised regarding the application of the derivative-specific guidance in ASC 810-10 to nonderivatives, generally in the context of unrecognized executory contracts (e.g., PPAs) that appear to both absorb risk (e.g., commodity price risk) and create new risk (e.g., credit of the off-taker). The guidance in ASC 810-10-25-35 and 25-36 is confined to derivatives (as determined under ASC 815). Accordingly, a reporting entity would be prevented from applying this guidance if, for example, there is no explicit or implicit notional amount in the PPA, or if the output under the PPA (power) does not meet the net settlement criteria in ASC 815-10-15-110 and ASC 815-10-15-119. See Section 4.3.3.1 for further discussion of the meaning of a derivative instrument in this context.

Example E-4

A reporting entity forms a legal entity to construct and hold a single plant that will produce electricity. The plant has an estimated useful life of 40 years and is financed with equity (10 percent) and nonrecourse debt (90 percent). During the formation of the legal entity, the reporting entity enters into a forward contract to buy 100 megawatts of the electricity produced by the plant, which is approximately 60 percent of the plant’s yearly electricity production, for 25 years. The forward contract is at a variable price, reimbursing the legal entity for raw materials and O&M costs. The reporting entity has no other involvement with the legal entity. The legal entity can choose to purchase the raw materials needed to produce the electricity on the spot market either when it needs them or before. Assume that the forward contract possesses the following characteristics necessary for the application of ASC 810-10-25-35 and 25-36:

The forward contract meets the definition of a derivative in ASC 815.
The forward contract’s underlying (electricity) has an observable market price.
The reporting entity is senior in priority to the legal entity’s other interest holders. (In this instance, the reporting entity’s interest is senior in priority to the nonrecourse debt; often, this is not the case.)

Further, the reporting entity has identified that the legal entity is designed to be exposed to risks related to construction, raw-material prices, O&M, and credit of the purchaser. The forward contract would probably be considered a creator of variability even though the contract absorbs the variability associated with the raw-material price risks and the O&M risk. Although the forward contract is related to a majority of the operations of the legal entity, changes in the cash flows or fair value of the forward contract are not expected to offset all, or essentially all, of the risk or return (or both) related to the output of the legal entity. Specifically, the forward contract is designed to absorb approximately 60 percent of the plant’s raw-material price risk and O&M risk, which do not constitute essentially all the risk in the legal entity.

E.5.2.4 Rate-Regulated Entities — Ratepayers Are Not Variable Interest Holders

Regulated utility companies many times enter into a PPA to purchase all the power of a power-generating plant at an amount equal to a fixed capacity payment plus the variable costs of fuel, operations, and maintenance. The regulated utility company generally expects that all of its costs incurred under the PPA will be recovered from ratepayers under the rate regulation statutes in its operating jurisdiction. Further, in many instances, the power-generating plant is the sole asset of a VIE.

Although the regulated utility is permitted to pass the costs of the PPA to its ratepayers as they are billed for services in the future, no identifiable ratepayers have the obligation to absorb the VIE’s economics at the present time. That is, an individual ratepayer does not have an obligation to absorb the variability in the PPA until the ratepayer consumes electricity in the future. Further, the ratepayer is not obligated to absorb any of the VIE’s variability if electricity is not purchased in the future (e.g., if the ratepayer uses alternative energy sources or moves to another state).

Because the individual ratepayers do not have an obligation, contractual or otherwise, to absorb the variability of the regulated utility’s arrangement with the VIE, the indirect involvement of the ratepayers does not meet the definition of a variable interest. As a result, the variability passed through the PPA between the regulated utility and the VIE is considered to be absorbed completely by the regulated utility under the VIE model, and no portion of that variability should be attributed to the ratepayers.

E.5.3 Determining Whether the Legal Entity Is a VIE

To the extent that a PPA, tolling agreement, or similar off-take arrangement is deemed to be a variable interest, or when a reporting entity has other variable interests in the legal entity (e.g., equity interests, loans, guarantees), the reporting entity is required to consider whether the legal entity is a VIE and, accordingly, whether to apply the VIE model or the voting interest entity model in performing its consolidation assessment. To determine which model to use, the reporting entity must determine whether any of the following conditions apply:

The legal entity has insufficient equity at risk to finance its activities.
The equity holders (as a group) lack any of the three characteristics of a controlling financial interest.
Members of the equity group have nonsubstantive voting rights.

If any of these conditions apply, the equity is not considered substantive, and the legal entity should be evaluated under the VIE model. Legal entities in the P&U industry often are considered VIEs because (1) the equity holders are protected from losses or their return is capped (e.g., a put or call arrangement for assets of the entity or an arrangement that protects the equity holders from commodity price risk (fuel and electricity) and O&M risk), (2) the equity holders share power with or cede power to other parties (e.g., debt investors or another party through a PPA), or (3) the equity holders have disproportionate voting rights to their profit-sharing arrangements. See Chapter 5 for further discussion of whether a legal entity is a VIE.

E.5.3.1 The Business Scope Exception

The “business scope exception” exempts reporting entities from evaluating whether a legal entity that qualifies as a business under ASC 805 is a VIE unless one or more of the four conditions discussed in Section 3.4.4 apply. While legal entities in the P&U industry may meet the definition of a business under ASC 805,7 the reporting entity often fails to meet one or more of the four conditions that preclude the use of the exception. For example, a single-plant entity that has issued debt collateralized by the asset would generally not qualify for the business scope exception because it would meet the condition in ASC 810-10-15-17(d)(4).

E.5.3.2 Limited Partnerships

Developers in the renewable energy sector often use limited partnerships or similar structures for tax purposes. For example, a developer of a renewable energy facility that does not generate sufficient taxable income to offset the tax incentives or investment tax credits generated from its operations may monetize these tax credits by identifying investors that are able to use the tax incentives and credits. These renewable “flip” structures are typically set up as tax pass-through entities to give the investors (i.e., tax-equity investors) the ability to use the tax benefits of the partnership. When evaluating these types of structures under ASC 810, reporting entities should assess whether they are limited partnerships (or similar structures) and, if so, whether the holders of equity at risk (typically, the limited partners) have substantive kick-out or participating rights. If such rights do not exist, the partnership would be considered a VIE. See Section 5.3.1.2 for further discussion of whether a limited partnership (or similar entity) is a VIE.

E.5.3.3 Tax Equity

The prevalence of tax equity in renewable flip structures has led to questions about whether tax equity qualifies as equity at risk. The answer can affect the VIE determination related to equity sufficiency and the requirement that equity holders (as a group) have the three characteristics of a controlling financial interest. Tax equity will generally qualify as “at risk” unless the return of the tax investor is somehow guaranteed by the partnership. Disproportionate equity distributions until a flip date, in isolation, would not constitute a guarantee of the tax investor’s return.

E.5.4 Determining Whether the Reporting Entity Is the Primary Beneficiary of a VIE

The evaluation of whether to consolidate a VIE focuses on whether the reporting entity has (1) the power to direct the activities that most significantly affect the economic performance of the VIE (power criterion) and (2) a potentially significant interest in the VIE (economics criterion). However, the determination is often based on which variable interest holder satisfies the power criterion since generally more than one variable interest holder meets the economics criterion. Determining which variable interest holder, if any, meets the power criterion can be challenging. Although a quantitative expected loss calculation is not required, an understanding of the economic performance of the entity is useful in the assessment of the purpose and design of the VIE and the risks the VIE was designed to create and pass along to its variable interest holders (see discussion below).

E.5.4.1 Risks of the Entity

When identifying the activities that most significantly affect the legal entity, the reporting entity should focus on the purpose and design of the VIE and the risks the VIE was designed to create and pass along to its variable interest holders. The evaluation should focus on how each risk affects the VIE’s economic performance, not just those risks that have a direct impact on the net income of the VIE.

This concept is best illustrated by an example involving a traditional PPA with fixed-capacity pricing (e.g., a fixed monthly capacity charge) and variable pricing designed to pass through the variable cost of production to the off-taker. In this arrangement, the capacity payment is designed to (1) reimburse the seller’s capital investment in the plant, (2) cover fixed production costs, and (3) provide a return to the equity holders. The variable price, on the other hand, is often a pure pass-through mechanism designed to pass fuel and variable O&M costs along to the off-taker without a profit adder. Accordingly, the decision to dispatch electricity from the plant does not have a direct bearing on the profitability of the VIE — the capacity payment, which is dependent only on the availability of the plant, determines the net income of the VIE. A narrow focus on only those risks that affect net income could lead a reporting entity to conclude that the ability to dispatch would not be considered in the analysis of which party has the power to direct the activities that most significantly affect the VIE’s economic performance because the dispatch decision does not affect earnings of the VIE.

We believe that such a conclusion would be inappropriate because it ignores the fact that the dispatch decision governs the off-taker’s variable payment obligation and therefore directly affects the VIE’s level of exposure to commodity prices that the off-taker absorbs. Note that the dispatch rights, in and of themselves, may not necessarily lead to consolidation by the off-taker. To weigh the significance of commodity-price risk in the context of the VIE’s overall risk profile, a reporting entity must consider (1) the other risks created and passed along to variable interest holders and (2) which parties have the power to direct the activities related to those risks. See Section E.5.4.3 for additional information.

Example E-5

A local utility enters into a long-term PPA with a single-plant legal entity. The PPA is a prerequisite to the legal entity’s acquisition of bank financing. The PPA is structured such that the local utility reimburses the legal entity for certain production costs, including fuel.

Although the single-plant legal entity is not a merchant operation, its risk profile is similar to that of a merchant generator. That is, the risks the legal entity is exposed to are likely to include commodity price risk (fuel and electricity), O&M risk (including efficiency and technology risk), residual value risk, remarketing risk, credit risk, regulatory risk, catastrophic risk, construction risk,8 and, in some cases, tax risk. In this example, even though the local utility absorbs 100 percent of the legal entity’s fuel price risk, that risk is still relevant to the analysis because it is absorbed by a variable interest holder, albeit not an equity owner. This view would also apply to scenarios involving tolling arrangements in which the off-taker provides the fuel input. Like the PPA, a tolling arrangement is another example of risk allocation through contracting, but the base risks remain those of a merchant generator. Further, there is no substantive difference between the provision of the fuel by the off-taker and the billing of the off-taker by the generator for fuel it procures on a dollar-for-dollar basis.

Once the risks have been identified, the reporting entity is required to identify the activities related to those risks. It is appropriate to exclude from the analysis uncontrollable risks. On the other hand, there may be situations in which the activities related to the risks are asserted to be “outside” the entity and should be included in the analysis. See Section 4.3.10.1 for a discussion of the SEC’s views on “activities around the entity.”

The example above describes the identification of risks in a single-plant entity or merchant operation. However, the risks identified could differ depending on the nature of the legal entity. For example, there may be unique considerations for equipment-leasing entities (including those related to uninstalled gas turbines, rail cars, etc.).

