Partnership Accounts

Master limited
partnership accounting
and reporting guide
October 2011
Contents
Introduction ....................... 1
Background........................ 3
Preparing for formation of an MLP............ 4
Accounting and
reporting by GPs
of MLPs ............................30
Consolidation considerations .................. 30
Deconsolidation considerations ............... 33
Issuance of equity in a partnership .......... 34
Noncontrolling interest
presentation ........................................... 35
Accounting and
reporting for MLPs ............ 7
Cash flow statement presentation ........... 37

Common control transfers ...................... 37
Predecessor financial information ............. 7

Less than full financial statements .......... 12
Issuance costs ........................................ 16
Other matters ..................39
Accounting for contributed assets

and liabilities ........................................... 17
Change in the tax status of an

enterprise ............................................... 39
Accounting for investments in

partnerships and LLCs ............................ 22
SEC filing status and internal

control over financial reporting
following a spin-off .................................. 40
Convertible equity securities ................... 24

Puttable or redeemable equity
securities ................................................ 24
Presentation of partnership equity
accounts................................................. 24
Allocation of earnings between the
GP and the LP ......................................... 26
Dividend policy disclosures ..................... 28
Introduction
MLPs offer positive attributes that spur their attractiveness to the markets.
Master Limited Partnerships (MLPs) have

surged in growth, with total market
capitalization topping $200 billion in
2011, up from $25 billion in 2008. In
addition, the MLP segment has generally
outperformed both the energy sector as
Companies continue to pursue opportunities to capitalize on

the MLP structure, particularly as the markets have been
receptive to initial public offering (IPO) activity.
From an accounting and reporting perspective, each MLP
involves complexities that, without careful consideration,
could impede a companys go-to-market strategy or impair
its marketability. Moreover, no two MLPs are exactly alike.
With the formation of each new MLP comes a group of
assets with their own unique history and set of issues.
well as the broader market.1

MLPs offer positive attributes that spur their attractiveness
to the markets, namely:
Tax advantages
Stable cash flows
Lower cost of capital potential
Attractive risk profile of yield-oriented investments in a

low interest rate environment.
These MLP traits fueled growth and diversification within the

sector, and the number of MLPs jumped from 15 to more
than 70 over the last decade. The energy MLP sector has
long been dominated by midstream pipeline operators, but
increasingly, other types of operations have been put into
MLP structures, including: upstream exploration and
production (E&P) operations, gathering and processing
operations, propane and refined product distribution and
coal production and shipping.
Based on comparison of the Alerian MLP (AMZ), Alerian E&P (AEPI) and S&P 500
indices from 2009-September 2011.
Introduction
As in any business transaction, careful research and

planning is essential at every step. By giving proper
consideration to these issues early in the planning stages,
companies can accelerate the MLP formation process
and reduce costs, thereby enhancing the overall value of
the structure.
Ernst & Young has published Master limited partnership
accounting and reporting guide, which covers a variety of
common accounting and reporting considerations associated
with the formation and ongoing operations of an MLP. This
publication is available to assist companies in understanding
many of the technical financial accounting and reporting
issues that arise when forming an MLP. This publication can
be used as a resource for understanding the issues
associated with an MLP and the related authoritative
financial accounting and reporting guidance. However, it is
not intended to be, and it is not, an all-inclusive discussion of
every issue or every aspect of an issue that may be
encountered relating to an MLP.2 We hope you find this
publication useful.
This publication has been carefully prepared, but it necessarily contains information
in summary form and is therefore intended for general guidance only. It is not
intended to be a substitute for detailed research or the exercise of professional
judgment. The information presented in this publication should not be construed as
legal, tax, accounting or any other professional advice or service. Ernst & Young LLP
can accept no responsibility for loss occasioned to any person acting or refraining
from action as a result of any material in this publication. You should consult with
Ernst & Young LLP or other professional advisors familiar with your particular
factual situation for advice concerning specific audit, tax or other matters before
making any decision.
Master limited partnership accounting and reporting guide
Background
An MLP is a limited partnership

organization whose limited partnership
units are available to investors and traded
on public exchanges, just like corporate
stock. MLPs usually consist of (1) a
general partner (GP), who typically holds a
small percentage (commonly two percent)
To qualify for the tax benefits, ninety percent of an MLPs

income must be derived from activities in natural resources,
real estate or commodities. As a result, the energy industry
is well positioned to benefit from the MLP structure.
MLPs initially gained favor among midstream and E&P oil
and gas companies and various other industries in the early
1980s. However, due to adverse economic conditions, most
of these early MLPs did not survive into the 1990s. The
surviving MLPs were able to thrive due in large part to three
key strengths: (1) a core base of assets (pipelines,
gathering systems, processing plants and storage facilities)
that could be maintained cost effectively, (2) assets and
of the outstanding partnership units and

manages the operations of the
partnership and (2) limited partners (LPs),
who provide capital and hold most of the
ownership but have limited influence over
the operations.
Energy companies that form MLPs typically do so to take

advantage of the special tax treatment of the partnership
structure (although MLPs may also provide an attractive
exit strategy for owners of private equity assets). MLPs do
not pay federal corporate income taxes. Instead, each
partner includes its distributive share of income when
computing its federal income tax. Subsequent distributions
of cash from the MLP to the partners are not again subject
to tax. This process enables MLPs to avoid the double
taxation generally applied to traditional corporations and
their shareholders. These benefits create increased free
cash flow and a lower cost of capital for the MLP.
Background
operations that offered less exposure to volatile commodity

prices and (3) businesses that had relatively stable revenue
and cash flows. These same strengths along with certain
regulatory changes, such as the Lakehead Policy,3 and
substantial divestitures of midstream assets primarily by
large integrated companies led to the MLP resurgence
that took place in the early 2000s.
The MLP business model is built around generating and
distributing cash flows. Cash is generated and used to
make debt payments, fund growth, maintain the asset base
and sustain the operating cash flow generating capability
of the partnership. Excess cash is distributed to the general
partner and limited unit holders to meet required minimum
quarterly distributions. The general partner and others
may hold incentive distribution rights (IDRs), which allow
them to participate in an increasing level of distributions
after the minimum distribution exceeds specified levels.
Holding IDRs encourages the general partner to grow the
MLP business and increase distributions to all unit holders.
As the earliest surviving MLPs proved, assets with steady
growth potential and high cash flow best lend themselves to
the MLP goal of increasing cash distributions to unit
holders. Following their lead, other subsets of the energy
industry, such as natural gas processing plants, coal
production facilities and fully developed and slowly declining
crude oil or natural gas producing assets, have also worked
well in the MLP structure. The low cost of capital of the
MLP, once formed, also gives the MLP a competitive
advantage in the acquisition markets, which is essential to
fueling its growth strategy.
In 2005, the Federal Energy Regulatory Commission reinstated a policy, referred to

as the Lakehead Policy, to allow a regulated entity, whether in a taxable structure
or not, to recover an income tax allowance in rates to the extent its holding
corporation is subject to tax.
Preparing for formation of an MLP

The MLP is a unique business structure that pairs the tax
benefits of a partnership with the fundraising ability and
liquidity of a public company resulting in an enticing
opportunity for energy companies. However, MLPs also
present their own set of accounting challenges, some of
which differ from the issues faced by traditional corporations.
Perhaps the most orderly way to highlight the accounting
challenges associated with an MLP is to think of them in
terms of two stages. The first is the historical period and
formation/IPO stage, and the second is the ongoing growth
and management stage after the initial IPO.
Get organized, prepare for changes
As a plan to form an MLP begins to materialize,
identifying and addressing the accounting and reporting
requirements in the IPO targeted time frame becomes a key
objective. Launching an MLP can involve a considerable
amount of organizational planning, technical research and
an extensive process of collecting and preparing historical,
as well as forecasted, financial information.
One of the early determinations that must be made is the
form, content, and level of any financial statements that
would need to be provided in a registration statement,
which could require obtaining audited financial statements
for an entity or business for the first time. This process
may include identifying a predecessor and determining
whether the historical financial statements of the
predecessor would be best captured with financial
statements of an existing entity or with carve-out
financial statements. Carve-out financial statements
generally relate to special-purpose financial statements of a
business, such as a division, within a larger entity. In such a
case, the related financial information must be carved out
of the larger entity. In cases in which the financial
statements of an existing legal entity are available,
Background
Companies also need to consider whether they need to seek

pre-clearance from the Securities and Exchange Commission (SEC)
staff on complex reporting issues surrounding the financial
information to be included in the MLP registration statement.
consideration of which accounting entitys financial

statements would be most meaningful to investors is
important. In these cases, consideration should be given to
whether the entire legal entity will be contributed to the
MLP, or whether certain assets or operations will be spun
off, and whether the entity will be combined with other
entities or assets in the MLP.
Settle in, get used to growth
Those overseeing the MLP formation process must also

consider how a number of other matters will be addressed,
such as how to account for shared services, allocation of
expenses and push-down of debt and related interest
expense in the historical financial statements.
Following the IPO, the MLP will have additional accounting

issues related to the presentation of multiple classes of
equity (general partnership units, common units and
perhaps subordinated units or other classes of equity),
allocation of earnings to these equity classes and earnings
per unit calculations on multiple classes of units.
Companies also need to consider whether they need to

seek pre-clearance from the Securities and Exchange
Commission (SEC) staff on complex reporting issues
surrounding the financial information to be included in the
MLP registration statement including the issues described
above. Obtaining pre-clearance can help address and
resolve issues up front, potentially avoiding the costly and
time consuming process of redrafting financial statements
and pro forma financial information following the SECs
review, which could delay the offering.
Simultaneous with preparing the historical financial
statements and registration statement, general partners
should plan for the changes that will occur at or near the
time of the IPO. For example, corporations earmarked for
inclusion in the MLP will be required to change to nontaxable
entities (limited liability companies or partnerships).
The MLP going public and taking its place on an exchange

marks the beginning of what will be an ongoing management
process replete with all the corporate governance,
reporting, regulations and other responsibilities of public
companies. As such, general partners will need to plan for
the accounting and reporting requirements of the new MLP.
Furthermore, the MLP will need to continue to seek

opportunities to grow. Keeping in mind that an MLPs primary
goal is to maintain and/or increase cash distributions to its
unit holders, building upon the MLPs existing asset portfolio
is, in most cases, an ongoing objective. Whether through
organic growth, acquisitions or contributions of assets from
the general partner, these transactions will require further
deal execution and assimilation of the growing business into
the MLP organization.
Put simply, once formed, the MLPs reporting will have
some additional complexity, and acquisition and integration
must become core competencies for the MLP.
By taking proactive steps to evaluate and plan for these and

other accounting challenges in the historical period and
formation/IPO stage of the MLP process, the public offering
will be more efficient and expedient.
Background
Parent company considerations

