In February 2018, the joint SORP-making body issued an Exposure Draft of Update Bulletin 2 to the Charities SORP (FRS 102), largely as a result of the triennial review of FRS 102 by the Financial Reporting Council (FRC).
The key areas of proposed change are set out below:
- A clarification of the requirement for comparative information for all amounts presented in the accounts and notes to the accounts
- The removal of the undue cost or effort exemption for depreciating assets comprising two or more major components which have substantially different economic lives
- An amendment to clarify that when payments are made by subsidiaries to their charitable parents that qualify for gift aid after the end of the reporting period, they should be accounted for as distributions and should not be recognised as a liability at the end of the reporting period unless a legal obligation for the subsidiary to make the payment exists
- Charities now have the choice as to whether properties rented to another group entity are measured at fair value or using the (depreciated) cost model. This also applies where only a part of a property is rented to another group entity to the extent of the component part
- The removal of the undue cost or effort exemption for mixed use properties (i.e. part used for operational purposes and part let out) for measuring the rented out part at fair value. If the fair value cannot be measured reliably, the entire property should be accounted for as property within tangible fixed assets and measured at depreciated cost
- The requirement for the disclosure of the amount of stock recognised as an expense in the notes has been removed
- A requirement for a reconciliation of net debt as a note to the Statement of Cash Flows has been introduced
- The transfer of activities to a subsidiary is now included as an example of a charity reconstruction that may be accounted for as a merger.
Assuming there are no changes when the Update Bulletin is released in final form, the changes are to be adopted for periods commencing on or after 1 January 2019 (although early adoption is permitted providing the all of the amendments are adopted at the same time) except the first three items which it states are effective immediately.
This is because the Bulletin states that they are just clarifications as to how charities should apply FRS 102 rather than changes. We wait to see if there is any further clarity on this and we will discuss with you how this affects your accounts.
The most significant areas arise in points 1. and 3. and we set out below our commentary on these particular points.
The requirement for comparative information on all disclosures presented in the accounts has brought about almost universal condemnation. This seemingly extends to requiring the notes on movements on reserves and the allocation of net assets by reserves to require comparative information and it is also not clear whether the full table on the allocation of expenditure for the prior period is also required. This will inevitably make financial statements longer, more cluttered and even less readable to the average user.
Our newsletter from Spring 2017 highlighted that the Institute of Chartered Accountants in England and Wales had issued guidance on the point that gift aid was a distribution, this largely being concerned whether a charity subsidiary had sufficient reserves to pay the full amount of gift aid if there was a difference between the profit for tax purposes and the reported profit in the accounts. The current update confirms the treatment as a distribution, and also confirms that it is not possible to provide for the payment as a liability at the end of a reporting period unless there is a legal obligation to do so. The Bulletin uses the example of a Deed of Covenant but at this stage it is not clear whether the approval of a payment by the members of the subsidiary prior to the year end (even if paid afterwards) or the Articles of Association having a specific clause would be acceptable. We will let you know if there is any further clarification on this point.
A result of adopting this is likely to be that a prior year adjustment will be required in the financial statements.
The consultation period has now closed and we are awaiting release of Update Bulletin 2 in final form shortly. We will let you know if any major changes to the proposals are made.
For further information please contact a member of our Charities Team: