1.3 The Voting Interest Entity Model

For limited partnerships (and similar entities) that are not VIEs, the identification of a controlling financial interest focuses on (1) whether any limited partner holds substantive kick-out rights that give it the unilateral right to remove the general partner or dissolve the partnership without cause and (2) whether the noncontrolling limited partners do not have substantive participating rights. Under ASC 810-10, a general partner will not consolidate a limited partnership under the voting interest entity model. Rather, only a limited partner that has the unilateral right to remove the general partner or dissolve the partnership would do so.

For legal entities that are not limited partnerships (and not VIEs), the identification of a controlling financial interest focuses on whether the reporting entity has voting interests that give it control over the financial and operating policies of the legal entity. A controlling financial interest typically exists when a reporting entity owns more than 50 percent of the outstanding voting shares of another entity and the noncontrolling shareholders do not have substantive participating rights. However, there are exceptions to this general principle, including when control exists without a majority voting interest and control does not exist with a majority voting interest.

In addition to the VIE and voting interest entity models, ASC 810-10 contains guidance on evaluating entities that are controlled by contract and are not deemed to be VIEs. With the introduction of the VIE model, the relevance of the contract-controlled entity model has diminished. This is because a legal entity that is controlled by contract would most likely be a VIE since one of the conditions to qualify as a voting interest entity is that the equity investors at risk must control the most significant activities of the legal entity.