Partnerships, trusts and segment reporting

The course has concentrated on corporations and their investments, but many businesses are organized as partnerships, especially in professional services, and trusts hold assets for beneficiaries in estates, pension plans and investment vehicles. This final lesson covers the accounting that is distinctive to partnerships (formation, sharing profit, changes in partners and liquidation), introduces trusts, and then returns to the Larkspur group to see how segment reporting tells users what a consolidated group is made of. It ends by drawing the course together.

Partnerships

A partnership is the relation between persons carrying on a business in common with a view to profit, governed in Canada by provincial partnership statutes and the partnership agreement. In a general partnership each partner is personally liable for the partnership's debts; in a limited partnership, limited partners' liability is restricted to their investment, provided they do not take part in management; and limited liability partnerships, available to professionals such as accountants and lawyers in most provinces, shield partners from liability for other partners' negligence. A partnership is not a taxable entity: its income is allocated to the partners and taxed in their hands, and many partnerships file an annual information return (form T5013). Partnerships generally report under ASPE, which has no special partnership standard, so the distinctive accounting is in the owners' equity section.

Each partner has a capital account, credited with contributions and their share of profit and debited with withdrawals (drawings) and their share of losses. Non-cash contributions are recorded at their fair value at the date of contribution, because the partners have bargained over that value; a partner who contributes land worth $300,000 that cost $120,000 is credited with $300,000. Liabilities assumed by the partnership reduce the contributing partner's credit.

Sharing profit

The partnership agreement sets how profit and losses are shared. Without an agreement, partnership law generally divides them equally. Agreements often recognize differences in what partners contribute: salary allowances for partners who work more, interest on capital for those who invest more, and a residual ratio for whatever remains. Salary allowances and interest are not expenses of the partnership; they are steps in dividing profit, and they apply even if profit is too small to cover them, in which case the shortfall is shared in the residual ratio.

# Dividing partnership profit: salaries, interest on capital, then a residual ratio (illustrative)
partners = {"Ada": {"capital": 200_000, "salary": 60_000, "ratio": 0.40},
            "Ben": {"capital": 150_000, "salary": 40_000, "ratio": 0.30},
            "Cleo": {"capital": 250_000, "salary": 0, "ratio": 0.30}}
rate = 0.05                                   # interest on opening capital
def divide(profit):
    out = {}
    fixed = sum(p["salary"] + rate * p["capital"] for p in partners.values())
    residual = profit - fixed                 # may be negative: shared in the ratio anyway
    for name, p in partners.items():
        out[name] = round(p["salary"] + rate * p["capital"] + residual * p["ratio"])
    return residual, out
for profit in (180_000, 100_000):
    residual, out = divide(profit)
    print(f"Profit {profit:>9,}: residual {residual:>9,.0f}  " + "  ".join(f"{n} {v:,}" for n, v in out.items()))

Profit   180,000: residual    50,000  Ada 90,000  Ben 62,500  Cleo 27,500
Profit   100,000: residual   -30,000  Ada 58,000  Ben 38,500  Cleo 3,500

Admitting and withdrawing partners

A new partner can join in two ways. Buying an interest from an existing partner is a private transaction between them: the partnership simply transfers capital from the seller's account to the buyer's, whatever price is paid. Investing in the partnership increases its assets and total capital. When the new partner pays more than the book value of the interest received, the excess is usually treated as a bonus to the existing partners, credited to their capital in the residual ratio. Some partnerships instead record goodwill implied by the price, but because internally generated goodwill is not recognized under general-purpose accounting standards, the bonus method is more common.

When a partner retires, the partnership pays out the capital balance, usually after revaluing assets to fair value so the retiring partner shares in unrecognized gains. Paying more than the capital balance is a bonus to the retiring partner, charged to the remaining partners in their ratio; paying less is a bonus to the remaining partners.

Liquidation

When a partnership ends, it sells its assets (realization), pays creditors, shares gains and losses on realization in the profit ratio, and distributes remaining cash according to the partners' capital balances, not their profit ratio. If a partner's capital becomes negative, that partner must contribute cash to cover the deficiency; if they cannot, the deficiency is absorbed by the other partners in their relative profit ratio. Because the order and amounts of realization are uncertain, partnerships distributing cash in instalments prepare a safe payments schedule that assumes all unsold assets are worthless and no deficient partner will pay, so no partner is paid cash that might later have to be returned.