In addition to the accounting challenges at the MLP level, a
public parent company to the general partner will also face
separate issues related to the IPO and ongoing accounting
for its investment in the MLP. Thus, companies planning to
launch an MLP will want to analyze and forecast the
accounting ramifications of the MLP on the parent
companys financial statements. Among others,
consolidation and the related accounting for noncontrolling
interests are common issues the parent company may need
to consider.
Pave the way
As energy companies evaluate and plan for MLPs, they
must keep in mind that the significant accounting decisions
related to their MLP will depend heavily on the particular
facts and circumstances involved. Sound knowledge of
accounting and reporting guidance, including SEC
requirements, is necessary for MLPs and their parent
companies to be prepared to go to market and reduce
obstacles along the way.
Accounting and
reporting for MLPs
This section provides an overview of the

various financial accounting and reporting
issues, and the related authoritative
guidance, that may be applicable to the
preparation of financial statements of a
newly-formed MLP for inclusion in a
registration statement. This section also
addresses certain accounting and
reporting issues associated with the
periodic reporting by the MLP subsequent
to its initial registration statement.
Predecessor financial information

Historical financial statements of the MLP must be included
in the registration statement (generally Form S-1) for the
MLP to be registered as a separate publicly-traded limited
partnership (i.e., a separate SEC registrant). The historical
financial statements presented in Form S-1 must comply
with Regulation S-X, which provides financial statement
requirements for SEC filings.
If an MLP is formed through a combination of companies, a
decision needs to be made regarding which of the combining
companies in the MLP is the predecessor. The term
predecessor is defined in Rule 405 of Regulation C as a
person the major portion of the business and assets of which
another person acquired in a single succession, or in a series
of related successions in each of which the acquiring person
acquired the major portion of the business and the assets of
the acquired person. Predecessor financial statements are
required because they represent the past operating
performance of the assets forming the MLP thereby
providing readers with an ability to evaluate the historical
operating performance and future prospects of the MLP.
Accounting and reporting for MLPs
If the combining companies are under common control but

were acquired at different times during the periods
presented in the financial statements, the predecessor
normally will be the entity first controlled by the parent of
the entities that are going to be combined (dropped down)
into the MLP4. In some situations, it may be appropriate to
have multiple predecessors. For example, if two companies
are of similar size and were acquired at or about the same
time, a company may conclude that they both should be
treated as predecessors. Since a predecessor has to provide
the same financial statements as if it were a registrant,
Regulation S-X Rules 3-01, Consolidated Balance Sheets,
and 3-02, Consolidated Statements of Income and Cash
Flow, which require full financial statements for all periods,
must be followed. That is, the predecessor is not eligible for
any relief that might be available under S-X Rule 3-05,
Financial Statements of Businesses Acquired or to Be
Acquired (Rule 3-05). Additional considerations relating to
the formation of an MLP by the merger of entities under
common control are discussed in the Financial statements
of entities under common control section.
The MLPs predecessor must include in the IPO registration
statement the following (audited and unaudited) financial
statements5:
Audited balance sheets as of the end of each of the past

two fiscal years.
Audited statements of income, cash flows and

shareholders equity for each of the past three fiscal
years. In addition, the financial statements may need to
include a separate statement of comprehensive income
or disclose information about other comprehensive
As commented on by the SEC staff at the 2006 AICPA National Conference on

Current SEC and PCAOB Developments.
Requirements may differ for smaller reporting companies (see

Regulation S-K Item 10(f) to determine eligibility).
income items in the income statement or statement of

shareholders equity.
Unaudited financial statements as of and through the

most recent interim period (together with comparative
statements for the corresponding period of the
preceding fiscal year). These interim statements may
be required if the registration statement is filed or
declared effective more than 134 days after the end
of a fiscal year.
In addition to consolidated financial statements of the

registrant and its consolidated subsidiaries, other financial
statements are often required in SEC filings. Most of these
additional financial statement requirements apply to both
initial registration statements and annual reports made
pursuant to the 1934 Securities Exchange Act (the Exchange
Act). These include financial statements of investments
accounted for under the equity method (Regulation S-X,
Rule 3-09, Separate Financial Statements of Subsidiaries
Not Consolidated and 50 Percent or Less Owned Persons
(Rule 3-09)), and guarantors and affiliates who collateralize
an issuers registered security or a security being registered
(Regulation S-X Rules 3-10, Financial Statements of
Guarantors and Issuers of Guaranteed Securities Registered
or Being Registered and 3-16, Financial statements of
affiliates whose securities collateralize an issue registered or
being registered, respectively), among others. Further,
separate schedules, selected financial data, managements
discussion and analysis and other requirements of
Regulation S-K must be provided for a predecessor in the
initial registration statement.
Financial statements of entities under common control
Spinoff of a business
While not always the case, an MLP may be formed through

a combination of entities under common control of the
parent company. When the merger occurs during the
historical periods presented or prior to the effectiveness,
the historical financial statements in the IPO filing should
give retroactive effect to the merger of entities under
common control. When the merger occurs after
effectiveness (e.g., the merger occurs at the time of and as
a condition to the closing of the IPO), the SEC staff has
stated that separate historical financial statements of the
entities to be combined should be presented, and the
merger should be reflected only in pro forma financial
statements. The SEC staff also indicated that they would
consider requests for relief to use combined financial
amounts as the denominator for purposes of significance
calculations in determining other financial statement
requirements for the filing (for example,
Rules 3-05 and 3-09 of Regulation S-X).
In certain situations, the subsidiary being contributed to the

MLP by its parent may distribute a business to the parent
prior to that subsidiary being contributed to the MLP. Since
the distribution typically occurs simultaneously with the IPO
transaction, the question becomes whether the historical
financial statements of the MLP included in the initial
registration statement should include the operations of the
distributed business(es). SEC Staff Accounting Bulletin
Topic 5.Z.7, Accounting for the Spin-off of a Subsidiary
(SAB Topic 5.Z.7), provides guidance as to whether the
distributed business(es) should be included in the
subsidiarys historical financial statements that will appear
in the MLPs initial registration statement. Generally,
companies will be required to account for the disposition
under ASC 360, Property, Plant, and Equipment (ASC 360),
and provide three years of pro forma financial information.
Excerpt from SAB Topic 5.Z.7

Facts
A Company disposes of a business through the distribution of a subsidiarys stock to the

Companys shareholders on a pro rata basis in a transaction that is referred to as a spinoff.
Question
May the Company elect to characterize the spinoff transaction as resulting in a change in the
reporting entity and restate its historical financial statements as if the Company never had an
investment in the subsidiary, in the manner specified by FASB ASC Topic 250, Accounting
Changes and Error Corrections?
Interpretive Response
Not ordinarily. If the Company was required to file periodic reports under the Exchange Act
within one year prior to the spinoff, the staff believes the Company should reflect the
disposition in conformity with FASB ASC Topic 360. This presentation most fairly and
completely depicts for investors the effects of the previous and current organization of the
Company. However, in limited circumstances involving the initial registration of a company
under the Exchange Act or Securities Act, the staff has not objected to financial statements
that retroactively reflect the reorganization of the business as a change in the reporting
entity if the spinoff transaction occurs prior to effectiveness of the registration statement.
This presentation may be acceptable in an initial registration if the Company and the
subsidiary are in dissimilar businesses, have been managed and financed historically as if they
were autonomous, have no more than incidental common facilities and costs, will be operated
and financed autonomously after the spinoff, and will not have material financial
commitments, guarantees, or contingent liabilities to each other after the spinoff. This
exception to the prohibition against retroactive omission of the subsidiary is intended for
companies that have not distributed widely financial statements that include the spunoff
subsidiary. Also, dissimilarity contemplates substantially greater differences in the nature of
the businesses than those that would ordinarily distinguish reportable segments as defined by
FASB ASC paragraph 280-10-50-10 (Segment Reporting Topic).
10 Master limited partnership accounting and reporting guide
Carve-out financial statements generally relate to specialpurpose financial statements of a business, such as a division,
within a larger entity.
Financial information of the GP in LP offerings

Regulation S-X Rule 8-07, Limited Partnerships (Rule 8-07),
requires certain information (e.g., balance sheet
information) of a GP to be presented in the registration
statement of an LP. Article 8 is applicable to financial
statements filed for smaller reporting companies; however,
in the past, the SEC staff requested this information for
reporting entities that would not otherwise be required to
follow the guidance in Article 8.
During 2010, the SEC staff updated the Division of

Corporation Finance Financial Reporting Manual (FRM)
to address providing the balance sheet of the general
partner. Section 2805 General Partner, Where
Registrant is a Limited Partnership in the FRM states
the following for registrants other than smaller
reporting companies: Oil and gas companies can rely
on SAB 1136 and do not need to request the SEC staffs
concurrence to exclude the balance sheet of the
general partner
Likewise, non oil and gas companies do not need to
request the SEC staffs concurrence to exclude the
balance sheet of the general partner. However, there
can be situations in which the relationship between the
limited partnership and the general partner can be
relevant to an investor. In these situations, the SEC staff
believes there needs to be clear disclosure about this
relationship. For example, registrants should disclose
the following about the general partner relationship:
Any material transactions with the general partner,

such as substantial receivables from or payables to a
general partner, or any affiliate of the general partner.
Disclose the pertinent terms of any material
transactions.
When there is a commitment, intent or reasonable

possibility that the general partner(s) will fund cash flow
deficits or provide other direct or indirect financial
assistance to the registrant. Describe the nature and
extent of any funding or financial support arrangement.
When an affiliate of the general partner has committed

itself to increase or maintain the general partners
capital, if the commitment could reasonably be
expected to impact the registrant. For example,
disclose when an affiliate has committed to maintain
the general partners capital when there is a
commitment, intent or reasonable possibility that the
general partner will provide financial support to the
registrant. Describe the nature and extent of the
affiliates commitment to the general partner.
A smaller reporting company is required to provide the

balance sheet of the general partner under certain
circumstances. SAB 113 did not change Rule 8-07. A smaller
reporting company should comply with this rule or, if they
believe that there is a basis for relief, submit a waiver request
in writing to the Division of Corporation Finance.
SAB 113 revises or rescinds portions of the interpretive guidance included in SAB
Topic 12: Oil and Gas Producing Activities (SAB Topic 12).
11
Due to the difficulty in distinguishing the elements of a subsidiarys

capital structure, the SEC staff will not insist that an interest charge
for intercompany debt be included in the historical income
statements of an MLP if such a charge was not previously provided.
Less than full financial statements