E.5.4.2 Risks With No Activities

While reporting entities should consider all the VIE’s risks, the VIE may be exposed to risks that do not have direct activities related to them. Accordingly, the evaluation should focus on any substantive ongoing activities that are expected to have a significant effect on the economic performance of the VIE rather than on risks that may be significant to the legal entity but are not subject to control by any party. For example, the exposure to electricity price risk in a renewable project is a function of production, which is typically affected by external factors, such as wind volume. Similarly, the occurrence of a catastrophic loss event is a noncontrollable risk that would not affect the power analysis.

E.5.4.3 Identifying the Significant Activities

After a reporting entity has identified the risks of the legal entity that are expected to have the most significant effect on the legal entity’s economic performance, the reporting entity would need to consider the level of decision making and activities related to those risks. Such decisions and related activities may include, for example, choices about when to operate the facility (dispatch rights), how to operate the facility, the purchasing of raw materials, the selling of excess output, the maintenance of the facility, the hiring and firing of employees, remarketing at the end of the PPA term, and the disposition of the plant at the end of its useful life (e.g., the decision to refurbish or dismantle the plant).

Typically, commodity price risk (electricity price risk and fuel price risk) and O&M risk will be the most significant controllable risks of a single-plant legal entity with a fossil-fuel generating asset. However, the reporting entity may need to use significant judgment in identifying the related relevant activities because the types of decisions, and the weight of those decisions, may vary on the basis of the design of legal entity being evaluated.

E.5.4.3.1 Fossil-Fuel Generating Assets

The significance of certain decisions may depend on whether the legal entity’s primary asset is a fossil-fuel generating facility (e.g., a coal-fired power plant) or a renewable energy facility (e.g., a wind or solar farm). For example, commodity price risk is inherent in a fossil-fuel-powered plant’s inputs (i.e., fuel) and outputs (i.e., electricity). Some have argued that because of the importance of O&M, it would generally be the plant’s most significant activity. However, in certain instances (see discussion below), the opportunity to recognize enhanced (or deteriorating) returns on the basis of superior (or inferior) O&M performance (i.e., the opportunity to affect the efficiency of the generating asset) may not outweigh the activities that affect the potential volatility that results from commodity price risk. Accordingly, in those instances, we would expect more weight to be placed on the power to decide when to run the plant (i.e., dispatch) than on the power to decide how to run the plant (O&M). The fuel source and expected run profile of the facility (e.g., baseload, peaking) may be relevant in the reporting entity’s assessment of the potential variability associated with commodity price risk. The nature of the off-taker’s commodity exposure (e.g., full exposure to input or output price volatility as opposed to a net exposure to the spark spread9) should also be considered. Finally, availability guarantees, minimum production guarantees, and guaranteed heat rates are examples of features that may need to be considered in the assessment of the potential variability associated with O&M.

A baseload plant is designed to run substantially all the time regardless of market conditions. Therefore, although a reporting entity (typically the power purchaser) may have the ability to make the dispatch decisions, the plant is not designed such that those decisions are likely to be exercised or have a significant impact on the plant’s economic performance. Rather, the economic performance may be most closely associated with the cash inflows from a capacity payment. Capacity cash flows typically vary only according to the availability of the plant (i.e., a payment is “all or nothing”), and therefore O&M may be the most significant activity ensuring that the plant is available and the cash inflows are received. Accordingly, on the basis of facts and circumstances, O&M and other important decisions may most significantly affect the plant’s economic performance.

On the other hand, a peaking plant is designed to be dispatched in times of peak load, when the market price of electricity is economic in comparison to the cost of producing the electricity. That is, the off-taker will dispatch when the spark spread is favorable since every dispatch decision effectively involves a purchase of fuel (e.g., natural gas) and a contemporaneous sale of electricity. If commodity price risk is the risk that most significantly affects the legal entity’s economic performance, the reporting entity that makes dispatch decisions (e.g., the off-taker) would typically be deemed to have the power over the most significant activities of the VIE unless another variable interest holder has powers that, in the aggregate, exceed the effect of dispatch. The reporting entity should consider all facts and circumstances, including the extent to which the primary dispatch decision is affected by market economics or by the off-taker’s decisions.

In all cases, a reporting entity should document its considerations related to the design, purpose, risks, and significant activities of a fossil fuel-powered plant housed in a VIE when determining which party, if any, is the primary beneficiary of the VIE.

E.5.4.3.2 Renewable Generating Assets

If no party makes dispatch decisions, which may be the case for certain renewable energy technologies such as wind and solar farms, the analysis of the power to direct the activities that most significantly affect the VIE’s economic performance should focus on the other ongoing activities (e.g., O&M).

E.5.4.4 No Ongoing Activities

In the financial services industry, there are certain so-called “auto-pilot” structures (e.g., certain resecuritization structures) that have limited, if any, ongoing activities other than the administration of payments. Many believe that for these structures, the ongoing activities do not have a significant impact on the economic performance of the legal entity and that control over such activities is not indicative of a controlling financial interest. Consequently, design decisions and risk-and-reward profiles carry more weight in the consolidation analysis. However, such an approach is not likely to apply outside of pure financial structures since most operating entities (including those with physical assets) will generally involve some ongoing activities that are expected to have a significant impact on the economic performance of the legal entity.

When there are substantive ongoing activities that are expected to have a significant effect on the economic performance of the legal entity, little or no weight would be placed on decisions made at the legal entity’s inception as part of its design, including the location of the facility. Companies in the renewable sector will need to consider whether ongoing activities (e.g., O&M) are substantive and contribute significantly to the economic performance of the legal entity. For example, if the decisions about O&M are expected to have a significant impact on the productive output of the generating unit, these activities would be deemed to contribute significantly to the economic performance of the legal entity.

E.5.4.5 Activities Over the Life of the VIE10

The evaluation of whether a reporting entity has power over a VIE should focus on the ongoing activities performed throughout the life of the VIE. Thus, variable interest holders should reassess their power related to the significant activities as their rights change or simply as their power relative to that of other variable interest holders changes over time. In other words, it is not necessary for a discrete change in power (e.g., based on a new contract) to occur for there to be a change in the primary beneficiary; the primary beneficiary could change over time as one party ceases to direct the most significant activities of the VIE (e.g., as the contract that gives the party power expires). For example, a PPA holder with dispatch rights may have power over the most significant activities of a VIE when making the consolidation assessment at inception of a long-term PPA. However, that same party may conclude that it no longer has power over the most significant activities of the legal entity as the PPA expires. This may be the case when another party has agreed to purchase the plant output at expiration of the current PPA or when the equity holder will operate the plant on a merchant basis for the remaining useful life of the facility. On the other hand, further analysis may be required when the terms of the arrangement indicate that the off-taker has the ability to remain in power after the PPA expires (see discussion below of puts, calls, and term-extending options). For nonfinancial assets or in-substance nonfinancial assets, depending on the guidance that applies to them (e.g., they may be within the scope of ASC 606, ASC 610-20, ASC 810, or other U.S. GAAP), an entity should evaluate whether there are conditions that may hinder the ability to derecognize the generating facility once it has been recognized on the balance sheet through consolidation. In other words, an entity that reaches a conclusion that deconsolidation under ASC 810 is appropriate may have to apply additional guidance, depending on the nature of the transaction, which may make derecognition challenging.

In assessing power over the remaining life of the VIE, the reporting entity must consider all contractual rights and obligations, including those that will arise in the future (e.g., a fixed-price call option or a residual value guarantee on a power plant on the expiration of the PPA) pursuant to contracts in existence as of the balance sheet date. It is not appropriate to ignore these rights simply on the basis that they are not currently exercisable. These rights are often central to the design of the VIE and should not be disregarded in the primary-beneficiary analysis. The existence of such rights, in isolation, may not be determinative in the identification of the party with power over the activities that are most significant to a VIE’s economic performance, but they are often informative in the determination of which party has that power and should be incorporated into the analysis. Relevant considerations may include the pricing of the feature (e.g., in the money) and other business factors (e.g., a utility holds a call option on a facility that it needs to serve its native load). See Section 7.2.9.1 for more information about forward starting rights and the primary-beneficiary assessment.

Although forward starting rights (including puts, calls, and forward contracts) are not ignored in the consolidation analysis, it is likely that such rights (depending on their terms) have a more meaningful impact on the analysis for VIEs with a limited life or a limited range of activities. For example, a call right held by a party on another party’s interest in an operating venture may not be given significant weight in the power analysis until exercisable if the other party’s interest gives it the substantive ability to unilaterally make the significant decisions of the VIE until its interest is bought out. On the other hand, a future call right on an asset (e.g., power plant) of a VIE whose business revolves around that asset might be given more weight in the power analysis before becoming exercisable, particularly when the party holding the call right is already exerting some degree of power over the VIE through another variable interest (e.g., an off-taker that controls dispatch under a PPA).

E.5.4.6 Multiple Parties Involved in Decision Making

It is important to remember that the primary-beneficiary analysis should take into account all parties that have power; a party with power over multiple significant activities may determine when those powers are aggregated that it has the power to direct the most significant activities of the legal entity. This concept is illustrated in ASC 810-10-25-38E.

Example E-6

Party A controls an activity that is deemed to significantly affect the economic performance of a legal entity, and Party B controls four activities, none of which individually affects the economic performance of the legal entity as significantly as the activity directed by A, but in the aggregate affect the economic performance of the legal entity more significantly than the activity controlled by A. In this example, B would have the power to direct the activities that most significantly affect the economic performance of the legal entity. This scenario might apply to an off-taker that has one significant power (e.g., dispatch) while another variable interest holder, such as the owner-operator, has several powers that are individually less significant but in the aggregate exceed the effects of the dispatch rights.

In identifying the significant risks and activities that affect the economic performance of a legal entity, as well as in assessing the “power to direct” those activities, a reporting entity must remember that ASC 810-10-25-38G indicates that the level of a reporting entity’s economic interest may indicate the amount of power that the reporting entity holds. If an off-taker concludes that the design of a legal entity and the overall substance of its PPA give it substantially all the benefits and obligations of plant ownership, but it also concludes that it is not the primary beneficiary of the VIE, the off-taker should carefully consider whether it has appropriately identified the risks and activities that affect the economic performance of the VIE and its powers related to such activities.

E.5.4.7 Multiple Parties Have Power Over the Same Activity

When multiple unrelated parties are responsible for the same significant activity or activities that most significantly affect the economic performance of different portions of the VIE, and consent is not required, a party with power over the majority of the significant activity or activities (if such party exists) has power over the VIE. To determine which party has power over the majority of the significant activities, the reporting entity will need to use judgment and consider all facts and circumstances.

E.5.4.8 Impact of Curtailment Rights

There have been questions about the effects of curtailment rights (which are often held by off-takers in renewable PPAs) on the primary-beneficiary analysis. Such questions have included whether a curtailment right (which is effectively the inverse of a dispatch) could represent the power to direct the significant activities of a VIE. If a PPA is a variable interest or the off-taker has another variable interest in the legal entity, curtailment rights may represent the power to direct an activity of the VIE. However, in most circumstances, the effects of such rights on the economic performance of the legal entity will be relatively minor. In addition, the significance of such rights will depend on the type of curtailment rights in the PPA. Emergency curtailment is unlikely to contribute significantly to economic performance because of the remote and contingent circumstances associated with their exercise.

