Understanding the SORP

The SORP was updated to reflect the requirements for large LLPs and groups to include an energy and carbon report as part of the annual report as required by The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Reporting) Regulations 2018 (SI 2018/1155).

In the revised (SORP), profit divisions within a Limited Liability Partnership (LLP) are classified as either discretionary or automatic. Discretionary divisions, which remain as equity until division, require a decision by the LLP, which retains the unconditional right to refrain from making such a decision. Supplementary guidance was offered regarding the automatic allocation of profits to members who do not contribute significant services to the LLP.

The SORP highlights that the default position on profit division within an LLP is irrelevant. The crucial factor is the LLP’s unconditional right to indefinitely retain profits. If the LLP’s right to withhold payment is conditional, such as due to short-term cash flow issues, it may still have an unconditional right to avoid cash delivery once these issues are resolved. However, this may vary depending on the specific terms outlined in the LLP Deed.

Discretionary profit divisions are debited directly to equity in the year they occur. As stated in paragraph 45B of the SORP, a discretionary profit division occurring after the balance sheet date is classified as a non-adjusting event under section 32 of FRS 102.

Automatic profit divisions, recognised as liabilities, are obligations that the LLP cannot unconditionally avoid. These typically include:

• Salaries: Regular payments to members as stipulated in the LLP agreement
• Interest on capital balances: Payments on members’ capital contributions as agreed in the LLP deed.

These items are treated as liabilities because the LLP is contractually obligated to make these payments, regardless of its financial performance.

While the SORP amendment does not generally alter how LLPs account for profit divisions, there may be instances where a division is deemed automatic rather than discretionary, or vice versa.

The interpretation of various clauses in the LLP agreement often presents challenges in determining the application of accounting requirements. As classification depends on the terms of the LLP’s members’ agreement, LLPs may wish to review whether their existing agreement clearly addresses these points considering the revised SORP.

In a Limited Liability Partnership (LLP), the automatic division of profits typically refers to a pre-established agreement among the partners regarding the distribution of profits, generally incorporated into the LLP’s operating agreement.

The SORP now requires clarity on categorising member payments in cash flow statements. There are alternative classifications within the cash flow statement relating to distributions to members (operating or financing cashflows), and a requirement for LLPs to disclose their accounting policy for classifying such distributions and apply this policy consistently from year to year.

This modification enables LLPs to categorise these cash flows as either payments for services provided to the LLP as part of its revenue-generating activities (operating), or as expenses incurred in securing financial resources or entitlements to cash flows from the LLP’s capital providers (financing), depending on the LLP’s specific circumstances.

In May 2024 the CCAB issued a revised Statement of Recommended Practice (SORP) for LLPs, effective for periods commencing on or after 1 July 2024. The new edition incorporates several updates and clarifications to ensure that LLPs’ financial statements are comparable with those of other entities. Similar to the 2022 iteration, the 2024 edition aims to enhance consistency, comprehensiveness, and transparency in financial reporting.

Key updates include:

• Climate-Related Financial Disclosure Regulations: The SORP now reflects the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/46), requiring certain LLPs and groups to make climate-related financial disclosures in line with the Taskforce for Climate-related Disclosures (TCFD) recommendations.
• Automatic Division of Profits: A new paragraph (34D) has been added to clarify that an automatic right to a share of the LLP’s profits, without providing any substantive services, should be treated as a return on capital. Additionally, Example 11 in Appendix 2 has been added to clarify this position.
• Clarification on Members’ Rights: The SORP provides guidance on analysing members’ participation rights in the earnings or assets of an LLP between a financial liability or equity, as per section 22 of FRS 102.
• Guidance on Post-Retirement Obligations: The flowchart on paragraph 76B has been updated to provide guidance applicable to a particular obligation, including the uncommon circumstances in which FRS 103 Insurance Contracts applies, as well as when the requirements of section 26 Share-based Payment of FRS 102 apply.
• Guidance on Interests held in Subsidiary LLPs: New paragraphs (119A to 119H) have been added to provide guidance on the appropriate treatment of members’ debt and equity interests in a subsidiary LLP.

This summary highlights the significant changes and updates that have been incorporated into the latest version of the SORP, ensuring clarity, transparency, and compliance with current financial regulations and economic contexts.

According to the new SORP for UK LLPs, certain LLPs are required to apply the Taskforce for Climate-related Financial Disclosures (TCFD) regulations. These requirements are primarily aimed at larger LLPs and those with significant public interest.

Summary

• Large LLPs: Must apply TCFD if their turnover exceeds £500 million.
• Public Interest LLPs: Must apply TCFD if they have more than 500 employees and are either listed on a regulated market or are banking/insurance companies.
• Other LLPs: May choose to adopt TCFD recommendations voluntarily.

New sections clarify the treatment of members’ debt and equity interests in subsidiary LLPs. In group accounts, only members’ equity interests that are not attributable to the parent LLP are recognised as non-controlling. Ref: Paragraph 119A – 119H.

The guidance has been updated to address the presentation of members’ remuneration charged as an expense within the subsidiary LLP entity accounts in the parent’s group accounts. This applies to both scenarios where the members of the subsidiary LLP and the parent LLP are different individuals, and where the members of the subsidiary LLP are also members of the parent LLP.

The 2024 SORP for LLPs introduces significant modifications aimed at enhancing the transparency and comparability of financial statements. These changes may necessitate updates to LLPs’ accounting practices and systems to ensure compliance. The revisions are designed to provide stakeholders with a clearer understanding of LLPs’ financial health and sustainability practices.

The latest SORP includes additional disclosure obligations, particularly in the notes accompanying the accounts. These obligations cover several critical areas:

• Positioning of Member Loans and Debts: The SORP clarifies how member loans and debts should be treated relative to other unsecured creditors during a winding-up petition.
• Safeguards for Creditors: Ensures that certain protections are extended to creditors, making them immune to revocation by members.
• Quantification of Member Debts: Requires a detailed account of the debts owed by members to the LLP.
• Policies on Fund Contributions and Repayments: Mandates clear policies governing the contribution of funds by members and the corresponding repayments by the LLP.

Furthermore, LLPs must provide explicit details of their policies concerning account drawings and profit distribution. This requirement aims to ensure transparency and accountability in the financial operations of the LLP. Adhering to these guidelines is crucial for maintaining the integrity of the financial reporting process.