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Under the ASC 810 guidance, equity investors at risk do not have substantive voting rights if:

  1. The voting rights of some investors are not proportional to their economic interests (based on obligations to absorb expected losses and rights to receive expected residual returns); and
  2. Substantially all if the legal entity’s activities are conducted for or involve the investors with disproportionately few voting rights.

Disproportional Voting Rights

The guidance does not require that voting rights be precisely proportional to economic interests; rather, voting rights need to be a reasonably close approximation. For example, if an investor is obligated to absorb 75% of expected losses and and receive 75% of expected residual returns, and holds a 70% voting interest, the voting interest is considered proportional. When the economic interests and voting rights straddle different sides of 50%, or when the proportions are significantly mismatched (for example, 95% versus 55%), then the voting rights are considered disproportional.

Substantially All

The wording of this criterion is consistent with that used in the business scope exception seen earlier. There is no bright line percentage that determines what ‘substantially all’ means nor is there guidance on which minimum set of ‘activities’ must be evaluated. This a primarily a qualitative analysis that looks at the design of the entity and evaluates the voting rights of the investors, including de facto agents and related parties, relative to that groups level of involvement with the silo. Involvement should include the level of sales by the silo to the investor group (or vice versa), sales of assets by the investor group to the silo, financing provided by the silo to customers of the silo investor group, outsourcing or blending of operations, leasing of assets, and so forth.

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