9 April 2018

Charity SORP update

By now, you’re probably aware that the “new” accounting standard, FRS102, has already been revised and will be effective for accounting periods commencing on or after 1 January 2019.  There are some changes which need to be reflected in the SORP but these are factual rather than debatable so the SORP committee proposes to make the changes via an update bulletin rather than re-issuing the SORP.

The update bulletin consultation period was relatively short, reflecting the few amendments proposed, and ended on 4 April.  There are four key changes and then a number of minor amendments which will affect some but not all charities.  We’ve set out below the major changes and flagged the others.  We will return to these throughout the course of 2018.

Main changes

1.   Comparatives:  bad news, comparative information will be required for all amounts presented in the current period accounts, including the notes, unless the FRS specifies otherwise.  The impact of this is likely to be felt most in the funds note, which must be replicated for the whole of the prior year.    Bear in mind the FRS requires disclosure of material items only so now is a good time to reconsider the impact of your reporting:  it may be that fewer lines will reduce the volume and increase the impact.

2.   “Undue cost or effort”: The FRS has removed this concept as an acceptable excuse for non-compliance.  There were five separate instances where this was used in the original FRS.  Our top three are:

• The exemption from depreciating major components of an asset at different rates when they have substantially different economic lives has been removed.  
• Where property is owned by a charity in a group and rented to another group entity.   There is now a choice between measurement at cost or fair value.  
• Charities holding mixed use property must value the investment part at fair value and the own use part at cost if the property could be divided and sold separately.  If this is not possible, or a reliable valuation cannot be obtained, it is accounted for within fixed assets rather than investments.

3.   Gift aid from wholly-owned subsidiaries: the FRS has caught up with developments over the past 3 years.  Gift aid to a charity is now classified as a distribution in the subsidiary, which sets aside the concept of “constructive obligation” and means it cannot be included in the liabilities at the year-end unless a legal obligation exists (for example by signing a deed of covenant).  Also included in the FRS and relevant for trading subsidiaries, is guidance that the subsidiary will account for the tax it expects to pay (ie very little if it is gift aiding all its profits).  If there is no deed of covenant, there will need to be a post-balance sheet communication of the gift aid amount from subsidiary to charity to create this expectation.

4.   Statement of cash flows:  there is a new note to add to the statement of cash flows.  This is a reconciliation of net debt and it analyses the net borrowings of the charity.  There are options to adapt this note for charities – we’ll go into that in more detail in a subsequent article.

Other changes

There are a number of changes which affect a minority of charities depending on specific circumstances.  These are highlighted below:

1. Financial instruments:  there is clarification to the accounting of what were previously described as non-convertible preference or non-puttable ordinary shares, and of how transaction costs are reflected on initial recognition of all FIs.  There is a new requirement to disclose more information when there are significant risks, which is likely to have greatest impact on social investors.  On the plus side, you will only be required to analyse the carrying amount of financial instruments at fair value, which will remove the need for a note for many charities.
2. Stock:  you don’t have to disclose the amount of stock recognised as an expense in the notes.
3. Charity mergers:  the SORP will be expanded to confirm merger accounting is acceptable for transfer of activities from a charity to a non-charitable subsidiary. 
4. Immaterial subsidiaries:  these can only be excluded from consolidation if they are immaterial in aggregate. 
5. For the rare transactions where intangible assets are acquired in the acquisition of subsidiaries, there are new requirements which must be met before recognition is permitted, and when it is recognised separately from goodwill. 
6. Assets: initial recognition conditions for heritage assets and the fair value of social investments have been updated slightly, mainly to include reference to arm’s length transactions between knowledgeable, willing parties in the determination of fair value. 
7. New disclosure is required in respect of the nature, extent and risks attached to unconsolidated interests in special purpose entities in group accounts.

Next steps

The final version of this update bulletin is expected to be issued in October 2018 for implementation alongside the revised FRS102.   

It can be early adopted if done so in its entirety and whether individual charities decide to do so will require evaluation of the relative advantage of doing so.  For many charities the reductions in disclosure will have little impact but the increase in comparative information will increase disclosure substantially. 

Those that have mixed use property will need to consider whether the asset is separable as a valuation may be required, and those with property in development will need to separate major components, although the QS should be able to provide the necessary information.

Future changes

The next full SORP review will be timed to co-incide with the next FRS102 update.  For those that were aware of the SORP research exercise carried out in late 2016, the SORP committee has been considering the feedback on these via four separate working groups, one for each of the themes identified (smaller charities, transparency, tiered reporting and governance).  The findings of each group will be discussed during the second half of 2018 and we will keep you informed as the SORP committee minutes are published.