Further, voluntary or economic curtailment rights that are not contingent upon other circumstances are rarely invoked because the scenarios that make them economical to exercise (e.g., excessive negative locational marginal pricing at the delivery location) are fairly uncommon in most markets. In assessing the effects of these rights, reporting entities should consider the expected significance of the rights in the context of overall economic performance of the VIE. In many cases, this will dilute the effects of curtailment rights and lead to a relatively low weighting in the assessment of the power to direct.

E.5.4.9 Impact of Liquidation and Withdrawal Rights

In some cases, withdrawal rights are tantamount to kick-out or liquidation rights and should be treated as such. Section 7.2.10.3 discusses situations in which withdrawal rights should be considered in a manner similar to liquidation rights in the primary-beneficiary analysis. The existence of liquidation rights (or withdrawal rights that are in-substance liquidation rights) may be applicable, for example, when a VIE owned by an engineering, procurement, and construction (EPC) contractor is established to house the construction of a new generating facility and the utility has the right to exit the VIE, take the underlying assets, and hire a replacement EPC contractor to finish the construction.

E.5.4.10 Approval of Maintenance Schedules

Approval rights over planned maintenance schedules would not represent power over O&M (unless the approval rights are accompanied by other rights related to O&M decisions). Off-takers frequently have these rights but have no ability to influence the actual work done on the facility (other than requiring compliance with prudent utility practice). These rights would generally be more akin to protective rights than participating rights of the off-taker.

E.5.5 Other Items

E.5.5.1 Separate Presentation

Given the prevalence of non-recourse-project financing in the P&U industry, reporting entities should ensure that they comply with the presentation requirements in ASC 810-10-45-25. Under those requirements, separate presentation on the face of the balance sheet is required for (1) assets of a consolidated VIE that can be used only to settle obligations of the VIE and (2) liabilities of a consolidated VIE for which the creditors do not have recourse to the general credit of the primary beneficiary. Such information is required to be presented gross (i.e., assets and liabilities cannot be “linked” or netted). See Section 11.1.1 for more information about separate presentation.

Footnotes

In many situations, the evaluation of whether a PPA is (or contains) a lease may be relatively simple; however, there is diversity in practice related to how this evaluation should be performed. See Section E.5.2.1.1 for additional information.

See discussion in Section 3.4.4.2 on ASU 2017-01, which narrowed the definition of a business. As a result of the ASU, fewer legal entities (such as single-plant entities) may meet the definition of a business on a prospective basis.

In this example, it is assumed that the evaluation is being performed over the entire life of the entity. See Section 7.2.9.2 for a discussion of evaluating entities that have multiple distinct stages.

“Net exposure to the spark spread” means that the off-taker’s contract is designed to absorb only the difference between the market price of electricity and the cost of producing that electricity.

The guidance in this section generally applies to single-plant legal entities in the operational phase. Before achievement of commercial operations, reporting entities should consider whether the power to direct the VIE’s most significant activities changes as the reporting entities move through discrete phases such as development and construction. In these scenarios, the relative certainty of successfully completing each stage is likely to be relevant to the analysis. See Section 7.2.9.2 for more information about assessing VIEs that go through discrete operational stages or phases of development.

E.6 NFP and Health Care Entities

As discussed in Section 3.4.1, an NFP13 is not required to determine whether to consolidate a legal entity under the VIE model. An NFP that qualifies for the scope exception in ASC 810-10-15-17(a) would instead apply ASC 958-810 and ASC 954-810 for NFP and health care entities, respectively. Considerations related to applying those subsections are discussed below. In addition, the AICPA Audit and Accounting Guides Not-for-Profit Entities (Chapter 3) and Health Care Entities (Chapter 12) provide interpretive guidance on those subsections.

E.6.1 Overview

ASC 958-810

05-1 This Subtopic provides guidance on the following:

Reporting relationships between a not-for-profit entity (NFP) and another NFP that potentially result in consolidation
Reporting relationships with special-purpose entity lessors (either for-profit entities or NFPs)
Reporting a noncontrolling interest in an acquiree
Reporting relationships between an NFP and a for-profit entity that is other than a limited partnership or similar legal entity (incremental guidance only).
Reporting relationships between an NFP that is a general partner or a limited partner and a for-profit limited partnership or similar legal entity.

The consolidation considerations for NFPs depend on whether the NFP’s relationship is with another NFP (see Section E.6.2), an SPE lessor (see Section E.6.3), or a for-profit entity (see Section E.6.4). ASC 958-810 also provides guidance on presenting and disclosing noncontrolling interests (see Section E.6.5.1).

E.6.2 Reporting Relationships Between an NFP and Another NFP

The following flowchart (reproduced from ASC 958-810-55-3) can be used to analyze relationships between one or more NFPs:

ASC 958-810-55-3

E.6.2.1 Nature of the Relationship Between One or More NFPs

ASC 958-810

05-2 An NFP may be related to one or more other NFPs in numerous ways, including any of the following:

Ownership
Control
Economic interest.

05-4 The nature of the relationship between the entities determines the following:

Whether the financial statements of an NFP and those of another NFP should be consolidated
Whether the other NFP should be reported using a method similar to the equity method (see Subtopic 958-20)
The extent of the disclosure that should be required, if any.

As discussed in ASC 958-810, NFPs may be related through ownership, control, or an economic interest. The nature of the relationship determines whether one NFP should consolidate another NFP or report its interest in the NFP by using a method similar to the equity method under ASC 958-20.

E.6.2.1.1 Ownership

ASC 958-810

05-3 Because NFPs may exist in various legal forms, ownership of NFPs may be evidenced in various ways. Examples include:

Corporations issuing stock
Corporations issuing ownership certificates
Membership corporations issuing membership certificates
Joint ventures
Partnerships.

A parent corporation typically owns stock in a for-profit entity, whereas a sole corporate member holds (all) membership rights in an NFP.

ASC 958-810-05-3 indicates that evidence of an NFP’s ownership of another NFP can include stock or ownership certificates in an NFP corporation as well as interests in NFP joint ventures or NFP partnerships. Some NFPs may also be structured as membership corporations. In a membership corporation, the corporate decision making that is typically granted to the NFP’s board of directors is granted to the corporate members identified in the NFP’s articles of incorporation. When a membership corporation consists of a single member, that single member is referred to as the sole corporate member and is generally considered equivalent to a sole shareholder since it typically has the unilateral power to appoint and terminate the NFP’s board and dissolve the NFP.

E.6.2.1.2 Control

ASC 958-810-20 defines control as the “direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.” As discussed below, an NFP may have control over another NFP through a majority voting interest or a majority voting interest in the board, as the sole corporate member, or through other means, such as a contract.

E.6.2.1.3 Economic Interest

ASC 958-810-20 defines the term “economic interest” as follows:

ASC 958-810 — Glossary

Economic Interest

A not-for-profit entity’s (NFP’s) interest in another entity that exists if any of the following criteria are met:

The other entity holds or utilizes significant resources that must be used for the purposes of the NFP, either directly or indirectly by producing income or providing services.
The NFP is responsible for the liabilities of the other entity.

See paragraph 958-810-55-6 for examples of economic interests.

In addition, ASC 958-810-55-6 provides some examples of economic interests, including the assignment of significant functions to another entity or residual interests held by an NFP in another NFP. However, the determination of whether an NFP has an economic interest in another NFP involves significant judgment and requires consideration of the facts and circumstances.

ASC 958-810

55-6 The following are examples of economic interests:

Other entities solicit funds in the name of and with the expressed or implied approval of the NFP, and substantially all of the funds solicited are intended by the contributor or are otherwise required to be transferred to the NFP or used at its discretion or direction.
An NFP transfers significant resources to another entity whose resources are held for the benefit of the NFP.
An NFP assigns certain significant functions to another entity.
An NFP provides or is committed to provide funds for another entity or guarantees significant debt of another entity.
An NFP has a right to or a responsibility for the operating results of another entity. Or upon dissolution, an NFP is entitled to the net assets, or is responsible for any deficit, of another entity.

Example E-7

Church P is a religious NFP corporation with over 1,000 local churches in the United States. Under P’s corporate structure, P is a legal entity, and each local church is a separate legal entity. To ensure that each local church is operating in accordance with P’s mission as a nonprofit organization, P supports the professional development of ministry leaders at the local churches as well as the growth and development of local church programs. In exchange, P is entitled to 10 percent of the general offerings that each local church receives. As a result of P’s right to 10 percent of the offerings received by each local church, P has an economic interest in each local church.

Example E-8

Foundation F is an NFP formed by School S, an NFP university, to provide estate planning services, planned giving services, and trust administration for individuals with multiple charitable interests. Foundation F has historically served as a conduit for donors to contribute to S and holds approximately $30 million in donations provided by outside donors specifically for the benefit of S. These amounts cannot be used for any other purpose by F. In addition, F and S entered into a gift agreement under which F would transfer funds from F to S over future years. The gift agreement is irrevocable, binding on and enforceable against F and S, and designed to provide S with both up-front payments and a steady stream of funds. The gift is restricted to specific purposes and is to be added to existing funds held by F for the benefit of S. Since F is committed to providing funds to S through the gift agreement as well as holding amounts for the benefit of S, S has an economic interest in F.

E.6.2.2 Consolidation Framework for an NFP’s Relationship With Another NFP

ASC 958-810

25-1 A relationship with another not-for-profit entity (NFP) can take any one of the following forms, which determines the appropriate reporting:

A controlling financial interest through direct or indirect ownership of a majority voting interest or sole corporate membership in the other NFP (see the following paragraph)
Subparagraph not used
Control of a related but separate NFP through a majority voting interest in the board of that NFP by means other than ownership or sole corporate membership and an economic interest in that other NFP (see paragraph 958-810-25-3)
An economic interest in the other NFP combined with control through means other than those listed in (a) through (c) (see paragraph 958-810-25-4)
Either an economic interest in the other NFP or control of the other NFP, but not both (see paragraph 958-810-25-5).

Under ASC 958-810-25-1, an NFP’s relationship with another NFP may take a number of different forms, including those noted above.

E.6.2.2.1 Controlling Financial Interest Through a Majority Voting Interest or Sole Corporate Membership

ASC 958-810

25-2 An NFP with a controlling financial interest in another NFP through direct or indirect ownership of a majority voting interest or sole corporate membership in that other NFP shall consolidate that other NFP, unless control does not rest with the majority owner or sole corporate member (for example, if the subsidiary is in legal reorganization or bankruptcy), in which case consolidation is prohibited, as discussed in paragraph 810-10-15-10. Sole corporate membership in an NFP, like ownership of a majority voting interest in a for-profit entity, shall be considered a controlling financial interest, unless control does not rest with the sole corporate member (for instance, if the other [membership] entity is in bankruptcy or if other legal or contractual limitations are so severe that control does not rest with the sole corporate member).

25-2A In some situations, certain actions require approval by a supermajority vote of the board. Such voting requirements might overcome the presumption of control by the owner or holder of a majority voting interest. For related implementation guidance, see paragraph 958-810-55-4A.

