What are the changes?
The significant changes in the LLP SORP 2022 are:
- revised definitions;
- guidance on whether an LLP has an unconditional right to avoid delivering cash or other assets to members; and
- guidance on the classification of payments to members in cash flow statements.
In addition, the SORP incorporates the requirement for large LLPs to present, with the accounts, an energy and carbon report that is approved by members and includes not only the name of the designated member signing the report on behalf of the LLP but also the names of every member, including those who are no longer members at the year end.
As a result of these changes the SORP sets out three steps that result in the payment of profit to LLP members, with examples of how these relate to each other in practice.
The changes were made with the intention of clarifying arrangements around profit sharing into a three step model, which is as follows:
- Allocation (attribution or sharing) - allocating shares of profit to members, but without them having the right to receive those profits.
- Division - the mechanism by which profits become a debt due to members.
- Distribution - actually paying the cash to the member. This is distinguished from drawings on account of profit.
There is also potential for alternative classifications within the cashflow statement relating to profit distributions, along with a new requirement for LLPs to disclose their accounting policy for classifying such distributions in the cash flow statement and for these cash flows be classified consistently from period to period.
What does this mean for your firm?
Hywel Pegler, National Audit Lead for professional services commented:
“We would encourage management teams to consider the potential implications of these changes as soon as practicable, prior to mandatory implementation for accounting periods commencing post 1 January 2022. LLP agreements weren’t specifically written with accountants in mind, and sometimes language and intention doesn’t necessarily align, and might not be consistent between legal and accounting perspective.”
“Following these amendments to the SORP, generally speaking, we envisage there may be circumstances where this reassessment of an LLP agreement results in the treatment of some or all of an LLP’s profits being revised from “profits available for distribution” to “members’ remuneration charged as an expense”.
Sam Wright, Senior Audit Manager in the professional services team explained:
“We hope this is an opportunity for further clarity and consistency in presentation, and for firms to review the terminology and definitions applied in in their LLP agreements. It will be important to draft disclosures in the financial statements that adequately explain any changes in interpretation appropriately. This could also lead to retrospective classification changes requiring additional disclosure too.”
If you would like to discuss any aspect of the above, please get in touch with Hywel Pegler.