Carve-out financial statements generally relate to specialpurpose financial statements of a business, such as a
division, within a larger entity. The preparation of such
financial statements requires care in identifying all of the
assets and liabilities of the business, regardless of whether
those assets and liabilities are being contributed to the
MLP. Furthermore, corporate expenses such as interest
expense or income tax expense may not have
been specifically allocated to the division. The SEC staff
would expect carve-out financial statements to comply
with the guidance in SEC Staff Accounting Bulletin
Topic 1.B, Allocation of Expenses and Related Disclosure
in Financial Statements of Subsidiaries, Divisions or Lesser
Business Components of Another Entity (SAB Topic 1.B).
The staff may allow audited statements of assets acquired
and liabilities assumed and/or statements of revenues and
direct expenses if it is impracticable to prepare the full
financial statements required by Regulation S-X. An
explanation of that impracticability must be included in the
filing. For example, in an acquisition of a working interest in
an oil and gas property, the acquired property often is not a
stand-alone entity; separate, audited financial statements
of the property have not been prepared; and the seller has
not maintained the distinct and separate accounts
necessary to present the full financial statements of the
property. When statements of assets acquired and liabilities
assumed and/or statements of revenues and direct
expenses are presented instead of full financial statements,
a statement of cash flows generally is not required.
However, registrants are required to provide information
about the businesss operating, investing and financing cash
flows, to the extent available, in the notes to the financial
statements or in unaudited supplemental disclosures.
The use of abbreviated financial information in lieu of full

financial statements or carve-out financial statements
that comply with SAB Topic 1.B requires pre-clearance from
the SEC staff prior to filing.
Allocation of expenses
SAB Topic 1.B discusses the SEC staffs approach to the
allocation of expenses and related disclosure in the
separate financial statements of subsidiaries, divisions or
other components of a business when those financial
statements are included in filings with the SEC. SAB
Topic 1.B was issued due to the lack of authoritative
guidance in the accounting literature and the practical
problems associated with preparing historical stand alone
financial statements that reflect all costs incurred in
operating the business. Because many of these costs are
incurred by the parent company (e.g., income taxes,
interest, advertising, accounting and legal), the SEC staff
believes it is essential that the separate entitys financial
statements include not only its allocable share of these
costs but also disclosures necessary to fully understand the
entity on an independent basis.
SAB Topic 1.B expresses the SEC staffs view that whenever
separate historical financial statements of a subsidiary or
other affiliate of an entity are presented, those statements
should reflect all the costs of doing business. Common
applications of SAB Topic 1.B include the financial
statements of spin-offs (distribution to shareholders of
some or all of the parent companys common stock in a
subsidiary) and carve-outs (sales of stock in a subsidiary
to a third party). As such, when carve-out financial
statements are required in the MLPs initial registration
statement, SAB Topic 1.B will apply. An excerpt of SAB
Topic 1.B is included at the end of this section.
Intercompany interest costs
Allocation of income taxes
Due to the difficulty in distinguishing the elements of a

subsidiarys capital structure, the SEC staff will not insist that
an interest charge for intercompany debt be included in the
historical income statements of an MLP if such a charge was
not previously provided. However, an interest charge is
required if the parent is servicing debt that is specifically
related to the MLPs operations. This interest charge is
required whether the debt is carried on the parents books
as a matter of convenience or will now be carried on the
MLPs books. In these situations, the historical financial
statements of the MLP should include such a charge for all
periods for which the debt was outstanding.
Because the operations of the MLP will not be subject to

income taxes (i.e., only the investors in the MLP will be
subject to income taxes), the SEC may accept (if agreed to
prior to filing) combined carve-out financial statements
prepared on a tax-free basis even though historically the
parent company provided income taxes for the operations
of the assets contributed to the MLP.
13
Excerpt from SAB Topic 1.B

Facts: A company (the registrant) operates as a subsidiary
of another company (parent). Certain expenses incurred by
the parent on behalf of the subsidiary have not been
charged to the subsidiary in the past. The subsidiary files a
registration statement under the Securities Act of 1933 in
connection with an initial public offering.
Costs reflected in historical financial statements
Question 1: Should the subsidiarys historical income
statements reflect all of the expenses that the parent
incurred on its behalf?
Interpretive Response: In general, the staff believes that
the historical income statements of a registrant should
reflect all of its costs of doing business. Therefore, in
specific situations, the staff has required the subsidiary to
revise its financial statements to include certain expenses
incurred by the parent on its behalf. Examples of such
expenses may include, but are not necessarily limited to,
the following (income taxes and interest are discussed
separately below):
Officer and employee salaries
Rent or depreciation
Advertising
Accounting and legal services
Other selling, general and administrative expenses
When the subsidiarys financial statements have been

previously reported on by independent accountants and
have been used other than for internal purposes, the staff
has accepted a presentation that shows income before tax
as previously reported, followed by adjustments for
expenses not previously allocated, income taxes, and
adjusted net income.
Question 2: How should the amount of expenses incurred

on the subsidiarys behalf by its parent be determined, and
what disclosure is required in the financial statements?
Interpretive Response: The staff expects any expenses
clearly applicable to the subsidiary to be reflected in its
income statements. However, the staff understands that in
some situations a reasonable method of allocating common
expenses to the subsidiary (e.g., incremental or
proportional cost allocation) must be chosen because
specific identification of expenses is not practicable. In
these situations, the staff has required an explanation of
the allocation method used in the notes to the financial
statements along with managements assertion that the
method used is reasonable.
In addition, since agreements with related parties are by
definition not at arms length and may be changed at any
time, the staff has required footnote disclosure, when
practicable, of managements estimate of what the
expenses (other than income taxes and interest discussed
separately below) would have been on a stand alone basis,
that is, the cost that would have been incurred if the
subsidiary had operated as an unaffiliated entity. The
disclosure has been presented for each year for which an
income statement was required when such basis produced
materially different results.
Excerpt from SAB Topic 1.B, cont.

Question 3: What are the staffs views with respect to the
accounting for and disclosure of the subsidiarys income
tax expense?
an interest charge on intercompany debt if such a charge

was not provided in the past, except when debt specifically
related to the operations of the subsidiary and previously
carried on the parents books will henceforth be recorded in
the subsidiarys books. In any case, financing arrangements
with the parent must be discussed in a note to the financial
statements. In this connection, the staff has taken the
position that, where an interest charge on intercompany
debt has not been provided, appropriate disclosure would
include an analysis of the intercompany accounts as well as
the average balance due to or from related parties for each
period for which an income statement is required. The
analysis of the intercompany accounts has taken the form of
a listing of transactions (e.g., the allocation of costs to the
subsidiary, intercompany purchases, and cash transfers
between entities) for each period for which an income
statement was required, reconciled to the intercompany
accounts reflected in the balance sheets.
Interpretive Response: Recently, a number of parent

companies have sold interests in subsidiaries, but have
retained sufficient ownership interests to permit continued
inclusion of the subsidiaries in their consolidated tax
returns. The staff believes that it is material to investors to
know what the effect on income would have been if the
registrant had not been eligible to be included in a
consolidated income tax return with its parent. Some of
these subsidiaries have calculated their tax provision on
the separate return basis, which the staff believes is the
preferable method. Others, however, have used different
allocation methods. When the historical income statements
in the filing do not reflect the tax provision on the separate
return basis, the staff has required a pro forma income
statement for the most recent year and interim period
reflecting a tax provision calculated on the separate
Pro forma financial statements and earnings per share
return basis.7
Question: What disclosure should be made if the registrants
Question 4: Should the historical income statements
historical financial statements are not indicative of the
reflect a charge for interest on intercompany debt if no
ongoing entity (e.g., tax or other cost sharing agreements
such charge had been previously provided?
will be terminated or revised)?
Interpretive Response: The staff generally believes that
financial statements are more useful to investors if they
reflect all costs of doing business, including interest costs.
Because of the inherent difficulty in distinguishing the
elements of a subsidiarys capital structure, the staff has
not insisted that the historical income statements include
Interpretive Response: The registration statement should

include pro forma financial information that is in accordance
with Article 11 of Regulation S-X and reflects the impact of
terminated or revised cost sharing agreements and other
significant changes.
FASB ASC paragraph 740-10-30-27 (Income Taxes Topic) states: The consolidated amount of current and deferred tax expense for a group that files a consolidated tax
return shall be allocated among the members of the group when those members issue separate financial statements. The method adoptedshall be systematic, rational, and
consistent with the broad principles established by [ASC 740-10]. A method that allocates current and deferred taxes to members of the group by applying [ASC 740-10] to
each member as if it were a separate taxpayer meets those criteria.
15
It is not uncommon for an MLP to issue both debt and equity in

connection with its public offerings. If this occurs, the MLP will
need to allocate the issuance costs incurred to debt and equity.
Excerpt from SAB Topic 1.B, cont.

Other matters
Question: What is the staffs position with respect to
dividends declared by the subsidiary subsequent to the
balance sheet date?
In these situations, pro forma per share data should give

effect to the increase in the number of shares which, when
multiplied by the offering price, would be sufficient to
replace the capital in excess of earnings being withdrawn.
Interpretive Response: The staff believes that such

dividends either be given retroactive effect in the balance
sheet with appropriate footnote disclosure, or reflected in
a pro forma balance sheet. In addition, when the dividends
are to be paid from the proceeds of the offering, the staff
believes it is appropriate to include pro forma per share
data (for the latest year and interim period only) giving
effect to the number of shares whose proceeds were to be
used to pay the dividend. A similar presentation is
appropriate when dividends exceed earnings in the current
year, even though the stated use of proceeds is other than
for the payment of dividends.
Issuance costs
Companies often incur costs in connection with the issuance
of equity securities. SEC Staff Accounting Bulletin Topic 5.A,
Expenses of Offering (SAB Topic 5.A), states that prior to
the effective date of an offering of equity securities, certain
costs related to the offering can be deferred. Specific
incremental costs directly attributable to a proposed or
actual offering of securities may properly be deferred and
charged against the gross proceeds of the offering. Such
costs include legal fees, due diligence fees, travel costs and
similar items. They also may include internal costs that meet
the incremental and direct criteria. Costs such as salaries
(and generally any other form of compensation), rent and
other period costs, including other general and
administrative costs are not capitalizable as issuance costs.
In addition, SAB Topic 5.A states that deferred costs of an
aborted offering may not be deferred and charged against

proceeds of a subsequent offering. A short postponement
(up to 90 days) does not represent an aborted offering.
Allocation of issuance costs
It is not uncommon for an MLP to issue both debt and
equity in connection with its public offerings. If this occurs,
the MLP will need to allocate the issuance costs incurred to
debt and equity. The portion of issuance costs allocated to
the debt should be classified as an asset and amortized as
interest expense using the effective interest method. The
portion of issuance costs allocated to the equity
instruments should be recognized as a reduction to the
proceeds of the equity offering (i.e., a reduction to equity).
There is no authoritative literature that provides guidance
on how issuance costs should be allocated.
We believe that the issuer should adopt a rational allocation

approach and apply that approach consistently. For
example, assume the company is issuing $125 million in
notes and is also issuing $125 million in partnership
interests. The issuer could, for example, allocate the
offering costs based on the relative costs of separately
issuing debt and equity. Assume that the total offering costs
were $4 million, and the typical costs associated with
similar debt is one percent of the issuing amount, while the
typical offering costs for common stock are three percent
of the offering amount. In that case, the issuer might
allocate one-quarter, or $1 million, to debt issuance costs,
and three-quarters, or $3 million, to equity offering costs.
Accounting for contributed assets and liabilities

