2.6 Participating Rights
ASC 810-10 — Glossary
Participating Rights (VIE Definition)
The ability to block or participate in the actions through which an entity exercises the power to direct the
activities of a VIE that most significantly impact the VIE’s economic performance. Participating rights do not
require the holders of such rights to have the ability to initiate actions.
Participating Rights (Voting Interest Entity Definition)
Participating rights allow the limited partners or noncontrolling shareholders to block or participate in certain
significant financial and operating decisions of the limited partnership or corporation that are made in the
ordinary course of business. Participating rights do not require the holders of such rights to have the ability to
initiate actions.
Participating rights give a party or a group of parties the ability to either participate in or block the actions that are most significant to a legal entity’s economic performance. Decision makers do not have a controlling financial interest if another party has the substantive right to participate in their decisions. Holders of participating rights are not required to have the ability to initiate actions for their rights to be substantive. Like kick-out rights, participating rights must be substantive to be considered in the VIE analysis.
As described in Sections 5.3.1.1.3.5 and 5.3.1.2.7, in determining whether a legal entity is a VIE, a reporting entity analyzes the impact of the existence of substantive participating rights differently depending on whether the legal entity is a limited partnership (or similar entity). That is, the evaluation of participating rights under the voting interest entity model focuses on whether the holder of such rights can participate in certain significant financial and operating decisions of the entity, while the evaluation of such rights under the VIE model focuses on whether the holder can participate in the most significant activities of the entity. The evaluation of whether a limited partnership is a VIE is based on the voting interest entity definition of a participating right. Accordingly, it is important to determine which activities the limited partners can participate in.