Steve Collings covers some of the main amendments proposed in the draft LLP SORP and examines other clarifications proposed to maintain consistency with FRS 102.
On 1 August 2018, the Consultative Committee of Accountancy Bodies (CCAB) issued a consultation Draft Statement of Recommended Practice – Accounting by Limited Liability Partnerships (LLPs SORP).
The revisions to the LLP SORP have arisen primarily from the Financial Reporting Council’s triennial review which was completed in December 2017. It should be noted that micro-entity LLPs reporting under FRS 105 do not apply the provisions of the LLP SORP, and hence the proposed amendments to the LLP SORP will be irrelevant for micro-entities reporting under FRS 105. This is because micro-entity LLPs choosing to report under FRS 105 only apply FRS 105 in the preparation of their financial statements. The LLP SORP is based on the provisions in FRS 102 and as there are differences between FRS 102 and FRS 105, the CCAB concluded that micro-entities reporting under FRS 105 are outside the scope of the LLP SORP.
The triennial review amendments to FRS 102 are mandatorily effective for accounting periods commencing on or after 1 January 2019 and early adoption is permissible with some limited exceptions to this rule. The same ‘effective from’ date will also apply to the updated LLP SORP. The CCAB has concluded that only limited (although important) changes to the LLPs SORP are required as a result of the triennial review amendments. Some of the notable amendments to the LLP SORP are as follows:
Cash flow statement
Paragraph 74C has been inserted into the draft LLP SORP to follow the requirement in FRS 102 (March 2018) that an entity is to provide an analysis of changes in net debt between the beginning and end of the accounting period.
Paragraph 74C of the draft LLP SORP confirms that although ‘loans and other debts due to members’ are regarded as borrowings for the purpose of the definition of net debt, they are not external financing. To that end, the draft SORP recommends that LLPs show an analysis of the movements in net debt for the period, with appropriate subtotals to show the changes in net debt separately from debt relating to members in the notes to the financial statements.
Paragraph 74C provides a useful example presentation as follows:
|Balance at beginning of period||Arising from cash flows||New finance leases||Other non-cash changes||Acquisition or disposal of subsidiaries||Changes in market value and exchange rate movements||Balance at end of period|
|Cash at bank||X||X||-||-||X||X||X|
|Bank borrowings (less than one year)||(X)||X||-||(X)||X||X||(X)|
|Bank borrowings (more than one year)||(X)||-||-||X||X||X||(X)|
|Net debt (before members’ debt)||(X)||X||X||-||X||X||(X)|
|Loans and other debts due to members|
|Other amounts due to members||(X)||X||-||(X)||-||X||(X)|
Loans to small LLPs
As part of the FRC’s triennial review, paragraph 11.13A was inserted into FRS 102 (March 2018) which allows a small entity receiving a loan from a director-shareholder, or from a director’s group of close family members (including the director) when that group also includes a shareholder in the entity, a relief from discounting the loan using a market rate of interest for a similar debt instrument – ie the loan is recognised at cost. The relief is not available for a loan from a director who is not a shareholder nor has any close family members that are shareholders. This relief has also been extended to small LLPs.
Paragraph 57A of the draft LLP SORP recognises that FRS 102 (March 2018), paragraph 11.13A is worded in such a way that it refers to ‘directors’ whereas an LLP has (designated) members. The term ‘director’ has not been defined in FRS 102 for an LLP and hence the draft SORP recommends that for the purposes of applying the relief in FRS 102 (March 2018) paragraph 11.13A, a director is taken to mean a person who has an equivalent role within the LLP. For some small LLPs, this could be the members as a whole, whereas for others it may be a member who is part of a governing body or management board.
Intangible assets acquired in a business combination
The FRC made some useful amendments to FRS 102, Section 18 Intangible Assets other than Goodwill in respect of intangible assets acquired as part of a business combination. Prior to the amendments there were practical difficulties encountered by some entities in this respect.
Amendments were made to paragraph 18.8 of FRS 102 so that entities are required to recognise some, but not all, intangible assets acquired in a business combination separately from goodwill. Intangible assets are recognised separately from goodwill when they meet the recognition criteria (in paragraph 18.4) and are separable and arise from contractual or other legal rights.
In addition, paragraph 18.8 of FRS 102 (March 2018) also allows an entity to choose to separately recognise intangible assets acquired in a business combination which meet the recognition criteria and which are either separable or arise from contractual or other legal rights. This accounting policy choice must be applied consistently to the relevant class of intangible asset and to all business combinations. In addition, paragraph 18.28A of FRS 102 (March 2018) requires disclosure of the nature of the additional intangible assets separated from goodwill together with the reasons why they have been separated from goodwill.
Paragraph 108B has been introduced into the draft LLP SORP and this follows the same stance. Paragraph 108B also acknowledges that where an LLP takes up the accounting policy choice of separate recognition of intangible assets, this could increase the amount of negative goodwill. Paragraph 108A of the draft LLP SORP cites a situation of two independent LLPs joining together in a business combination where no cash or other consideration is paid by either party. If significant amounts of intangible assets are recognised on acquisition, this could result in an increased amount of negative goodwill as illustrated below:
|No additional intangibles recognised
|Additional intangibles recognised
|Cost of combination||Nil||Nil|
|Net assets acquired||(200)||(300)|
The guidance on merger accounting has been amended in the draft LLP SORP to reflect the extended definition of a group reconstruction. FRS 102 was amended as part of the triennial review to extend the definition of a ‘group reconstruction’ which can be seen as follows:
|Group reconstruction definition per FRS 102 (September 2015)||Group reconstruction definition per FRS 102 (March 2018)|
|Any one of the following arrangements:
||Any one of the following arrangements:
Paragraph 5 of the draft LLP SORP provides a helpful illustrative scenario and analysis which has been amended and the revised paragraph 5 is as follows (deleted text is in brackets and new text is underlined):
‘Entity A establishes an LLP on 1 April and transfers its trade and assets to the LLP on 1 July in exchange for an equity member’s stake in the LLP. The LLP has a 31 December year end and prepares entity-only accounts.
The transfer of a business to a new entity whose equity holders are the same as those of the entity transferring the business meets the definition of a group reconstruction in FRS 102.
(Assuming that the transfer meets the definition of a group reconstruction and) Therefore, assuming the conditions in paragraph 19.27 of FRS 102 are met; the merger accounting principles of reflecting the transfer at book value (as set out in paragraph 19.29 of FRS 102) may be applied to the entity-only accounts of the LLP in the above scenario. (and that the merger accounting method is used) There are potentially two alternative ways of presenting its results:
a) bring in the net asset book values at the date of the transfer of trade and assets, and only recognise profits arising in the LLP from the date of incorporation – 1 April – which will, in effect, only include transactions from 1 July to 31 December since the LLP had no trade before the date of transfer; or
b) bring in the net asset book values at 1 January and include the results for the 12-month period 1 January to 31 December, to be consistent and comparable with entity A’s reporting period.’
This article has covered some of the main amendments proposed in the draft LLP SORP and there are other minor clarifications which have also been proposed to maintain consistency with FRS 102 and the amendments are proposed as the CCAB consider them important and have specific relevance to LLPs.
Comments on the draft LLP SORP are open until 17 October 2018 and can be emailed to [email protected].