55-4A This paragraph provides implementation guidance on the application of paragraph 958-810-25-2A to situations in which certain actions require approval by a supermajority vote of the board. That paragraph states that such voting requirements might overcome the presumption of control by the owner or holder of a majority voting interest. An NFP shall exercise judgment in evaluating such situations. If supermajority voting requirements exist—for example, a specified supermajority of the board is needed to approve fundamental actions such as amending the articles of incorporation or dissolving the entity, an NFP shall consider whether those voting requirements have little or no effect on the ability to control the other entity’s operations or assets or, alternatively, whether those voting requirements are so restrictive as to call into question whether control rests with the holder of the majority voting interest. The guidance in paragraphs 810-10-25-2 through 25-14 may be helpful in considering whether the inability of the majority voting interest to unilaterally approve certain actions due to supermajority voting requirements is substantial enough to overcome the presumption of control.

When an NFP has a controlling financial interest in another NFP through either direct or indirect ownership of a majority of the voting interest or through a sole corporate membership, consolidation is required unless control does not rest with the majority owner or sole corporate member (for instance, if the other (membership) entity is in bankruptcy, or other legal or contractual limitations are so severe that control does not rest with the sole corporate member). See Sections D.1.3.2 and D.3 for further discussion of instances in which the holder of a majority voting interest lacks control. NFPs should also consider specific voting requirements (e.g., supermajority) that may overcome the presumption of control. The guidance in ASC 810-10-25-2 through 25-14 on the effect of noncontrolling rights on consolidation may help NFPs determine whether the presumption of control by the majority voting interest holder or sole corporate member has been overcome. See Section D.2 for more information about the effect of noncontrolling rights on consolidation.

Example E-9

NFP X is the sole corporate member of NFP Y and has the power to select and appoint all five directors on Y’s board. No other NFP retains corporate membership rights over Y; thus, all control rests solely with X. NFP X and Y do not hold any economic interests in each other. Therefore, X should consolidate Y in accordance with ASC 958-810-25-2, which states, “Sole corporate membership in an NFP, like ownership of a majority voting interest in a for-profit entity, shall be considered a controlling financial interest, unless control does not rest with the sole corporate member.”

Example E-10

Assume the same facts as in the example above except that NFP X only has the power to select and appoint three out of five directors on NFP Y’s board. NFP Z has the power to select and appoint the remaining two directors on Y’s board. A unanimous vote of all five directors on Y’s board is needed to approve fundamental actions, including selecting, terminating, and setting the compensation of management and establishing operating and capital decisions (including budgets). NFP X determines that these unanimous voting requirements related to the fundamental actions of Y restrict X’s ability to control Y’s operations. Therefore, control does not rest with X as the sole corporate member in Y.

E.6.2.2.2 Majority Voting Interest in the Board

ASC 958-810

25-3 In the case of control of a related but separate NFP through a majority voting interest in the board of the other NFP by means other than ownership or sole corporate membership and an economic interest in that other NFP, consolidation is required, unless control does not rest with the holder of the majority voting interest, in which case consolidation is prohibited. An NFP has a majority voting interest in the board of another entity if it has the direct or indirect ability to appoint individuals that together constitute a majority of the votes of the fully constituted board (that is, including any vacant board positions). Those individuals are not limited to the NFP’s own board members, employees, or officers. For implementation guidance on a majority voting interest in the board of another entity, see paragraph 958-810-55-5.

55-5 A majority voting interest in the board of another entity, as referred to in paragraph 958-810-25-3, is illustrated by the following example. Entity B has a five-member board, and a simple voting majority is required to approve board actions. Entity A will have a majority voting interest in the board of Entity B if Entity A has the ability to appoint three or more of Entity B’s board members. If three of Entity A’s board members, employees, or officers serve on the board of Entity B but Entity A does not have the ability to require that those members serve on the Entity B board, Entity A does not have a majority voting interest in the board of Entity B.

Generally, a majority voting interest in an NFP will result when the NFP’s articles of incorporation grant the right to appoint a majority of its fully constituted governing board (including any vacant board positions) to another NFP. However, if a majority of an NFP’s board consists of another NFP’s board members, employees, or officers, that NFP would not have a majority voting interest in the board if it lacked the ability to require that those members serve on the NFP’s board.

When control by an NFP of a related but separate NFP is through (1) a majority voting interest in the board of the NFP by means other than ownership or sole corporate membership and (2) an economic interest in the other NFP, consolidation is required unless control does not rest with the holder of the majority voting interest in the board. This requirement is similar to that related to a majority voting interest or sole corporate membership discussed in Section E.6.2.2.1, except that it involves voting interests conveyed through means other than ownership (either direct or indirect). The guidance in ASC 810-10-25-2 through 25-14 on the effect of noncontrolling rights on consolidation may help an NFP determine whether the presumption of control by the holder of the majority voting interest in the board has been overcome (see ASC 958-810-55-4A and Section E.6.2.2.1). See Section D.2 for further discussion of the effect of noncontrolling rights on consolidation.

Paragraph 3.78 of Not-for-Profit Entities provides the following example of control by a majority voting interest in the board of another NFP:

An NFP may be related to another NFP that performs political activities that the reporting entity does not wish to perform, perhaps because performing those activities may threaten the reporting entity’s tax exempt status, the reporting entity is precluded from conducting such activities, or for other reasons. For example, a membership entity may establish and sponsor a political action committee (PAC) whose mission is to further the interests of the membership entity. The resources held by the PAC are used for the purposes of the membership entity and the governing board of the PAC is appointed by the board of the membership entity. In the circumstances described, both control and economic interest are present and the PAC should be consolidated. Control through a majority voting interest in the board of the PAC exists because the governing board of the PAC is appointed by the board of the membership entity. An economic interest exists because the PAC holds significant resources that must be used for the purposes of the membership entity.

E.6.2.2.3 Control by Other Means

ASC 958-810

25-4 Control of a related but separate NFP in which the reporting entity has an economic interest may take forms other than majority ownership interest, sole corporate membership, or majority voting interest in the board of the other entity; for example, control may be through contract or affiliation agreement. In circumstances such as these, consolidation is permitted but not required. Consolidation is encouraged if both of the following criteria are met:

The reporting entity controls a separate NFP in which it has an economic interest and that control is not control through either of the following means:
1. A controlling financial interest in the other NFP through direct or indirect ownership of a majority voting interest
2. A majority voting interest in the board of the other NFP.
Consolidation would be meaningful.

When an NFP holds both (1) an economic interest (see Section E.6.2.1.3) in another NFP and (2) control through means other than a majority ownership interest, sole corporate membership, or a majority voting interest in the board, consolidation is permitted but not required. Other means of control may include a contract or affiliation agreement (see Section D.3.4 for further discussion of situations in which an entity may be controlled through a contract). Consolidation is encouraged in these circumstances if it would be meaningful. Such determination involves judgment and requires consideration of the facts and circumstances. The indicators in paragraph 3.118 of Not-for-Profit Entities used to help an NFP determine whether to consolidate a for-profit entity can also help it determine whether to consolidate another NFP. Considerations related to this determination include, but are not limited to, the following:

“The size of the for-profit subsidiary in relation to the NFP parent.”
“The activities of the for-profit subsidiary in relation to the mission of the NFP parent.”
Other quantitative and qualitative considerations relevant to the financial statement users.

E.6.2.2.4 Control or an Economic Interest, but Not Both

ASC 958-810

25-5 The existence of control or an economic interest, but not both, precludes consolidation.

Consolidation is prohibited if an NFP holds either an economic interest in another NFP or control of the other NFP, but not both. However, there may be certain scenarios in which an NFP should consolidate a legal entity when it holds an economic interest and does not have direct control of that legal entity’s board. It is important to view the ownership interests and rights to the residual interest as indicators of indirect control when direct control of the board is not present. An NFP is presumed to have indirect control, and should therefore consolidate a legal entity, if the NFP possesses the following:

An ownership interest of 100 percent of the legal entity or the right to the residual interest in it.
Representation on the board of the legal entity when no party directly controls the board.

See Section D.1.3.1, which discusses control in the absence of a majority voting interest, for additional factors to consider in the determination of substantive control of a legal entity.

E.6.3 SPE Lessors

ASC 958-810

25-8 Notwithstanding the guidance in this Subtopic, an NFP that is engaged in leasing transactions with a special-purpose-entity (SPE) lessor shall consider whether it should consolidate such lessor. Specifically, such an NFP shall consolidate an SPE lessor if all of the following conditions exist:

Substantially all of the activities of the SPE involve assets that are to be leased to a single lessee.
The expected substantive residual risks and substantially all the residual rewards of the leased asset(s) and the obligation imposed by the underlying debt of the SPE reside directly or indirectly with the lessee through means such as any of the following:
1. The lease agreement
2. A residual value guarantee through, for example, the assumption of first-dollar-of-loss provisions
3. A guarantee of the SPE’s debt
4. An option granting the lessee a right to do either of the following:
  1. To purchase the leased asset at a fixed price or at a defined price other than fair value determined at the date of exercise
  2. To receive any of the lessor’s sales proceeds in excess of a stipulated amount.
The owner (or owners) of record of the SPE has not made an initial substantive residual equity capital investment that is at risk during the entire lease term. This criterion shall be considered met if the majority owner (or owners) of the lessor is not an independent third party, regardless of the level of capital investment.

25-10 If all of the conditions in paragraph 958-810-25-8 exist, the assets, liabilities, results of operations, and cash flows of the SPE shall be consolidated in the lessee’s financial statements. This conclusion shall be applied to SPEs that are established for both the construction and subsequent lease of an asset for which the lease would meet all of the conditions in paragraph 958-810-25-8. In those cases, the consolidation by the lessee shall begin at lease inception rather than the beginning of the lease term. [For related implementation guidance, see paragraphs] 958-810-55-7 through 55-16.

An NFP that is engaged in leasing transactions with an SPE lessor must apply the consolidation guidance in ASC 958-810 to determine whether it should consolidate the SPE lessor.

An NFP is required to consolidate an SPE lessor if all of the following three conditions are met:

Substantially all the activities of the SPE involve assets that are to be leased to a single lessee (see Section E.6.3.1).
The expected substantive residual risks and substantially all the residual rewards of the leased asset(s) and the obligation imposed by the underlying debt of the SPE reside directly or indirectly with the lessee (see Section E.6.3.2).
The SPE’s owner or owners of record have not made an initial substantive residual equity capital investment that is at risk during the entire lease term. This criterion would be considered met if the majority owner or owners of the lessor are not independent third parties, regardless of the level of capital investment (see Section E.6.3.3).

ASC 958-840 also contains guidance on NFP transactions with SPE lessors related to leases that do not meet all three conditions for consolidation.

Note that in February 2016, the FASB issued ASU 2016-02 (ASC 842), which requires a lessee to account for most leases on its balance sheet, including those leases that have historically been accounted for as operating leases. ASC 842 changes the definition of certain terms in ASC 958-810, such as lease term, and therefore reporting entities should determine the effect of the adoption of ASC 842 on their application of the consolidation guidance on SPE lessors. See Deloitte's Roadmap Leases for further discussion.

