The views in this summary are not Generally Accepted Accounting Principles until a consensus is reached and it is ratified by the Board. Memo No.

Transcription

1 Memo No. Issue Summary No. 1, Supplement No. 1 * Memo Issue Date March 5, 2015 Meeting Date(s) EITF March 19, 2015 Contact(s) Mark Pollock Lead Author Ext. (203) Jennifer Hillenmeyer EITF Coordinator Ext. (203) Robert Uhl EITF Liaison Project Project Stage Dates previously discussed by EITF Previously distributed Memo Numbers EITF Issue No. 14-A, Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions Redeliberations September 18, 2014 Issue Summary No. 1, dated September 4, 2014 Purpose or Objective of This Memo 1. At the September 18, 2014 EITF meeting, the Task Force reached a consensus-forexposure that when a general partner transfers (or drops down ) net assets to a master limited partnership (MLP) and that transaction is accounted for as a transaction between entities under common control, the earnings (losses) of the transferred business before the date of the dropdown transaction should be allocated entirely to the general partner interest for purposes of calculating historical earnings per unit under the two-class method. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. * The alternative views presented in this Issue Summary Supplement are for purposes of discussion by the EITF. No individual views are to be presumed to be acceptable or unacceptable applications of Generally Accepted Accounting Principles until the Task Force makes such a determination, exposes it for public comment, and it is ratified by the Board. Page 1 of 8

2 2. In addition, the Task Force reached a consensus-for-exposure that qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit would be required. 3. A proposed Update was issued on October 30, 2014, with a January 15, 2015 comment letter deadline. 4. At the March 19, 2015 EITF meeting, the Task Force will have the opportunity to consider the feedback received through comment letters and the FASB staff s outreach as it redeliberates the consensus-for-exposure. The Task Force will then be asked whether it wishes to affirm its consensus-for-exposure on this Issue as a final consensus. Summary of Comment Letters 5. Five comment letters were received on the proposed Update. The breakout of respondents by constituent group is as follows: Constituency Group Number of Comment Letters Accounting Firms 2 Professional Accounting Associations 1 Preparers 2 Total 5 Scope 6. The proposed Update included the following question for respondents on scope: Question 1: Should the scope of the proposed amendments be limited to entities within the scope of the Master Limited Partnerships Subsections of Topic 260 that retrospectively adjust their financial statements as a result of a dropdown transaction Page 2 of 8

3 accounted for as a transaction between entities under common control in accordance with Subtopic ? 7. Four respondents agreed with limiting the scope of the proposed guidance to MLPs as described in Question 1. One preparer suggested expanding the scope of the proposed guidance to include entities that are structured in a way that is the same as or similar to the way in which MLPs are structured, such as entities commonly referred to as YieldCos. 8. YieldCos are publicly traded entities that can be organized as corporations or partnerships. They typically own assets in clean-energy infrastructure (such as wind and solar farms) that produce stable cash flows that are distributed to their owners. These assets are sometimes transferred from a sponsor, which could be the YieldCo s general partner, a controlling shareholder, or a limited partner with a common control relationship. These transfers are often accounted for as transactions between entities under common control, similar to MLP dropdown transactions within the scope of this Issue. The staff identified seven YieldCos registered in the U.S., five of which follow GAAP. 9. The scope of the MLP subsections of Topic 260 is limited to MLPs that are required to make incentive distributions when certain thresholds have been met and when those distributions are accounted for as equity distributions (as opposed to compensation costs). The MLP subsections of Topic 260 were codified from EITF Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships, which was written primarily to address questions about the treatment of incentive distribution rights in an MLP s earnings per unit calculations. Question 1 for the Task Force 1. Does the Task Force want to affirm the scope of the proposed guidance or recommend that the staff research expanding the scope to similarly structured entities? 10. The staff recommends that the Task Force affirm the scope of the proposed Update. Page 3 of 8

4 11. The staff acknowledges that there may be other entities that are structured similar to MLPs, but are not within the scope of the MLP subsections of Topic 260, such as YieldCos. However, the EITF s consensus-for-exposure for this Issue is based on the conclusion in Issue 07-4 (which is applicable only to MLPs) that a strict contractual approach to allocating undistributed earnings is preferable to methods that are pro forma in nature that would not reflect the actual economic rights to undistributed earnings. 12. Furthermore, because of the variations in organizational structure of YieldCos and other entities structured similar to MLPs, the staff would need to perform further research to determine whether it is appropriate to expand the scope of this Issue and, if so, how the scope should be expanded. Given the limited number of YieldCos that currently exist, the staff does not recommend performing further research at this time. Allocation of earnings (losses) for purposes of computing earnings per unit 13. The proposed Update included the following question for respondents on the allocation of earnings (losses) for purposes of computing earnings per unit: Question 2: When a dropdown transaction occurs that is accounted for as a transaction between entities under common control, should a reporting entity allocate the earnings (losses) of the transferred business to the general partner interest so that no restatement of the previously reported earnings per unit of the limited partners is required? 14. All respondents agreed with this method of allocating earnings (losses) of the transferred business for purposes of computing earnings per unit. One respondent noted that the limited partners have no legal rights or obligations related to the earnings (losses) of the transferred business for periods before the date of the dropdown transaction. Question 2 for the Task Force 2. Does the Task Force want to affirm that earnings (losses) of the transferred business should be allocated to the general partner interest for purposes of computing earnings per unit? Page 4 of 8

