Changes to the LLP SORP

In August 2016, the Consultative Committee of Accountancy Bodies (CCAB) issued Draft Statement of Recommended Practice – Accounting by Limited Liability Partnerships which is open for comment until 1 November 2016.  The proposals make amendments to the latest edition of the SORP which was last issued on 15 July 2014.

SI 2016/575 The Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016 were issued earlier in 2016.  These Regulations amend legislation relating to the accounting and audit regulatory framework for limited liability partnerships (LLPs) and also introduce an exemption from certain financial reporting requirements for very small (micro) LLPs and very small (micro) partnerships, including limited partnerships, which are ‘qualifying partnerships’ under the Partnerships (Accounts) Regulations (SI 2008/569).

Accountants will be familiar with the changes made to the Companies Act 2006 by virtue of SI 2015/980 which now includes the provisions of the EU Accounting Directive and which apply for accounting periods starting on or after 1 January 2016 with early-adoption permissible.  LLPs are not subject to the EU’s Accounting Directive, but are, however, subject to a very similar accounting regime to limited companies, including the requirement to file accounts at Companies House.  SI 2016/575 introduces similar changes to the financial reporting framework for LLPs as SI 2015/980 does for small companies, but it does not fundamentally change the financial reporting regime itself; although it does allow small and micro LLPs to benefit from a less burdensome financial reporting regime.

The Regulations also align the LLP thresholds to the company thresholds which determine whether an LLP is micro, small, medium-sized or large; hence a small LLP will have turnover of not more than £10.2m (up from £6.5m), a balance sheet total of not more than £5.1m (up from £3.26m) and not more than an average of 50 employees (headcount remains unchanged) and at least two out of the three have to be met.  See below for the micro-entity thresholds.

Review of the SORP

The CCAB are proposing to amend the SORP in light of new and revised accounting standards since the last edition was published in July 2014.  The latest review considers:

• the changes made to FRS 102 in July 2014 which relaxed the conditions for determining whether a financial instrument is ‘basic’ (hence accounted for under Section 11 Basic Financial Instruments) or ‘other’ (hence accounted for under Section 12 Other Financial Instruments Issues);
• the amendments made to FRS 102 in February 2015 which clarifies aspects in respect of defined benefit pension plan accounting;
• amendments to UK accounting standards that were published in July 2015 including:
  • the withdrawal of the FRSSE;
  • the inclusion of Section 1A Small Entities in FRS 102; and
  • the publication of FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime; and
• amendments made to FRS 102 in March 2016 which updated the fair value hierarchy disclosures.

Micro-LLPs

FRS 105 was issued in July 2015 and can be applied by an incorporated entity which meets two out of the following three criteria:

• Turnover not more than £632,000
• Balance sheet total not more than £316,000
• Not more than ten employees

Prior to the implementation of SI 2016/575, LLPs were not eligible to apply FRS 105.  However, SI 2016/575 introduces a micro-entities regime for LLPs which meet two out of the above three criteria in respect of turnover, balance sheet total and employee headcount.  This means that FRS 105 becomes available to qualifying LLPs which choose to apply the micro-entities regime when preparing the accounts.  In recognition of this, the Financial Reporting Council issued amendments to FRS 105 on 17 May 2016 and the amendments apply to accounting periods starting on or after 1 January 2016, with earlier-adoption permissible.

In terms of how FRS 105 interacts with the SORP, there are significant differences between FRS 105 and FRS 102 and the SORP is based on the provisions in FRS 102.  In light of these differences, the CCAB have concluded that LLPs which choose to apply FRS 105 should be scoped out of the requirements of the SORP and simply follow the requirements of FRS 105.

Small LLPs

The CCAB propose that small LLPs which qualify for, and choose to apply, the small entities’ regime in the preparation of their financial statements, must comply with the recognition and measurement requirements of FRS 102 and the SORP.  In addition, the CCAB proposes that small LLPs are only required to comply with the disclosure requirements of Section 1A Small Entities of FRS 102 as opposed to the disclosure requirements of the SORP.

Notwithstanding the reduced disclosure requirements reflected in Section 1A, the accounts of a small LLP must give a true and fair view (as is the case for a small company).  This will mean that more judgement is needed when considering whether additional disclosures, over and above those required by Section 1A are necessary to achieve a true and fair view.  This may mean that in some circumstances, some, or all, of the disclosures included in the revised SORP may be needed in order that the small LLP’s financial statements give a true and fair view.

LLPs’ currently prepare a reconciliation of the movement in members’ other interests (which is contained in paragraph 59 of the draft SORP).  Under the draft SORP, this reconciliation may need to be presented in some instances by a small LLP so that the accounts give a true and fair view.  However, the CCAB does not believe that it is necessary to require all small LLPs to include such a reconciliation.  This is consistent with the requirements not to mandate small companies to produce a statement of changes in equity.  However, the draft SORP does encourage a small LLP to include such a reconciliation.

Loans and other debts

Paragraphs 63 and 64 of the SORP require disclosures about how loans and other debts due to members rank in relation to other unsecured creditors.  Some respondents to previous consultations about the SORP said that these disclosures were onerous and overly burdensome in comparison to financial reporting by other types of entities, such as companies.

Companies are subject to capital maintenance provisions; which LLPs are not subjected to.  In light of this, the CCAB are of the opinion that such disclosures are necessary to ensure a true and fair view is given regardless of the size of the LLP.  As a consequence, they have been retained in the draft SORP and will also be mandatory for small LLPs which qualify for, and choose to apply, the small entities’ regime even though they are additional disclosures which are beyond the requirements of Section 1A of FRS 102.

Statement of changes in equity

Previous editions of the SORP have not explicitly stated that there is no requirement to prepare a statement of changes in equity if the LLP does not have any equity.  The draft SORP includes an additional paragraph 59A which confirms that a statement of changes in equity does not need to be prepared if the LLP has no equity.  The exception to this would be where the LLP provides the reconciliation of members’ interests as a primary statement in accordance with paragraph 60A.  Where the LLP does not include a statement of changes in equity, a statement should be made either on the face of one of the other primary statements, or within the notes to the accounts, that the LLP has no equity and consequently a statement of changes in equity is not given.

Conclusion

The comment period on the draft SORP is open until 1 November 2016.  The revised SORP is scheduled to be effective for periods commencing on or after 1 January 2016, with early-adoption permissible for accounting periods beginning on or after 1 January 2015.  Where early-adoption is chosen, the LLP must apply the provisions in The Limited Liability Partnerships (Accounts and Audit) Regulations 2016 (SI 2016/575) from the same date.

Category: Accounting and standards, Audit