ASU No. 2015-06 standardizes the calculation of historical earnings per share related to dropdown transactions for Master Limited Partnerships (MLPs), partnerships where interests are publically traded. The issue was not addressed in Topic 260 Earnings Per Share and so in practice, there are a variety of methods being used; ASU No. 2015-06 should eliminate the variety. ASU No. 2015-06 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and should be applied retrospectively for all statements presented.
MLPs apply a two-class method of calculating earnings per share since the general partner, limited partners, and incentive distribution rights holders may participate differently in the distribution of cash. A dropdown is a transfer of assets from a sponsor or general partner to an MLP in exchange for consideration. Topic 260 Earnings Per Share states that when a dropdown is considered a transaction between entities under common control, the statements of operations for the master limited partnership is adjusted retrospectively as if the dropdown had occurred on the earliest date the entities were under common control. Topic 260 did not specify how to calculate historical earnings per share between the date the MLP formed and the date of the dropdown.
ASU No. 2015-06 states that to calculate historical earnings per share under the two-class system, the earnings per share of a transferred business before the date of transfer are all allocated to the general partner. The dropdown does not change the historical earnings per share of the limited partners before the date of dropdown. ASU No. 2015-06 requires disclosures about how rights to the earnings (losses) differ before and after the dropdown.
Disclosures must now include a narrative description of the effects of the dropdown on earnings per unit. FASB 260-10-50-1 already required a disclosure to reconcile the numerator, which would show an allocation of earnings to the transferred business away from the limited partners. ASU No. 2015-06 added the additional requirement to disclose in narrative format how the rights to the earnings (losses) of the transferred net assets differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method.
The new reporting requirements implemented in ASU No. 2015-06 are complex and represent a significant change to annual reporting procedures. Looking for assistance implementing these new guidelines? For additional information on ASU No. 2015-06, please contact Bill Rosenberger, CPA, at 818-334-8623, or click here for email. We look forward to hearing from you!