It’s been a busy few years for the CCAB, the organisation which publishes the LLP SORP. Having published an updated version of the SORP in 2014, to align with new UK GAAP (FRS 102), it published a further revision in January 2017 (SORP 2017). SORP 2017 can be downloaded from http://www.ccab.org.uk/.
The 2017 revision was largely to reflect the new rules in Statutory Instrument 2016/575 (SI 2016/575), The Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016. SI 2016/575 transposes into LLP law new ‘light touch’ rules on financial reporting for small entities and micro entities that had previously not been available to LLPs. These are largely based on European Union Accounting Directives.
SI 2016/575 came into force for accounting periods beginning on or after 1 January 2016, with early adoption allowed for accounting periods beginning on or after 1 January 2015.
In a nutshell, the new legislation allows small LLPs to apply new Companies Act rules for small entities and FRS 102 section 1A and micro LLPs to apply micro entity legislation and FRS 105 on the same basis that equivalent-sized companies can.
What is the ‘light touch’ regime?
The light touch regime as it applies to small companies (and now LLPs) means that, although they have to comply with the full recognition and measurement rules of FRS 102, they are able to take advantage of significant disclosure exemptions. The notes to the accounts might be limited to those in Appendix C of Section 1A of FRS 102 (required by the new EU Accounting Directive) and Appendix D (strongly recommended by the Financial Reporting Council).
The light touch regime as it applies to micro companies (and LLPs) means that they need only produce a short form profit and loss account and balance sheet with three supplementary notes.
So what does this actually mean for LLPs?
As well as generally giving LLPs the opportunity in accounts prepared for the members (and for filing) to include less detailed information, the new regime raises some interesting specific questions.
Here are some of the most common recently raised questions in respect of LLPs applying the small entity regime:
What is a small LLP?
The thresholds used to determine whether or not an LLP is small, and thus eligible to use the small LLP regime, are the same as those laid out in the updated Companies Act for small companies: turnover: ≤ £10.2M; gross assets: ≤ £5.1M; employee numbers: ≤ 50.
If an LLP breaches two out of the three thresholds it becomes medium-sized. The ‘years rules’ mean that a growing LLP has to breach two of the thresholds for two consecutive years before becoming medium-sized.
The transitional provisions in the new legislation mean that the new thresholds can be applied retrospectively to earlier years to determine if an LLP is small.
Does a small LLP need a members’ interests table in its accounts?
The members’ interests section (bottom half) of many LLP balance sheets contains ‘loans and other debts due to members’. Disclosure of movements in loans and other debts due to members is specifically required by law for medium-sized and large LLPs, but not for small LLPs.
The members’ interests section of an LLP balance sheet also often contains members’ other interests (‘equity’). SORP 2017 encourages but does not require small LLPs to include a reconciliation of such ‘other interests’ in their members’ accounts.
On that basis, there is nothing to specifically require a small LLP to include a full reconciliation of members’ interests. However financial statements are required to give a true and fair view and if the members feel that a full reconciliation is required in order to achieve this, it should be included.
If a members’ interests table is included, SORP 2017 gives LLPs the option of including it as a primary statement, instead of a statement of changes in equity. Where this option is taken, comparative amounts should be presented by way of the full table relating to the prior period.
If a members’ interest table is included, must this be filed?
Prior to the implementation of SI 2016/575, small LLPs (like small companies) would typically have filed abbreviated accounts at Companies House. Under the abbreviated accounts regime, the members’ interests table would not have been filed.
Abbreviated accounts have now been abolished and LLPs must (per s444 of the Companies Act 2006) file their members’ accounts – although they are allowed to ‘fillet out’ the profit and loss account and any profit and loss account related notes for filing purposes.
Since a members’ interests table, or a note reconciling members’ other equity, is a not a profit and loss account note, it would need to be filed by the LLP. This will probably disincentivise small LLPs who are keen for minimum public disclosure, from including such information in their statutory members’ accounts in the first place!
What related party transactions must be disclosed in the members’ accounts for an LLP?
Based on the EU Accounting Directive, SI 2016/575 requires disclosure of related party transactions not conducted under normal market conditions with (1) members of the LLP that are related parties and (2) undertakings in which the LLP itself has a participating interest.
“My client is a small LLP applying SORP 2017 for the first time in its 31 December 2016 year-end accounts. It has three corporate members. One corporate member (Member A) made a market rate loan to the LLP during the current year. The others (Members B and C) made non-market rate loans. What are the accounting and disclosure implications?”.
All loans would need to be accounted for at amortised cost per section 11 of FRS 102. This would be straightforward for the loan from member A, but, for the loans from members B and C, future payments to the lenders would need to be discounted to net present value using a market rate for a similar debt instrument (paragraph 11.13 FRS 102) to determine the carrying value of the loan at the outset.
Loan A would not require disclosure in the related party transactions note to the members’ accounts. Loans B and C would require disclosure, by virtue of being transactions with members not conducted under normal market conditions. Particulars would be need to be disclosed of the amount of the transaction and the nature of the related party relationship. However the names of the transacting parties would not need to be disclosed and details of the two loans could be aggregated.
If a related party transactions note is included, must this be filed?
As mentioned earlier, s444 of the Companies Act 2006 requires an LLP to file its members’ accounts – although it is allowed to ‘fillet out’ the profit and loss account and any profit and loss account related notes for filing purposes.
Because the related party transactions note is not a profit and loss account related note, it cannot be filleted out for filing purposes.
Does the SORP impose additional disclosure requirements?
In addition to the disclosure requirements imposed by Appendix C of Section 1A of FRS 102 (required by the new EU Accounting Directive) and Appendix D (strongly recommended by the Financial Reporting Council), SORP 2017 requires additional disclosures for small LLPs. A lack of capital maintenance provisions in LLP law mean that these disclosures are necessary in order to ensure a true and fair view:
- The notes to the accounts must explain where amounts in ‘loans and other debts due to members’ would rank in relation to other creditors who are unsecured in the event of a winding up;
- Disclosure is required of any protection afforded to other creditors in the event of a winding up which is legally enforceable and cannot be revoked solely by a decision of the members; and
- Disclosure is required of any restrictions or limitations that exist on the ability of the members to reduce the amount of ‘members’ other interests’ or a statement is required that there are no such restrictions
What about micros?
SI 2016/575 allows micro LLPs to use the micro-entity accounting regime in FRS 105. In order to apply FRS 105, a micro LLP needs to qualify based on the relevant size criteria (turnover ≤ £632K; gross assets ≤ £316K; employee numbers ≤ 10) and not be otherwise ineligible. The Financial Reporting Council has made consequential amendments to FRS 105 as a result of SI 2016/575. The main adjustment is to slightly modify the profit and loss account and balance sheet formats to reflect the different legal requirements for LLPs.
SORP 2017 makes clear that FRS 105 is available for qualifying LLPs that wish to use it. However qualifying LLPs that choose to apply the micro-entities regime are not within the scope of the SORP and should use FRS 105 only. SORP 2017 complements the requirements of FRS 102, not FRS 105.