The formation of an MLP can be performed in a variety of
ways, including the following:
Roll-up two or more previously legally separate

limited partnerships are combined into one limited
partnership
Drop-down certain assets of a sponsor (usually a

corporate entity) are placed into a limited partnership
and units are sold to the public
Roll-out certain assets are placed into a limited

partnership and units are distributed to the
shareholders
Reorganization all of the assets are placed into an

MLP and the predecessor entity ceases to exist
One of the first accounting issues to be addressed

associated with the formation of an MLP is whether the MLP
should recognize a new basis of accounting in the historical
financial statements to be included in the registration
statement for the assets and liabilities its parent has
contributed. Generally, a new basis of accounting is not
appropriate for the assets and liabilities contributed by the
parent (ASC 805-50-30-7).
While no example is provided in ASC 805-50-30, Business
Combinations Related Issues Initial Measurement, for
when a new basis of accounting would be appropriate, it
does state that in some situations it is possible. For a new
basis of accounting to be appropriate, the SEC staff will
require (1) the MLP to sell eighty percent or more of the
partnership units to the public and (2) the limited partners
to have the ability to replace the general partner through a
reasonable vote. The evaluation of whether the limited
partners have the ability to replace the general partner
(which would prevent the general partner from controlling
the MLP) should be evaluated under ASC 810-20-25,
Consolidation Control of Partnerships and Similar
Entities Recognition. If the requirements are met, the
SEC staff will not object to a new basis of accounting to the
extent of the percentage change in ownership. A new basis
of accounting for a newly-formed MLP is not common in
practice because most parent company general partners
will continue to control the operations of the MLP.
The issuance of MLP units to a general partner of a
predecessor limited partnership may have the
characteristics of compensation rather than of equity and
should be accounted for accordingly by the new MLP. This
would occur when, in settlement of management contracts
or for other services that will not carry over to the new
MLP, the general partner of a predecessor limited
partnership will not be the general partner of the new MLP.
17
Preparing financial statements and performing the related audit of

the financial statements of a business acquired or to be acquired
may be a significant undertaking.
Entities under common control

Some MLPs are formed or expanded when the parent
company transfers its ownership interest in a subsidiary to
the MLP in exchange for ownership interest in the MLP.
ASC 805-50-30-5 states the following:
When accounting for a transfer of assets or exchange
of shares between entities under common control, the
entity that receives the net assets or the equity
interests should initially recognize the assets and
liabilities transferred at their carrying amounts in the
accounts of the transferring entity at the date of
transfer. If the carrying amounts of the assets and
liabilities transferred differ from the historical cost of
the parent of the entities under common control, for
example, because push-down accounting had not been
applied, then the financial statements of the receiving
entity should reflect the transferred assets and
liabilities at the historical cost of the parent of the
entities under common control.
The MLP that receives the net assets or equity interests in a
transfer between entities under common control should
recognize the assets and liabilities transferred at the
historical cost of the parent on the date of the transfer. The
use of the historical cost is required even if the fair value is
reliably determinable. If the MLP transfers cash in the
exchange, any cash transferred in excess of the carrying
value of the assets and liabilities transferred should be
treated as a capital transaction (for example, a dividend to
the general partner). If the MLP issues partnership interests
in the exchange, the partnership interests issued should be
recorded at an amount equal to the carrying amount of the
assets and liabilities transferred, even if the fair value of the
partnership interests issued is reliably determinable.
In certain situations, such as when the push-down method
of accounting was not required to be recorded in the
transferors financial statements, the historical cost of the
net assets of a subsidiary may differ from the historical cost

of the subsidiary in the parent companys consolidated
financial statements. In such a scenario, the carrying value
of the transferred net assets should be recorded by the MLP
at the parent companys carrying value if the MLP is a
substantive operating entity. For example, if the parent
company transfers its ownership interest in a subsidiary
(Sub B) to another subsidiary (MLP A) in exchange for an
additional partnership interest of MLP A, then the
transaction is appropriately accounted for as an exchange
of shares between entities under common control. The
consolidated financial statements of MLP A should reflect
the historical cost of Sub B as it is reflected in the
consolidated financial statements of the parent company.
We believe this would also be required in situations where
the parent company transfers a noncontrolling interest
accounted for under the equity method in a subsidiary to
the MLP (e.g., the parent company transfers a fifty percent
ownership interest in Sub B to MLP A). In this situation, the
MLP would reflect fifty percent of the parent companys
historical cost in Sub B.
Businesses acquired or to be acquired
If an entity being contributed to an MLP has had a recent
acquisition, the audited financial statements of the business
acquired may be required to be presented in the initial
registration statement under Rule 3-05. MLPs will also need
to consider the requirements of Rule 3-05 in order to
comply with Form 8-Ks periodic reporting requirements for
businesses acquired after initial registration of the MLP.
In many cases, the businesses acquired or to be acquired
may not have been required to prepare and present
financial statements and, even if they have, those
statements may not have been audited. Preparing financial
statements and performing the related audit of the financial
statements of a business acquired or to be acquired may be
a significant undertaking. Rule 3-05 requires the filing of
The determination of what constitutes a business for SEC reporting

purposes may differ from what constitutes a business for
accounting purposes.
separate pre-acquisition historical financial statements in a

registration statement when the acquisition of a significant
business has occurred or is probable of occurrence. Form 8K requires such financial statements following
consummation of a business combination.
The determination of what constitutes a business for
SEC reporting purposes may differ from what constitutes
a business for accounting purposes. The definition of
a business for reporting purposes in Regulation S-X
Rule 11-01(d), Presentation requirements (Rule 11-01(d)),
presumes that a separate entity, a subsidiary or a division is
a business. The definition also notes that a lesser
component of an entity may also constitute a business.
Facts and circumstances should be considered in evaluating
whether an acquisition of a lesser component of an entity
constitutes a business. Rule 11-01(d) specifically identifies
certain circumstances that may indicate that a lesser
component is a business, including whether (1) the nature
of the revenue-producing activity of the component will
remain generally the same as before the transaction or
(2) certain attributes remain with the component after the

transaction. For accounting purposes, a business consists of
inputs and processes applied to those inputs that have the
ability to create outputs (i.e., that provide or have the
ability to provide a return in the form of dividends, lower
costs or other economic benefits directly to investors or
other owners, members or participants). It is possible for
acquired assets to represent a business for reporting
purposes, but not for accounting purposes.
Registrants must measure the significance of an acquired
business under Rule 3-05 using three tests:
Asset test
Investment test
Income test
The table below details the financial statement

requirements based on these tests (excerpted from the SEC
Division of Corporation Finance FRM Section 2030.1):
If the greatest of the three calculations:

Does not exceed 20%
No financial statements required
Exceeds 20% but not 40%
Financial statements for the most recent fiscal year (audited) and the latest
required interim period (unaudited) that precedes the acquisition, and the
corresponding interim period of the preceding year (unaudited)
Exceeds 40% but not 50%
Financial statements for the two most recent fiscal years (audited) and the
latest required interim period (unaudited) that precedes the acquisition , and
the corresponding interim period of the preceding year (unaudited)
Exceeds 50%
Financial statements for full three years (audited) and the latest required
interim period (unaudited) that precedes the acquisition, and the
corresponding interim period of the preceding year (unaudited)
Exception: Financial statements for the earliest of the three fiscal years may
be omitted if net revenues of the acquired business in its most recent fiscal
year are less than $50 million.
19
Financial statements of acquired businesses are required as

follows (excerpted from the SEC Division of Corporation
Finance FRM Section 2040.1):
Form
Registration Statements and Proxies
If less than or equal to 50% significant, financial statements of a recent or

probable acquisition need not be included unless the registration statement
(or post-effective amendment) is declared effective (or proxy statement is
mailed) 75 days or more after the acquisition is consummated.
If significance exceeds 50%, financial statements of a recent or probable
acquisition must be included in a registration statement (or post-effective
amendment) at the effective date.
Form 8-K
Reporting the transaction is required within 4 business days of the

consummation of any business acquisition exceeding 20% significance or for
any asset purchase exceeding 10% significance that does not meet the
definition of a business.
If the required financial statements of the business acquired are not required
to be provided with the initial report, they must be filed by amendment
within 71 calendar days after the date that the initial report on Form 8-K
must be filed.
Note: While an Item 2.01 Form 8-K is not required for business acquisitions
at or below 20% significance, registrants may elect to report business
acquisitions at or below 20% significance pursuant to Item 8.01 of Form 8-K
even if financial information is not provided.
SAB Topic 1.J, Application Of Rule 3-05 In Initial Public

Offerings (SAB Topic 1.J), provides guidance on applying
Rule 3-05 in initial public offerings involving businesses
that have been built by the aggregation of discrete
businesses that remain substantially intact after
acquisition. SAB Topic 1.J is intended to be applied in
situations in which an acquired entity may be better
measured in relation to the size of the registrant at the
time the registration is filed. It ensures that the
registration statement will include not less than three,

two and one year(s) of audited financial statements for
not less than 60%, 80% and 90%, respectively, of the
constituent businesses that will comprise the registrant
on an ongoing basis. The following table details the
financial statement requirements for an initial registration
statement (excerpted from the SEC Division of
Corporation Finance FRM Section 2070.11):
Minimum financial statement requirement

Year 1 (most recent fiscal year)
Businesses not included for at least 9
months in the registrants financial
statements:
May exclude pre-acquisition financial statements to the extent that the sum
of their highest significance levels does not exceed 10%.
Thus, identify completed and probable acquisitions whose highest level of
significance sums to 10% or less. If there is more than one combination of
entities whose highest level of significance sums to 10% or less, the
registrant may choose one combination. Financial statements for this
combination may be omitted.
For all other completed and probable acquisitions, the registrant must present
at least 9 months of audited financial statements for each acquisition with no
gap or overlap between the acquired business pre-acquisition audited periods
and the registrants post-acquisition audited periods.
Year 2 ( preceding fiscal year)

statements:
Add to combination of acquisitions selected by the registrant that had a
combined highest level of significance of 10% or less additional completed
and probable acquisitions such that the combined highest level of
significance sums to 20% or less.
For all other completed and probable acquisitions that were not included in
the registrants combination of completed and probable acquisitions whose
highest level of significance sums to 20% or less, present at least 21 months
of audited financial statements for each acquisition with no gap or overlap
between the acquired business pre-acquisition audited periods and the
registrants post-acquisition audited periods.
Year 3 (second preceding fiscal year)

statements:
Add to the registrants combination of acquisitions that had a combined
highest level of significance of 20% or less additional completed and
probable acquisitions such that the combined highest level of significance
sums to 40% or less.
For all other completed and probable acquisitions that were not included in
the registrants combination of completed and probable acquisitions whose
highest level of significance sums to 40% or less, present at least 33 months
of audited financial statements for each acquisition with no gap or overlap
between the acquired business pre-acquisition audited periods and the
registrants post-acquisition audited periods.
21
If the aggregate of either the asset, investment or income

