Recasting Of Financial Statements By Partners Of LLP

Introduction

Suppose a Limited Liability Partnership (‘LLP’) has filed its financial statements prepared for a financial year with the Registrar in terms of the applicable provisions of the Limited Liability Partnership Act, 2008 (‘Act’). However, due to certain reasons, there was a need to recast/ restate the said financial statements. The Act does not prescribe any provision for recasting of financial statements of an LLP unlike the Companies Act, 2013 (‘CA, 13’) which enables the companies to recast their financial statements. In view of the absence of any such provisions of recasting/ restatement of financial statements, whether an LLP can recast/ restate its financial statements? Here an analysis. 

What LLP Act and LLP Rules say?

Section 34

“(1) The limited liability partnership shall maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence on cash basis or accrual basis and according to double entry system of accounting and shall maintain the same at its registered office for such period as may be prescribed. 

(2) Every limited liability partnership shall, within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last day of the said financial year in such form as may be prescribed, and such statement shall be signed by the designated partners of the limited liability partnership. 

(3) Every limited liability partnership shall file within the prescribed time, the Statement of Account and Solvency prepared pursuant to sub-section (2) with the Registrar every year in such form and manner and accompanied by such fees as may be prescribed. 

XXX.” [emphasis supplied] 

Rule 24

“(1) Every limited liability partnership shall keep books of accounts which are sufficient to show and explain the limited liability partnership’s transactions and are such as to- 

• disclose with reasonable accuracy, at any time, the financial position of the limited liability partnership at that time; and 

• enable the designated partners to ensure that any Statement of Account and Solvency prepared under this rule complies with the requirements of the Act. 

(6) A limited liability partnership's Statement of Account and Solvency shall be signed on behalf of the limited liability partnership by its designated partners. 

(7) The Statement of Account and Solvency of a limited liability partnership shall be signed by the designated partners of the LLP and each designated partner shall be taken to be a party to its approval unless he shows that he took all reasonable steps to prevent their being approved and signed. 

XXX” [emphasis supplied] 

Provisions of CA 13

Section 131

“(1) If it appears to the directors of a company that- 

• the financial statement of the company; or


• the report of the Board, 

do not comply with the provisions of section 129 or section 134 they may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar; 

XXX 

Provided also that the detailed reasons for revision of such financial statement or report shall also be disclosed in the Board's report in the relevant financial year in which such revision is being made. 

(2) Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or laid before the company in general meeting, the revisions must be confined to— 

(a) the correction in respect of which the previous financial statement or report do not comply with the provisions of section 129 or section 134; and

(b) the making of any necessary consequential alternation. 

XXX [emphasis supplied]

IND AS 8

Para 5

“Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: 

(a) was available when financial statements for those periods were approved for issue; and

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.”

“Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

Para 42 

“Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by: 

(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or

(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.”

The scope, applicability of the aforesaid provisions may be analysed as below- 

Scope of IND AS 8 

The provisions of IND AS are similar to those of IAS 8 which provide for restatement of financial statements with retrospective effect in certain events. It is pertinent to note here that the said accounting standard is concerned, inter alia, with correction of a prior period error with retrospective effect at the time of discovery of the error. The scope of the said IND AS extends to correction of prior period errors to the first set of financial statements approved for issue after the discovery of error by restating the comparative amounts for the prior period concerned. While the term ‘retrospective restatement’ is defined to mean correcting an error as if the same has never occurred, however, it is not clear as in when to proceed with for such re-statement i.e. whether restatement can be done after the adoption of the financial statements by the members or whether it should be prior to such adoption only. On a reading of Para 42, it seems that correction of the prior period error may be done even after the adoption of the financial statements by the members of a company as it allows correction in the first set of financial statements approved for issue after the discovery of the concerned error subject to the same being in line with the provisions of applicable law.

Recast of accounts by companies under CA, 13

Under the erstwhile Companies Act, companies were not generally permitted to recast financial statements. However, the then Department of Company Affairs (DCA) provided its views on recasting of financial statements of companies based on ICAI Guidance Notes issued in this regard. The initial views of DCA as well as of ICAI were such that, any revision/ recasting of financial statements can be done only before its adoption in the AGM. However, later on, DCA had partially modified the said view by clarifying that a company can reopen and revise its accounts even after its adoption in the AGM provided such revision is due to the need of compliance of technical requirements of any other law to achieve the object of exhibiting true and fair view.

On a reading of section 131(2) of CA, 13, it appears that the said section clearly follows the DCA’s view, which contemplates two possible situations, one, revision after being the financial statements signed off by the directors and auditors but prior to being circulated to the members and, the other is, after being circulated to the members. In case of the latter situation, the revision is confined to correction of non- compliance of provisions section 129 and consequential changes, while the former may include any revision subject to the same is within the purview of section 129. It is also advisable to put such a restriction of revision after adoption of the financial statements by the members. It is because that the directors of the company prepares the statements and lay before the shareholders. 

Position in case of LLP

Evidently, neither the LLP Act nor the LLP Rules provide for any provision with regard to recasting of financial statements unlike in case of companies as provided above. While the views of DCA and IND AS are applicable only to companies, it is pertinent to understand here how the structure of an LLP is different from the structure of a company. An LLP is different from a company in various aspects, however, the predominant one would be the relationship between the management and the ownership. In case of a company, management and ownership lies with two separate groups of persons since the management of the company lies with the directors and the ownership lies with the shareholders who are the owners of the company. Therefore, in case of a company there is a separation of ownership and management. The directors act as agents on behalf of the owners of the company. However, in case of LLP, it has partners but not directors. There is no separation of management and ownership in case of an LLP as the LLP is managed by the partners for themselves. The concept of management in trust or management on behalf of the owners is not applicable in case of an LLP. Further, in case of LLP, all the decisions are taken by the partners by and on behalf of themselves unlike in case of companies, where the proposing and approving authority are two different groups of persons i.e. Board and the shareholders respectively.

As regards approval of financial statements of an LLP, the persons responsible for preparing the financial statements and the persons responsible for the adoption of the said financial statements are the same persons. Because the partners prepare, sign the financial statements and lay it before themselves. In other words, those responsible for preparation are those who approves also, and thereby keeping no distinction between preparing and authorizing. Accordingly, the restrictions provided under CA, 13 and/ or IND AS are not applicable to an LLP. Therefore, when the partners feel the need of revision in such financial statements not involving any fraud, misrepresentation etc., in order to provide a true and fair picture even after the same is once finalised, a positive view may be taken. Yes, the accounts are required to be filed with the appropriate authorities and may have been submitted to some external parties such as lenders of the LLP, therefore, it is advisable that the recasted financials are resubmitted with such authorities along with other persons to whom the same was earlier issued.