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Accounting for limited liability partnerships - a brief guide

Chemistry is simple lads; it's folk who make it difficult - A teacher in the author's school

Introduction
The accounting and reporting requirements for small LLP's are largely governed by The Small Limited Liability Partnerships (Accounts) Regulations 2008 and the Financial Reporting Standard for Smaller Entities (FRSSE). The Statement of Recommended Practice (SORP) "Accounting by Limited Liability Partnerships" interprets and expands upon both of these and adds some additional requirements.

Many of the reporting requirements for LLP's are identical to that for companies. The major difference (and complexity) is the way that members' capital and other amounts due to/from members (collectively known as members' interests) are accounted for and reported. Also, automatic divisions of profit are deducted on the face of the profit and loss account under the heading Members remuneration charged as an expense.

See also
LLP double entry examples

Members' interests
Accounting for partners' interests in an unincorporated partnership, at least in VT, is very simple. All the amounts due to a partner are included in a single capital account and a note shows the movement on the account broken down into profit share (including notional salaries), capital introduced and drawings. It is more complicated for an LLP. In an LLP, credit balances with members must be divided between Loans and other debts due to members (eg debt) and Members' other interests (eg equity). Each of these must be further analysed as follows:

  Loans and other debts due to members £
  Members' capital classified as a liability X
  Loans from members X
  Amounts due to members in respect of profits X
  Other amounts X
   
X
     
  Members' other interests £
  Members' capital classified as equity X
  Revaluation reserve X
  Other reserves (typically unallocated profit) X
   
X

A note is required showing the movement on the various categories of members' interests and paragraph 60 of the SORP prescribes a precise layout for this consisting of 6 columns. However, the following may apply to many small LLP's:

In these cases all members' interests will be classified under Loans and debts due to members and the members' interests movement note will consist of only one column as follows:

  Loans and other debts due to members £
  Balance at start of period X
  Members remuneration charged as an expense X
   
X
  Introduced by members X
  Repayment of debt (X)
  Drawings (X)
  Balance at end of period
X

That is all nice and simple again provided one appreciates that all automatic profit shares are included within Members remuneration charged as an expense (see below).

Total members' interests
Paragraph 58 of the SORP requires the face of the balance sheet of an LLP to include an additional memorandum statement showing Total members' interests defined as follows:

  Total members' interests £
  Amounts due from members included in debtors (X)
  Loans and other debts due to members X
  Members' other interests X
   
X

The terminology is slightly misleading as Total members' interests thus defined consists of members' interests (the balance sheet foot total) less any amounts due from members.

The distinction between financial liability (debt) and equity
Members' capital is considered to be a liability and not equity if there is a contractual obligation for the LLP to repay it to the members, even if that obligation is conditional - for instance on retirement. Many LLP's may therefore have no equity capital at all.

Profit and loss account
The profit and loss account for an LLP is similar to that of a company, except that taxation is usually is the personal liability of members and hence not shown. The SORP also adds a new category at the end of the profit and loss account, Members remuneration charged as an expense. Hence the last three lines show the following:

  Profit for the financial year before members' remuneration and profit shares X
  Members remuneration charged as an expense (X)
  Profit for the financial year available for discretionary division between members
X

Profit share
In an LLP, there is a distinction between the automatic division of profits and profits available for discretionary division. Profits are available for discretionary division only if the LLP has an unconditional right to refuse payment of the profits of a particular year unless and until the members agree to divide them (albeit in pre-agreed ratios).

Profits that are automatically divided are deducted under the heading Members remuneration charged as an expense at the bottom of the profit and loss account. For many LLP's, all divisions of profit will be deemed to be automatic and the net figure at the bottom of the profit and loss account will always be zero. This contrasts with an unincorporated partnership, at least in VT, where neither partners 'salaries' nor profit share are shown on the face of the profit and loss account.

The double entry for the two types of profit share are as follows:

  Automatic division of profits £ £
  Debit: Members remuneration charged as an expense at the bottom of the face of the profit and loss account X  
  Credit: Amounts due to members in respect of profits in the balance sheet   X
       
  Discretionary division of profits £ £
  Year -end transfer of net profit (automatic in VT)    
  Credit: Other reserves in the balance sheet   X
       
    £ £
  Upon allocation to members    
  Debit: Other reserves in the balance sheet X  
  Credit: Amounts due to members in respect of profits in the balance sheet   X

Losses
There are no specific provisions in the SORP regarding losses. Losses should normally be debited to Other reserves in the same way that profits available for discretionary division are credited. This is done automatically by both VT Final Accounts and VT Transaction+.

If profits are normally automatically divided, there is an argument for showing losses as negative membersí remuneration and debiting the members. However, in this case the accounts would show the members as being liable for the loss.

Disclosure of members' interests by member
There is no requirement to disclose membersí interests by member and this information is not included in the LLP templates in VT Final Accounts.

If the LLP chart of accounts in VT Transaction+ is used for the bookkeeping for the LLP, the Display>Account Balances By List report shows the movements and balances on the various categories of membersí interests with a column for each member. This report could be appended to the accounts printed from VT Final Accounts, or copied and pasted into an additional sheet in the accounts workbook.

Related party transactions
A small LLP is required to report related party transactions under the FRSSE in a similar manner to a company. A director of a company is automatically deemed to be a related party, but there is not a specific rule for the members of an LLP. However, most members of a small LLP are likely to fall within the definition of a related party.

The FRSSE does not apply to abbreviated accounts and hence there is no need to disclose related party transactions in the abbreviated accounts.

Members report
Unlike the directors' report for a company, there is no legal requirement to include a members' report with the accounts for an LLP. However, the SORP mandates that there should be one and defines its contents. Parliament thought that a members' report was not necessary; the Consultative Committee of Accountancy Bodies (who wrote the SORP) clearly thought otherwise.