To read Part One of this article, click here.
This is the final article which takes a look at some of the changes in the LLP Statement of Recommended Practice (SORP) Accounting by Limited Liability Partnerships and considers the presentation and disclosure requirements for members’ remuneration, the cash flow statement, merger accounting and related parties.
The revised SORP is effective for accounting periods commencing on or after 1 January 2015 although earlier adoption is permissible.
Members’ remuneration: presentation and disclosure
The provisions in FRS 102 allow entities a choice of presenting total comprehensive income for the accounting period in one statement (which is the statement of comprehensive income) or two statements (an income statement (profit and loss account) and a statement of comprehensive income).
The LLP Regulations require disclosure on the face of the profit and loss account/statement of comprehensive income of a subtotal, being ‘Profit or loss for the financial year before members’ remuneration and profit shares’. The total of members’ remuneration charged as an expense should be disclosed separately and deducted from this balance, hence:
| £ |
|
| Profit or loss for the financial year before members’ remuneration and profit shares |
X |
| Members’ remuneration charged as an expense |
(X) |
| Profit or loss for the financial year available for discretionary division among members |
X |
FRS 102 at paragraph 4.12 requires certain disclosures concerning an entity’s share capital and reserves. LLPs do not have share capital and equivalent information is required to comply with paragraph 4.13 which show the changes in the period for each category of equity, and the rights, preferences and restrictions attached to each category of equity.
This requirement is achieved by way of a reconciliation of the movement in members’ interests which is then analysed between ‘Members other interests’ and ‘Loans and other debts due to members’. An illustrative example is shown on page 23 of the SORP at paragraph 60 and this reconciliation may be presented as a primary statement instead of a statement of changes in equity. However, if this option is taken, comparative amounts should be presented by way of the full table relating to the prior period.
Cash flow statement
There are considerable presentational changes brought about by FRS 102 in respect of the cash flow statement and LLPs reporting under FRS 102 need to present such a statement to conform to the requirements in Section 7 Statement of Cash Flows which analyses cash flows during the period between operating, investing and financing cash flows.
LLPs are also required to separately disclose transactions with members (and former members) and these are reported as follows:
| Nature of transaction |
Classification of cash flows |
| Remuneration that is paid under an employment contract |
Operating cash flow |
| Other remuneration (discretionary or non-discretionary) for services provided |
Operating cash flow |
| Post-retirement payments to former members |
Operating cash flow |
| Capital introduced by members (classified as equity or liability) |
Financing cash flow |
| Repayment of capital or debt to members |
Financing cash flow |
| Payments to members that represent a return on amounts subscribed or otherwise contributed |
Financing cash flow |
Merger accounting
Under FRS 102, merger accounting can only be applied in group reconstructions whereas in current UK GAAP the use of merger accounting has a wider scope. In merger accounting, book values, not fair values, are used because this method reflects the substance of the transaction (fair values are used in a business combination when one party is the acquirer and one party is the acquiree – i.e. a parent/subsidiary relationship). When an existing partnership, limited company or other form of undertaking transfers into an LLP this could be accounted for as a group reconstruction. FRS 102 provides a choice of merger accounting or the purchase method, but the SORP recommends that the merger accounting method be used where permitted to reflect the substance of the initial ‘conversion’ to LLP with the initial ‘opening’ balance sheet following the accounting policies adopted by the LLP.
Related parties
FRS 102 at paragraph 33.7 requires the disclosure of total compensation paid to key management personnel and this may be made up of employee remuneration and profit attributable to members.
As a consequence, the SORP now requires the LLP to disclose aggregate key management personnel remuneration. The SORP states that key management personnel of an LLP are those persons – whether designated members, members or employees – having authority and responsibility for planning, directing and controlling the activities of the LLP, directly or indirectly.
Conclusion
The revised SORP should be applied for accounting periods commencing on or after 1 January 2015, although earlier adoption is permissible when the LLP adopts FRS 102 early. For earlier periods, the previous edition of the SORP will continue to apply.
In addition, LLPs adopting FRS 102 will also have to follow the transitional provisions outlined in Section 35 Transition to this FRS and accounting policy alignments to comply with FRS 102 will lead to changes in opening equity and hence the SORP requires consideration to be given of these impacts and the importance of a sound programme of preparation cannot be over-emphasised.
Steve Collings
LinkedIn: http://uk.linkedin.com/pub/steve-collings-fmaat-fcca/17/686/95a
Twitter: @stecollings
Website: http://www.stevecollings.co.uk/
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd. He regularly lectures on financial reporting and audit issues and has written extensively for the small to medium-sized firm market. For Bloomsbury Professional he has authored Accounts and Audit of Limited Liability Partnerships, Fourth Edition and Financial Reporting for Unlisted Companies in the UK and Republic of Ireland.
