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Thus, the LIBOR Notes were initially booked at a cost that
included the $1,093,750 transaction costs incurred on their
origination. The cost would be amortized over the life of the
investment. This amortization would constitute a charge against
income, offset by accrued payments on the Notes. If any of the
LIBOR Notes were distributed or a partner was redeemed, the
amortized balance would be adjusted for changes in value due to
interest rate movements and increased by the previously amortized
portion of the origination cost. This convention had the effect
of ensuring that the origination cost would be borne solely by
the partner(s) that held an interest in the Notes, directly or
indirectly, at the time they matured or were sold.
The Accounting Policies do not specify the methodology to be
used in revaluing the LIBOR Notes to reflect changes in interest
rates. The methodology would differ depending on whether the
book value was meant to reflect the minimum price at which the
Notes could be purchased in the market (ask value), the maximum
price at which they could be sold in the market (bid value), or
the midpoint between the two (mid-market value). The
understanding among the partners on this issue is revealed by the
partnership's actual accounting practice. In pricing the LIBOR
Notes at issuance, Merrill used an ask-side valuation
methodology. The Notes were originally booked at a value based
on this price; the bid value of the Notes at that time, as
determined by Merrill, was about $1.3 million lower. Thereafter,
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