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32.6 Calculating earnings per unit for MLPs
Publication date: 12 Nov 2019
us Financial statement presentation guide
MLPs with publicly held units should present earnings per partnership unit (EPU) on the face of the income statement under ASC 260-10-55-102 through ASC 260-10-55-110, Earnings Per Unit.
Publicly traded MLPs often issue multiple classes of securities that may participate in partnership distributions according to a formula specified in the partnership agreement. A typical MLP is generally formed by the general partner contributing mature assets with stable cash flows to the partnership in exchange for a general partner (GP) interest and incentive distribution rights (IDRs). The MLP then issues publicly-traded common units held by limited partners (the Common Units).
Generally, the IDRs are viewed as being a return on the GP’s investment, whereby the GP has an additional mechanism to participate in the performance of the partnership and represent a separate class of nonvoting limited partner (LP) interest. However, some arrangements are structured such that the IDRs are not a separate LP interest, but are embedded within the GP interest. When the IDRs are a separate LP interest, then the holder of the IDRs (which is initially the GP) may transfer or sell the IDRs, subject to the consent of the LPs prior to a specified date.
When the IDRs are embedded within the GP interest, the IDRs cannot be detached and transferred. Except for the GP interest, the IDR holder does not have a separate residual ownership interest in the partnership. MLPs are predominately utilized in the energy industry and, more specifically, in the pipeline business because of the stable income generated by those businesses.
Regardless of whether the IDRs are embedded within the GP interest or are separate securities, MLPs are required to apply the two-class method to calculate EPU because of the differences between the Common Units and the GP interest. When applying the two-class method to the interests of the GP and LPs in MLPs, questions have arisen about the effect of IDRs on the computation of EPU. The effect will differ based on whether the IDR is embedded in or separate from the GP interest.
32.6.1 IDRs that are separate securities
IDRs that are a separate class of LP interest are participating securities because they have a right to participate in earnings with common equity holders. Therefore, to calculate EPU, current period earnings are allocated to the GP, LPs, and IDR holders using the two-class method in ASC 260. When calculating EPU under the two-class method, the MLP would reduce (or increase) net income (or loss) for the current reporting period by the amount of available cash that has been or will be distributed to the GP, LPs, and IDR holders for that reporting period.
The partnership agreement may contractually limit the amount of distributions to holders of the IDRs. Therefore, the MLP should allocate the undistributed earnings, if any, to the GP, LPs, and IDR holders, utilizing the distribution waterfall (i.e., a schedule included in the partnership agreement that prescribes distributions to the various interest holders at each threshold). The undistributed earnings should be allocated to the IDRs based on the contractual participation rights of the IDRs to share in current period earnings. Therefore, if the partnership agreement includes a “specified threshold” as described in ASC 260-10-55-30 in which the IDRs stop participating in earnings, an MLP should not allocate undistributed earnings to the IDRs once the specified threshold has been met. If the partnership agreement includes a “specified threshold,” that threshold would generally recognize that a legal mechanism exists that allows the partnership to make a distribution to the LP interests outside the distribution waterfall.
The MLP should allocate any excess of distributions over earnings to the GP and LPs based on their respective sharing of losses specified in the partnership agreement (that is, the provisions for allocation of losses to the partners’ capital accounts for the period presented). If the IDR holders do not share in losses, the MLP would not allocate the excess of distributions over earnings to the IDR holders. However, if the IDR holders have a contractual obligation to share in the losses of the MLP on a basis that is objectively determinable (as described in ASC 260-10-45-67 ), the MLP should allocate the excess of distributions over earnings to the GP, LPs, and IDR holders based on their respective sharing of losses specified in the partnership agreement for the period presented.
32.6.2 IDRs that are embedded within the GP interest
IDRs that are embedded in the GP interest are not separate participating securities. However, because the GP and LP interests are separate classes of equity, the MLP would still apply the two-class method in computing EPU for the GP and LP interests.
For purposes of the EPU calculation, in some cases, the MLP would reduce (or increase) net income (or loss) for the current reporting period by the amount of available cash that will be, but has not yet been, distributed to the GP (including the distribution rights of the embedded IDRs) and LPs for that reporting period.
In addition, MLPs may have multiple classes of securities (see FSP 32.6). In these situations, EPU is only required for the common units, although the MLP is not precluded from calculating EPU for all classes. This is similar to reporting entities with both common and preferred stock, whereby entities are only required to report EPS for common stock but are not precluded from reporting EPS for preferred stock.
Example FSP 32-1 illustrates application of the two-class method of computing EPU.
Example FSP 32-1 illustrates application of the two-class method of computing EPU.
EXAMPLE FSP 32-1
Two-class method of computing EPU
Assume a partnership agreement requires the GP to distribute available cash within 60 days following the end of each fiscal quarter. The MLP is required to file financial statements with a regulatory agency within 45 days following the end of each fiscal quarter.
How should the MLP compute EPU for the first quarter?
Analysis
To compute EPU for the first quarter, the GP should determine the amount of available cash that will be distributed to the GP and LPs for the quarter.
The MLP should reduce (or increase) net income (or loss) by that amount in computing undistributed earnings that will be allocated to the GP (including the distribution rights of the embedded IDRs) and LPs.
32.6.3 Calculation of EPU after a common control transaction
When assets and liabilities comprising a business are transferred between reporting entities under common control, ASC 805-50-45 -2 through ASC 805-50-45-5 requires that financial statements of the receiving entity be presented as though the transfer occurred at the beginning of the period. Financial statements for prior years must also be retrospectively adjusted to provide relevant comparative information.
In addition, when an MLP is formed through a “drop-down” of assets and liabilities by a sponsor who retains control of the MLP (thus, the drop-down occurs under common control), ASC 260-10-55-111 requires that EPU for periods before the date of the drop-down be calculated assuming allocation of all of the earnings related to the transferred assets and liabilities to the general partner. Disclosure of how the rights to the earnings differ for purposes of the EPU calculation before and after the drop-down occurred is required.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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