significance test of all insignificant acquisitions exceeds
50%, financial statements of the investments that make up
the mathematical majority of the test that yields the
greatest significance (combined if appropriate) for the most
recent fiscal year and the latest interim period preceding
the acquisition must be provided.8 The requirement under
Rule 3-05 to file financial statements of individually
insignificant businesses under certain circumstances is
applicable only to registration statements and proxies. Form
8-K does not require audited financial statements of
insignificant acquirees unless they are "related businesses"
and significant on a combined basis.
Rule 3-05s reporting requirements, including the
computation of the significance tests and related financial
statement requirements are quite complex, and the
previous discussion only provides a summary of their
applicability. Companies should consider consulting with
advisors and, in certain instances, seek pre-clearance of
certain issues with the SEC staff.
The SEC Division of Corporation Finance FRM Section 2035.3 provides
an example of calculating the mathematical majority.
Accounting for investments in partnerships

and LLCs
The equity method of accounting is required for (1) all
investments in corporate joint ventures (see definition
below) and (2) other investments in the common stock of
corporations when the investor does not control an investee
but has the ability to exercise significant influence over its
operating and financial policies. Because the primary
benefit of the MLP business structure is to pass through its
income to the limited partners without paying federal or
state income tax, thereby eliminating the double taxation of
distributions, increasing free cash flow and lowering its cost
of capital, MLPs generally will not hold investments in
common stock or corporate joint ventures. Typically, MLPs
will hold investments in general partnerships, limited
partnerships or limited liability companies (LLCs) in order to
avoid having their earnings in these investments taxed.
General partnerships
A general partnership that is controlled, directly or
indirectly, by an investor is, in substance, a subsidiary of the
investor. A general partner will first need to determine if the
variable interest guidance in ASC 810, Consolidation applies
(for additional information on the variable interest model,
see the Consolidation considerations section below). If the
variable interest guidance is not applicable, the voting
interest model should be followed. Under the voting interest
model, the usual condition for control of a corporation is
ownership of a majority (over fifty percent) of the
outstanding voting stock. However, if partnership voting
interests are not clearly indicated in the partnership
agreement, a condition that would usually indicate control is
ownership of a majority (over fifty percent) of the financial
interests in profits or losses. The power to control may also
exist with a lesser percentage of ownership, for example, by
contract, lease, agreement with other partners or by court
decree (ASC 810-10-15-8). A controlling investor should
consolidate the general partnership. A noncontrolling

investor in a general partnership should account for its
investment using the equity method of accounting.
For further discussion related to the accounting for

an investment in a limited partnership by the general
partner, refer to the Consolidation considerations
section of this publication.
Limited partnerships
A limited partnership interest in a limited partnership is to
be accounted for using the equity method of accounting,
unless the limited partners interest is so minor that the
limited partner may have no influence over partnership
operating and financial policiesand, accordingly,
accounting for the investment using the cost method may
be appropriate ( ASC 970-323-25-6 ). The SEC staff
clarified its view that investments of more than three to five
percent are considered to be more than minor and,
therefore, should be accounted for using the equity
method. As a result, investments of as little as three
percent in a limited partnership may be subject to the equity
method of accounting (ASC 323-30-S99-1). The rights and
obligations of the general partner in a limited partnership
are different from those of the limited partners. The general
partner in a limited partnership is presumed to control that
limited partnership (ASC 810-20-25-3). This presumption
may be overcome for voting interest entities if the limited
partners have either (1) the substantive ability to dissolve
(liquidate) the limited partnership (either by a single limited
partner or through a simple majority vote) or otherwise
remove the general partner without cause or (2)
substantive participating rights. Substantive participating
rights provide the limited partners with the ability to
effectively participate in significant decisions that would be
expected to be made in the ordinary course of the limited
partnership's business and thereby preclude the general
partner from exercising unilateral control over the
partnership. If a general partner does not control the limited
partnership, the general partner should account for its
interest under the equity method of accounting.
Limited liability companies

LLCs have characteristics of both corporations and
partnerships but are dissimilar from both in certain
respects. The issue of whether an LLC should be viewed as
similar to a corporation or partnership depends on whether
the LLC maintains separate ownership accounts for each
investor. If an LLC maintains separate ownership accounts
for each investor, it should be viewed similar to a
partnership for purposes of determining whether a
noncontrolling interest in the LLC should be accounted for
using the cost or equity method of accounting. An
investment interest of as little as three to five percent in an
LLC that maintains separate ownership accounts would
generally be subject to the equity method of accounting. An
LLC that does not maintain separate ownership accounts
for each investor should be viewed as similar to a
corporation for purposes of determining the appropriate
accounting for a noncontrolling interest in the entity.
This guidance does not apply to investments in an LLC that
are equity in legal form but are required to be accounted for
as debt securities (ASC 323-30-15-4).
23
Convertible equity securities
Presentation of partnership equity accounts
It is not uncommon for some MLPs to issue Class B

partnership units that are subordinated and convertible into
common units. If the Class B unit holders do not elect to
convert their units into common units, the common unit
holders have the right to either force conversion or receive
additional distributions (e.g., one-hundred fifteen percent of
what the common distribution would have been). Typically,
these Class B partnership units are sold at a slight discount
to the price of the common units. MLPs that issue these
types of partnership units should review ASC 815,
Derivatives and Hedging and ASC 470-20-25, Debt Debt
with Conversion and Other Options Recognition, to assess
the accounting for the conversion feature. The conversion
feature should be evaluated when calculating earnings per
unit.
SEC Staff Accounting Bulletin Topic 4.F, Limited

Partnerships (SAB Topic 4.F), addresses how the financial
statements of limited partnerships (including MLPs) should
be presented so that the two ownership classes (i.e., the
limited partner(s) and the general partner(s)) can readily
determine their relative participations in both the net assets
of the partnership and in the results of its operations. For
MLPs, there may be multiple classes of limited partner
interests, including common and subordinated limited
partner interests. For further discussion of subordinated
limited partner interests, refer to the Issuance of equity in
a partnership section. The equity section of the limited
partnership balance sheet should distinguish between
amounts ascribed to each ownership class. The equity
attributed to the general partners should be stated
separately from the equity of the limited partners, and
changes in the number of equity units authorized and
outstanding should be shown for each ownership class. A
statement of changes in partnership equity for each
ownership class should be furnished for each period for
which an income statement is included.
Puttable or redeemable equity securities

Typically, MLPs do not issue limited partnership interests that
are redeemable at the option of the holder (puttable) or that
are mandatorily redeemable. However, if these types of
instruments are issued by the MLP, the MLP should evaluate
the guidance in ASC 480-10, Distinguishing Liabilities from
Equity Overall, especially the guidance from the SEC staff
on classification and measurement of redeemable securities
in ASC 480-10-S99-3A, in determining the appropriate
classification and measurement of these puttable and/or
redeemable limited partnership interests.
The statement of income of limited partnerships should be

presented in a manner that clearly shows the aggregate
amount of net income (loss) allocated to the general
partners and the aggregate amount allocated to the
limited partners. The statement of income also should state
the results of operations on a per unit basis. The SEC staff
also requires a reconciliation of taxable income/loss to
GAAP net income/loss in the notes to the financial
statements, if available.
SAB Topic 4.F

Facts
There exist a number of publicly held partnerships having one or more corporate or individual
general partners and a relatively larger number of limited partners. There are no specific
requirements or guidelines relating to the presentation of the partnership equity accounts in the
financial statements. In addition, there are many approaches to the parallel problem of relating
the results of operations to the two classes of partnership equity interests.
Question
How should the financial statements of limited partnerships be presented so that the two
ownership classes can readily determine their relative participations in both the net assets of the
partnership and in the results of its operations?
Interpretive
Responsive
The equity section of a partnership balance sheet should distinguish between amounts ascribed
to each ownership class. The equity attributed to the general partners should be stated
separately from the equity of the limited partners, and changes in the number of equity units
authorized and outstanding should be shown for each ownership class. A statement of changes in
partnership equity for each ownership class should be furnished for each period for which an
income statement is included.
The income statements of partnerships should be presented in a manner which clearly shows the
aggregate amount of net income (loss) allocated to the general partners and the aggregate
amount allocated to the limited partners. The statement of income should also state the results of
operations on a per unit basis.
25
Because the GP and LPs both participate in the distribution of earnings,

MLPs are required to calculate EPU using the two-class method.
Allocation of earnings between the GP

and the LP
A common method used by MLPs to allocate earnings to the
capital accounts between the GP and LPs is the partnership
agreement method. The MLPs partnership agreement
addresses the allocation of earnings for capital account
purposes. Typically, the partnership agreement provides
that net income and losses are allocated to the GP and the
LPs based on their respective ownership interests. In many
agreements, it stipulates that the LPs accounts cannot be
negative. Priority allocations to the IDR holders under the
MLPs partnership agreement should also be considered in
the allocation of earnings to the capital accounts.
As discussed previously, net income and losses generally
should be allocated to the capital accounts based on the
respective ownership percentages consistent with the
partnership agreement. However, when distributions are
made to the IDR holders as required by the partnership
agreement, earnings equal to the amount of these
distributions are allocated to the GP prior to earnings being
allocated based on the ownership percentages to the
respective capital accounts.
For example, assume a GP owns 2% of the MLP. If net
income is $110 million and the IDR holders (in this case, the
GP) received $10 million in incentive distributions, net
income would be allocated $12 million (((110-10)*.02)+10)
to the GP and $98 million ((110-10)*.98) to the LPs .
Earnings per unit
Publicly-traded MLPs typically issue multiple classes of
securities that participate in partnership distributions
according to a formula specified in the partnership
agreement. A typical MLP consists of publicly-traded
common units (and in some cases, subordinated common
units) held by LPs, a GP interest and IDRs. IDRs may be a
separate non-voting limited partner interest that the GP

initially holds, but may be transferable apart from its GP
interest. IDRs may also be embedded in the GP interest such
that they cannot be transferred separately from the GPs
overall interest in the MLP.
In many cases, the partnership agreement obligates the GP
to distribute one-hundred percent of the partnership's
available cash (as that term is defined in the partnership
agreement) to the LPs, GP and, when certain thresholds are
met, the holder(s) of IDRs, based on a distribution waterfall
schedule included in the partnership agreement. Partnership
agreements generally state that the holder(s) of IDRs are not
entitled to distributions other than those provided in the
distribution waterfall of available cash. The net income (or
loss) of the partnership is allocated to the capital accounts of
the GP and LPs based on their ownership percentages after
taking into account any priority income allocations (or
distributions) to the holder(s) of IDRs.
Because the GP and LPs both participate in the distribution
of earnings, MLPs are required to calculate EPU using the
two-class method. For additional information on the twoclass method of computing earnings per share, refer to
Ernst & Youngs Financial Reporting Developments
publication, Earnings per share (Score No. BB1971).
IDRs and participating securities
The Master Limited Partnership Subsections of ASC 260,
Earnings Per Share (ASC 260), clarify the application of
ASC 260 to MLPs that are both (a) required to make
incentive distributions when certain contractually specified
thresholds are met and (b) account for the incentive
distributions as equity distributions. ASC 260 does not
apply to incentive distributions accounted for as
compensation cost. IDRs in an MLP that are a separate class
of LP interest (i.e., the IDRs are transferable and not
embedded in the GP interest) are participating securities. If
the IDRs are not transferable separate from the GP interest,

