Guidance for the Accounts of Limited Liability Partnerships (LLPs)
The accounts of a limited liability partnership are similar to those of a limited company the Statement of Recommended Practice (SORP) gives guidance on the application of accounting standards and adds some additional requirements.
The LLP SORP 2015 gives guidance for LLPs on the application of FRS 102 and the accounting requirements of the Companies Act as applied to LLPs it can be downloaded by clicking here. LLPs are now permitted to produce accounts to the FRS 105 standard (micro entities) for accounting periods beginning on or after 1 January 2016 with early adoption permitted for accounting periods beginning on or after 1 January 2015. FRS 105 can be obtained by clicking here and the amendments to FRS 105 for LLPs can be downloaded by clicking here
Specific LLP Accounting Requirements
Members Participation Rights
One of the fundamental questions to resolve then preparing the financial statements of an LLP is whether the participation rights of the members give rise to a financial liability or equity or both.
The treatment will depend upon the terms of the membership agreement for each LLP and therefore the treatment can vary significantly between different LLPs. LLPs have considerable flexibility on how the agreement is drafted and there is wide diversity in practice. The absence of standard arrangements makes it necessary to analyse each members’ agreement so that equity and liability interests are properly reflected in the financial statements.
A key element of determining whether the members’ participation rights should be treated as a financial liability rather than an equity instrument is the consideration of whether the LLP has a contractual obligation to deliver either cash or other financial asset to the member. Generally a member’s participation right will result in a liability unless either the LLP has an unconditional right to avoid delivering cash or other business assets to the member. Participation rights in respect of amounts subscribed or contributed by members to an LLP should be analysed separately from participation rights in respect of remuneration.
Treatment of the Division of Profits
- Remuneration paid under an employment contract – Is treated as an expense in the income statement and a liability in the statement of financial position to the extent that it is unpaid.
- No equity participation rights – Where there are no participation rights all amounts becoming due to members in respect of those profits will be presented within ‘members' remuneration charged as an expense’ i.e. it is treated as a charge against profits and not an allocation of profits.
- Profits automatically divided – Where the profits are automatically divided and the LLP doesn't have the right to refuse payment the allocation is treated as an expense in the income statement and as a liability in the statement of financial position to the extent that they are unpaid.
- No automatic division of profits – Where there is no automatic division of profits the LLP has an unconditional right to refuse payment of the profits. Under these circumstances the profits are treated as a division of equity rather than an expense. They are shown as a residual amount available for appropriation in the profit & loss account. Once the profits are divided they are treated as an appropriation which is deducted from equity.
Combination of 3 and 4 – It is possible that a combination of these circumstances may arise for example 75% of profits are automatically divided with the remainder at the discretion of the LLP. The 75% will be treated as an expense in the income statement and the remainder when divided as an appropriation.
Members’ Interests – Presentation and Disclosure
All amounts due to members classified as liabilities are presented within Loans and other debts due to members in the statement of financial position. This will include any unpaid element of remuneration charged as an expense and any unpaid allocated profits arising from the discretionary division of profits. Members’ capital classified as a liability will also be included. The heading in the balance sheet is broken down in the notes under the same heading and comprises:
Members’ capital classified as a liability
Loans from members
Retirement benefits in respect of current members
Amounts due to members in respect of profits
Members’ other interests i.e. the elements which constitute the equity of the LLP members capital (capital classified as equity) the revaluation reserve and other reserves are classified separately on the balance sheet as ‘Members’ other interests’ with the three main elements shown separately.
Within the financial statements there is a statement of members interests (previously a members interests note in SORP 2005) that shows the movements in members’ interests for the current and prior year. This note reconciles with the Total members’ interests heading in the balance sheet.
Presentation of the income statement
The presentation of the income statement is pretty much the same as for that of a limited company. Taxation doesn’t appear as it is considered to be the responsibility of the individual members. In addition the SORP prescribes an extra section at the bottom: Members’ remuneration charged as an expense which is broken down in the notes under the heading Information in relation to members.
Double entry examples
The double entry for the automatic division of profits:
Debit account 3054 - non-discretionary division of profit (P&L).
Credit account 6122 - profits due to members’ automatic allocation of profits (balance sheet).
The double entry for profits for discretionary division among members:
This occurs automatically; any remaining profit after automatic division is reported in the P&L as profit for the financial year available for discretionary division among members and under the heading other reserves in the Members’ interests note. Any unallocated profit is carried forward in account 8060 at year end and appears as a brought forward value in the Members’ interest note.
To make a discretionary allocation of profit to members the double entry is:
Debit account 8061 – discretionary allocation of profits to members (balance sheet).
Credit account 6123 – other allocations of profit (balance sheet).
The double entry for members’ salaries
Debit account 3050 - members’ salaries under LLP agreement (income statement)
Credit account 6121 – members’ remuneration (salaried members) (statement of financial position)
When salary is paid:
Debit account 6124 members’ drawings (statement of financial position)
Credit account 5240 – current account (income statement)
Where a loss is incurred by the LLP the loss should be allocated to ‘other reserves’ unless there is a specific agreement set out in the partnership agreement i.e. don’t post an automatic division of profits in that year.
Filing Accounts at Companies House
Companies House are now able to accept on-line submission of SORP 2015 accounts for LLPs (both full and micro) and this service is available through Accounts Production. SOPR 2005 accounts must be filed on paper.