5 15. The staff recommends that the Task Force affirm that earnings (losses) of the transferred business for periods before the date of the dropdown transaction should be allocated to the general partner interest for purposes of computing earnings per unit. The staff believes that this method is consistent with the economic rights of the general partner to those earnings (losses). Disclosure 16. The proposed update included the following question for respondents on disclosure: Question 3: Should a reporting entity be required to disclose how the rights to the earnings (losses) of the transferred business differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method? 17. Four respondents agreed that a reporting entity should be required to disclose this information. One respondent did not comment on this question. Question 3 for the Task Force 3. Does the Task Force want to affirm that a reporting entity should be required to disclose how the rights to the earnings (losses) of the transferred business differ before and after the dropdown transaction occurs for purposes of computing earnings per unit? 18. The staff recommends that the Task Force affirm that a reporting entity should be required to disclose how the rights to the earnings (losses) of the transferred business differ before and after the dropdown transaction occurs for purposes of computing earnings per unit. The staff believes that this would provide more transparent disclosure about the effects of the dropdown transaction on earnings per unit. Page 5 of 8

6 Transition 19. The proposed update included the following question for respondents on transition: Question 4: Should the proposed amendments be applied retrospectively? 20. Three respondents agreed that the proposed amendments should be applied retrospectively. One professional accounting organization indicated either retrospective application or prospective application should be allowed. That respondent questioned whether retrospective application has value to investors in mature MLPs or in situations in which the dropdown transaction occurred several years ago, and whether the necessary information would be available. One respondent did not respond to this question. Question 4 for the Task Force 4. Does the Task Force want to affirm that the proposed amendments should be applied retrospectively? 21. The staff recommends that the Task Force affirm that the proposed Update should be applied retrospectively. 22. Based on feedback received during its outreach, the staff acknowledges that historical earnings per unit may not be a significant metric used by investors. However, given the prominence of the earnings per unit metric, the staff believes that the comparability provided by retrospective application is important and consistent with FASB Concept Statement No. 2, Qualitative Characteristics of Accounting Information. Retrospective application is also consistent with the transition method for other accounting standards issued by the Board related to earnings per share. 23. The staff does not believe that prospective application is appropriate because it could result in a mixed presentation of earnings per unit, particularly for MLPs that have had multiple dropdown transactions. For example, if an MLP changes its method of calculating historical earnings per unit as a result of this proposed Update, the earnings (losses) related to certain transferred businesses would be allocated to the general partner, Page 6 of 8

7 limited partners, and incentive distribution rights holders, while the earnings (losses) related to other transferred businesses would be allocated entirely to the general partner. 24. Although there is diversity in practice, the staff understands that the majority of reporting entities currently allocates earnings (losses) consistent with the proposed amendments. Therefore, the staff does not expect most entities to incur costs for retrospective transition. 25. Furthermore, no comment letters were received from preparers indicating that the information necessary for retrospective application would not be available. Effective date 26. The proposed update included the following question for respondents on effective date: Question 5: How much time would be needed to implement the proposed amendments? Should early adoption be permitted? 27. Four respondents indicated that the time to implement the proposed Update would not be significant. Two of those respondents recommended that the proposed Update be effective for financial statements issued for fiscal years beginning after December 15, One respondent did not respond to this question. 28. Three respondents indicated that early adoption should be permitted. Two respondents did not respond to this question. Questions 5 and 6 for the Task Force 5. What should the effective date be? 6. Should early adoption be permitted? 29. The staff recommends that the proposed amendments be effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The staff believes that such an effective date would provide entities Page 7 of 8

8 with sufficient time to comply with the proposed amendments. No separate effective date is recommended for non-public entities because the scope of this Issue is limited to publicly-traded MLPs. 30. The staff also recommends that early adoption should be permitted. Because there is currently diversity in practice over the way in which entities compute EPU with respect to this Issue, the staff believes that early adoption should be available to reduce any diversity as soon as possible. Page 8 of 8