LLP Regulations set for change

On 20 November 2015, the Department for Business Innovation and Skills (BIS) issued a consultation document De-regulatory changes for Limited Liability Partnerships (LLPs) and Qualifying Partnerships.

This consultation document seeks feedback on proposals to make de-regulatory changes to LLPs and other qualifying partnerships in an attempt, by Government, to reduce the administrative burdens on businesses.  The implementation of the EU Accounting Directive into legislation completed earlier in the year and this made changes to the regulatory framework by reducing the administrative burdens associated with the preparation and publication of statutory accounts for companies.

Should the proposals receive Parliamentary approval, the new framework will apply to financial years commencing on or after 1 January 2016 and BIS are anticipating that the regulations will be made by the summer of 2016.  The consultation ends on 21 December 2015.

New micro-entities regime for LLPs

FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime is currently not available to LLPs and BIS is looking to introduce a micro-entity regime for LLPs.  BIS are also proposing to introduce a micro-entity regime for Qualifying Partnerships and will be available to those general partnerships and limited partnerships which are Qualifying Partnerships under the Partnerships (Accounts) Regulations 2008 (SI 2008/569) as amended by the Companies and Partnerships (Accounts and Audit) Regulations 2013 (SI 2013/2005) and which meet the eligibility criteria.  The Partnership (Accounts) Regulations 2008 defines a ‘qualifying partnership’ as:

‘A partnership which is formed under the law of any part of the United Kingdom is a qualifying partnership for the purposes of these Regulations if each of its members is—

•  a limited company, or
• an unlimited company, or a Scottish partnership, each of whose members is a limited company.’

Groups, which include LLPs in the group structure, will also be able to apply the same reporting requirements across the group and hence the proposals are also designed to assist in the preparation of group accounts.

BIS undertook a consultation on implementing the EU Accounting Directive into company law and stakeholders suggested that any changes to the companies’ legislation should also be extended to LLPs.  Having different rules for LLPs and companies was viewed by many respondents as creating additional burdens on business as well as confusion for users of financial statements.

The proposed thresholds for a micro-entity LLP are as follows:

• Turnover £632,000
• Balance sheet total £316,000
• Average number of 10 employees

LLPs which are classified as micro-entities will be permitted to:

• Publish annual financial statements provided that the financial information contained in the balance sheet is filed with Companies House.
• Prepare simpler and abridged balance sheet and profit and loss accounts.
• Only disclose (at the foot of the abridged balance sheet):
  • all commitments by way of guarantees of any kind; and
  • advances and credits to members including guarantees and commitments entered into on their behalf.

As with micro-entities which are companies, deeming provisions will be contained in the legislation which will state that where micro-entity LLPs prepare their annual accounts in accordance with the legislation, they will be presumed to give a true and fair view and hence the members need not consider any additional disclosure requirements to achieve a true and fair view.  The financial statements for the micro-entity LLP will continue to be prepared under UK GAAP in respect of the recognition and measurement of amounts.

The micro-entity LLP regime will not be available for LLPs which are excluded from the small LLP regime and in relation to an LLP’s accounts for a financial year if:

• the LLP is a parent LLP, which prepares group accounts for that year as permitted by section 398 of the Companies Act 2006; or
• the LLP is not a parent LLP but its accounts are included in consolidated group accounts for that year.

Qualifying partnerships will also be allowed to have access to the micro-entity LLP regime.

Changes to the regulatory framework

 Following the transposition of the EU Accounting Directive into the Companies Act 2006, BIS took advantage of the maximum thresholds permitted by the Directive and increased the size thresholds which define a micro-entity, a small company/group, a medium-sized company/group and a large company/group.  This change resulted in the small company size thresholds increasing from a turnover of £6.5 million to £10.2 million and a balance sheet total from £3.26 million to £5.1 million.  BIS did not, however, increase the size thresholds for LLPs and hence there is currently divergence between the limits for a small company and the limits for a small LLP.

