CHARITY SORP 2015 PRACTICAL GUIDANCE - Tait Walker · TAITWALKER.CO.UK CHARITY SORP 2015 PRACTICAL...

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C H A R I T Y S O R P 2 0 1 5 P R A C T I C A L G U I D A N C E

Adopting the new standard

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T H E C H A R I T I E S ’ S T A T E M E N T O F R E C O M M E N D E D P R A C T I C E ( S O R P )

A CHOICE OF SORP – FRS102 vs FRSSE. Because of the differences in treatment between those entities adopting FRS 102, and those that may adopt the FRSSE (small entities) the Charity Commission has issued two new SORPS, one for charities that cannot use small entity reporting under FRSSE (to be referred to as FRS 102 SORP), and one for those that can (to be referred to as the FRSSE SORP). As with FRS 102, the new SORPs must be applied to accounting periods beginning on or after 1 January 2015. This date is known as the ‘Transition Date’. Hence the first set of accounts prepared under the new SORP will be Years Ending 31/12/15, although in most cases this will be Years Ending 31/3/2016. So when drawing up the 31/12/15 or 31/3/16 financial statements, the comparative figures, i.e. either 31/12/14 or 31/3/15, will be amended to apply the new SORP. If a charity is small then it could choose to adopt the FRSSE SORP, but larger charities have no choice but to adopt the FRS102 SORP. Small charities are those who meet at least 2 of the following 3 indicators;

Total Income < £6.5m Gross Assets < £3.26m Employees <50

In a departure from the existing SORP, the new versions are modular in format; there are core modules relevant to all charities, covering areas such as the trustees' annual report, fund accounting (restricted and unrestricted funds), primary statements, general income and expenditure and the balance sheet. There are then specialist modules for certain types of charities, such as companies, or charities undertaking particular activities, such as joint ventures, grant making, or those holding heritage assets. The specialist guidance also covers investments, social investments, branches, groups and mergers.

Charity Commission has produced a very useful set of help sheets (see http://www.charitysorp.org/about-the-sorp/helpsheets/) which includes mapping the main differences between the existing SORP and the new requirements, and those between FRS 102 SORP and the FRSSE version. FRSSE SORP. While FRS 102 is a game-changer for large charities, for small charities which apply the FRSSE there is currently little difference between the current FRSSE and FRSSE 2015* (*the standard due to come into effect in 2015). However one apparently small difference is crucial. FRSSE 2015 requires relevant entities to have regard to the public benefit entity (PBE) requirements in FRS 102. Crucially these include provisions on donations/legacies, concessionary loans and charity mergers. As a result, in all these areas the FRSSE SORP follows FRS 102. Apart from this, charities which have applied the FRSSE in their accounts before the new SORP comes into effect can continue with those existing accounting policies not covered by the FRSSE or new SORP (para. 3.28), provided that the policies are consistent with “accepted” accounting practice (i.e. the current FRSSE 2008). A good example of this is the treatment of multi-employer pension schemes - see later. Charities that have not previously applied FRSSE accounting policies will need to apply the new SORP’s accounting policies in full. One important consideration is the intention to bring the FRSSE into line with FRS 102 (possibly by abolishing the FRSSE and introducing small entity provisions into FRS 102); when this happens charities will need to change their accounting policies accordingly. This is likely to happen in 2016, potentially meaning that any charity seeking to apply the FRSSE SORP in 2015, would then need to change again in 2016. We would advise charities who can choose between the two SORPs to leave a definite decision until nearer the time that the first new SORP accounts are prepared; by then it is likely that the future of the FRSSE, and the FRSSE SORP, will be much clearer.

http://www.charitysorp.org/about-the-sorp/helpsheets/











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AREA CHANGE AND IMPLICATION IMPACT AT TRANSITION

Must, Should & May: One key change in the new SORPs is that the SORP Committee has made an effort to distinguish between

compulsory accounting policies (and disclosures) and recommended practice or simple suggestions. It has

done so by using the three words “must”, “should” and “may”. These words are used liberally in the new

SORPs and have their normal meanings. It is therefore important to read carefully, because only the “must”

points are mandatory. An example of this is the position with going concern disclosures where charities

“must” explain in the accounts if there are material uncertainties (paras. 3.40/3.38). On the other hand,

such uncertainties merely “should” be explained in the Trustees’ Annual Report (paras. 1.24/1.23).

Irrespective of which SORP you apply, you need to determine whether you are a ‘small’ or ‘large’ charity.

Small charities are those which are not subject to statutory audit (i.e. incomes <£500k). Not to be confused

with those financial indicators (as shown in the introduction) which help decide which SORP you apply.

