Regulations issued last May significantly changed the financial reporting framework applicable to small LLPs, mirroring changes introduced for small companies a year or two previously. The most noteworthy changes include the raising of the size thresholds which determine whether an LLP qualifies as small and the creation of a new micro-entities regime for the smallest LLPs.
These changes, coupled with the withdrawal of the FRSSE, mean that many small LLPs will see significant changes in their reporting requirements for accounting periods beginning on or after 1 January 2016. Many will be switching to the new UK GAAP for the first time.
Exactly which standard they will use will depends on their circumstances. Most are likely to apply FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, while taking advantage of the presentation and disclosure exemptions available under Section 1A of the standard. Those LLPs qualifying as micro-entities and choosing to apply the micro-entities regime will, however, apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.
To complicate things further, a number of changes to the LLPs SORP were necessary as a consequence of these developments. An exposure draft was issued in August of last year and a revised version of the SORP was issued in January of this year.
The good news is that the changes to the SORP will have little if any effect on most large and medium-sized LLPs. Having said that, it should be remembered that the new size thresholds will mean that some LLPs that have previously been considered medium-sized will qualify as small for the first time. Such LLPs will potentially benefit from significantly reduced disclosures under the new regime.
The biggest impact will undoubtedly be on small LLPs, who will benefit from a less demanding financial reporting regime.
Small LLPs applying FRS 102 will have to comply in full with the recognition and measurement requirements of both the standard and the SORP. They will, however, benefit from significant presentation and disclosure exemptions if they choose to apply Section 1A of the standard. A complete set of accounts for such LLPs will include only a balance sheet, profit and loss account and limited notes to the accounts. Small LLPs are not required to comply with many of the SORP’s disclosure requirements.
But care will be needed as small LLPs may need to provide additional disclosures to those set out in Section 1A in order to ensure that their financial statements give a true and fair view. Rather than prescribing which additional disclosures are required, the SORP generally allows small LLPs to apply their own judgement when determining what, if anything, is needed over and above the disclosures required by the standard.
The SORP does, however, require small LLPs to make certain disclosures about how loans and other debts due to members rank in relation to other unsecured creditors. This is because LLPs do not have any of the capital maintenance provisions that apply to companies, meaning that such disclosures are necessary in order to ensure a true and fair view.
The SORP also encourages – but does not require – small LLPs to include a reconciliation of the movement in members’ other interests in their financial statements.
As noted above, FRS 105 is available to LLPs qualifying for and choosing to apply the micro-entities regime. This standard allows the smallest LLPs to follow a far simpler reporting regime. While FRS 105 is based on FRS 102, it has been adapted significantly to accommodate the legal requirements of the micro-entities regime. For example, FRS 105 reflects the micro-entities regime’s prohibition of fair values and its very limited disclosure requirements. In addition, further simplifications – over and above those required by law – have been made in order to reflect the smaller size and simpler nature of micro-entities. For example, there are no accounting policy options and accounting for deferred tax is not permitted. Moreover, micro-entity accounts that include the statutory minimum accounting items are presumed by law to give a true and fair view.
LLPs qualifying for and choosing to apply the micro-entities regime are not within the scope of the SORP. Such LLPs should apply FRS 105 only. They can, however, refer to the SORP’s requirements if they wish, but they must satisfy themselves that in doing so they are also complying with the relevant requirements of FRS 105.
Many of the challenges faced by small and micro-LLPs transitioning away from the FRSSE are the same as those faced by companies going through the same process. All in all, the new SORP shouldn’t add too many additional complications. But it is of course important that you and your clients are familiar with its contents.
The new SORP can be downloaded from the CCAB website. You may also be interested in the Financial Reporting Faculty’s FAQ document on the subject.