In the consultation, BIS are proposing to increase the thresholds used to determine the size of LLPs to enable approximately 195 medium-sized LLPs to be re-categorised as small and hence have access to a less burdensome financial reporting regime.  BIS have also estimated that some 86 large LLPs will also be re-classified to medium-sized and therefore be able to report less information in their financial statements.

Other changes to the regulatory framework include:

• limiting the number of mandatory notes required in a small LLP’s financial statements;
• providing LLPs with the opportunity of using alternative layouts for their profit and loss account and balance sheet (provided that the information given is at least equivalent to the information otherwise required by the standard formats);
• allowing LLPs the opportunity to prepare an abridged balance sheet and an abridged profit and loss account if all the members of the LLP approve; and
• permitting the use of the equity method in the individual LLP financial statements.

Revised size thresholds

From 1 January 2016, BIS proposes to increase the thresholds for small, medium and large LLPs.  The following table highlights these changes and in order to be categorised to a particular size an LLP should not exceed the limits of at least two of the three criteria in that category:

The above size thresholds will bring LLPs in line with companies and BIS acknowledges that for some LLPs the new size thresholds will reduce costs because the amount of mandatory information will be reduced.  BIS has also acknowledged that LLPs will have to consider if the reduced disclosure information that LLPs could take advantage of would be sufficient to meet their business needs.

Revised small LLP regime

BIS is proposing to introduce a revised LLP regime which will allow small LLPs to reduce the number of mandatory disclosures that they are required to make in their financial statements.  An important point to emphasise where this proposal is concerned is that a small LLP will still be legally required to prepare financial statements which give a true and fair view of the LLPs financial position.  This means that the LLP will have to make additional disclosures in the financial statements if so doing enables a true and fair view to be given (in other words if the mandatory disclosures are insufficient for a true and fair view).

There are 13 legally required disclosures which LLPs would need to provide in their financial statements and mirror those required for a small company as follows:

• Accounting policies adopted
• Fixed assets revaluation table
• Fair valuation note
• Financial commitments, guarantees or contingencies not included in the balance sheet
• The amount of advances and credits granted to members of the administrative, managerial and supervisory bodies (with supporting information)
• Exceptional items
• Amounts due or payable after more than five years and entire debts covered by valuable security
• Average number of employees during the financial year
• Fixed asset note (in addition to the mandatory revaluation table)
• Name and registered office of the undertaking drawing up the consolidated financial statements of the smallest body of undertakings of which the undertaking forms part
• Nature and effect of post balance sheet event
• (Limited) related party transactions

There are certain LLPs which are specifically excluded from the small LLPs regime, such as:

• LLPs whose securities are admitted to trading on a regulated market in an EEA State;
• an LLP which is an authorised insurance company, a banking LLP, an e-money issuer, a MiFID (i.e. Markets in Financial Instruments Directive) investment firm or a UCITS (i.e. Undertaking for Collective Instruments in Transferable Securities) management company; and
• an LLP which carries on insurance market activity.

Such LLPs are automatically excluded from accessing the small LLPs regime and BIS has no intention of changing this; as a consequence, such LLPs will have to report as large LLPs regardless of their size.  A notable change, however, that BIS is proposing relates to small LLPs which are in the same group as a public company.  Currently such LLPs are excluded from accessing the small LLPs regime, but BIS are considering changing this rule to allow LLPs which are members of a group that are currently ineligible because the group includes a public company to access the small LLPs regime  provided such LLPs do not have securities traded on a regulated market.

Abridged financial statements

Small LLPs are already allowed to publish abbreviated accounts if they so wish and hence might only publish an abbreviated balance sheet.  For small LLPs, BIS is proposing to allow the option of an LLP preparing abridged financial statements (an abridged profit and loss account and an abridged balance sheet).  This option is to reduce the regulatory burden for a small LLP.  However, all of the members must unanimously agree to abridged financial statements being prepared.