Determining which SORP you

will follow will impact upon

your approach.

Application of Must, Should

and May within either SORP is

then applied depending on

whether you are small or large

i.e. subject to statutory audit or

not.

TRUSTEES ANNUAL REPORT

(TAR)

Risk Policy: The statement on risk for larger charities has been extended to include disclosure of principal risks and

uncertainties facing the charity and plans for their mitigation, aligning charity reporting with company law

requirements

Reserve Policy: Where there is no reserves policy in the TAR or the Trustees have agreed that holding reserves is

unnecessary, then charities need to explain this (paras. 1.23/1.22). Additionally, larger charities are

encouraged (“should”) to provide significantly more information about their reserves (paras. 1.49/1.48).

Prior to transition, it may be that trustees want to set up designated reserves in recognition of liabilities that

will arise e.g. holiday pay accrual, pension deficit after the charity transitions and adopts the new standard.

Consider whether any

designated reserves are

desired to mitigate where

future liabilities will arise under

FRS102

Remuneration & Social

Investment Policies:

Other changes for “larger” charities include the requirement to disclose:

1. The arrangements for setting the pay and remuneration of the charity’s key management personnel

(essentially trustees and senior management) and any benchmarks, parameters or criteria used in

setting their pay, must be disclosed; and

2. An explanation of social investment policies and how any programme related investments

contributed to the achievement of the charity’s aims and objectives.


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FINANCIAL STATEMENTS

SoFA:

Some terminology and

presentations are changing:

Whilst for companies (and therefore any trading subsidiaries) the Statement of Total Recognised Gains and

Losses (STRGL) will be replaced by a Statement of Comprehensive Income, either as a separate Statement

of Comprehensive Income or immediately after the Profit and Loss Account, charities applying either SORP

will continue to present a single SoFA (Statement of Financial Activity) which includes recognised gains and

losses.

A Statement of Historical Profits and Losses in your financial statements will not be required.

Investment Gains / Losses: In the SoFA, for those applying the FRS102 SORP, unrealised investment gains or losses will be included as

part of incoming or outgoing resources, instead of as "Other gains and losses", below the total for incoming

or outgoing resources. But this is unchanged in the FRSSE SORP.

Cashflow Statement: The format of cash flow statements will become simpler with cash flows being classified as resulting from

operating activities, financing activities and operating activities, as opposed to the eight different categories

currently used in UK GAAP.

A cashflow statement is a mandatory requirement under FRS102 SORP, where it is not required if applying

the FRSSE SORP.

If preparing a cashflow for the

first time, collecting prior year

opening balances to assist in

preparation would be useful.

Prior Period Adjustments: As well as changes in accounting policy, prior period adjustments under FRS 102 will be required for

correction of 'material errors'. A material error is considered to be a much lower requirement than a

'fundamental error' (the measure under current UK GAAP). Material errors, in future, will not be recognised

in the current year but corrected by restatement of the comparative accounts. This could lead to a higher

number of prior year adjustments being made to financial statements.

Bank Covenants:

It is very important that you review the potential changes under the new SORP, to consider whether these

will have an impact upon any bank covenants.

If any potential breaches to covenants are identified these will need to be discussed with the bank as soon

as possible.

Income: FRS 102 has new income recognition rules. We would expect that in certain cases e.g. legacies, income

might be recognised earlier than at present because income will be recognised when it is 'probable'.

Revisit income cut-off and

determine whether this would

change e.g. legacy income.


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ACCOUNTING FOR ASSETS

Investments & Fixed Assets:

Motivation for holding

Charities will be required to determine what their motivation is in holding their investments, i.e. whether it

is to further the charity's financial return, or to further its charitable objective.

Those charities that hold properties for mixed purposes, i.e. partly for occupation by the charity and partly

as investment, are expected to apportion the values of such properties accordingly. This includes situations

where a charitable group may lease a property to one of its subsidiary companies. The company leasing the

property may have to deal with the property as an investment property in its own accounts, but in the

group accounts this is then changed and incorporated as a normal fixed asset.

Review investments and

properties held at the

transition date and determine

their use.

Valuations may be required at

the transition date for any

investment properties.

Revalued Fixed Assets:

Guidance suggest valuation of

land & buildings may be more

frequent than other assets.

FRS 102 relaxes the requirements for revaluation of land and buildings. Instead of the absolute requirement

in current UK GAAP of an independent valuation every fifth year, with at least a review of the valuation on

the third year, there is a general requirement that revaluations are carried out with “sufficient regularity” to

ensure the carrying value does not differ materially from the fair value at the end of the reporting period.