E.6.3.1 Substantially All the Activities of the SPE Involve Assets to Be Leased to a Single Lessee

ASC 958-810

55-8 This implementation guidance addresses the application of paragraph 958-810-25-8(a) to a transaction involving all of the following characteristics:

An SPE is formed to acquire two separate properties that are to be leased to two unrelated lessees.
The two asset acquisitions are financed with the proceeds from two nonrecourse borrowings that do not contain cross-collateral provisions; that is, in the event of default, each borrowing is collateralized only by a pledge of the respective assets leased to a single lessee and an assignment of the respective lease payments under the related lease.
The SPE has no assets other than the leased properties and the related leases.

55-9 The use of nonrecourse debt with no cross-collateral provisions effectively segregates the cash flows and assets associated with the two leases and, therefore, in substance, creates two SPEs. For purposes of applying the provisions of paragraph 958-810-25-8, each lessee would be considered to have satisfied the condition in paragraph 958-810-25-8(a). For either lessee to be in a position of not satisfying that condition, the assets of the SPE (subject to the two leases) would need to be commingled such that, in the event of default, both lenders to the SPE would have equal rights (that is, pari passu) to the cash flows and assets related to both leases of the SPE. In this regard, the amounts of the cash flows from each lease and the fair values of the individual assets subject to the leases must represent more than a minor amount (that is, more than 10 percent) of the aggregate cash flows from all leases and the aggregate fair value of all assets of the SPE, respectively.

The “substantially all” threshold is high and is applied in a manner similar to the business scope exception discussed in Section 3.4.4.7 and the VIE determination discussed in Section 5.4.2. A reporting entity should consider both quantitative and qualitative factors in evaluating whether substantially all the activities of the SPE involve assets that are to be leased to a single lessee. As the guidance above demonstrates, there may be circumstances in which the condition in ASC 958-810-25-8(a) is satisfied even when there are multiple properties in a single SPE lessor with multiple lessees.

E.6.3.2 Expected Substantive Residual Risks — Substantially All the Residual Rewards of the Leased Asset(s) and the Obligation Imposed by the Underlying Debt of the SPE Reside Directly or Indirectly With the Lessee

This condition may be satisfied as a result of any of the following:

The lease agreement.
A residual value guarantee through, for example, the assumption of first-dollar-of-loss provisions.
A guarantee of the SPE’s debt.
An option granting the lessee a right to do either of the following:
- Purchase the leased asset at a fixed price or at a defined price other than fair value determined as of the date of exercise.
- Receive any of the lessor’s sales proceeds in excess of a stipulated amount.

E.6.3.3 SPE Owner Has Not Made an Initial Substantive Residual Equity Capital Investment at Risk During the Entire Lease Term

ASC 958-810

25-9 To satisfy the at-risk requirement in item (c) in the preceding paragraph, an initial substantive residual equity capital investment shall meet all of the following conditions:

It represents an equity interest in legal form.
It is subordinate to all debt interests.
It represents the residual equity interest during the entire lease term.

55-10 This implementation guidance addresses the level at which an entity should apply the conditions in paragraph 958-810-25-8 to a transaction having all of the following characteristics:

Sponsor forms an SPE, SPE A.
SPE A acquires property with the proceeds from nonrecourse debt and leases the property to Lessee A.
SPE A has no other activities and the terms of the lease satisfy the condition in paragraph 958-810-25-8(b), which discusses the residual risks and rewards associated with the leased assets and related debt.
The sponsor owns 100 percent of SPE A’s voting common stock.
The sponsor contributes the common stock of SPE A to capitalize another SPE (SPE B) that is formed to own and lease assets to Lessee B.
The other assets of SPE B are financed entirely with nonrecourse debt and are subject to a lease, the terms of which also satisfy the condition in paragraph 958-810-25-8(b).

Thus, SPE B, which is wholly owned by the sponsor, becomes the parent of SPE A.

55-11 Consistent with the implementation guidance in paragraph 958-810-55-8 that addresses multiple properties within a single SPE, the conditions set forth in paragraph 958-810-25-8 shall be applied at the lowest level at which the parties to a transaction create an isolated entity, whether by contract or otherwise. Therefore, in the situation described in the preceding paragraph, the test for compliance with the condition in paragraph 958-810-25-8(a) should be applied to the parent-only financial statements of SPE B.

55-12 In the transaction described in paragraph 958-810-55-10, assume the assets of SPE B will include the common stock of SPE A and the assets leased to Lessee B. Ownership of the stock of another SPE that is engaged in leasing property would not constitute an activity contemplated by the condition in paragraph 958-810-25-8(a). Accordingly, in this situation, the lessee shall consider that condition to be satisfied in evaluating the activities of SPE B. In addition, the sponsor’s contribution of the stock of SPE A to capitalize SPE B shall not be considered an initial substantive residual equity capital investment, as contemplated by the condition in paragraph 958-810-25-8(c), because a sponsor’s investment shall not be used to capitalize more than one SPE for purposes of applying that condition.

Payments to Equity Owners of an SPE During the Lease Term

55-13 The characterization of any payments made by the SPE-lessor to its owners of record shall be based on the SPE’s GAAP basis financial statements. That is, distributions of the SPE-lessor’s GAAP basis change in net assets shall be considered a return on equity capital, but any distribution in excess of previously undistributed GAAP change in net assets shall be considered a return of equity capital, which would reduce the amount of the equity capital investment that is at risk. If the amount of the equity capital investment is reduced below the minimum amount required as a result of a distribution in excess of previously undistributed GAAP change in net assets, the owner of record would have to make an additional investment to continue to avoid the condition in paragraph 958-810-25-8(c). An owner of record would not be required to make an additional equity capital investment if residual equity capital is reduced below the minimum amount required because of losses recorded by the SPE in accordance with generally accepted accounting principles.

Fees Paid to Owners of Record of an SPE

55-14 Paragraph 842-10-30-5(e) states that, for a lessee, lease payments include fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transaction. Paragraph 842-10-30-5(e) states that such fees shall be included as part of lease payments (but shall not be included in the fair value of the underlying asset) for purposes of applying the criterion in paragraph 842-10-25-2(d). With respect to the SPE and the application of the guidance in paragraph 958-810-25-8, the fees paid by the lessee to the owners of the SPE shall be considered a return of the owners’ initial equity capital investment. To the extent that the fees reduce the equity capital investment below the minimum amount required, the owners of record would not be considered to have a substantive residual equity capital investment that is at risk during the entire term of the lease.

Source of Initial Minimum Equity Investment

55-15 If the source of the funds used to make the initial minimum equity investment in an SPE lessor is financed with nonrecourse debt that is collateralized by a pledge of the investment, the investment shall not meet the at-risk requirement in paragraph 958-810-25-8(c). Similarly, that at-risk requirement shall not be met if the owners purchased residual insurance or obtained a residual guarantee in an amount that would ensure recovery of their equity investment. If the initial minimum equity investment is financed with recourse debt from a party not related to the lessee, the owners (borrowers) shall have other assets at risk to support the borrowing to avoid the condition in paragraph 958-810-25-8(c). Thus, if the loans were full recourse loans and if the fair value of the residual equity investment serves as collateral for the debt, the lessor-owner shall be considered at risk to the extent that the owners of record are liable for any decline in the fair value of the residual interest and have, and are expected to continue to have during the term of the lease, other significant assets, in addition to and of a value that exceeds their equity investment, that are at risk.

Payment to Owners of Record of an SPE Before the Lease Term

55-16 In some build-to-suit lease transactions involving SPEs, the lease or related construction agreement provides that the SPE will construct, or cause to be constructed, the property that is to be leased. The terms of the construction or lease agreements provide that payments are to be made by the SPE to the owners of record during the construction period, which, in some cases, may be several years. Such payments generally are made to provide the owners of record with a cash yield on their equity capital investments. Payments made by the SPE to the owners of record of the SPE during the construction period shall be deemed to be a return of their initial equity capital investment as opposed to a return on their equity capital investment. To the extent that those payments reduce the equity capital investment below the minimum amount required under paragraph 958-810-25-8, the owners of record of the SPE shall not be considered to have made an initial substantive residual equity capital investment that is at risk during the entire lease term.

To evaluate whether this condition is satisfied, an NFP must first determine whether the SPE owner’s residual equity capital investment is at risk. The SPE owner’s residual equity capital investment is at risk if (1) it is legal-form equity, (2) it is subordinate to all debt interests, and (3) it represents the residual equity interest during the entire lease term. The NFP should consider the source of the funds used by the SPE owner to make the initial minimum equity investment in an SPE lessor as well as any other agreements entered into by the SPE owner. For instance, if the SPE owner’s investment is financed with nonrecourse debt collateralized by a pledge of the investment, or if the SPE owner purchased residual insurance or obtained a residual guarantee in an amount that would ensure recovery of its equity investment, the investment would not meet the at-risk requirement. In addition, if the source of funds is recourse debt from a party unrelated to the lessee, the SPE owner must have other assets at risk to support the borrowing.

Paragraph 3.110 of Not-for-Profit Entities provides the following guidance on the minimum acceptable investment that would qualify as an initial, substantive, residual equity capital investment:

FinREC believes that 3% is the minimum acceptable investment to qualify as an initial, substantive, residual equity capital investment. A greater investment may be necessary depending on the facts and circumstances, including the credit risk associated with the lessee and market risk factors associated with the leased property. For example, the cost of borrowed funds for the transaction might be indicative of the risk associated with the transaction and whether an equity investment greater than 3% is needed. Additional information about the application of the preceding criteria and guidance for consolidation of the SPE is located in FASB ASC 958-810.

Any payments made by the SPE-lessor to its owners of record that are considered returns of investment (on the basis of the SPE’s GAAP-basis financial statements) would reduce the amount of the equity capital investment at risk. Fees paid by the lessee to the owners of the SPE for structuring the lease transaction, and payments made by the SPE to the owners of record during the construction period (in some build-to-suit lease transactions), are deemed returns of investment and therefore would also reduce the amount of the equity capital investment at risk. If the amount of the equity capital investment is reduced below the minimum amount required as a result of these returns of investment, the owners of record would not be considered to have a substantive residual equity capital investment at risk during the entire term of the lease unless the owners make an additional investment.

