30 November 2022
Revised Statement of Recommended Practice – Accounting by Limited Liability Partnerships (LLP SORP 2022) seeks to achieve consistency by LLPs in how they treat transactions with members.
Although effective for periods commencing on or after 1 January 2022, with early adoption permitted, now may be the time to revisit members’ agreements to identify any inconsistencies with the current accounting treatment for members’ interests and to consider accounting policies.
Changes to the definitions
Revised definitions of the division of profits, divided profits, automatic division of profits, discretionary division of profits, and drawings in advance of profits have been included.
Three steps resulting in the payment of profit to LLP members, with examples of how these relate to each other in practice, are set out:
1. Allocation (attribution or sharing) - allocating shares of profit to members, but without them having the right to receive those profits.
2. Division - the mechanism by which profits become a debt due to members.
3. Distribution - actually paying the cash to the member. This is distinguished from drawings on account of profit.
Steps 1 and 2 could be reversed or happen simultaneously, but will often not all be taken at the same time as the examples in the SORP explain. It also clarifies that it is the division of profits that creates a debt to members, not the allocation of profits to individual members.
- Changed emphasis – from consideration of whether the members’ agreement gives an unconditional obligation to divide profit to whether the LLP has an unconditional right (in all circumstances until it is wound up) not to deliver cash or other assets to members.
- Additional guidance – to help determine when an LLP has this unconditional right and makes it clear a liability to members still arises if any right to retain profits is conditional or temporary.
- Footnotes – to clarify what constitutes a decision by an LLP.
- Guidance – explaining that the ability of an LLP to temporarily avoid payment of profits to members to manage cash flow or meet working capital needs does not necessarily create an unconditional right to avoid delivering cash or other assets to members.
Cash flow statements
Additional guidance sets out the basis for alternative options for classifying cash flows relating to profit distributions in the cash flow statement, with LLPs required to disclose their chosen accounting policy and for these cash flows be classified consistently from period to period.
We recommend LLPs revisit the members’ agreement now in light of the amended definitions and new guidance to determine whether the treatment of profits is consistent with the SORP.
This review should focus on whether the agreement appropriately reflects the intended rights and obligations between the LLP and its members. Revisions may be required to explicitly make clear to members, and the auditor, the extent to which the division of profit is discretionary or automatic, and the mechanism for that division. Wording should be compared with the amended definitions in the SORP to aid consistent interpretation and ensure the accounting reflects the members rights.
Such reassessment may result 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”. No changes are envisaged as a result of the SORP updates where the profits are currently accounted for as “members’ remuneration charged as an expense”, nor to the accounting for or presentation of members’ capital.
Accounting policies for the classification of payments to members in the cash flow statement should be decided.
Where a change in accounting treatment for profits or a reclassification in the cash flow statement of payments to members is required as a result of the LLP SORP 2022, FRS 102 requires the change to be accounted for retrospectively. LLPs will need to draft narrative disclosures appropriate to their particular circumstances.
Large LLPs also need to include the names of all members, including those who ceased to be members during the year, in their energy and carbon reporting and so will also need to consider whether any available list of members held at Companies House has the information to allow compliance with this requirement.
How RSM can help?
If you have any questions about LLP SORP 2022 and in particular about any reassessment of LLP agreements and treatment of profits please contact Andrew Baker, or your usual RSM contact.