Care will be needed to justify this if a valuation has not been carried out within the last five years.

The SORP also notes that whilst an external valuation is preferred, that a member of staff with “sufficient

knowledge of the market” can be used.

Revalued Fixed Assets: The valuation basis has also changed. Land and buildings will now be valued at fair value, not open market

value on an existing use basis. This may affect the valuation of certain assets, perhaps where redevelopment

costs of an asset have been capitalised. Specialised properties can continue to use the depreciated

replacement cost basis.

Deferred tax will be recognised in full on revaluation of fixed assets where an entity is subject to

Corporation Tax. This represents a significant change, but is less likely to be an issue for charities, except

where a subsidiary pays tax if is unable to Gift Aid its profits to its charitable parent.

Consider whether any market

valuations held at the transition

dates would alter using a Fair

Value basis.

Fixed Assets:

Deemed Cost option

You will have the option, on first time adoption of FRS 102, to take the carrying value of a fixed asset

(whether held previously at cost or revaluation) and hold it at deemed cost. Where it was held at cost this

will result in a one off revaluation but does not comprise a policy of revaluation; regular revaluations will not

be required in future.

Determine your policy choice

going forwards i.e. locking off

previous valuations, or uplifting

cost at transition.


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ACCOUNTING FOR ASSETS

Fixed Assets:

Useful Economic Life (UEL) of

an Asset

Unlike under the current accounting standard (UK GAAP) there will be no limit to the expected useful life of

a fixed asset, which would trigger the requirement for a full annual impairment review if the accounting

policy stated a longer depreciation period. Currently an impairment review is needed if the UEL exceeds 50

years, so it is common for maximum life to be set at 50 years. So whilst It will no longer be ‘prohibited’ to

have an expected useful life of say 100 years for buildings, care would be needed in the justification of a

long life.

Consider the policy and

determine any impact of

making a change to the UEL of

the asset.

Fixed Assets:

Present Value of delayed

payments for Fixed Assets

Acquired

Where payment for property, plant or equipment is deferred significantly to a future period, cost will be

recognised at the present value of future cash flows.

Determine whether any Fixed

Assets previously capitalised at

the transition date were on a

deferred payment basis.

Intangible Assets:

Software or website

development costs

Software or website development costs would normally have been classified as part of fixed assets under

current UK GAAP. On adoption of FRS 102, these will be reclassified as intangible assets. The lower

threshold for recognising internally generated intangibles should mean on-going spending on software or

website development costs are more likely to be able to be capitalised than before.

Intangible Fixed Assets:

Recognition

Expenditure on intangible assets after the transition date to FRS 102 may be capitalised. Expenditure prior

to transition under present UK GAAP cannot be recognised under FRS 102.

Intangible Fixed Assets:

Revaluation

Your intangible assets may be revalued to their fair value, but as under current UK GAAP this can only occur

if there is an active market to establish that value. The revalued amount is then subject to amortisation in

the usual manner.

The option to revalue does not

permit an entity to attach a

value to an asset that has not

previously been recognised.

Heritage Fixed Assets: The heritage asset accounting rules have been rolled forward into FRS 102 virtually unchanged. We would

not expect any change to the treatment of your heritage assets on transition to FRS 102.


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ACCOUNTING FOR LIABILITIES

AND LEASES

Lease Accounting: There are no significant changes to lease accounting. Leases will still be capitalised as finance leases if

substantially all the risks and rewards of ownership are transferred.

The current 90% of value test will no longer be required. If leases do not meet the definition of a finance

lease, they will be classified as an operating lease with the charge going through the SoFA.

On first time adoption, you

have the option to reassess

whether any lease

arrangements are finance lease

or operating leases based on

the facts at the transition date.

Lease Incentives:

Spread over a longer period

Lease incentives received used to be spread over the period up to the point where a change could be made.

For example any rent incentive would usually only be spread to the first break clause period or when market

rent became payable. This had the effect of giving a lower rent charge in the SoFA during the initial part of

the lease, followed by a stepped higher rent charge in later periods.

Under FRS 102, the incentive received will be spread over the most likely term of the lease. The charge

against income each year may be smaller as a result, spreading the incentive to reduce the charge to the

SoFA over a longer period and giving a more equally spread charge.

Although in many cases incentives are currently being recognised over the entire term, in which case the

change to FRS102 may not have any real impact.

Consider any lease incentive

being spread at transition and

consider the impact of

changing the spread basis

based on the facts at the

transition date.

