Though the NYSSCPA largely agreed with a Financial Accounting Standards Board (FASB) proposal meant to resolve certain inconsistencies in how earnings within master limited partnerships (MLP) are handled, it did raise concerns about the board’s plan to implement these changes retrospectively.

The Society made the comments in a Jan. 15 letter written by members of its Financial Accounting Standards Committee. The FASB’s exposure draft, “Proposed Accounting Standards Update–Earnings per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions,” was released in October.

The proposal takes aim at instances in which a general partner transfers or “drops down” net assets to an MLP—a type of partnership that is invested in by other limited partnerships (LP) and has no individual shareholders—and records it as a transaction between entities under common control.

MLPs are formed for several different reasons. For example, someone who is aiming to eventually form a partnership, but is still gathering investments, may create an MLP to hold the investments so that they can later be dropped down into the partnership. Or a general partner may form an MLP in order to have several feeder groups with different investment objectives that can later be dropped down into that person’s portfolio.

According to Margaret A. Wood, an NYSSCPA past president and one of the comment letter’s authors, entities consistently account for these dropdowns as a transaction under common control, which is treated as a merger.

It’s what happens next that seems to be causing the inconsistencies in practice that the FASB hopes to prevent. Restatement of previously issued financial statements is required to reflect the merger transaction. However, some partnerships allocate all of the past earnings or losses prior to the “drop down” date to the general partners’ account and do not restate the limited partners’ accounts. Others, however, restate the accounts of general and limited partners—as well as incentive holders—to reflect the earnings or losses prior to the dropdown date, as if the investment had been held by all partners and incentive holders for the period held by the general partner, according to Wood.

If implemented, the FASB proposal would specify that earnings of a transferred business before the date of a drop-down transaction would be allocated entirely to the general partner interest. The previously reported earnings per unit of the limited partners would not change as a result of the dropdown transaction, though the proposal would require qualitative disclosures about how the rights to the earnings differ before and after the dropdown transaction occurs.

While the Society agreed with the proposal, it disagreed with the board’s suggestion that it be applied retrospectively, mainly because it would mean conducting time-consuming restatements and resettlements for transactions that may have occurred many years ago by partnerships that could even be in the middle of winding down.

“The restatement would require restatement at the master partnership level and restatement by the limited partnerships that are investing in the master partnership,” Wood said. This, in turn, would require restatement of each of the investee LP’s general partner, limited partner and incentive holders individual partners equity accounts.

“You don’t want to go back and have to restate every partner’s equity … especially for the older and more mature partnerships,” she added. “We think it’s more work and not worth the benefit.”