the IDRs themselves are not participating securities.
However, the GP interest and the embedded IDRs are a
participating security.
Allocation of earnings and losses to determine EPU
IDR is separately transferable
If IDRs are separately transferable, earnings or losses for a
reporting period should be allocated to the GP, LPs and the
holder(s) of IDRs (collectively referred to hereafter as the
participating security holders) using the two-class method
to compute EPU. When computing EPU under the two-class
method, net income or loss for a reporting period must be
reduced (or increased) by the amount of available cash that
has been or will be distributed to the participating security
holders for that reporting period. As partnership
agreements generally obligate the GP to distribute available
cash for each reporting period within a certain number of
days after the end of a reporting period (e.g., 60 days), the
GP will need to determine available cash to be distributed to
the participating security holders prior to issuing financial
statements for each reporting period. The distributions of
available cash to the participating security holders are
generally based on a waterfall schedule (or some other
distribution methodology) that is stipulated in the
partnership agreement.
After adjusting net income for the reporting period by the
amounts distributed to the participating security holders,
any undistributed earnings should be allocated to the
participating security holders, including the holder(s) of
IDRs, pursuant to the terms of the partnership arrangement.
Thus, if the partnership arrangement contractually limits the
amount of distributions to the holder(s) of IDRs,
undistributed earnings should not be allocated to the
holder(s) of IDRs in excess of the specified amount.
To determine whether distributions to the holder(s) of IDRs

are contractually limited, an MLP will need to evaluate
whether distributions for a reporting period would be
limited to available cash even if all earnings for the period
were distributed (for example, in the event of a liquidating
dividend). Typically, partnership agreements specify that
distributions to the holder(s) of IDRs for a reporting period
are contractually limited to the holders share of available
cash distributed for the current reporting period. In the
case where distributions are contractually limited, all
undistributed earnings or losses would be allocated to the
GP and LPs, and no undistributed earnings or losses would
be allocated to the holder(s) of IDRs. However, if the
partnership agreement is silent or does not explicitly limit
distributions to the holder(s) of IDRs, the MLP should
allocate undistributed earnings or losses to the participating
security holders, including the IDRs using the distribution
waterfall schedule (or other distribution methodology)
specified in the partnership agreement.
When distributions to the participating security holders
exceed earnings for the reporting period, net income (or loss)
would be reduced (or increased) by actual distributions.
The resulting net undistributed loss should be allocated to
the GP and LPs based on the method of allocating losses
specified in the partnership agreement. Losses should be
allocated to the holder(s) of IDRs only to the extent they
are contractually obligated to participate in losses.
IDR is not separately transferable
IDRs that are embedded and not separately transferable
from the GP interest are not separate participating
securities. While this type of IDR is not considered a separate
participating security, MLPs are still required to compute
EPU under the two-class method because the GP and LP
interests are separate classes of equity. When the IDRs are
embedded in the GP interest, the guidance is virtually the
same as when the IDRs are a separate LP interest, except
27
The computation of EPU for a year-to-date or an annual period

should be made without regard to the quarterly computations.
that all distributions and allocations of undistributed

earnings (or losses) related to the IDRs are aggregated with
the distributions and allocations of earnings (or losses) to
the GP interest. As a result, the effect on the calculated
EPU for the LP interests would be the same regardless of
whether the IDRs are a separate LP interest or are
embedded in the GP interest. However, the calculated EPU
for the GP in many cases will be higher than if the IDRs were
considered separate participating securities.
Determination of available cash
The requirement to determine the contractual obligation to
the holder(s) of IDRs at the end of a reporting period will
require MLPs to determine available cash at the end of a
reporting period before the financial statements for that
period are issued. This requirement may cause some MLPs
to accelerate the timing of the determination of available
cash. While companies are required to determine available
cash prior to issuing their financial statements for purposes
of calculating EPU, there is no requirement to record a
distribution payable prior to distributions being declared.
For example, if an MLP determines available cash in April
20X0 for their first quarter of calendar-year 20X0 reporting
period, the MLP would not record a distribution payable
until April 20X0, when the distribution is actually declared,
even though the distributions will be used to compute EPU
for the first quarter of the reporting period.
Dividend policy disclosures9

The SEC staff believes that certain disclosures that include
statements regarding the intention to pay future dividends
are necessary in registration statements for initial public
offerings by new registrants. In the case of MLP offerings,
the registration statement typically states that the MLP will
distribute all available cash to unit holders. However the
distributions are generally not guaranteed since a majority of
common unit holders can modify the partnership agreement.
Further, the current owners (prior to the IPO) likely will still
have significant control of the entity after the IPO and the
ability to unilaterally modify the partnership agreement.
The SEC staff believes the following disclosures are
necessary in registration statements (outside of the audited
financial statements, given the forward-looking nature of
the disclosures) for initial public offerings where the
registrant indicates its intention to pay out a significant
amount of dividends:
A detailed dividend policy description
A discussion of material risks and limitations, including:
Year-to-date calculation
The computation of EPU for a year-to-date or an annual
period should be made without regard to the quarterly
computations. That is, earnings for the annual period
should be allocated to the unit classes independent of the
quarterly EPU calculations.
9
The fact that the distribution rate could be changed

or eliminated at any time
The impact of debt covenants and state laws on

proposed dividend policy
The risks of paying out all excess cash as dividends

on growth
The impact on future debt repayment
1 December 2005 Division of Corporation Finance Current Issues

paper Section II.A., Other Current Accounting and Disclosure Issues
Dividend Policy Disclosures.
Forward-looking information about cash available for

distribution
Disclosures supporting whether the registrant would

have been able to achieve its distribution policy
historically if the new policy had been in place at
that time
The forward-looking information about cash available for

distribution should include a reconciliation of expected
cash earnings to cash available for distribution. This
reconciliation should start with a measure that the
registrant considers to be highly correlated to cash. In some
situations, it may be appropriate for a registrant to start
with a non-GAAP measure such as EBITDA (earnings before
interest, taxes, depreciation and amortization), assuming
the registrant is able to assert that this measure is highly
correlated to cash. Adjusted EBITDA also may be
appropriate if calculated consistently with the measure
contained in the registrants debt covenants and the
registrant is able to assert that the measure is highly
correlated to cash.
Registrants also should include detailed disclosures

regarding the assumptions used in arriving at the forwardlooking information, including the risks and expected
outcomes if expected results are not achieved. This
disclosure may take the form of a bullet point list of
assumptions with discussion of any changes from historical
amounts. The registrant should discuss any impact on
compliance with debt covenants based on the forwardlooking operating results and expected cash flow
information. MD&A disclosure also should include the
intended dividend policy for the next year and how the
registrant expects to fund the distribution.
The historical information supporting whether the

registrant would have been able to achieve the proposed
distribution policy should include a reconciliation of GAAP
cash flows from operating activities to cash available for
distributions. This reconciliation also should include
reconciling items for things such as the additional costs
associated with being a public company and adjustments for
changes in interest expense expected as a result of the
initial public offering or recapitalization transactions
occurring concurrently with the initial public offering.
Registrants should include detailed disclosures surrounding
the assumptions used in deriving these amounts.
Additionally, if the registrant would not have been able to
pay the dividends at the intended level based on historical
amounts, the registrant should clearly disclose why it
believes it will be able to pay the dividends going forward.
29
Accounting and
reporting by GPs
of MLPs
This section discusses various

considerations that may be applicable to
the preparation of financial statements
for the parent company (general partners)
of MLPs.
Variable interest entity considerations

An entity is a VIE if any of the following are met: (1) the
equity investment at risk is not sufficient to permit the
entity to carry on its activities without additional
subordinated financial support (even if that support has
been provided by one or more holders of an at-risk equity
investment), (2) as a group, the holders of the equity
investment at risk do not have the power, through voting or
similar rights, to direct the activities of the entity that most
significantly impact the entitys economic performance, (3)
Consolidation considerations
The purpose of consolidated financial statements is to
present the results of operations and financial position of a
parent and its subsidiaries as if the group were a single
company. The first step in applying consolidation accounting
is to determine whether the entity is a voting interest entity
or a variable interest entity (VIE). Accordingly, a company
must first determine whether the entity is a VIE under
ASC 810. If the entity is a VIE, consolidation is based on the
entitys variable interests and not its outstanding voting
shares. Only if the entity is determined not to be a VIE should
consolidation be based on an evaluation of voting interests
generally pursuant to the provisions of ASC 810-20-25,
Consolidation Control of Partnerships and Similar Entities
Recognition (ASC 810-20-25), as discussed in the section
below entitled Voting interest entity considerations.
30
Accounting and reporting by GPs of MLPs
The first step in applying consolidation accounting is to determine

whether the entity is a voting interest entity or a variable interest
entity (VIE).
the equity owners, as a group, do not have the obligation to

absorb the expected losses of the entity through the equity
investments they hold or (4) the equity holders, as a group,
do not have the right to receive the entitys expected
residual returns.
In order for the investment at risk to be sufficient, the entity
must have enough equity to induce lenders or other investors
to provide the funds necessary for the entity to conduct its
activities. Expected losses are the benchmark for
determining the sufficiency of equity. The equity investment
at risk can be demonstrated to be sufficient by any one of
three ways: (1) by demonstrating the ability to finance its
activities without additional subordinated financial support,
(2) by having at least as much equity as a similar entity that
finances its operations with no additional subordinated
financial support or (3) by comparing the entitys investment
at risk to its calculated expected losses. If the equity
investment at risk is insufficient to absorb expected losses,
the entity is a VIE.
An entity is a VIE if the equity holders as a group do not
have the power to direct the activities of an entity that most
significantly affect the entitys economic performance. The
owners of the equity investment at risk should have the
power to direct activities that significantly affect the
economic performance of the entity, because as the
decisions to be made by the equity holders become less
significant in nature, a model that bases consolidation on
ownership of voting interests becomes less relevant. Kickout rights or participating rights held by the equity holders
do not prevent any equity interest from having power
unless a single equity holder has the unilateral ability to
exercise such rights.
Additionally, an entity is a VIE if the equity owners, as a

group, do not have the obligation to absorb the expected
losses and the right to receive the entitys expected residual
returns. An entity is subject to the variable interest
consolidation model if the equity owners are directly or
indirectly protected from expected losses by the entity itself
or by other parties involved with the entity. We believe this
means that, by design, the holders of the equity investment
at risk cannot be shielded from the risk of loss on any
portion of their investment by the entity itself, or by others
that are involved with the entity. The equity investors, as a
group, cannot have their return capped through
arrangements with the entity, through the rights provided
through variable interests other than equity interests (even
if those rights are held by equity holders) or by the entitys
governing documents.
The anti-abuse provisions provide that an entity is a VIE
when (1) the voting rights of some investors are not
proportional to their obligations to absorb the expected
losses of the entity, their rights to receive the expected
residual returns of the entity, or both and (2) substantially
all of the entity's activities either involve or are conducted
on behalf of an investor (including the investors related
parties, except its de facto agents that have
disproportionately few voting rights). The intent of this
provision is to move the consolidation analysis from the
voting interests model to the variable interests model in
those instances where it is clear that the voting
arrangements have been skewed such that the investor with
disproportionately few voting rights, as compared with its
economic interest, derives substantially all of the benefits
of the activities of the entity. In other words, it is an abuseprevention mechanism intended to identify instances where
features of the entity's structure, or the contractual
arrangements among the entity's investors, indicate the
voting arrangements are not useful in identifying who truly
controls the entity.
31
Question 1:
Question 2:
A limited partnership may have a general partner that has a

