Real estate developers: beware of changes to LLP SORP

Upcoming changes to accounting standards may affect property development limited liability partnerships (LLPs). This insight explains how. 

LLP SORP – what it is and why it’s changing

The accounting principles and disclosure requirements for LLPs in the UK and Ireland are set out in the Statement of Recommended Practice for LLPs (the LLP SORP). It is based on Financial Reporting Standard 102 (FRS 102) and applies to all LLPs that do not have to use UK adopted international accounting standards.The LLP SORP is being updated to provide more guidance, following feedback from stakeholders. The revised LLP SORP will apply to accounting periods starting on or after 1 July 2024, and can be adopted early.

How a property developer will be affected by the revised LLP SORP

It’s not uncommon for property developments to be run through an LLP structure, whereby one party contributes through provision of funds, another contributes through running the development, and both are rewarded through a share in the profits from the development.

The revisions to the LLP SORP deal specifically with the situation where profit shares are payable to members that do not provide services to the LLP, with the following key implications:

• Where amounts subscribed by non-working members and subsequent profit shares payable to them meet the accounting definition of debt (i.e. the LLP does not have the indefinite right to withhold them), the amounts subscribed should be accounted for as a financial instrument;
• Depending on the nature of the arrangement, the financial instrument will subsequently be measured at fair value or amortised cost, potentially giving rise to complex and costly calculations.

The revisions additionally cover the treatment of parent LLP’s interests in their subsidiaries and the treatment of post-retirement benefits to members, which are discussed in Are you prepared for the revised LLP SORP?.

How to prepare for the revised LLP SORP

Property development LLPs need to take the following steps to get ready for the revised LLP SORP:

• Analyse whether the profit entitlements of any non-working members are debt or equity;
• Where some or all entitlements are debt, review  existing accounting policies and assess whether they are consistent with the revised LLP SORP;
• Identify and quantify any adjustments that may be needed to comply with the revised LLP SORP, and consider the impact on the financial statements;
• Where the requirements are onerous, LLPs might consider whether business needs could equally be met through an equity structure, giving rise to a less complex accounting position.

How we can help

The revised LLP SORP will apply to 30 June 2025 year ends and any relevant short periods of account, so the lead time is short. If your property development business is an LLP and you need advice on preparing for the changes to the LLP SORP, please get in touch with our real estate and construction specialists.