1. A Global Reach with a Local Perspective
University of North Alabama
19th Annual Decosimo Accounting Forum
July 22, 2011
www.decosimo.com
Issues in Partnership Accounting
PAM MANTONE, CPA, CFF, CFE, FCPA, CITP
Senior Assurance Manager

2. Current Authoritative Guidance

3. Little authoritative guidance exists for partnership
accounting in general
 Generally the partnership/operating agreement
dictates the basis of accounting to be used in
preparing financial statements and allocating profits
and losses
 May require income tax basis of accounting – commonly
used
 May require tax-basis allocation methods that are not pro-
rata
 State-specific rules on allocations and other matters
may apply if no written agreement

4. Selected accounting issues specific to
Partnerships and LLCs
 Income taxes
 Guaranteed payments
 Allocations of profit and loss
 Accounting for changes in partnership interests

5. Reporting income taxes
 No federal tax, but state taxation varies
 May have state tax provision if entity level income tax
applies
 Payments made with composite state returns on
behalf of partners/members
 Treated as distributions if paid by partnership/LLC
 May be withheld from regular distributions or collected from
partners/members
 Not treated as income tax expense for partnership/LLC

6. Accounting for guaranteed payments to partners
 Conventional method is to treat payments as part of
the allocation of partnership net income rather than as
an expense.
 If payments are designed to reflect reasonable
compensation, may be more meaningful to treat as an
expense.

7. Allocations of profit and loss
 Usually driven by partnership/operating agreement
 May be tax-driven or basis-driven
 If one partner has guaranteed liabilities of the partnership,
may receive 100% of losses.
 Profits may be allocated pro-rata based on ownership
percentages.
 Usually no effect on financial statements except to the extent
general partner and limited partners’ interests separately
disclosed.

8. Accounting for changes in partnership interests
 In practice, two methods are generally used
depending on circumstances -
 Bonus method
 Goodwill method
 Both methods applied in the same way regardless
of whether transaction is between partnership and
individual partners or solely between individual
partners.

9. Bonus method
 Assets contributed for admission are valued at fair
market value on contribution date.
 Assets distributed for withdrawal are adjusted to fair
value and adjustment is included income.

10. Goodwill method
 Value of partnership as a whole is imputed based on
price of partnership interest being sold or acquired.
 Assets are adjusted to reflect imputed value, including
goodwill, and capital is credited.

11. Bonus and Goodwill are equally acceptable
alternatives, but some observations have been made
in the industry about the appropriateness of the
goodwill method in certain circumstances.
 Is a complete revaluation always appropriate,
particularly where no change in control has occurred?
 EITF 85-46 proposed a third method – the push-down
method – that permits a partial revaluation to the
extent the price of the acquired interest differs from
the book value of that interest, but a consensus was
not reached.

12. EITF revised guidance for leveraged buyouts in 1989
that indicated no change in basis is appropriate
unless transaction results in new controlling interest,
(although this was not intended to govern accounting
for partnership transactions.)
 New partner(s) owns more than 50% after the transaction
 No subset of continuing partners owned more than 50%
before the transaction

13. Examples of Bonus Method For Contribution

14. Examples of Goodwill Method For Contribution

15. Examples of Goodwill Method For Contribution

16. Examples of Bonus Method For Withdrawal

17. Examples of Bonus Method For Withdrawal

18. Examples of Goodwill Method For Withdrawal

19. Questions?

20. Connect with me
Pamela S. Mantone, CPA, CFF, CITP,
CFE, FCPA,
Senior Assurance Manager
423.756.7100
pammantone@decosimo.com
On LinkedIn:
http://www.linkedin.com/pub/pamela
-mantone/10/824/807
Disclaimer: The contents of this presentation are for informational purposes only. The information is not intended to be a substitute for
professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have
regarding your financial goals or specific situations.