E.6.4 Reporting Relationships Between NFPs and For-Profit Entities

ASC 958-810

15-4 Additional guidance for reporting relationships between NFPs and for-profit entities resides in the following locations in the Codification:

An NFP with a controlling financial interest through direct or indirect ownership of a majority voting interest in a for-profit entity that is other than a limited partnership or similar legal entity shall apply the guidance in the General Subsections of Subtopic 810-10. However, in accordance with paragraph 810-10-15-17, NFPs are not subject to the Variable Interest Entities Subsections of that Subtopic.
An NFP that is a general partner or a limited partner of a for-profit limited partnership or a similar legal entity (such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership) shall apply the guidance in paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I. However, the guidance in those paragraphs does not apply to the following:
1. A general partner or a limited partner that reports its partnership interest at fair value in accordance with (e)
2. Entities in industries, such as the construction or extractive industries, in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership (see paragraph 810-10-45-14).
An NFP that owns 50 percent or less of the voting stock in a for-profit entity shall apply the guidance in Subtopic 323-10 unless the investment is measured at fair value in accordance with applicable GAAP, including the guidance described in (e). If the NFP is unable to exercise significant influence, the NFP shall apply the guidance for equity securities in Topic 321.
An NFP with a more than minor noncontrolling interest in a for-profit real estate partnership, limited liability company, or similar legal entity shall report its noncontrolling interests in such entities using the equity method in accordance with the guidance in Subtopic 970-323 unless that interest is reported at fair value in accordance with applicable GAAP, including the guidance described in (e). An NFP shall apply the guidance in paragraph 970-810-25-1 to determine whether its interests in a general partnership are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I to determine whether its interests in a for-profit limited partnership, limited liability company, or similar legal entity are controlling financial interests or noncontrolling interests. An NFP shall apply the guidance in paragraph 323-30-35-3 to determine whether a limited liability company should be viewed as similar to a partnership, as opposed to a corporation, for purposes of determining whether noncontrolling interests in a limited liability company or a similar legal entity should be accounted for in accordance with Subtopic 970-323 or Subtopic 323-10.
An NFP that is not within the scope of Topic 954 on health care entities may elect to report the investments described in (b) through (d) and paragraph 958-325-15-2 at fair value, with changes in fair value reported in the statement of activities, provided that all such investments are measured at fair value.

ASC 958-810-55-4 contains a flowchart (included below), which can be used to analyze relationships between NFPs and for-profit entities.

ASC 958-810

55-4 The following flowchart and related footnote indicate the order in which an NFP applies the guidance elsewhere in the Codification to determine the accounting for its relationship with a for-profit entity.

As discussed below, ASC 958-810-15-4 specifies that NFPs should also apply other relevant ASC guidance on reporting relationships between NFPs and for-profit entities.

E.6.4.1 NFP With a Controlling Financial Interest in a For-Profit Entity

An NFP with a controlling financial interest in a for-profit entity through direct or indirect ownership of a majority voting interest in that entity should apply the voting interest entity model in the same manner as any for-profit entity. Under the voting interest entity model, a controlling financial interest typically exists when a reporting entity owns more than 50 percent of the outstanding voting shares of another entity. However, there are exceptions to this general principle. See Appendix D for more information about the application of the voting interest entity model.

E.6.4.2 NFP That Is a General Partner of a For-Profit Limited Partnership or a Similar Entity

In response to questions from stakeholders on when NFPs that are general partners should consolidate for-profit limited partnerships (or similar entities), the FASB issued ASU 2017-02 in January 2017. The ASU:

Amends the consolidation guidance in ASC 958-810 to retain the accounting under which an NFP that is a general partner is presumed to control a for-profit limited partnership or similar entity, regardless of the extent of the general partner’s ownership interest, unless the limited partners are able to exercise substantive kick-out or participating rights. The definitions of substantive kick-out and participating rights are consistent with those used in the definition of voting interest entity in ASC 810-10 (see Section 2.4, Section 2.6, and Appendix D for more information).
Adds new guidance to ASC 958-810 on when an NFP limited partner should consolidate a for-profit limited partnership. Under the new guidance, a limited partner that owns, either directly or indirectly, more than 50 percent of the limited partnership kick-out rights is deemed to have a controlling financial interest and must consolidate the limited partnership. However, if noncontrolling limited partners have substantive participating rights, a limited partner with a majority of kick-out rights would not have a controlling financial interest.

E.6.4.3 NFP That Owns 50 Percent or Less of the Voting Stock in a For-Profit Business Entity

An NFP that owns 50 percent or less of the voting stock in a for-profit business entity should apply ASC 323-10 unless it reports the investment at fair value (see Section E.6.4.5).

E.6.4.4 NFP With More Than a Minor Interest in a For-Profit Real Estate Partnership, Limited Liability Company, or Similar Entity

ASC 958-810-15-4(d) discusses the accounting for NFPs with more than a minor interest in a for-profit real estate partnership, limited liability company, or similar entity. To determine whether their interests are considered more than minor, many NFPs refer to ASC 323-30-S99-1, which reflects the SEC staff’s understanding that practice generally has viewed investments of more than 3 percent to 5 percent to be more than minor.

If an NFP has more than a minor interest in a for-profit real estate partnership, limited liability company, or similar entity, it should determine whether it holds a controlling financial interest or a noncontrolling interest in the for-profit real estate entity. ASC 970-810-25-1 through 25-3 provide the guidance below to help NFPs make this determination.

ASC 970-810

General Partnerships

25-1 A general partnership that is controlled, directly or indirectly, by an investor is, in substance, a subsidiary of the investor. Paragraph 810-10-15-8 states that the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one entity, directly or indirectly, of over 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. However, if partnership voting interests are not clearly indicated, a condition that would usually indicate control is ownership of a majority (over 50 percent) of the financial interests in profits or losses (see paragraphs 970-323-35-16 through 35-17). Paragraph 810-10-15-8 states that the power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The power to control may also exist with a lesser percentage of ownership by agreement with other partners.

25-2 On the other hand, the majority interest holder may not control the entity if one or more of the other partners have substantive participating rights that permit those other partners to effectively participate in certain significant financial and operating decisions that are made in the ordinary course of business. The determination of whether the rights of the other partners are substantive participating rights shall be evaluated in accordance with the guidance for substantive participating rights in paragraphs 810-10-25-2 through 25-14. If the other partners have substantive participating rights, the presumption of control by the majority interest holder is overcome. A controlling investor shall account for its investment under the principles of accounting applicable to investments in subsidiaries. Accordingly, interentity profits and losses on assets remaining within the group shall be eliminated. A noncontrolling investor in a general partnership shall account for its investment by the equity method and should be guided by the provisions of Topic 323.

Limited Partnerships

25-3 If a limited partnership does not meet the conditions in paragraph 810-10-15-14 and, therefore, is not a variable interest entity, limited partners shall evaluate whether they have a controlling financial interest according to paragraph 810-10-15-8A. The guidance in Subtopic 810-10 on consolidation shall be used to determine whether any limited partners control the limited partnership:

If no single partner controls the limited partnership, the general and limited partners shall apply the equity method of accounting to their interests, except for instances when a limited partner’s interest is so minor that the limited partner may have virtually no influence over partnership operations and financial policies (see paragraph 323-30-S99-1).
Subparagraph superseded by Accounting Standards Update No. 2015-02.
If a single limited partner controls the limited partnership, that limited partner shall consolidate the limited partnership and apply the principles of accounting applicable for investments in subsidiaries in Topic 810.

In accordance with the guidance above, if the for-profit real estate entity is a general partnership, an NFP should apply the voting interest entity model to determine whether it holds a controlling financial interest in the general partnership (see Appendix D). Similarly, if the for-profit real estate entity is a limited partnership, an NFP should apply the voting interest entity model to determine whether any of the limited partners control the limited partnership (see Appendix D).

If an NFP does not have a controlling financial interest in the for-profit real estate entity, the NFP should first apply ASC 323-30-35-3 to determine whether it should consider an interest in a limited liability company as an interest in a partnership instead of a corporation. ASC 323-30-35-3 specifies that “[a]n investment in a limited liability company that maintains a specific ownership account for each investor — similar to a partnership capital account structure — shall be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment in a limited liability company shall be accounted for in accordance with the guidance in Topic 321 or the equity method.”

If an NFP has a noncontrolling interest in a partnership or a limited liability company that is similar to a partnership under ASC 323-30-35-3, the NFP should use the equity method in accordance with ASC 970-323 to report such noncontrolling interest except when it elects to report the interest at fair value under ASC 825-10 (see Section E.6.4.5).

If an NFP has a noncontrolling interest in a limited liability company that is similar to a corporation, the NFP should use the equity method in accordance with ASC 323-10 to report the noncontrolling interest except when it elects to report such interest at fair value under ASC 825-10 (see Section E.6.4.5).

E.6.4.5 Reporting an NFP’s Investment at Fair Value

If consolidation is not required, an NFP with an investment in a for-profit entity could (1) be required to carry its investment at fair value (if it is an equity security with a readily determinable fair value or any debt security) or (2) elect the fair value option in accordance with ASC 825-10-25-1.

E.6.5 Presentation and Disclosures for NFPs

E.6.5.1 Presentation of Noncontrolling Interests

ASC 958-810

25-6 An interest by an NFP in another NFP may be less than a complete interest. For example, an NFP may appoint 80 percent of the board of the other NFP. For NFPs other than those within the scope of Topic 954, if the conditions for consolidation in paragraphs 958-810-25-2, 958-810-25-3, or 958-810-25-4 are met, the basis of that consolidation would not reflect a noncontrolling interest for the portion of the board that the reporting entity does not control, because there is no ownership interest other than the interest of the reporting entity.

45-1 Noncontrolling interests in the equity (net assets) of consolidated subsidiaries shall be reported as a separate component of the appropriate class of net assets in the consolidated statement of financial position of a not-for-profit entity (NFP). That amount shall be clearly identified and described (for example, as noncontrolling ownership interest in subsidiaries) to distinguish it from the components of net assets of the parent, which includes the parent’s controlling financial interest in its subsidiaries. See paragraphs 958-810-50-4 through 50-5 for additional guidance on the requirement related to disclosure of noncontrolling interests either on the face of the statement of activities or in the notes. The effects of donor-imposed restrictions, if any, on a partially owned subsidiary’s net assets shall be reported in accordance with Subtopics 958-205 and 958-220. Example 1 (see paragraphs 958-810-55-17 through 55-25) illustrates the reporting requirements.

If the conditions for consolidation discussed in Section E.6.2.2.1, Section E.6.2.2.2, or Section E.6.2.2.3 are met, an NFP would not reflect a noncontrolling interest in its consolidated financial statements for the portion of the board of directors the NFP does not control, because the NFP is the only entity that holds an ownership interest.

When noncontrolling interests of consolidated subsidiaries are required to be presented, they should be clearly identified and included as a separate component of net assets in the NFP’s consolidated financial statements. ASC 958-810-55-17 through 55-25 illustrate how an NFP may present and disclose noncontrolling interests in accordance with ASC 958-810.

The effects of donor-imposed restrictions on a partially owned subsidiary’s net assets should also be reported. ASC 958-810-20 defines a donor-imposed restriction as follows:

ASC 958-810 — Glossary

Donor-Imposed Restriction

A donor stipulation (donors include other types of contributors, including makers of certain grants) that specifies a use for a contributed asset that is more specific than broad limits resulting from the following:

The nature of the not-for-profit entity (NFP)
The environment in which it operates
The purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association.

Some donors impose restrictions that are temporary in nature, for example, stipulating that resources be used after a specified date, for particular programs or services, or to acquire buildings or equipment. Other donors impose restrictions that are perpetual in nature, for example, stipulating that resources be maintained in perpetuity. Laws may extend those limits to investment returns from those resources and to other enhancements (diminishments) of those resources. Thus, those laws extend donor-imposed restrictions.

