There are some specific disclosures requirements for LLCs and partnerships, and some general requirements that are especially pertinent for them.

32.4.1 Reconciliation between statements prepared on different bases

For SEC registrants, FRP 405 indicates that it may be desirable to include financial data on the tax basis of accounting within the US GAAP-basis financial statements. Ordinarily, LPs distribute tax basis information to their partners after the balance sheet date because of the limited partners’ personal tax reporting responsibilities. The annual report including audited US GAAP-basis financial statements may be distributed at a later date.
We encourage presentation in the footnotes of a reconciliation to the US GAAP-basis financial statements if the LP includes audited tax-basis statements in an SEC filing as additional information to the audited US GAAP-basis financial statements. A note or some similar reference in the tax-basis statements, if filed, should state that US GAAP-basis financials are included elsewhere in the filing.
If provided, the reconciliation of US GAAP- to tax-basis information should include, at a minimum:
  • net income/loss on the US GAAP-basis to the tax-basis balance (frequently described as excess/deficit of revenue collected over/under expenses disbursed)
  • total assets on the US GAAP basis to total assets on the tax basis and
  • partners’ capital/deficit on the US GAAP basis to partners’ capital/deficit on the tax basis

32.4.2 Income tax matters

Designation of tax status is considered to be a tax position under ASC 740. Partnerships (and LLCs that are treated as partnerships for tax purposes) are generally not taxpayers; instead, the general and limited partners (or LLC members) pay taxes on their shares of the profits. The partnership or LLC should monitor its continued qualification as a non-tax-paying entity, with disclosure of any developments in the entity or in legislation that might subject it to corporate taxation.
US GAAP-basis financial statements of an LP (or an LLC treated as a partnership for tax purposes) should include a footnote indicating that the partnership itself is not subject to federal income tax.
Figure FSP 32-1 is a sample disclosure of a partnership’s tax matters.
Figure FSP 32-1
Sample disclosure — partnership tax matters
Note X — Income taxes
No provision for federal income taxes is necessary in the financial statements of the partnership because, as a partnership, it is not subject to federal income tax and the tax effect of its activities accrues to the partners.
In certain circumstances, partnerships may be held to be associations taxable as corporations. The IRS has issued regulations specifying circumstances under current law when such a finding may be made, and management has obtained an opinion of counsel based on those regulations that the partnership is not an association taxable as a corporation. A finding that the partnership is an association taxable as a corporation could have a material adverse effect on the financial position and results of operations of the partnership.
LLCs that are subject to income taxes are also subject to ASC 740. See FSP 16. Change in tax status

The tax implications of a change from (1) a partnership to a corporation or (2) a corporation to a partnership are subject to the recognition requirements of ASC 740. ASC 740 also applies for recording deferred tax assets and liabilities for temporary differences on the day the tax status changes to a corporation. See FSP 16. For changes from a corporation to a partnership, see FSP 32.7.
In SEC FRM 3410.1 - SEC FRM 3410.4, the SEC also has incremental guidance for conversions of a partnership or similar tax-exempt entity to a corporation. Historical financial statements need to include pro forma information for tax and EPS on the face of the financial statements. If taxes are the only adjustments as a result of the formation of the corporation, the reporting entity is required to include pro forma EPS for only the latest fiscal year-end and current stub period. Also, reporting entities are encouraged, but not required, to include pro forma information for all periods presented. If other adjustments in addition to taxes are required, the reporting entity should show only the latest fiscal year and interim period. The reporting entity should continue to include such pro forma presentation in subsequent years until the year of conversion is no longer presented in the comparative financial statements. Undistributed earnings or losses of partnerships should be reclassified to paid-in capital in the pro forma statements, as if a distribution had been made to the owners with a subsequent contribution to equity within the new structure. Concurrent with the conversion, partnerships that pay distributions to owners from equity issuance proceeds (not from retained earnings) should present pro forma EPS for the latest year and interim period giving effect to the conversion (but not the offering) if the conversion will result in a material reduction to EPS (excluding the effects of the offering). See FSP 32.7 for further information on conversion to partnerships.

32.4.3 Related parties

As noted in FSP 26, ASC 850-10-50-1 requires disclosure of all material related party transactions and agreements. In the context of partnerships, related party disclosures include:
  • the relationship of the general partner to the partnership;
  • the extent of the general partner’s equity interest;
  • the nature of any management contract between the partnership and the general partner or other party and
  • any relationship between the general partner and other parties related to the partnership
LLCs would be expected to include similar disclosures for transactions between its members.
FRP 405 promotes US GAAP-basis financial statements as the best available financial data. US GAAP requires inclusion of any related party amount on the face of the primary financial statements and disclosure of all related party transactions in the footnotes, particularly regarding the relationship and transactions between a general partner and other related parties.
Common related party transactions for MLPs include human resource and supply arrangements. Presentation and disclosure of related party transactions in general is addressed in FSP 26.

32.4.4 Finite life of the entity

If there is a finite life of the entity, it should disclose the date it will cease to exist.
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