Nick Randall takes a look at the proposed changes to the SORP on accounting by LLPs.

As with previous versions, the proposed new statement of recommended practice (SORP) revealed in October addresses matters that are specific to the structure of limited liability partnerships (LLPs). The changes in accounting introduced by FRS102 in March will be equally relevant to LLPs and as the SORP is not a comprehensive guide to all accounting requirements, firms will need to consider both the SORP and FRS102 when they approach transition date.

The main changes, are set out below.

Statement of changes in equity

FRS102 requires that a statement of changes in equity (SOCIE) is presented as a primary statement. While there are many similarities between the SOCIE and the reconciliation of members' interests, more information is required for the latter. Where an LLP decides to use the reconciliation of members' interests in place of the SOCIE, it will need to present full comparatives.

FRS102 also permits, in certain circumstances, the combination of the profit and loss account, and SOCIE into a statement of income and retained earnings. However, the SORP doesn't recommend that LLPs use this option.

Annuities

While it may appear at first to be an unexpected outcome, a large proportion of annuity arrangements are likely to fall not under the accounting requirements of FRS102, but under FRS103 Insurance Contracts. This is due to the fact that many annuity arrangements include what are considered to be insurance risk features. A typical example would be mortality risk where, for example, an arrangement is limited to payments over the life of the former partner without any terminal payment. Although the way in which annuities are classified will change, and determining which standard and sections of FRS102 apply will be more complex, the underlying accounting in many cases will not change.

Classification of cash flows

Under FRS102 there are only three headings where cash flows are analysed and the SORP includes guidance on which might be the most appropriate category for cash flows specific to LLPs.

Merger accounting

As merger accounting is generally prohibited under FRS102, the SORP has been amended to remove previous guidance on merger accounting except in respect of transactions meeting the definition of group reconstructions.

This change is likely to lead to goodwill being recorded on mergers and therefore create additional complications for LLP accounting.

With the transition date for FRS102 for April year ends being April 2014, firms will need to set aside some time in the next few months to consider the impact.

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