Paragraphs 3.113 and 3.114 of Not-for-Profit Entities emphasize that the determination of whether net assets are restricted as a result of donor-imposed stipulations (or other restrictions) should be made from the perspective of the NFP reporting entity as a whole and should take into account the existence of separate consolidated entities. Because the consolidated entity may serve a broader purpose than the separate subsidiary, “[a]ll or a portion of a subsidiary’s net assets without donor restrictions might need to be reported as net assets with donor restrictions in the consolidated financial statements.” Conversely, it may also be true, albeit less likely, that “all or a portion of a subsidiary’s net assets with donor restrictions might need to be reported as net assets without donor restrictions in the consolidated financial statements.”

Paragraphs 3.22, 3.113, and 3.114 of Not-for-Profit Entities contain the following examples, which demonstrate the concepts discussed above:

3.22 [A] voluntary health and welfare entity has a broad mission of helping low income families and is the parent of an NFP that has a mission of running a day care and after-school care center for children in the county. The subsidiary NFP received a gift of a small office building subject to the donor’s restriction that it be used for providing day care or after-school care or for the administrative support of those programs. In the separate financial statements of the subsidiary, those assets are not separately reported as restricted assets because the use of the assets is no narrower than the nature of the NFP and the purposes specified in its articles of incorporation and bylaws. However, when the subsidiary NFP is consolidated with its voluntary health and welfare entity parent, the office building would be reported separately with related disclosures because the donor-imposed restriction to use the building for day care, after-school care, or the administrative support of those two programs is narrower than the broad mission of helping low income families of the reporting entity. . . .

3.113 [A] membership association has a subsidiary foundation that has as its sole mission to provide scholarships. Donors make contributions to the subsidiary with the intent that the subsidiary use the contributions to support its mission without restriction, including granting scholarships and incurring fund-raising and general and administrative expenses. The gifts to the subsidiary are therefore classified as increases in net assets without donor restrictions in the separately issued financial statements of the subsidiary. However, when the subsidiary’s financial statements are consolidated with those of the membership association, the classification of the net assets of the subsidiary would be changed to reflect that they are net assets with donor restrictions from the perspective of the consolidated financial statements. Likewise, investment income on donor-restricted endowment funds of the subsidiary would be reported as net assets with donor restrictions in the consolidated financial statements if they were required to be used for scholarships, even if an appropriation had released the time restriction.

3.114 [A]n NFP adoption agency has a subsidiary whose mission is to raise funds for various children’s causes, including adoption, foster care, and parental training. If donors restrict their contributions for adoption services, the subsidiary classifies them as increases in net assets with donor restrictions. However, when the subsidiary’s financial statements are consolidated with those of the adoption entity, the classification of the net assets of the subsidiary would be changed to reflect that they are without donor restrictions from the perspective of the reporting entity, which remains primarily an adoption agency.

E.6.5.2 Disclosures for Noncontrolling Interests

ASC 958-810

50-1 If consolidated financial statements are presented, the reporting entity (parent) shall disclose any restrictions made by entities outside of the reporting entity on distributions from the controlled not-for-profit entity (NFP) (subsidiary) to the parent and any resulting unavailability of the net assets of the subsidiary for use by the parent.

50-4 An NFP (parent) that has one or more consolidated subsidiaries with a noncontrolling interest shall provide a schedule of changes in consolidated net assets attributable to the parent and the noncontrolling interest either in notes to the consolidated financial statements or on the face of financial statements, if practicable. That schedule shall reconcile beginning and ending balances of the parent’s controlling interest and the noncontrolling interests for each class of net assets for which a noncontrolling interest exists during the reporting period.

50-5 The schedule required by the preceding paragraph shall, at a minimum, include:

A performance indicator, if the entity is a not-for-profit, business-oriented health care entity (see Section 954-10-15)
Amounts of discontinued operations
Subparagraph superseded by Accounting Standards Update No. 2015-01.
Changes in ownership interests in a subsidiary, including investments by and distributions to noncontrolling interests acting in their capacity as owners, which shall be reported separate from any revenues, expenses, gains, or losses and outside any measure of operations, if reported
An aggregate amount of all other changes in net assets without donor restrictions and net assets with donor restrictions for the period.

50-6 Paragraph 958-810-55-25 illustrates the required disclosures using a reconciling schedule in notes to the consolidated financial statements.

An NFP that presents consolidated financial statements and has one or more consolidated subsidiaries with a noncontrolling interest must provide the disclosures discussed above. ASC 958-810-55-17 through 55-25 illustrate how an NFP may present and disclose noncontrolling interests in accordance with ASC 958-810.

E.6.5.3 Disclosures Required When Consolidated Financial Statements Are Not Presented

ASC 958-810

50-2 If, as described in paragraph 958-810-25-4, an NFP (the reporting entity) controls a related but separate NFP through a form other than majority ownership interest, sole corporate membership, or majority voting interest in the board of the other entity and has an economic interest in that other NFP, the reporting entity shall disclose all of the following information if it does not present consolidated financial statements:

Identification of the other NFP and the nature of its relationship with the reporting entity that results in control
Summarized financial data of the other NFP, which shall include the following information:
1. Total assets, liabilities, net assets, revenue, and expenses
2. Resources that are held for the benefit of the reporting entity or that are under its control.
The disclosures required by paragraphs 850-10-50-1 through 50-6.

50-3 The existence of control or an economic interest, but not both, as described in paragraph 958-810-25-5, requires the disclosures in paragraphs 850-10-50-1 through 50-6. (The existence of an economic interest does not necessarily cause the entities to be related parties. However, the disclosures in those paragraphs are required if an economic interest exists.)

If an NFP holds both (1) an economic interest in another NFP and (2) control through means other than a majority ownership interest, sole corporate membership, or a majority voting interest in the board (see Section E.6.2.2.3), it must disclose the quantitative and qualitative information required by ASC 958-810-50-2 if it does not present consolidated financial statements.

If an NFP holds either an economic interest in another NFP or control of the other NFP, but not both (see Section E.6.2.2.4), it must disclose the information required by ASC 850-10-50-1 through 50-6.

E.6.5.4 Disclosures Required When an NFP Consolidates a For-Profit Entity

ASC 958-810 does not provide specific presentation and disclosure requirements for an NFP that has a controlling financial interest in a for-profit entity. Paragraph 3.118 of Not-for-Profit Entities states that in determining the relevance of the for-profit subsidiary and the presentation and disclosures that would be most meaningful to financial statement users, an NFP should consider the following factors:

The size of the for-profit subsidiary in relation to the NFP parent. The larger the for-profit subsidiary is in relation to the NFP, the more likely it is that discrete information about the for-profit subsidiary would be meaningful to financial statement users.
The activities of the for-profit subsidiary in relation to the mission of the NFP parent. The more marginal the activities of the for-profit subsidiary are to the mission of the NFP, the more likely it is that discrete information about the for-profit subsidiary would be meaningful to financial statement users.
The need for creditors to have separate information about the for-profit subsidiary, including information about guarantees of the for-profit subsidiary’s debt or limitations on transferring cash to or from the subsidiary. If the assets of a for-profit subsidiary are encumbered (for example, by mortgages, contracts, or other matters), it may be meaningful to include discrete information about the for-profit subsidiary’s total assets, equity, and changes in equity, similar to the disclosures required to be reported by business entities pursuant to FASB ASC 280.

In addition, paragraphs 3.121 through 3.126 of Not-for-Profit Entities provide the following three examples (not all-inclusive) of ways an NFP may present information related to for-profit subsidiaries:

Example A

3.121 NFP Trade Association creates a wholly owned for-profit subsidiary (For-Profit Training Facility) to provide continuing professional education to its members. For-Profit Training Facility subsidiary incurs debt in order to build a classroom building. The debt is secured solely by a mortgage on For-Profit Training Facility’s assets. NFP Trade Association’s mission includes providing training to its members. Although members could obtain training from other service providers, the training is integral to NFP Trade Association’s overall mission.

3.122 It may be most meaningful to report For-Profit Training Facility’s assets, liabilities, revenues, expenses, and cash flows as part of the overall activities of NFP Trade Association, without discrete information presented on the face of the financial statements about For-Profit Training Facility. However, the notes to the financial statements would include any material disclosures that relate only to the For-Profit Training Facility, such as to disclose any collateral-based debt for which the For-Profit Training Facility is obligated or any assets restricted solely for the use of the Facility.

Example B

3.123 NFP College creates a wholly owned for-profit subsidiary, For-Profit Day Care Center, that operates a day care center for the benefit of its students and faculty. The College does not use the day care center as a teaching resource for its students. For-Profit Day Care Center has no outstanding debt.

3.124 Because the day care center provides services to students, but is peripheral and incidental to the mission of the college, it may be most meaningful to report the assets, liabilities, activities, and cash flows of For-Profit Day Care Center in a manner similar to an auxiliary operation in the college’s financial statements. (Auxiliary operations typically are reported on the statement of activities with one line for total revenues and one line for total expenses; the statement of financial position and statement of cash flows do not separate information associated with auxiliary operations.) Alternatively, it may be meaningful to present the operations of the day care center separately on the statement of activities.

Example C

3.125 NFP Community Organization received a contribution of 100% of the voting common stock of a For-Profit Plastics Company. The terms of the contribution agreement state that For-Profit Plastics Company’s net income may be used for NFP Community Organization’s general operations. NFP Community Organization is not involved in the day-to-day management of For-Profit Plastics Company.

3.126 If For-Profit Plastics Company is material to NFP Community Organization’s financial statements, it may be meaningful to report the assets, liabilities, activities, and cash flows of For-Profit Plastics Company separately from those of NFP Community Organization. Acceptable methods of doing so include, but are not limited to, presenting (a) consolidating financial statements, or (b) consolidated financial statements with note disclosure of the assets, liabilities, net assets, activities, and cash flows of For-Profit Plastics Company.

E.6.6 Health Care Entities

ASC 954-810

05-2 An integrated health care system typically consists of multiple related entities, operating both for-profit entities and not-for-profit entities (NFPs). A not-for-profit parent entity may be the sole corporate member or, through other means, it may control other entities such as a not-for-profit hospital, a not-for-profit medical foundation that contracts with a for-profit physician group, or other not-for-profit providers such as a long-term care center, a substance abuse center, a surgery center, or an outpatient clinic. The system also may own stock in various for-profit ventures such as health maintenance organizations or insurance entities that may or may not provide patient care. Fundraising typically is accomplished through a separate foundation. Foundations, auxiliaries, guilds, and similar entities frequently assist and, in many instances, are related to the health care entity.

05-3 The rights and powers of the controlling entity may vary depending on the legal structure of the controlled entity and the nature of control. The majority owner of a for-profit entity’s voting stock or the sole corporate member of an NFP may not only have the ability to determine the direction of the controlled entity but also have the proportionate right to (or the responsibility for) operating results and a residual interest in the net assets upon dissolution. However, in other situations, the rights of the controlling party may be more limited. For example, in the case of a sole general partner in a limited partnership, the limited partners — and not the general partner — may be entitled to the net assets upon dissolution.

45-1 Whether the financial statements of a reporting health care entity and those of one or more other for-profit entities or not-for-profit entities (NFPs) shall be consolidated, whether those other entities shall be reported using the equity method, and the extent of disclosure that is be required (if any) if consolidated financial statements are not presented, shall be based on the nature of the relationship between the entities. See paragraphs 954-810-15-2 through 15-3.

