At its March 26, 2008 meeting, the Financial Accounting Standards Board (FASB) ratified the final consensus reached at the March 12, 2007 Emerging Issues Task Force (EITF) meeting for EITF Issue No. 07-04, “Application of the Two-Class Method under FASB Statement No. 128, ‘Earnings per Share,’ to Master Limited Partnerships”. Master limited partnerships (MLPs) often issue multiple classes of securities that participate in partnership distributions based on a formula. A typical MLP consists of a general partner interest (GP), publicly traded limited partner units (LPs), and incentive distribution rights (IDRs). IDRs are a type of limited partner interest; however, they are nonvoting interests that do not represent ownership in the MLP. The Task Force reached a consensus that this Issue would be applicable to all MLP arrangements regardless of whether the IDRs are a separate interest or embedded in the GP interest.
When the IDRs are a separate LP interest, the IDRs would represent a participating security and therefore the MLP would allocate current-period earnings to the LP, GP, and IDR holder using the two-class method. When current-period earnings are in excess of cash distributions, undistributed earnings should be allocated to the GP, LPs, and IDR holder as if the undistributed earnings were available cash. When cash distributions are in excess of current-period earnings, net income (or loss) should be reduced (or increased) by distributions to the GP, LPs, and IDR holder. The resulting hypothetical loss would be allocated to the GP and LPs based on their respective sharing of losses specified in the partnership agreement. This consensus assumes that the IDR holder does not have a contractual obligation to share in the losses of the MLP.
When the IDR is embedded in the GP interest, the IDR would not be considered a participating security; however, the MLP would still apply the two-class method to the interests of the GP and LPs (although the GP's earnings allocation would include the rights of the IDR). Undistributed earnings should be allocated to the GP (including the distribution rights of the embedded IDR) and LPs as if the undistributed earnings were available cash. When the IDR is embedded in the GP interest, net income (or loss) should be reduced (or increased) by distributions to the GP (including the distribution rights of the embedded IDR) and LPs. The resulting hypothetical loss would be allocated to the GP and LPs based on their respective sharing of losses specified in the partnership agreement.
The guidance in this Issue is effective in the first fiscal year beginning after December 15, 2008, including the interim periods within that fiscal year.
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