Exclusions from the medium-sized and dormant LLP regime

The following types of LLPs are currently excluded from provisions which relate to the medium-sized LLP regime:

• LLPs whose securities are admitted to trading on a regulated market in an EEA State;
• LLPs who have permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity;
• LLPs which carry on an insurance market activity; and
• LLPs who are a member of an ineligible group.

BIS are not considering any changes to these exclusions, except where there is a public company within the group.  Hence a public company, which does not have any securities traded on a regulated market would not make a group ineligible under the new regime and LLPs which are also members of such a group would be able to apply the medium-sized LLP regime if they meet the revised threshold requirements.

Exemptions from filing accounts for dormant subsidiaries does not exclude LLPs which have issued securities from taking up the exemption.  However, BIS are considering changing this so that such LLPs which have securities traded on a regulated market will be excluded from the exemption.

Flexibility in the financial statement layouts

BIS are proposing to allow greater flexibility in adapting the financial statement layouts for LLPs which in turn will allow for sector-specific layouts.  This will allow consolidation processes to be easier than is currently the case due to the rigidity of the layouts in current Regulations.

The equity method

Current company law does not recognise the equity method of accounting for participating interests (e.g. investments in associates) in the individual financial statements of an LLP – only cost-based and fair value measurements are available (although for consolidation purposes, the equity method of accounting for such interests is required).  BIS is proposing to allow LLPs to use the equity method for participating interests in the individual financial statements of an LLP in addition to the requirement to use the equity method in preparing the consolidated financial statements.

BIS also intends to allow a proportion of the profit or loss attributable to the participating interest to be recognised in the investor’s profit and loss account to the extent of the amount corresponding to dividends already received or the payment of which can be claimed.  BIS views this proposal as allowing LLPs greater flexibility in the preparation of their financial statements and in some cases will allow the LLP’s financial statements to better represent their financial performance.

Value adjustments including goodwill

Where the members of an LLP cannot reliably estimate the useful life of goodwill and development costs, BIS is proposing to change the amortisation period to a maximum of 10 years where such useful lives cannot be reliably measured (as is the case for companies).  Also, any goodwill which was previously impaired will not be allowed to be reinstated.

Consolidated subsidiaries

BIS is intending to require that information in the notes to the consolidated financial statements include information in relation to the subsidiaries included within the consolidation.  Currently LLPs can provide this information when submitting annual returns to Companies House but BIS has suggested that providing this information in the annual return results in consolidated financial statements which are not as informative as might otherwise be the case, plus there are also delays in making this information publicly available.

Audit thresholds

There is no intention to de-couple the link between accounting regulatory requirements and audit requirements.  All small LLPs will be exempt from statutory audit for financial years beginning on or after 1 January 2016, except where an LLP:

• has its securities admitted to trading on a regulated market in an EEA State;
• is an authorised insurance company, a banking LLP, an e-money issuer, a MiFID investment firm or a UCITS management company;
• carries on insurance market activity;
• is an employers’ association as defined in section 122 of the Trade Union and Labour Relations (Consolidation) Act 1992 or Article 4 of the Industrial Relations (Northern Ireland) Order 1992; or
• is a parent LLP or subsidiary undertaking (unless dormant for the period during which it was a subsidiary undertaking) except where the group also qualifies as a small group (treating all the bodies corporate in the group, including non-UK bodies corporate as if they were LLPs or companies) and was not any time in the year an ineligible group.

Where groups are not small groups, they will not be able to take up audit exemption, nor will any ineligible groups.

The subsidiaries audit exemption does not exclude any LLPs which have issued securities from being able to take up the exemption.  However, BIS are proposing to change this exemption so that it excludes all LLPs with securities traded on a regulated market in an EEA State.

The dormant LLPs audit exemption is currently available to LLPs whose securities are traded on a regulated market.  BIS has decided to exclude all LLPs with securities admitted to trading on a regulated market.

Conclusion

The changes to the LLP regulations are welcomed because there is currently divergence between the thresholds for companies and thresholds for LLPs.  The consultation can be accessed from the BIS website.

Category: Accounting and standards, Audit