2% ownership interest. If the limited partners have protective
voting rights (as that term is defined in ASC 810-20-25) in
the partnership and the general partner has all of the
substantive decision making ability, will such an entity be a
VIE because of the anti-abuse clause in the variable interest
consolidation model?
An MLP is formed by the parent company contributing

pipeline assets into the MLP in exchange for a one percent
general partnership interest and the remaining ninety-nine
percent limited partnership interest. As general partner, the
parent company is responsible for maintaining and operating
the pipeline asset. Simultaneous to the formation of the MLP,
the parent company sells the ninety-nine percent limited
partnership to an unrelated institutional investor. The limited
partner is not actively involved in the pipeline business and
holds its interest for investment purposes. Is the entity a VIE
pursuant to the anti-abuse clause?
Response:
The anti-abuse test is applied on an investor-by-investor
basis. Although the group of limited partners has
disproportionately few voting rights, the anti-abuse clause
results in the classification as a VIE only if substantially all
of the entitys activities are conducted on behalf of a limited
partner (and the limited partners related parties, except its
de facto agents).
Response
We generally do not believe the size of the investment alone
is determinative in assessing whether substantially all of the
entitys activities are conducted on behalf of the investor
with disproportionately few voting rights. Instead, the
nature of the activities being performed by the entity
should also be considered and compared to the activities
performed by the investor as part of its ongoing operations
to make this determination. In this case, because the
partnership is maintaining and operating the pipeline asset,
and the limited partner is not engaged in that same activity
outside of the partnership, substantially all of the activities
of the partnership may not be viewed as being conducted
on behalf of the limited partner with the disproportionately
few voting rights. Accordingly, the entity is not a VIE
because of the anti-abuse clause.
For additional information on consolidation accounting of
variable interest entities, refer to Ernst & Youngs Financial
Reporting Developments publication, Consolidation of
variable interest entities (Score No. BB1905).
Voting interest entity considerations

The evaluation of whether the general partner should
consolidate an MLP that is not a VIE should be performed
using the guidance in ASC 810-20-25. This guidance
contains a presumption that the general partner in a limited
partnership controls that limited partnership. That
presumption may be overcome if the limited partners have
either (1) the substantive ability either by a single limited
partner or through a simple majority vote to dissolve
(liquidate) the limited partnership or otherwise remove the
general partner without cause or (2) substantive participating
rights. Substantive participating rights provide the limited
partners with the ability to effectively participate in
significant decisions that would be expected to be made in
the ordinary course of the limited partnerships business
and thereby preclude the general partner from exercising
unilateral control over the partnership.
Deconsolidation considerations
A parent may lose control over, and thus be required to
deconsolidate, an MLP. When such an event occurs, the
parent/GPs must determine the accounting consequences of
the deconsolidation event.
The guidance for deconsolidation and derecognition in ASC
810-10-40 applies to the following:
A subsidiary or group of assets that is a business or a

nonprofit activity, except for either of the following:
A sale of in-substance real estate (for guidance on a

sale of in substance real estate, see Subtopic 36020 or 976-605)
A conveyance of oil and gas mineral rights (for

guidance on conveyances of oil and gas mineral rights
and related transactions, see Subtopic 932-360).
A subsidiary that is not a business or a nonprofit activity

if the substance of the transaction is not addressed
directly by guidance in other ASC Topics.
First, the company must determine whether the MLP is insubstance real estate or a conveyance of oil and gas mineral
rights. ASC 360-20, Property, Plant, and Equipment Real
Estate Sales (ASC 360-20), applies to all sales or partial sales
of real estate, including real estate with property
improvements or integral equipment. The terms property
improvements and integral equipment refer to any physical
structure or equipment attached to the real estate that
cannot be removed and used separately without incurring
significant cost. Examples include an office building, a
manufacturing facility, a power plant, and a refinery. The
guidance in ASC 360-20 should be followed if it is determined
that the transaction resulting in loss of control is in substance
the sale of real estate. The guidance in ASC 932-360 should
be followed if it is determined that the transaction is a
conveyance of oil and gas mineral rights.
If the transaction does not involve in-substance real estate
or conveyance of oil and gas mineral rights, the
deconsolidation provisions under ASC 810-10-40,
Consolidation Overall Derecognition, should be followed.
A gain or loss is recorded and the assets are derecognized
when there is a decrease in ownership resulting in loss of
control, regardless of whether the transaction is a partial
sale, a contribution to a joint venture or a contribution in
exchange for an equity interest. Any remaining interest
would be measured at fair value and accounted for under
the equity method if its investment in the MLP is considered
more than minor, as discussed by the SEC staff (ASC 32330-S99-1).
33
Issuance of equity in a partnership

All sales of LP interests first should be evaluated to
determine if they represent in-substance sales or partial
sales of real estate under ASC 360-20 or a conveyance of
oil and gas mineral rights under ASC 932-360.
Assuming the sale is not in substance a sale or partial sale
of real estate or a conveyance of oil and gas mineral rights,
a consolidated subsidiary that issues shares that decrease
the parents ownership interest in the subsidiary while the
parent maintains control of the subsidiary should be
accounted for as a capital transaction. In accounting for
such transactions, the carrying amount of the
noncontrolling interest should be increased to reflect the
change in the noncontrolling interests ownership in the
subsidiarys net assets (i.e., the amount attributed to the
additional noncontrolling interests should reflect its
proportionate ownership percentage in the subsidiarys net
assets acquired).
Any difference between the consideration received
(whether by the parent or the subsidiary) and the
adjustment made to the carrying amount of the
noncontrolling interest should be recognized directly in
equity attributable to the controlling interest (i.e., as an
adjustment to additional paid-in capital).
Subordinated LP units
This guidance may not apply when an MLP issues limited
partnership units that have a preference in distributions or
liquidation rights (referred to as the common LP units). It is
common for an MLP partnership agreement to provide that,
during a subordination period, the common LP units will
have the right to receive distributions of available cash each
quarter based on a minimum quarterly distribution, plus any
arrearages, before any distributions of available cash may
be made on the subordinated LP units. Furthermore, no
arrearages will be paid on the subordinated units. The
practical effect of the subordinated LP units is to increase

the likelihood that during the subordination period, there
will be available cash to be distributed on the common LP
units. When subordinated LP units are held by the
parent/GP of an MLP, the issuance of common LP units do
not possess the characteristics of a residual equity interest
given the common LP units preference over the
subordinated LP units.
We believe that if the class of security issued by the MLP
subsidiary has a preference in distribution or liquidation
rights over any other class of equity security, then it is
analogous to preferred stock. Unlike common stock,
preferred stock of a subsidiary often does not represent a
residual equity interest. Oftentimes, the holders of
preferred stock are entitled to a liquidation preference,
which generally includes a par amount and, in some cases,
cumulative unpaid dividends. Additionally, the preferred
stockholders of a subsidiary typically are entitled to a share
of the subsidiarys earnings up to the stated dividend. Unlike
an issuance of common stock by a subsidiary (which
generally results in a change in the parents ownership
interest), the issuance of preferred stock by a subsidiary
does not change the parents ownership interest. When
recording the issuance of preferred stock by a subsidiary
that is not a residual interest, we would not expect to see an
adjustment to the parents equity accounts.
To the extent it is determined that the issuance of
partnership units represents the issuance of preferential
units (e.g., such units have preference in operating or
liquidating cash flows), we believe that the guidance
provided above should be followed. That is, when recording
the issuance of preferential units by a partnership
subsidiary, there is generally no adjustment to the parents
equity accounts. Alternatively, if partnership units are
issued without preferences, we believe that a parent of a
partnership would follow the guidance on decreases in
The noncontrolling interest is presented separately from the equity

of the parent so that users of the consolidated financial statements
can distinguish the parents equity from the equity attributable to
the noncontrolling interest.
ownership while maintaining control that may result in a

capital transaction. We would expect a parent of a
partnership to develop a reasonable policy with respect to
this accounting and apply that policy consistently.
Expiration of the subordination period
MLP partnership agreements include provisions for the
subordination period to expire after a specific period of
time if the minimum quarterly distributions have been made
to the holders of the common LP units. Upon the expiration
of the subordination period, all subordinated LP units held
by the parent/GP have the same distribution and liquidation
rights as the other common LP units.
Although the common LP units previously issued by the
MLP to the holders of the noncontrolling interest no longer
have a preference in distributions due to the expiration of
the subordination period, we believe this event has no
accounting consequences. The accounting for changes in
noncontrolling interests only applies to changes in a
parents ownership interest in a subsidiary including when
(a) the parent purchases additional ownership interests in
its subsidiary, (b) the parent sells some of its ownership
interests in its subsidiary, (c) the subsidiary reacquires
some of its ownership interests, or (d) the subsidiary issues
additional ownership interests (ASC 810-10-45-22). We
believe the expiration of the subordination period is not a
change in the parents ownership interest in a subsidiary
under ASC 810-10-45-22 because the expiration does not
result in a change in ownership interest in the MLP. As such,
there is no adjustment to be recognized to the equity
accounts of the parent (i.e., no adjustment to additional
paid-in capital) or noncontrolling interest as a result of the
expiration of the preferences.
Noncontrolling interest presentation

