B.6 Transactions Involving Master Limited Partnerships
ASC 805-50
Master Limited Partnership Transactions
05-7 Master limited partnerships are partnerships in which interests are publicly traded. Most master limited partnerships are formed from assets in existing businesses. Typically, the general partner of the master limited partnership is affiliated with the existing business (that is, the master limited partnership is usually operated as an extension of or complementary to the business of the general partner). The purposes for forming a master limited partnership vary. They can be formed to realize the value of undervalued assets, to pass income and tax-deductible losses directly through to owners, to raise capital, to combine several existing partnerships, or as a vehicle to enable entities to sell, spin off, or liquidate existing operations. A master limited partnership may be created in a variety of ways. Whether a particular transaction is a business combination that should be accounted for using the acquisition method or a transaction between entities under common control can be determined only after a careful analysis of all facts and circumstances. The Formation of a Master Limited Partnership Subsections identify specific transactions involving master limited partnerships and provide guidance on whether a new basis of accounting is appropriate.
Formation of a Master Limited Partnership
30-7 Because of such factors as the consideration of common ownership and changes in control, a new basis
of accounting is not appropriate for any of the following transactions that create a master limited partnership:
- A rollup in which the general partner of the new master limited partnership was also the general partner in some or all of the predecessor limited partnerships and no cash is involved in the transaction. Transaction costs in a rollup shall be charged to expense.
- A dropdown in which the sponsor receives 1 percent of the units in the master limited partnership as the general partner and 24 percent of the units as a limited partner, the remaining 75 percent of the units are sold to the public, and a two-thirds vote of the limited partners is required to replace the general partner.
- A rollout.
- A reorganization.
30-8 In other situations, it is possible that a new basis of accounting would be appropriate.
30-9 The issuance of master limited partnership units to a general partner of a predecessor limited
partnership who will not be the general partner of the new master limited partnership in settlement of
management contracts or for other services that will not carry over to the new master limited partnership has
characteristics of compensation rather than of equity and shall be accounted for accordingly by the new master
limited partnership.
A master limited partnership (MLP) is a publicly traded partnership that combines the tax benefits of
a limited partnership with the liquidity of publicly traded securities. For the MLP to qualify for the tax
benefits, 90 percent of its income must come from activities related to natural resources, real estate,
or commodities. MLPs commonly engage in petroleum and natural gas extraction and transportation.
There are two classes of MLP owners: (1) the “sponsor“ or the general partner and (2) the limited
partners. The general partner manages the MLP’s day-to-day operations. The MLP technically has no
employees, so all services are provided or managed by the general partner. All other investors are
limited partners and have no involvement in the MLP’s operations. The limited partner units are publicly
traded much like shares in a corporation, while the general partner units usually are not. The general
partner stake is often 2 percent of the partnership, though the general partner can also own limited
partner units to increase its overall ownership percentage.
Example B-6
Illustration of Typical MLP Structure
An MLP may be formed in various ways. ASC 805-50-30-7 contains terms describing some of the ways in
which MLPs may be formed. The ASC master glossary defines these terms as follows:
- Dropdown — “A transfer of certain net assets from a sponsor or general partner to [an MLP] in exchange for consideration.“
- Reorganization — “A way to create [an MLP] in which all of the assets of an entity are placed into [an MLP] and that entity ceases to exist.“
- Rollout — “A way to create [an MLP] in which certain assets of a sponsor are placed into a limited partnership and units are distributed to the shareholders.“
- Rollup — “A way to create [an MLP] in which two or more legally separate limited partnerships are combined into one [MLP].“
Before the adoption of ASU
2015-02, the transfer of assets or net assets to form an MLP and
any subsequent transfers of assets or net assets to the MLP were often accounted for
as common-control transactions because the general partner typically controlled the
net assets before and after the transfer. After the adoption of ASU 2015-02, a
general partner with a 2 percent interest in an MLP may not control the MLP.
Entities should consider all facts and circumstances in determining whether the
formation of an MLP and any subsequent transfers to the MLP should be accounted for
as a common-control transaction in accordance with ASC 805-50 or as a business
combination in accordance with ASC 805-10, ASC 805-20, and ASC 805-30. See
Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial
Interest for more information. In addition, an entity should
consider all facts and circumstances in determining whether the receiving entity
should present the transfer as a change in the reporting entity (see Section B.4.1).