Example of the Setup and Tracking of Carried Interest
To illustrate the setup, here’s an example of a simple joint venture that has one default ownership definition with four stakeholders. The following table shows how stakeholders 1, 3, and 4 will equally carry stakeholder 2’s interest in the joint venture.
| Consenting Stakeholder | Nonconsenting Stakeholder | Carried Percentage |
|---|---|---|
| Stakeholder 1 | Stakeholder 2 | 33.33% |
| Stakeholder 3 | Stakeholder 2 | 33.33% |
| Stakeholder 4 | Stakeholder 2 | 33.34% |
The Carried Interest Agreement Setup
In the Carried Interest Agreement application, the joint venture accountant creates a carried interest agreement with these details:
- A stakeholder group that identifies the percentage that each consenting stakeholder is carrying for the nonconsenting stakeholder’s interest, as shown in the preceding table.
- The source ownership definition that contains the ownership percentages for the stakeholders prior to the carried interest agreement. The accountant selects the joint venture’s default ownership definition for the source ownership definition.
Next, the accountant uses the Carried Interest Agreement application to generate a carried interest ownership definition based on these details.
The following table shows the ownership percentages in the source ownership definition compared to the percentages in the generated carried interest ownership definition. It shows how Stakeholder 2’s ownership percentage of 36% is split among the consenting stakeholders. Notice that each consenting stakeholder’s percentage increased by roughly 12%.
| Stakeholder | Source Ownership Definition Percentages | Carried Interest Ownership Definition Percentages |
|---|---|---|
| Stakeholder 1 | 24% | 35.9988% |
| Stakeholder 2 | 36% | N/A (nonconsenting) |
| Stakeholder 3 | 20% | 31.9988% |
| Stakeholder 4 | 20% | 32.0024% |
To complete the setup, the accountant updates the joint venture definition, assigning the carried interest ownership definition as the default ownership definition.
The Processing of Transactions Based on the Carried Interest Agreement
Next, the accountant runs the processes to identify and distribute the joint venture transactions. The Identify Joint Venture Transactions process assigns the carried interest ownership definition to the transactions identified for the joint venture. The Create Joint Venture Distributions process distributes the transaction amounts according to each consenting stakeholder’s ownership percentage defined in the carried interest ownership definition.
The following table shows the distribution of costs and revenue to the consenting stakeholders in the joint venture for the first 6 months. In this time frame, the joint venture incurred $1 million in costs and $600,000 in revenue.
| Stakeholder | Distributed Costs | Distributed Revenue |
|---|---|---|
| Stakeholder 1 - Consenting | $359,988 | $215,992.80 |
| Stakeholder 3 - Consenting | $319,988 | $191,992.80 |
| Stakeholder 4 - Consenting | $320,024 | $192,014.40 |
| Total | $1,000,000 | $600,000 |
The terms in the carried interest agreement state that it will remain in effect until the costs carried by the consenting stakeholders are paid through the carried revenue. At this point, the carried interest agreement remains in effect because the carried costs still exceed the carried revenue.
The Tracking of Carried Amounts
During the same time frame, the accountant also runs the Create Joint Venture Distributions process using the option to create carried interest distributions. The process creates carried interest distributions for all transactions that were distributed according to the carried interest agreement.
The accountant downloads the carried interest distributions to a spreadsheet to track the amount that each consenting stakeholder is carrying for the nonconsenting stakeholder. For example, the following table represents three carried interest distributions generated for a transaction for $2000. It shows the breakdown of the amount that each consenting stakeholder is carrying for the nonconsenting stakeholder.
| Nonconsenting Stakeholder | Nonconsenting Source Percentage | Nonconsenting Distributed Amount | Consenting Stakeholder | Consenting Carried Percentage | Consenting Carried Amount |
|---|---|---|---|---|---|
| Stakeholder 2 | 36% | $720 | Stakeholder 1 | 35.9988% | $259.19 |
| Stakeholder 2 | 36% | $720 | Stakeholder 3 | 31.9988% | $230.39 |
| Stakeholder 2 | 36% | $720 | Stakeholder 4 | 32.0024% | $230.42 |