A noncontrolling interest in an MLP is any equity interest in
the consolidated entity that is not attributable to the
parent. ASC 810-10 requires that the noncontrolling
interest be classified as a separate component of
consolidated equity (ASC 810-10-45-15 through 45-17).
The noncontrolling interest is presented separately from
the equity of the parent so users of the consolidated
financial statements can distinguish the parents equity
from the equity attributable to the noncontrolling interest
(that is, equity held by owners other than the parent).
Attribution of net and comprehensive income
While ASC 810-10 requires earnings and other
comprehensive income to be attributed to the controlling and
noncontrolling interests, it does not prescribe a method for
making that attribution (ASC 810-10-45-18 through 45-21).
We generally believe that earnings and other comprehensive
income of a partially-owned consolidated MLP should be
attributed between controlling and noncontrolling interests
based on the terms of a substantive profit-sharing
agreement. If such an agreement does not exist, we generally
believe that the relative ownership interests in the subsidiary
should be used to allocate earnings and other comprehensive
income. Accordingly, in the latter case, attributing earnings
and other comprehensive income to the controlling and
noncontrolling interests may be as simple as multiplying the
GAAP earnings and other comprehensive income of the
partially-owned subsidiary by the relative ownership interests
in the subsidiary.
35
Substantive profit-sharing arrangements
Attribution of losses
We believe that, if substantive, a contractual arrangement

that specifies how earnings and other comprehensive
income are to be attributed among the MLPs partners
should be used for financial reporting purposes. To be
substantive, an arrangement should retain its purported
economic outcome over time, and subsequent events
should not have the potential to retroactively affect or
unwind prior attributions.
ASC 810 requires losses to be attributed to the

noncontrolling interest, even when the noncontrolling
interests basis in the partially-owned subsidiary has been
reduced to zero (ASC 810-10-45-21). Under ASC 810, the
noncontrolling interest is considered equity of the
consolidated group and participates in the risks and rewards
of an investment in the subsidiary. Therefore, it is
attributed its share of losses just like the parent, even if the
noncontrolling interest balance becomes a deficit.
Accordingly, any excess loss attributed to the
noncontrolling interest is reported in consolidated financial
statements as a deficit balance in the noncontrolling
interest line in the equity section.
Particular care should be exercised when different formulae

are used to allocate cash distributions and liquidating
distributions from taxable earnings. In these situations,
the tax allocation should be carefully evaluated to ensure
that the basis used for financial reporting purposes
representationally reflects the allocations of earnings to
which the parties agreed (ASC 970-323-35-16).
Specified profit and loss allocation ratios should not be
used if the allocation of cash distributions and liquidating
distributions are determined on some other basis. For
example, if [an] agreement between two investors purports
to allocate all depreciation expense to one investor and to
allocate all other revenues and expenses equally, but further
provides that irrespective of such allocations, distributions to
the investors will be made simultaneously and divided equally
between them, there is no substance to the purported
allocation of depreciation expense (ASC 970-323-35-17).
Determining whether a profit-sharing arrangement is
substantive is a matter of individual facts and
circumstances requiring the use of professional judgment.
Ordinarily, the provisions of MLP partnership agreements

stipulate that net losses are not allocated to the LPs if the
allocation would cause the LP unit holders to have a deficit
balance in their capital account. The partnership agreement
requires that the net losses are to be allocated to the GP.
In these situations, the parent company would not reduce
the noncontrolling interest of the MLP below zero, and
the recovery of losses would be recognized based on the
partnership agreement. Therefore, if substantive
contractual arrangements, such as many that are present
in MLP partnership agreements, limit the allocation of
losses to the amount of the noncontrolling interests
investment in the partially-owned entity, losses are
allocated to the noncontrolling interest for financial
reporting purposes when there is a positive (credit)
balance in the noncontrolling interest account. At the
point the balance reaches zero, if the provisions in the
agreement are deemed to be substantive, any additional
losses are allocated only to the GP.
Cash flow statement presentation
Common control transfers
The parent company consolidating the MLP will account for

the limited partnership units issued to the public as
noncontrolling interest. Since MLPs typically distribute
most, if not all, of their earnings to the partners, the
question arises as to how the parent company of the MLP
should present the distributions made to the noncontrolling
interest holders in its statement of cash flows. ASC 230,
Statement of Cash Flows, does not provide specific
guidance on classification of distributions to noncontrolling
interest holders. However, we believe that the classification
of payments to the noncontrolling interest holders should
be consistent with the rationale for the classification of
noncontrolling interest as equity in the statement of
financial position. The basis for this presentation is the
economic entity concept of consolidated financial
statements. Under the economic entity concept, all residual
economic interest holders in an entity have an equity
interest in the consolidated entity, even if the residual
interest is relative to only a portion of the entity
(i.e., a residual interest in a subsidiary). Therefore, a
noncontrolling interest is required to be displayed in the
consolidated statement of financial position as a separate
component of equity. Consistent with this view, the parent
company of an MLP should reflect distributions made to the
noncontrolling interest holders as financing activities in its
statement of cash flows.
In certain situations, an SEC registrant subsidiary may

distribute a business or businesses to its parent company
who will in turn contribute the business(es) to an MLP
controlled by the parent company. For example, assume
Subsidiary A (an SEC registrant) distributes Business A
(wholly-owned by Subsidiary A) to its parent, Parent A.
Subsequent to receiving Business A, Parent A contributes
Business A to an MLP that is controlled by Parent A. The
question becomes how Subsidiary A reports the distribution
of Business A in its consolidated financial statements.
In transfers of entities under common control in which it is
appropriate for the transferee to restate its prior period
financial statements in a manner similar to pooling-ofinterests accounting, the SEC staff generally does not
believe that it is appropriate to restate the financial
statements of the transferor. It is generally accepted that
prior period financial statements of the transferee (i.e., the
entity receiving the transferred operations, and in this case,
the MLP) should be restated for all periods in which the
transferred operations were part of the ultimate parents
consolidated financial statements. The question arises as to
how the transferors prior period financial statements
should be presented in transfers of entities under common
control in which it is appropriate for the transferee to
restate its prior period financial statements in a manner
similar to pooling-of-interests accounting.
37
In transfers of entities under common control in which it is

appropriate for the transferee to restate its prior period
financial statements in a manner similar to pooling-ofinterests accounting, the SEC staff generally does not
believe that it is appropriate to restate the financial
statements of the transferor. They do not believe that the
provisions of ASC 250, Accounting Changes and Error
Corrections, with respect to a change in reporting entity,
apply to transfers by transferors of business operations
between enterprises under common control. Rather, the
guidelines for discontinued operations under ASC 420
should be followed.
Other matters
Change in the tax status of an enterprise

Some forms of businesses, such as partnerships, certain
limited-liability companies and Subchapter S corporations,
generally are not subject to income taxes. However, as a
result of changes in tax law, or changes in elections, an
enterprise may change from nontaxable to taxable status or
vice-versa.
The deferred tax effects of a change in tax status should be
included in income from continuing operations at the date
the change in tax status occurs (ASC 740-10-45-19). When
an entity changes its tax status and becomes subject to
income taxes, deferred tax assets and liabilities should be
recognized for existing temporary differences. Likewise,
when a taxable enterprise ceases to be taxable, deferred
tax assets and liabilities should be eliminated. In both
cases, the resulting adjustment would be included in
income tax expense for the period in which the change
in status is effective.
An election for a voluntary change in tax status is

recognized on the approval date or on the filing date, if
approval is not necessary. A change in tax status that
results from a change in tax law is recognized on the
enactment date, similar to other tax law changes. An
adjustment could not be made merely because a change in
the status is planned. For example, a taxable corporation
could not eliminate deferred taxes because it planned to
change to Subchapter S status in the future.
39
Other matters
Subsequent event
If an election to change a companys tax status is approved
by the tax authority (or filed, if approval is not necessary)
after the end of a year but before the financial statements
for the year are issued, the change in tax status would be
reflected in the period in which the change is approved (in
this case, the subsequent year) or when it is filed (also in the
subsequent year), if approval is not necessary. If the effect
of the change is expected to be significant, disclosure of the
change and the effects of the change should be included in
the notes to the financial statements.
For additional information regarding the implications of
a change in tax status, refer to Ernst & Youngs Financial
Reporting Developments publication, Accounting for income
taxes (Score No. BB1150).
SEC filing status and internal control over

financial reporting following a spin-off
In June 2004, the SEC staff agreed that, following a spin-off
from an SEC registrant, the newly public company should
make its own assessment of its accelerated filer status
based on the criteria set forth in Exchange Act Rule 12b-2.
In December 2006, the Commission adopted Release 338760, Final Rule: Internal Control Over Financial Reporting
in Exchange Act Periodic Reports of Non-Accelerated Filers
and Newly Public Companies. Footnote 76 of that Release
indicates that, because of the inter-relationship between
Form S-3 eligibility and accelerated filer status, the SEC
believes that, to the extent a newly-formed public company
seeks to use and is deemed eligible to use Form S-3 on the
basis of another entitys reporting history (e.g., its former
parent or a predecessor) consistent with Staff Legal
Bulletin 4, that company also would be an accelerated filer
subject to full Section 404 of Sarbanes-Oxley reporting in
its first annual report (i.e., it would not be eligible for the
SEC 404 relief in its first annual report that is otherwise
available to a newly public company).
If, however, the newly public company does not seek to use
another entitys reporting history for purposes of meeting
the eligibility requirements of Form S-3, then the newly
public company should evaluate its status as an accelerated
filer (and a newly public company) based on the criteria set
forth in Exchange Act Rule 12b-2 (and Release 33-8760).
In those circumstances, its first annual report would not be
subject to accelerated filing deadlines (and would not be
required to comply with Section 404 reporting).
Ernst & Young

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SCORE no. BB1889 (updated 2011)
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Master limited

Cash flow statement presentation ........... 37

Predecessor financial information ............. 7

Other matters ..................39

Accounting for contributed assets

Change in the tax status of an

Accounting for investments in

SEC filing status and internal

Convertible equity securities ................... 24

Master Limited Partnerships (MLPs) have

Companies continue to pursue opportunities to capitalize on

well as the broader market.1

Stable cash flows

Lower cost of capital potential

Attractive risk profile of yield-oriented investments in a

These MLP traits fueled growth and diversification within the

As in any business transaction, careful research and

Master limited partnership accounting and reporting guide

An MLP is a limited partnership

To qualify for the tax benefits, ninety percent of an MLPs

of the outstanding partnership units and

Energy companies that form MLPs typically do so to take

operations that offered less exposure to volatile commodity

In 2005, the Federal Energy Regulatory Commission reinstated a policy, referred to

Master limited partnership accounting and reporting guide

Preparing for formation of an MLP

Companies also need to consider whether they need to seek

consideration of which accounting entitys financial

Settle in, get used to growth

Those overseeing the MLP formation process must also

Following the IPO, the MLP will have additional accounting

Companies also need to consider whether they need to

The MLP going public and taking its place on an exchange

Furthermore, the MLP will need to continue to seek

By taking proactive steps to evaluate and plan for these and

Parent company considerations

Master limited partnership accounting and reporting guide

This section provides an overview of the

Predecessor financial information

Accounting and reporting for MLPs

If the combining companies are under common control but

Audited balance sheets as of the end of each of the past

Audited statements of income, cash flows and

As commented on by the SEC staff at the 2006 AICPA National Conference on

Requirements may differ for smaller reporting companies (see

Master limited partnership accounting and reporting guide

income items in the income statement or statement of

Unaudited financial statements as of and through the

In addition to consolidated financial statements of the

Accounting and reporting for MLPs

Financial statements of entities under common control

While not always the case, an MLP may be formed through

In certain situations, the subsidiary being contributed to the

Accounting and reporting for MLPs

Excerpt from SAB Topic 5.Z.7

A Company disposes of a business through the distribution of a subsidiarys stock to the

10 Master limited partnership accounting and reporting guide

Accounting and reporting for MLPs

Financial information of the GP in LP offerings

During 2010, the SEC staff updated the Division of

Any material transactions with the general partner,

When there is a commitment, intent or reasonable

When an affiliate of the general partner has committed

A smaller reporting company is required to provide the