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 UK GAAP and adds some additional requirements.
The LLP SORP gives guidance for LLPs on the application of UK GAAP and the accounting requirements of the Companies Act as applied to LLPs, it can be downloaded by clicking here.
The SORP should not be used as a standalone document as it does not contain all the disclosure requirements that relate to LLPs. In the event of any conflict, accounting standards or the provisions of the Companies Act take preference over the LLP SORP.
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 profit & loss account and a liability in the balance sheet 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 profit & loss account and as a liability in the balance sheet 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 profit & loss 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 balance sheet. 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 under FRS 25
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 note that shows the movements in members’ interests from the start of the financial period to the end (a detailed example of this is shown in the SORP; in reality it is much simpler). This note reconciles with the Total members’ interests heading in the balance sheet.
Presentation of the profit & loss account
The presentation of the profit and loss account 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 (P&L)
Credit account 6121 – members’ remuneration (salaried members) (balance sheet)
When salary is paid:
Debit account 6124 members’ drawings (balance sheet)
Credit account 5240 – current account (balance sheet)
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
At the time of writing, accounts for LLPs cannot be filed on-line as there isn't a taxonomy. You should continue to file on paper until further notice.