13 ASC 272 LIMITED LIABILITY ENTITIES
PERSPECTIVE AND ISSUES
Subtopic
ASC 272, Limited Liability Entities, contains one subtopic:
- ASC 272-10, Overall, that contains guidance for limited liability entities organized in the United States that prepare financial statements under US GAAP.
DEFINITIONS OF TERMS
ASC 272 does not contain a glossary. However, it does define a limited liability company as having the following characteristics:
- It is an unincorporated association of two or more persons
- Its members have limited personal liability for the obligations or debts of the entity
- It is classified as a partnership for federal income tax purposes.
Further, ASC 272 it states that for a limited liability company to be classified as a partnership for federal tax purposes, it must lack at least two of the following characteristics:
- Limited liability
- Free transferability of interests
- Centralized management
- Continuity of life.
(ASC 272-10-5-6
CONCEPTS, RULES, AND EXAMPLES
Reporting by Limited Liability Companies and Partnerships
Accounting theory and practice have overwhelmingly developed within the context of businesses organized as traditional corporations. Accordingly, there is little official guidance to entities organized as partnerships or other forms of business, which is generally not a serious concern given that most transactions entered into by such entities do not differ generically from those conducted by corporations. The primary differences relate to equity transactions and to the display of the equity section of the statement of financial position.
ASC 272 addresses certain issues pertaining to accounting and reporting by limited liability companies and partnerships. This pronouncement establishes that, when an entity restructures itself as a limited liability company or a limited liability partnership, the basis of all assets and liabilities from its predecessor entity are carried forward. Also, as suggested by ASC 740, Income Taxes, if the new entity is not a taxable one, any deferred tax assets or liabilities existing previously are to be written off at the time the change in tax status becomes effective; with the elimination of any debit or credit balance being effected by a charge or credit to current period tax expense.
With regard to financial statement display issues, the C establishes that the headings of each statement identify the entity as being a limited liability company or a limited liability partnership, similar to the common practice of identifying partnership entities. The apparent logic is that this alerts the user to certain anomalies, such as (most commonly) an absence of income tax expense and a related liability, and the use of somewhat distinctive captions in the equity section of the statement of financial position. In the case of limited liability companies and partnerships, the term “members' equity” has been prescribed, and the changes in members' equity is to be communicated either in a separate financial statement, in a combined statement of operations and changes in members' equity, or in the notes to the financial statements.
Members' equity.
A limited liability company (LLC) presents its equity using the caption “members' equity.” In accordance with ASC 272-10-45-3, the equity attributable to each class of member is to be separately stated on the face of the statement of financial position or disclosed in the notes to the financial statements.
A deficit, if one exists, should be reported in the members' equity account(s), even if there is limited liability for the members. This is consistent with the “going concern” assumption that underlies GAAP. It is not required to disaggregate members' equity into separate components (undistributed earnings, unallocated capital, etc.) on the face of the statement of financial position or in the notes, although this is of course permissible. (ASC 272-10-45-4).
Amounts due from members for capital contributions, if any remain unpaid at the date of the statement of financial position, should be shown as deductions from members' equity. This is entirely consistent with practice for unpaid stock subscriptions receivable. (ASC 272-10-45-5).
GAAP presumes that comparative financial statements are more useful than those for a single period, and accordingly that comparative statements should normally be presented. However, for such financial statements to be meaningful, the information for the earlier period must be truly comparable to that of the more recent period. ASC 272-10-45-6). If the formation of the limited liability company or the limited liability partnership results in a new reporting entity being created, the guidance of ASC 250 dealing with changes in accounting entities should be consulted. (ASC 272-10-45-7).
ASC 272 sets forth certain disclosures to be made in the financial statements of limited liability companies. There should be a description of any limitations on members' equity and of the different classes of members' interests and the respective rights, preferences, and privileges of each class and amounts thereof. If the entity will cease to exist at a stipulated date, this must be disclosed. As suggested above, any change in tax status, and the impact of eliminating any tax liability or benefit from the entity's statement of financial position, must be adequately explained in the notes to the financial statements in the period the change in status occurs.