# Liquidation: a partner with a capital deficiency who cannot pay (illustrative)
capital = {"Ada": 50_000, "Ben": 30_000, "Cleo": -20_000}   # after realizing assets and paying creditors
ratio = {"Ada": 0.40, "Ben": 0.30, "Cleo": 0.30}
deficit = {n: -c for n, c in capital.items() if c < 0}
solvent = [n for n in capital if capital[n] > 0]
for d, amt in deficit.items():
    share = sum(ratio[n] for n in solvent)
    for n in solvent:
        capital[n] -= amt * ratio[n] / share  # absorbed in the solvent partners' relative ratio
    capital[d] = 0
cash = sum(v for v in capital.values())
for n, v in capital.items():
    print(f"{n:<5} final cash distribution {v:>10,.0f}")
print(f"Cash available {cash:,.0f}")

Ada   final cash distribution     38,571
Ben   final cash distribution     21,429
Cleo  final cash distribution          0
Cash available 60,000

In the program, Cleo's $20,000 deficiency is shared by Ada and Ben in their relative ratio of 40:30, so Ada absorbs $11,429 and Ben $8,571, leaving Ada $38,571 and Ben $21,429 of the $60,000 cash. If Cleo later pays, Ada and Ben recover their shares. Creditors are paid before partners, and personal creditors of a partner have prior claim on that partner's personal assets in many jurisdictions.

Trusts

A trust is a relationship in which a trustee holds property for the benefit of beneficiaries under terms set by the settlor. Accountants meet trusts in estates, family trusts, pension plans and investment funds. A trustee accounts to beneficiaries, often distinguishing capital (corpus) from income because the beneficiaries entitled to each may differ; the trust deed and provincial trust law govern that division. Trusts file T3 returns and are generally taxed on income not distributed to beneficiaries. Publicly traded income trusts, popular in Canada in the early 2000s, were largely converted to corporations after the specified investment flow-through (SIFT) rules took full effect in 2011. Under IFRS, units of a trust that must distribute its income or that holders can put back to the trust are financial liabilities unless the narrow puttable instrument exception in IAS 32 applies, which affects how many real estate investment trusts present their equity.

Whether a trust is consolidated by someone else is a control question from lesson 9: a sponsor that directs a trust's relevant activities and is exposed to its variable returns may have to consolidate it, as Larkspur did with its receivables trust.

Segment reporting

A consolidated statement adds together businesses with very different prospects. IFRS 8 Operating Segments requires listed entities to disclose information about their operating segments using the management approach: segments are the components whose operating results are regularly reviewed by the chief operating decision maker (CODM) to allocate resources and assess performance, and the amounts disclosed are those the CODM uses, reconciled to the consolidated totals. Segments may be aggregated if they have similar economic characteristics. A segment is reportable if its revenue (external and intersegment), its absolute profit or loss, or its assets are 10 per cent or more of the combined amounts; if reportable segments' external revenue is less than 75 per cent of the entity's revenue, more segments must be reported. IFRS 18, effective for annual periods beginning on or after 1 January 2027, adds requirements for management-defined performance measures but leaves the segment model intact. ASPE has no segment reporting requirement.

# Which operating segments are reportable? The 10% and 75% tests (illustrative, $ thousands)
seg = {"Sensors":  (12_000, 300, 1_900, 16_000),     # external revenue, intersegment revenue, profit, assets
       "Controls": (3_500,  500,   860,  5_800),
       "Optics":   (4_100,    0,   520,  4_000),
       "Service":  (900,      0,   140,    600),
       "Software": (600,    200,  -250,    900)}
rev = sum(e + i for e, i, _, _ in seg.values())
prof = max(sum(p for _, _, p, _ in seg.values() if p > 0), -sum(p for _, _, p, _ in seg.values() if p < 0))
assets = sum(a for *_, a in seg.values())
reportable = []
for name, (e, i, p, a) in seg.items():
    tests = [(e + i) >= 0.1 * rev, abs(p) >= 0.1 * prof, a >= 0.1 * assets]
    if any(tests): reportable.append(name)
    print(f"{name:<9} revenue {(e + i) / rev:5.1%}  profit {abs(p) / prof:5.1%}  assets {a / assets:5.1%}  reportable={any(tests)}")
ext = sum(seg[n][0] for n in reportable) / sum(e for e, *_ in seg.values())
print(f"External revenue of reportable segments: {ext:.1%} (must be at least 75%)")

Sensors   revenue 55.7%  profit 55.6%  assets 58.6%  reportable=True
Controls  revenue 18.1%  profit 25.1%  assets 21.2%  reportable=True
Optics    revenue 18.6%  profit 15.2%  assets 14.7%  reportable=True
Service   revenue  4.1%  profit  4.1%  assets  2.2%  reportable=False
Software  revenue  3.6%  profit  7.3%  assets  3.3%  reportable=False
External revenue of reportable segments: 92.9% (must be at least 75%)

Entity-wide disclosures apply even to an entity with a single segment: revenue by product and service, revenue and non-current assets by geographic area (domestic and all foreign countries, with material individual countries shown separately), and reliance on major customers, being any customer providing 10 per cent or more of revenue, with the segment concerned but not the customer's name.

Bringing the course together

The common thread is that the accounting follows the economic relationship: passive investments are measured at fair value, significant influence leads to the equity method, control leads to consolidation regardless of legal form, and foreign operations are translated in a way that reflects how their cash flows affect the parent. Judgements about influence, control and functional currency drive everything else, which is why they receive extensive disclosure. ACCT-470 applies these judgements to complex cases, and ACCT-412 covers public sector and not-for-profit organizations, which have their own standards on controlled and related entities.