Exposure Draft of Guidance Note on Financial Statements of LLPs issued by ICAI

Welcome to this video on GAAP Advisors Channel. Myself CA Manish C. Iyer. The Institute of Chartered Accountants of India (ICAI) has issued an exposure draft of guidance note on Financial Statements of Limited liability Partnerships (LLPs). The exposure draft proposes to replace technical guide on financial statements of LLPs issued by ICAI. This is a welcome move. I have submitted my comments which can be downloaded from ICAI’s website. I request you to also kindly submit your comments on the same before 8th of March.
In this video, I will discuss an important issue on Equity and Liability in financial statements of LLPs. The exposure draft proposes a structure of financial statements of LLPs similar to that contained in the technical guide. The balance sheet first lists the equity and liabilities and then the assets. The equity and liabilities section of the balance sheet does not have sub-total showing total equity. Therefore, as a user, I am confused as to what is the total equity of the LLP. Within equity and liabilities section, there are three sub-sections:
1. Partners’ funds
2. Non-current Liabilities
3. Current Liabilities
These sections indicate that partners’ funds is equity of the LLP. The partners’ funds comprise of partners’ capital account and reserves and surplus. The partners’ capital account includes partners’ current account which is a revolving account. Normally, partners’ can withdraw funds from current account at will. The LLP except for the limit specified in the LLP deed has no right to refuse such withdrawal, Therefore, partners’ current account does not evidence residual interest in LLP. The partners’ current account meets the definition of liability. The profits of LLP are added to partners’ current account. This indicated that the profit does not increase equity of the LLP. An item to be income must result in increase in equity and an item to be expense must result in decrease in equity. However, in LLP, the so called items of income and expense result in increase and decrease in liability. This is because the profits of LLP are added to current account which partners’ can withdraw at will.
There can be two solutions to this issue. Either amend the definition of equity and liability to permit balances over which the LLP has no right of refusal to be regarded as equity and not liability or amend the structure of financial statements of LLPs to specify partners’ current account in current liabilities.
The first solution will require companies following Indian Accounting Standards and having investment in LLPs to make significant changes to LLP’s balance sheet for consolidation purposes. In this case, it would be helpful if the guidance note also guides on the adjustments to be made for consolidating LLP with companies following Indian Accounting Standards.
The second solution will align financial statements of LLPs with that of companies following Indian Accounting Standards. However, this could require significant change in practice of preparing financial statements of LLPs. You see every coin has two sides. My preference is the second one.
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