The new LLP SORP: Are you ready yet? (Part One)

Limited Liability Partnerships (LLPs) have become increasingly widespread over the last decade and whilst most LLPs are confined to professional practices such as lawyers and accountancy firms, there are companies operating in industry and commerce which have also converted to LLP status. This is the first of two articles which looks at some of the revisions to the accounting for LLPs in light of the new SORP and new UK GAAP.

Accounting for an LLP can be inherently complex and the general accounting requirements are set out in the Limited Liability Partnerships Accounts and Audit Regulations 2008, Parts 1 to 9. An LLP is required to keep accounting records which are sufficient to enable accounts to be prepared which give a true and fair view; a concept which has been enshrined in legislation for many years. Under UK legislation it is a criminal offence for an LLP to fail to maintain adequate accounting records and this can also affect the audit report if the LLP is subject to external audit.

The members’ report

The members of the LLP are responsible for preparing the financial statements of the LLP at the end of each financial year and this also includes a members’ report. The form and content of the balance sheet, profit and loss account and notes to the accounts are set out in the Small Limited Liability Partnerships Regulations 2008 for small LLPs and the Large and Medium-sized Limited Liability Partnership Regulations 2008 for all other LLPs.

The fact that the financial statements of an LLP must give a true and fair view means that they must also comply with the requirements in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and the Statement of Recommended Practice – Accounting by Limited Liability Partnerships (SORP) governing LLPs which was re-issued on 15 July 2014 by the CCAB following the introduction of FRS 102.

The members’ report must contain certain information about the LLP in order to comply with the requirements of the SORP as follows:

  • the principal activities of the LLP (and any subsidiary undertakings) indicating any significant changes during the year;
  • an indication of the existence of any branches outside the UK;
  • the identity of anyone who was a designated member during the year, and
  • the policy of the LLP regarding members’ drawings and the subscription and repayment of amounts subscribed or otherwise contributed by members.

An LLP is not required to prepare a Strategic Report or a detailed Business Review which is required by limited companies (or make the disclosures in respect of corporate governance requirements required of listing companies). However, there is an increasing trend (especially among larger LLPs) to provide further information about the LLP’s financial performance. This is to aid transparency for the user(s) of the financial statements. Whilst narrative reporting can provide a good opportunity for the members to explain matters which affect the LLP’s financial performance, the members should be mindful not to include anything in the members’ report which may be construed as misleading by the users of the accounts.

The new LLP SORP

The Consultative Committee of Accountancy Bodies (CCAB) issues the LLP SORP Accounting by Limited Liability Partnerships and a revised version of the SORP was issued by the CCAB on 15 July 2014.  The revised SORP is effective for accounting periods commencing on or after 1 January 2015, although earlier adoption is permissible.

The SORP was revised because of the new UK GAAP which is to take mandatory effect for accounting periods also commencing on or after 1 January 2015, although changes to accounting standards which were made after 2 July 2014 have not been reflected in the revised SORP (for example changes to FRS 102 relating to financial instruments).

The new SORP removes references to old UK GAAP and incorporates terminology included in FRS 102 (e.g. the ‘balance sheet’ becomes the ‘statement of financial position’). The revised SORP also advises against LLPs presenting a single statement of income and retained earnings in place of the statement of comprehensive income and statement of changes in equity because there will be little benefit to users of LLP financial statements in the majority of cases.

Other points of interest in the new SORP are as follows:

Tax expense

Paragraph 29.22 of FRS 102 says that the tax expense of an entity (which includes withholding tax) should be presented in the same component of total comprehensive income (i.e. ‘continuing’ or ‘discontinued operations’ and profit or loss or other comprehensive income) or equity as the transaction or other event which resulted in the tax expense. The SORP requires that when an LLP incurs incremental tax expenses in respect of amounts presented in equity as distributions to members, that incremental tax expense should also be presented in equity.

Puttables exception

A puttable financial instrument can be classified as ‘debt’ or ‘equity’ depending on the substance of the instrument. When a puttable financial instrument places an obligation on the LLP to make payments to the holder of the instrument (e.g. interest or other non-discretionary returns), the instrument is classified as debt. When considering the puttables exception, the SORP requires the LLP to distinguish transactions between members and the LLP which are undertaken in their role as non-owners and those which are undertaken in their role as owners. The SORP cites an example of a profit or loss sharing arrangement which allocates profit or loss to instrument holders on the basis of services rendered or business generated during the current and previous years.

The SORP says that such arrangements are transactions with instrument holders in their role as non-owners and should not be considered when assessing the features listed in paragraph 22.4 of FRS 102. Conversely, profit or loss sharing arrangements which allocate profit or loss to instrument holders based on the nominal amount of their instruments relative to others in the class may represent transactions with instrument holders in their role as owners and hence should be considered further by applying the principles in paragraph 34 of the SORP.

For LLPs applying the Financial Reporting Standard for Smaller Entities (the FRSSE), the SORP confirms that there are no plans to incorporate the principles of the puttables exception into the FRSSE (possibly due to the fact that the FRSSE may currently have a short life in light of proposals to overhaul the small companies’ financial reporting regime) and hence users of the FRSSE should have regard to the requirements of FRS 102 (Section 22 Liabilities and Equity) as a means of establishing current practice but may continue to comply with the requirements of the FRSSE in respect of liabilities and equity.

Conclusion

There are many clarifications and changes on the cards for LLPs in light of the new UK GAAP and therefore practitioners dealing with LLPs and LLPs themselves need to have a sound awareness of these changes. The final article in the series will take a look at the presentation and disclosure requirements for members’ remuneration, the cash flow statement, merger accounting and related parties.

To read Part Two of this article, click here.

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.

Written by Ellie MacKenzie

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