A new edition of the Statement of Recommended Practice (SORP) for Limited Liability Partnerships (LLPs) gives further guidance around divisions of profit to members. In this article, we outline the changes and also flag new energy and carbon reporting regulations.
What is a SORP?
SORPs exist for a range of entities and industries and are developed by specific SORP-making bodies. They are intended to supplement accounting standards and other legal and regulatory requirements. They clarify how those standards should be applied to the specific circumstances or factors that affect the particular industry or sector.
The LLP SORP is developed by the Consultative Committee of Accountancy Bodies (CCAB) and applies to LLPs incorporated in the UK (and those incorporated prior to 1 October 2009 under the Limited Liability Partnerships Act (Northern Ireland) 2002), that report under FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland).
The LLP SORP deals with specific LLP matters such as the presentation of financial statements and the accounting for members’ interests and remuneration, which is not specifically covered in FRS 102.
The latest edition of the LLP SORP gives further guidance around divisions of profit to members. A division of profits is the mechanism by which the profits of an LLP become a debt due to members. A division may be automatic or discretionary, may relate to some or all of the profits for a financial period, and may take place during or after the end of a financial period.
An automatic division of profits is one where the LLP must make a division of some or all profits. It is obliged to divide those profits based on the members’ LLP agreement in force at the time.
A division of profits that requires a decision to be made by the LLP, which the LLP has the unconditional right to avoid making is on a discretionary basis. It does not constitute an automatic division because the LLP can avoid delivering cash or other assets to members in respect of those profits. When profits are divided on a discretionary basis the LLP could instead have chosen never to divide those profits.
There are also changes to the definitions included in the SORP relating to divisions of profit with further consequential amendments throughout the SORP to ensure consistency of terminology.
Additional guidance is included in the latest SORP to help determine when an LLP can avoid delivering cash or other assets to members. Unless otherwise provided in the members’ agreement, amounts drawn by members against future divisions of profit are loan assets, ultimately repayable by members. Where the LLP does not have any rights to recover amounts paid to members as drawings, it follows that the drawings have been offset or written off. Where this is the case, it will be important to determine whether the drawings form part of members’ remuneration charged as an expense or represent a discretionary division of profit.
UK accounting standards do not dictate how automatic or discretionary distributions of profit should be classified in the cash flow statement. Accordingly, LLPs should determine the classification that is appropriate to their business. One option is to classify automatic or discretionary profit distributions as operating cash flows, because they are paid out of operating cash flows or because they are in substance paid for services rendered to the LLP as part of its revenue generating activities. Alternatively, LLPs could classify automatic or discretionary distributions of profits as financing cash flows, because they represent costs of obtaining financial resources or claims on cash flows by the providers of capital to the LLP.
The SORP requires LLPs to disclose their accounting policy for classifying share of profits and classify the cash flows consistently from period to period.
Finally, there are updates to reflect the requirement for Large LLPs and groups to include an energy and carbon report within their annual report that became applicable for financial years beginning on or after 1 April 2019.
When does this come into effect?
The new SORP applies to accounting periods beginning on or after 1 January 2022. Early adoption is permitted.
Energy and carbon reporting for LLPs
The LLPs (Climate-related Financial Disclosure) Regulations 2022 were published in January 2022 and come into force on 6 April 2022 in respect of any financial year of an LLP which commences on or after that date.
These require LLPs with more than 500 employees and a turnover of more than £500 million, to include additional climate-related financial disclosures in their energy and carbon report. Traded and banking LLPs are excluded from the regulations.
The final required disclosures are expected to be:
- A description of governance arrangements in relation to assessing and managing climate-related risks and opportunities;
- A description of how the LLP identifies, assesses, and manages climate-related risks and opportunities;
- A description of how processes for identifying, assessing, and managing climate-related risks are integrated into its overall risk management process;
- A description of the principal climate-related risks and opportunities arising in connection with its operations, and the time periods in which those risks and opportunities are assessed;
- A description of the actual and potential impacts of the principal climate-related risks and opportunities on the LLPs business model and strategy;
- An analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios;
- A description of the targets used to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
- A description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities, and of the calculations on which those key performance indicators are based.
How we can help you
We have extensive experience of advising UK LLPs. Our experience includes:
- Planning and organising efficient and value-add audits;
- Supporting the members in preparation of annual financial statements (both UK GAAP and IFRS);
- Preparing and filing the partnership tax return;
- Reporting Accountant services on admission to a traded market; and
- Structure and related tax efficiency advice.