Reporting in Charities – SORP Update for the Triannual Review of FRS 102

The Financial Reporting Council (‘FRC’) has published its 2017 Triannual review FRS 102. One of the principal roles of the charity SORP is to provide charity specific guidance to applying UK accounting standards to charity Financial Statements. So when changes are made to UK accounting standards these need to be reflected in amendments to the SORP.

On 20 February an exposure draft Update Bulletin 2 to CHARITIES SORP (FRS 102) was published, upon which consultation is open until 4 April 2018. It is worth noting that the changes are driven entirely by changes in FRS 102 rather that those desired by the SORP Committee. The consultation is therefore more around how the required changes are practically applied by the SORP rather than if they should be.

The key amendment for many charities relates to changes relating to the recognition of gift aid payments by subsidiaries (as proposed by FRED 68). ICAEW guidance has already clarified that the expected gift aid payment was deemed to be a distribution of profit. FRS 102 does not allow these payments to be recognised as a liability unless there is a legal obligation to make a payment, usually via a deed of covenant. Therefore a constructive obligation or history of payment will no longer be sufficient to recognise the liability. Amendments to FRS 102 will however allow the tax effects of a distribution by a subsidiary to its charitable parent to be recognised so the accounting treatment is consistent with the tax treatment.

As a result a charitable subsidiary without a deed of covenant will not be able to recognise the distribution but will be able to recognise the tax effects of the gift aid payment on the basis that it is expected to be paid within 9 months of the year end.

Other principal amendments which are likely to impact the financial statements of charities are:

  • Permitting charities that rent investment property to another group entity to measure the investment property either at cost or at fair value.
  • Removing the undue cost or effort exemption for the investment property component of mixed use property to require measurement at fair value.
  • Removing the disclosure of stocks recognised as an expense.
  • Requiring charities to prepare a reconciliation of net debt as a note to the statement of cash flows; A net debt reconciliation will be required with the cash flow statement (similar to that required by old UK GAAP).
  • The introduction of a description of basic financial instruments, as well as conditions for classification which may increase the number of financial instruments falling into the basic category along with reduced disclosure around these basic financial instruments.
  • Allowing the exclusion of immaterial subsidiaries from the consolidated financial statements, several subsidiaries may be excluded as long as they are immaterial in aggregated.
  • Relaxation of the requirement to recognise intangible assets (brand valuation, contract valuations) acquired in a business combinations separately from goodwill.
  • For small entities interest free of low interest loans from a director may be initially measured at transaction price rather than present value.

The principal effective date for these amendments is accounting periods beginning on or after 1 January 2019, with early application permitted provided all amendments are applied at the same time. The only exceptions to this are the amendments relating to directors’ loans and the tax effects of gift aid payments, for which early application is permitted separately.

Once the final Update Bulletin 2 has been issued we will be working with all or our clients individually to discuss how these changes may impact their financial statements. However if you would like any more information or would like to discuss how these changes might effect you please contact the charity team here at Garbutt + Elliott.