In 2016 Statutory Instrument (SI) 2016/575 The Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016 was issued which made significant changes to the way in which small and micro limited liability partnerships (LLPs) prepare their financial statements. This SI aligned the small LLPs reporting regime with that of the small companies’ regime which was changed by virtue of SI 2015/980 to incorporate the provisions in the EU Accounting Directive (note: LLPs are not subjected to the EU Accounting Directive). The government acknowledged that aligning the small LLPs regime to that of the small companies’ regime will remove unnecessary complexity for those preparing and using the accounts. Also, as there are some 58,000 LLPs currently registered, with 98% of those LLPs being small, the reduced disclosure regime will benefit the majority of LLPs.
The main aim of the revised legislation is to reduce the amount of disclosures contained within the financial statements of a small and, indeed, a micro LLP. An LLP is classed as small when it meets two out of the following three criteria for two consecutive years:
- turnover not more than £10.2 million (up from £6.5 million previously)
- balance sheet total (fixed assets plus current assets) not more than £5.1 million (up from £3.26 million previously)
- not more than an average number of 50 employees (unchanged)
If the LLP is within a group, the group is classed as small if it meets two out of the following three criteria for two consecutive years:
- turnover not more than £10.2 million net or £12.2 million gross
- balance sheet total not more than £5.1 million net or £6.1 million gross
- not more than an average number of 50 employees
The term ‘net’ means the effects of intra-group trading have been eliminated; whereas the term ‘gross’ means intra-group trading has not been eliminated. A group should test for gross first and then, if necessary, test for net.
An LLP qualifies as a micro LLP when it meets two out of the following three criteria:
- turnover not more than £632,000
- balance sheet total (fixed assets plus current assets) not more than £316,000
- not more than 10 employees
Reporting requirements for small LLPs
The Consultative Committee of Accountancy Bodies (CCAB) issued a revised version of the LLP SORP on 26 January 2017. Small LLPs are within the scope of the SORP but must comply with the disclosure requirements of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland in Section 1A Small Entities rather than the disclosure requirements of the SORP. Recognition and measurement of amounts in the small LLPs financial statements are based on the full provisions of FRS 102. This is because if the LLP grows to an extent that it becomes, say, medium-sized, then the accounting treatments will not change, but the disclosure requirements will become more extensive.
The partners of a small LLP must keep in mind that it is still a legal requirement that they prepare financial statements that give a true and fair view. This means that they may have to make more disclosures in their financial statements than are required by Section 1A and hence more responsibility will be placed on the partners of the small LLP is discharging their legal obligations.
The disclosures required by law are contained in Appendix C Disclosure requirements for small entities in FRS 102 but there are also five encouraged disclosures found in Appendix D Additional disclosures encouraged for small entities although some of the disclosures will not apply to LLPs; for example, the disclosure in respect of dividends as LLPs do not have shares and thus will not pay dividends. In order to ascertain whether the encouraged or additional disclosures in other areas of FRS 102 or the SORP are required, the partners will have to use their professional judgement. To that end, the SORP acknowledges that, depending on the individual facts and circumstances of the LLP, some (or all) of the disclosures contained within the SORP and the rest of FRS 102 may be needed in order to give a true and fair view.
It should be noted by all LLPs that the requirement to disclose how loans and other debts due to members rank in relation to other unsecured creditors is mandatory for all LLPs, regardless of size. CCAB have confirmed that this disclosure is needed in order that the financial statements give a true and fair view regardless of the fact that it is not specifically required by Section 1A of FRS 102. The reason for mandating this disclosure is that LLPs do not have any of the capital maintenance provisions which apply to companies.
Small LLPs are encouraged, as opposed to mandated, to include a reconciliation of movements in members’ other interests. In addition, paragraph 59A has been inserted into the 2017 SORP which says that a statement of changes in equity is not needed where the LLP does not have any equity. This is a new addition to the SORP and where a statement of changes in equity is not included (and is not replaced as a primary statement by the reconciliation of members’ interests), a statement must be made on either the face of one of the other primary statements, or within the notes to the LLP’s accounts, stating that the LLP does not have any equity and hence a statement of changes in equity is not presented.
Reporting requirements for micro LLPs
Qualifying micro LLPs can choose to report under the provisions in FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime if they so wish. It should be noted that reporting under FRS 105 is optional and a micro LLP can choose a more comprehensive framework if its circumstances requires such (for example if the micro LLP has an investment property carried at fair value in its balance sheet as FRS 105 prohibits revaluation and fair value accounting). It is worthwhile emphasising that FRS 105 should be considered on a case-by-case basis for micro LLPs because if it transpires that FRS 105 is not suitable, then a transition to FRS 102 will have to be done; thus to avoid having to do two transitions in a short period of time, it is always worthwhile considering the appropriateness of FRS 105 prior to transition.
Care must also be taken to ensure that the LLP is, in fact, a business that is eligible to report under FRS 105 because LLPs that are financial or credit institutions or whose financial statements are subsequently consolidated in with those of a parent are not permitted to use FRS 105.
Where a micro LLP chooses to apply FRS 105 in the preparation of its financial statements, it is scoped out of the requirements of the LLP SORP. This is because the LLP SORP complements the requirements of FRS 102 and as there are so many differences between FRS 102 and FRS 105, CCAB took the decision to prohibit micro LLPs from applying the provisions in the LLP SORP.
This prohibition means that where FRS 105 does not deal with a transaction, the partners must develop an accounting policy in line with Section 2 Concepts and Pervasive Principles. The LLP must not look to FRS 102 or another GAAP because this may lead to an accounting treatment that is incompatible with the legislation.
The 2017 LLP SORP is mandatory for accounting periods starting on or after 1 January 2016, although early adoption is permissible. The fifth edition of Accounts and Audit of Limited Liability Partnerships incorporates all the changes made in legislation and in the LLP SORP to assist preparers and LLPs in complying with the revised requirements.
Steve Collings is the audit and technical director at Leavitt Walmsley Associates Ltd. He is also a member of the UK GAAP Technical Advisory Group at the Financial Reporting Council. Steve regularly lectures on company reporting issues and the book benefits from his wide range of experience in
dealing with clients in this area. He is also the author of Accounts and Audit of Limited Liability
Partnerships, Fourth Edition, Small Company Financial Reporting and the co-author of Financial Reporting for Unlisted Companies in the UK and the Republic of Ireland (Bloomsbury Professional).