accounting case

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Date: June 2, 2014 From: Ed Cywinski Re: NY Digital Health I and II, LLC Accounting Treatment

Background As of June 30, 2014, Safeguard holds A) an ownership interest of approximately 10.0% in NY Digital Health I, LLC after contributing $0.4 million of capital in June 2012 and B) an ownership interest of approximately 13.0% in NY Digital Health II, LLC after contributing $0.1 million of capital in May 2014. Safeguard’s ownership interest in both cases is in the form of a limited liability membership in the respective limited liability company. Accounting Issues

 What is the accounting treatment by a limited partner for an investment in a LLC? Applicable Guidance

 PwC ARM 1163.23 – Investments in LLCs  ASC 272 – Limited Liability Entities

Accounting Analysis Per PwC ARM 1163.23 – Investments in LLCs, “LLCs have the characteristics of both corporations and partnerships but are also dissimilar from both in certain respects. ASC 272-10-5-4 addresses whether an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-controlling investment in an LLC should be accounted for using the cost method or the equity method. An investment in an LLC that maintains a "specific ownership account" (similar to a partnership capital account structure) for each investor should be viewed similarly to an investment in a limited partnership. Thus, in these cases, the guidance in ASC 970-323, Investments - Equity Method and Joint Ventures, and ASC 323-30-S55-1 and ASC 323-30-S99-1 should be considered to determine whether equity method of accounting is appropriate.” As such, ASC 323-30-S99-1 states, “The SEC staff's position on the application of the equity method to investments in limited partnerships is that investments in all limited partnerships should be accounted for pursuant to paragraph 970-323-25-6. That guidance requires the use of the equity method unless the investor's interest "is so minor that the limited partner may have virtually no influence over partnership operating and financial policies." The SEC staff understands that practice generally has viewed investments of more than 3 to 5 percent to be more than minor.” Conclusion Safeguard’s investments in NY Digital Health I and II, LLC should be treated as investments in a limited partnership and as such should be accounted for under the equity method of accounting as Safeguard’s applicable ownership interests are above the “minority” threshold promulgated by the SEC staff for determining significant influence.