Liabilities Due More Than One

Year:

Present Value

FRS 102 requires loans and similar transactions which have a payment period in excess of one year to be

recognised at their fair value.

Fair Value is measured at the present value of the future cash flows discounted at a commercial rate of

interest. These rules apply to inter-company loans.

The amount recognised in the Balance Sheet will be less than the sum borrowed and the financing cost will

be released to the SoFA over the period of the loan.

You should review the existing

loans and their terms with a

view to evaluating the effect

this might have.

You will want to be prepared

with market rates of interest

for the year and comparative

year.


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ACCOUNTING FOR LIABILITIES

AND LEASES

Liabilities Due More Than One

Year:

Inter-group loans

Where there is no written agreement for long term inter-group loans and there is no interest being

charged, then FRS102 may give rise to a need to hold these balances at their present value.

Similarly with other loans, the inter-group loan would need to be held at its present value where interest

being charged on these loans is less than the overall charity’s borrowing costs.

Any changes are only required if they are material, but the onus is on the trustees (directors) to prove this

one way or the other.

You should review the existing

loans and their terms with a

view to evaluating the effect

this might have.

You will want to be prepared

with market rates of interest

for the year and comparative

year.


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FINANCIAL INSTUMENTS

Government Grants: Accounting for government grants under FRS 102 will be largely unchanged from the existing UK GAAP.

There will be two choices of recognition policy - a performance model or an accrual model. We note the

accrual method will not be available for charities as government grants continue to be unable to be

accrued, which is the same as their current treatment.

Subsidiary companies of charities, applying FRS102, have a choice of either method.

Employee Benefits: The basic principle under FRS 102 is that employee benefits, such as holiday pay, will be recognised as a cost

as entitlement to the benefit is earned. This will mean that holiday entitlement not taken at the Balance

Sheet date will need to be provided for if material.

This applies to other benefits, for example sabbaticals after (say) 10yrs service or sick leave. Entitlement to

the benefit will be recognised as it is earned. Due to the long term nature of these benefits, the amount

recognised will be at the expected present value of the liability.

This will require computation

of the accrual at the transition

date, at the comparative

period end and at the period

end.

Or consideration should be

given to aligning holiday

periods with the financial year

end and limiting carry forward

of holidays.


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EXPENDITURE & OUTGOINGS

Multi-employer Pension

Schemes:

Where the charity is a participant in a multi-employer pension scheme, under current treatment the

contributions paid may only be recognised on a contributions (paid) basis. The current payments may also

include ‘strain’ of ‘past deficit’ payments.

Under FRS102 these schemes are likely to crystallise a liability at the balance sheet date. Where the actuary

can split the scheme to apportion the charity’s share of assets and liabilities this should be requested.

Otherwise, the continue to be treated as contribution schemes. The main difference is that any element

which includes a ‘past deficit’ payment should be recognised at the balance sheet date. For example, if

£1,000 is being paid monthly for the next 10 years, then a liability of £120,000 should be recognised

(although this would need to be recognised at its Fair Value and discounted accordingly).

An actuary report may need to

be requested at the transition

date where it can be split.

Review any such scheme

pension payments and

correspondence regarding

‘past deficit payments’.

Calculate the liability at the

transition date.

Key Management Personnel: There will be a new requirement to disclose total key management personnel remuneration. Please note

this is a single aggregate disclosure and does not require disclosure of who the key management personnel

actually are. Key management personnel continue to be related parties and names will need disclosure if

there are any balances or transactions (other than salary) with them.

Consider who are Key

Management Personnel and

calculate disclosure data for

the comparative year following

transition.


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CONTACT For further information, please contact our Head of Not-for-Profit, Simon Brown on 0191 285 0321 or email [email protected]

OFFICE LOCATIONS AND CONTACT DETAILS

1. Newcastle upon Tyne Bulman House Regent Centre Gosforth Newcastle upon Tyne. NE3 3LS Tel (+44) 0191 285 0321 Fax (+44) 0191 284 9117 DX 603 68 2. Northumberland 10 Manchester Street Morpeth Northumberland. NE61 1BH Tel (+44) 01670 513 106 Fax (+44) 01670 504 064 DX 62514 3. Tees Valley Medway House Fudan Way Teesdale Park Stockton on Tees. TS17 6EN Tel (+44) 01642 676 8888 Fax (+44) 01642 605 866

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Further guides and information can be found online at our Publication pages: http://www.taitwalker.co.uk/resources/not-for-profit/

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CHARITY SORP 2015 PRACTICAL GUIDANCE - Tait Walker · TAITWALKER.CO.UK CHARITY SORP 2015 PRACTICAL...

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