Applying the consolidation rules to health care entities may be complex because, as described above, an integrated health care system generally consists of several related entities that may be NFPs or for-profit entities. See Sections E.6.6.1 and E.6.6.2 for a discussion of how to determine the correct accounting model to apply.

E.6.6.1 Accounting Model for a Reporting Entity That Is an Investor-Owned Health Care Entity

ASC 954-810

15-2 If the reporting entity is an investor-owned health care entity, this Subtopic provides consolidation guidance for reporting relationships with other entities in addition to the guidance in the following locations:

Pursuant to paragraph 810-10-15-3(a), if an investor-owned health care entity has an interest in an entity, it must determine whether that entity is within the scope of the Variable Interest Entities Subsections of Subtopic 810-10 pursuant to paragraph 810-10-15-14. If that entity is within the scope of the Variable Interest Entities Subsections, the investor-owned health care entity shall first apply the guidance in those Subsections. Paragraph 810-10-15-17 provides specific exceptions to applying the Variable Interest Entities Subsections.
Pursuant to paragraph 810-10-15-3(b), if the investor-owned health care entity has an interest in an entity that is not within the scope of the Variable Interest Entities Subsections of Subtopic 810-10 and is not within the scope of the Subsections mentioned in paragraph 810-10-15-3(c), it shall use only the guidance in the General Subsections of Subtopic 810-10 to determine whether that interest constitutes a controlling financial interest.
Pursuant to paragraph 810-10-15-3(c), if the investor-owned health care entity has a contractual management relationship with another entity (for example, a physician practice) and that other entity is not within the scope of the Variable Interest Entities Subsections of Subtopic 810-10, it shall use the guidance in the Consolidation of Entities Controlled by Contract Subsections of Subtopic 810-10 to determine whether the arrangement constitutes a controlling financial interest.
Subparagraph superseded by Accounting Standards Update No. 2015-02.
Pursuant to Section 810-30-15, if the investor-owned health care entity is a sponsor in a research and development arrangement, it shall apply the guidance in Subtopic 810-30.

The table below summarizes the guidance above on determining which accounting model to apply when a reporting entity is an investor-owned health care entity (not an NFP) that has a reporting relationship with another entity.

Table E-2 Investor-Owned Health Care Entities


Reporting Relationship	Accounting Model
Interest in an entity that does not qualify for any of the scope exceptions in ASC 810-10-15-17 to application of the VIE model (see Section 3.4)	Determine whether the entity is a VIE (see Chapter 5) If the entity is a VIE, apply the VIE model to determine the primary beneficiary (see Chapter 7)
Interest in an entity that qualifies for one of the scope exceptions in ASC 810-10-15-17 to application of the VIE model (see Section 3.4)	Apply the voting interest entity model (see Appendix D)
Contractual management relationship with another entity (e.g., a physician practice) not within the scope of the VIE guidance	Apply the contract-controlled entity model to determine whether the arrangement represents a controlling financial interest (see Section D.3.4)
Sponsor in a research and development arrangement	Apply ASC 810-30 (see Section D.3.3)

E.6.6.2 Accounting Model for a Reporting Entity That Is an NFP Business-Oriented Health Care Entity

ASC 954-810

15-3 If the reporting entity is a not-for-profit business-oriented health care entity, this Subtopic provides consolidation guidance for reporting relationships with other entities in addition to the guidance in the following locations:

a. Pursuant to paragraph 810-10-15-17, not-for-profit business-oriented health care entities are not subject to the Variable Interest Entities Subsections of Subtopic 810-10 unless the not-for-profit entity is used by a business entity in a manner similar to a VIE in an effort to circumvent the provisions of those Subsections.

b. If the not-for-profit, business-oriented health care entity has an investment in a for-profit entity, it shall use the guidance in the General Subsections of Subtopic 810-10 to determine whether that interest constitutes a controlling financial interest.

c. If the not-for-profit, business-oriented health care entity has a contractual management relationship with another entity (for example, a physician practice), it shall use the guidance in the Consolidation of Entities Controlled by Contract Subsections of Subtopic 810-10 to determine whether the arrangement constitutes a controlling financial interest.

d. Subparagraph superseded by Accounting Standards Update No. 2015-02.

dd. If the not-for-profit, business-oriented health care entity is the general partner or limited partner of a for-profit limited partnership or similar legal entity (such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership), it shall apply the guidance in paragraphs 958-810-25-11 through 25-29 and 958-810-55-16A through 55-16I.

e. If the not-for-profit, business-oriented health care entity is a sponsor in a research and development arrangement, it shall apply the guidance in Subtopic 810-30.

f. If the not-for-profit, business-oriented health care entity has a relationship with another not-for-profit entity that involves control, an economic interest, or both, it shall apply the guidance in Subtopic 958-810.

g. If the not-for-profit, business-oriented health care entity is engaged in leasing transactions with a special-purpose-entity (SPE) lessor, it shall consider whether it should consolidate the lessor in accordance with the guidance in paragraphs 958-810-25-8 through 25-10.

h. Except where it elects to report such interests at fair value in accordance with the Fair Value Option Subsections of Subtopic 825-10, a not-for-profit, business-oriented health care entity that owns 50 percent or less of the common voting stock of an investee and can exercise significant influence over operating and financial policies shall apply the guidance in Subtopic 323-10.

i. Except where it elects to report such interests at fair value in accordance with the Fair Value Option Subsections of Subtopic 825-10, a not-for-profit, business-oriented health care entity shall report noncontrolling interests in for-profit real estate partnerships, limited liability entities, and similar entities over which the reporting entity has more than a minor interest under the equity method in accordance with the guidance in Subtopic 970-323. A not-for-profit, business-oriented health care entity shall apply the guidance in paragraph 970-323-25-2 to determine whether its interest in a for-profit partnership, limited liability entity, or similar entity is a controlling interest or a noncontrolling interest. A not-for-profit, business-oriented health care entity shall apply the guidance in paragraph 323-30-35-3 to determine whether a limited liability entity should be viewed as similar to a partnership, as opposed to a corporation, for purposes of determining whether a noncontrolling interest in a limited liability entity or a similar entity should be accounted for in accordance with Subtopic 970-323 or Subtopic 323-10.

NFPs are not subject to the VIE guidance (see Section 3.4.1). The following table summarizes how a business-oriented health care NFP reporting entity that has a reporting relationship with another entity can determine which accounting model to apply:

Table E-3 NFP Business-Oriented Health Care Entities


Reporting Relationship	Accounting Model
Investment in a for-profit entity	Apply the voting interest entity model (see Appendix D)
Contractual management relationship with another entity (e.g., a physician practice)	Apply the contract-controlled entity model to determine whether the arrangement represents a controlling financial interest (see Section D.3.4)
Sponsor in a research and development arrangement	Apply ASC 810-30 (see Section D.3.3)
Relationship with another NFP that involves control, an economic interest, or both	Apply ASC 958-810 (see Section E.6.2)
Engaged in leasing transactions with an SPE lessor	Apply ASC 958-810-25-8 through 25-10 (see Section E.6.3)
Ownership of 50 percent or less of the common voting stock of an investee and ability to exercise significant influence over operating and financial policies	Apply ASC 323-10 except when electing to report such interest at fair value in accordance with ASC 825-10 (see Section E.6.4.3)
Noncontrolling interests in for-profit real estate partnerships, limited liability entities, and similar entities over which the NFP has more than a minor interest	Apply ASC 970-323-25-2 to determine whether the NFP’s interest is a controlling financial interest or a noncontrolling interest If the noncontrolling interest is in a partnership or limited liability company that is similar to a partnership on the basis of the guidance in ASC 323-30-35-3, apply ASC 970-323 except when electing to report such interest at fair value in accordance with ASC 825-10 If the noncontrolling interest is in a limited liability company that is similar to a corporation, apply ASC 323-10 except when electing to report such interest at fair value in accordance with ASC 825-10 See Section E.6.4.4

E.6.6.3 Presentation and Disclosures for a Reporting Health Care Entity

ASC 954-810

45-2 Paragraph 958-810-25-2A explains that, in some situations, certain actions require approval by a supermajority vote of the board. That paragraph states that such voting requirements might overcome the presumption of control by the owner or holder of a majority voting interest. (For related implementation guidance, see paragraph 958-810-55-4A.) Pursuant to paragraph 810-10-15-17(a) a not-for-profit, business-oriented health care entity is not subject to the Variable Interest Entities Subsections of Subtopic 810-10, except that it may be a related party for purposes of applying paragraphs 810-10-25-42 through 25-44. Also, if a not-for-profit, business-oriented health care entity is used by business entities in a manner similar to a variable interest entity (VIE) in an effort to circumvent the provisions of the Variable Interest Entities Subsections of Subtopic 810-10, that not-for-profit entity shall be subject to the Variable Interest Entities Subsections of that Subtopic.

45-3A A parent corporation typically owns stock in a for-profit entity, whereas a sole corporate member holds membership rights in a not-for-profit entity. Sole corporate membership in a not-for-profit entity, like ownership of a majority voting interest in a for-profit entity, shall be considered a controlling financial interest, unless control does not rest with the sole corporate member (for instance, if the other [membership] entity is in bankruptcy or if other legal or contractual limitations are so severe that control does not rest with the sole corporate member).

45-3B When consolidated financial statements are required or permitted by Section 958-810-25, a noncontrolling interest shall be provided if such interest is represented by an economic interest whereby the noncontrolling interest would share in the operating results or residual interest upon dissolution. (See presentation and disclosure requirements in Sections 958-810-45 and 958-810-50, respectively.)

45-3C Not-for-profit, business-oriented health care entities shall not report an investment in an entity at fair value, as described in paragraph 958-325-35-6, if that entity is required to be consolidated.

Medical Malpractice Claims

45-4 In general, a trust fund, whether legally revocable or irrevocable, shall be included in the financial statements of the health care entity. A portion of the fund equal to the amount of assets expected to be liquidated to pay malpractice claims classified as current liabilities shall be classified as a current asset; the balance of the fund, if any, shall be classified as a noncurrent asset. Revenues and administrative expenses of the trust fund are included in the statement of operations. In some circumstances, the foregoing may not be possible (for example, if a common trust fund exists for a group of health care entities; if the health care entity is part of a common municipality risk-financing internal service fund; or if the legal, regulatory, or indenture restrictions prevent the inclusion of a trust fund in a health care entity’s financial statements).

50-1 The existence of the trust fund and whether it is irrevocable shall be disclosed in the financial statements.

Noncontrolling Interests

50-2 A not-for-profit, business-oriented health care entity shall include the performance indicator in the schedule required by paragraphs 958-810-50-4 through 50-5. Paragraph 958-810-55-25 illustrates the required disclosure using a reconciling schedule in notes to the consolidated financial statements.

Much of the above guidance on presentation and disclosures for health care entities is consistent with ASC 958-810 (see Section E.6.5).

Footnotes

See Section 3.4.1.1 for a discussion of the definition of an NFP.