The new LLP SORP explained
On 26 January 2017, the Consultative Committee of Accountancy Bodies (CCAB) issued a revised Statement of Recommended Practice – Accounting by Limited Liability Partnerships (LLPs SORP). Steve Collings reviews the latest revisions and explains who falls within the provisions of the LLP SORP.
The revised LLP SORP reflects amendments to legislation by virtue of SI 2016/575 The Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016. The revised LLP SORP is effective for accounting periods which start on or after 1 January 2016 with early adoption permissible. Where an LLP early adopts the revised LLP SORP, it must also apply SI 2016/575 from the same date.
Background to the revisions
Accountants will, by now, be familiar with the changes made to the Companies Act 2006 to reflect the provisions in the EU Accounting Directive (the directive). The directive made changes to the financial reporting framework for companies, primarily to reduce the administrative burdens that were associated with the preparation and publication of financial statements for small companies and also the very smallest of companies that would fall to be classed as a micro-entity.
LLPs are not subject to the directive, but they are subjected to a similar reporting regime as an incorporated company, such as the obligation to file accounts with Companies House. SI 2016/575 makes similar changes to the financial reporting framework for LLPs that were introduced in 2015 for companies and hence the two frameworks are now aligned. The government have acknowledged that this will help avoid unnecessary complexity for those preparing and using the accounts. In addition, groups which include LLPs and companies within their group structure will now be able to apply the same reporting requirements across the group.
The government estimate that there are some 58,000 LLPs and the vast majority (approximately 98%) are said to be small, hence a significant majority will benefit from the deregulatory changes.
Increased size thresholds
The size thresholds which determine whether an LLP is small, medium-sized or large are now aligned to the size thresholds that determine the same classification for a company. Therefore, an LLP is small when it meets two out of the following three criteria for two consecutive years:
- turnover not more than £10.2m
- balance sheet total (fixed assets plus current assets) not more than £5.1m
- not more than an average number of 50 employees
A group is classified as small if it meets two out of the following three criteria for two consecutive years:
- turnover not more than £10.2m net or £12.2m gross
- balance sheet total (fixed assets plus current assets) not more than £5.1m net or £6.1m gross
- not more than an average number of 50 employees
The scope of FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime is now extended so that LLPs can use the framework. An LLP qualifies to be classed as a micro-entity if it is not in a business that is precluded from applying the framework (such as a financial institution) and the LLPs financial statements are not subsequently consolidated in with those of a parent – as groups are outside the scope of FRS 105. In addition, an LLP qualifies as a micro-entity LLP if it can meet 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 ten employees
The Financial Reporting Council issued amendments to FRS 105 in May 2016 to extend the standard’s scope so it caters for LLPs.
Micro-LLPs applying FRS 105 are scoped out of the requirements of the LLP SORP and hence must only prepare financial statements in accordance with FRS 105. This is because the LLP SORP complements the requirements of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, not FRS 105. As there are fundamental differences between the two standards, CCAB took the decision to prohibit micro-LLPs from applying the provisions within the LLP SORP.
As a result of this prohibition, where a micro-LLP enters into a transaction that is not dealt with in FRS 105, it must develop an accounting policy in line with the Concepts and Pervasive Principles outlined in Section 2 of the standard.
A small LLP will fall within the provisions of the LLP SORP. The SORP requires that small LLPs comply with the disclosure requirements of Section 1A Small Entities in FRS 102 rather than the disclosure requirements of the SORP. In respect of the recognition and measurement of amounts in the financial statements, these will be based on full FRS 102.
It is still a legal requirement that the small LLP prepares financial statements that give a true and fair view. Section 1A of FRS 102 contains the disclosure requirements in Appendix C Disclosure requirements for small entities and Appendix D Additional disclosures encouraged for small entities. Professional judgement will be needed to consider whether any additional disclosures, over and above those contained in Section 1A, will be required to achieve a true and fair view. To that end, the SORP recognises that, depending on the individual facts and circumstances, some, or all, of the disclosures in the SORP and the rest of FRS 102 may be needed in order to give a true and fair view.
A disclosure requirement within the SORP which has received criticism from some respondents is how loans and other debts due to members rank in relation to other unsecured creditors (paragraphs 63 and 64 of the SORP). The view of some respondents is that these disclosures are considered to be onerous and overly burdensome. CCAB have confirmed that such disclosures are needed for all LLPs, regardless of the fact that the LLP may be small, in order that the financial statements give a true and fair view. It should be noted that this disclosure is above and beyond the requirements of Section 1A of FRS 102. The LLP SORP mandates this disclosure because LLPs do not have any of the capital maintenance provisions which apply to companies
Small LLPs are also encouraged, rather than mandated, to include a reconciliation of movements in members’ other interests, outlined in paragraph 59 of the SORP.
Statement of changes in equity
Paragraph 59A has been inserted into the January 2017 SORP which says that a statement of changes in equity need not be prepared if the LLP has no equity. This was not explicit in previous versions of the SORP. Where a statement of changes in equity is not included on the basis that the LLP does not have any equity (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 in the notes to the accounts, that the LLP does not have equity and hence a statement of changes in equity is not given.
Paragraph 19.27 of FRS 102 allows the use of merger method of accounting, rather than the purchase method, provided the criteria in that paragraph are met. Paragraph 19.27(a) says that the use of the merger method of accounting must not be prohibited by company law other relevant legislation.
Paragraph 105 of the SORP has been redrafted to confirm that the LLP Regulations do not prohibit the user of the merger method and refers to GAAP as the authoritative guidance on whether the merger method is appropriate.
The revised LLP SORP is mandatory for accounting periods starting on or after 1 January 2016, which is in line with when small companies must transition mandatorily to FRS 102 following the withdrawal of the FRSSE. The revised LLP SORP can be obtained free of charge by clicking on this link.