Hot Topics for 2017 - Martin Aitken & Co · 2017-02-23 · Income Recognition: SORP 2015 •SORP...

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Charity Accounting & Finance

Hot Topics for 2017

The Gathering 201723/02/2017


Introductions

Adrienne Airlie, CAChief Executive, Martin Aitken & Co

Adrienne advises a wide range of charitable organisations on the full range of accounting, corporate governance, regulatory reporting as well as tax and performance issues. Adrienne is also a Non-Executive Director of Mercy Corps Europe, Chairing its Audit & Risk Committee and is also Convenor of the ICAS Charities Committee.

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SORP 2015• FRS102OSCR • SCIO incorporation• SE’s & CharitiesBrexit

Agenda


1. FRSSE Withdrawal

2. Investments

3. SOFAs

4. FRS102 Income Recognition

Grants

Contracts

Disclosures

Legacies

5. FRS102 Expenditure Recognition

Employee benefits

Pensions

SORPS 2015

Accounting issues6. Model Accounts Arts Theatre Trust

Key Management PersonnelCash FlowS35 RecGoing ConcernDonationsDC pensionHoliday Pay/ Employee BenefitsSOFA Comparative

7. Items not in Model AccountsInvestment PropertyPensions (2 examples )Discounting


Withdrawal of the FRSSE

FRSSE 2015 will be withdrawn by 1/1/16 – replaced by:

FRS 102 section 1A for small entities and

FRS 105 for micro entities

Definition of a small entity is in line with the company law

Turnover <£10.2m Balance sheet <£5.1m Employees <50


FRSSE SORP

The joint-SORP making bodies have stated the following for AP beg on or

after 1.1.16

• All charities will that prepare their accounts on the accruals basis

will apply FRS 102 in full

• Section 1A will not apply to charities

• Small charities will have exemption from preparing a cash flow *

• A charity would be classed as small if its turnover < £500k in line

with the charity audit limit in Scotland.

*Update Bulletin 1, concessions on cash flows. No early adoption

allowed in Scotland, SSI76. Effective AP beg on or after 1.1.16


FRSSE SORP – Who does it apply to?

Unincorporated Charities

• Small charities where income is over £250,000

• R&P can be used where income is under £250,000

Incorporated Charities

• All small *charities (* As defined by Company Law)


Current Future maximum‘Small’ ‘Small’Threshold Threshold

Turnover £6,500,000 £10,200,000

Gross Assets £3,260,000 £5,100,000

Employees 50 50

From when? NOW N/A

Eligible to

apply

FRSSE

SORP

OR

Apply

FRS102

SORP

Must meet

2 out of 3 criteria

FRSSE SORP – Small Company Limits


Investment Valuation Basis

Market Value/ Fair Value

Since SORP 1995

True & Fair Basis

Realised & Unrealised Gains & Losses on Investment assets (including Investment Property) can be shown as a single row on the SOFA

Can follow by way of note to splitOne line disclosure is easier if “mark to market” approach is taken

(Since SORP 2000)


Investment Valuation Basis cont’d

FRS102 4 forms of investmentListed / traded

Shares, bonds etc.

Investment PropertyNo – L & B if occupied by charity for its own useMixed Use – Split needed, if impractical show as L & BNo Dep’n on Inv Property

Unlisted Investments

Social InvestmentsProgramme RelatedMixed Motive


Investments –FRS 102 vs FRSSE SOFA

ONE Difference between FRS & FRSSE

Treatment of gains / losses on Investment assets (incl Investment Properties)

SORP 2005Shown in Other/ gains and losses – after “Net Incoming/outgoing resources”Below the Line (BTL)SORP 2015FRS102 requires that changes in the value of financial instruments (incl investments) are measured at fair value and taken through P/L.Now shown on SoFA before calculating “Net income/expenditure”Above the Line (ABL)FRSSE no change to the treatment in SORP 2005 for gains losses on Investment assets BTL.


Investments –FRS 102 vs FRSSE SOFA cont’d

New classification on investments – Social Investment (FRS102) ABL

FRSSE Mixed Motive is shown as in SORP 2005 BTL

FRSSE Gains on Programme Related Investment “Other Income” ABL


FRS 102 FRSSE

Investment properties are measured initially at cost and subsequently at fair value. Valuation basis prescribed.

Investment property valued at market value.

Property let or occupied by another group undertaking must now be shown as Investment property. Mixed use Investment – apportion between investment & operational.

Property, let or occupied by another group undertaking must be excluded from Investmentproperty and shown in tangible fixed assets.

Capitalised Goodwill assumed to be w/o 5 years max except where value can be reasonably measured.

No revaluation of intangible fixed assets (Historic cost). Goodwill assumed to have a life of 20 years.

Unlisted equity investments initially at cost and then fair value.

Unlisted equity investments best estimate of MV where practicable. If not then held at cost initially and then fair value.

New class of investment – Social Investment.

Additional investment disclosure.

Balance Sheet –Investments & Intangible assets


SOFA: SORP 2005 compared with FRS 102 SORP


Charities SORP FRS102Statement of Financial Activities

Un

rest

rict

ed

fun

ds

Re

stri

cted

fun

ds

En

do

wm

en

tfu

nd

s

Tota

l fu

nd

s

Pri

or

pe

rio

dTo

tal f

un

ds

Further

details

£ £ £ £ £ £

Income and endowments from:

Donations and legacies A1

Charitable activities A2

Other trading activities A3

Investments A4

Other A5

Total

Expenditure on:

Raising funds B1

Charitable activities B2

Other B3

Total


Charities SORP FRS102Statement of Financial Activities (continued)

Un

rest

rict

ed

fun

ds

Re

stri

cted

fun

ds

En

do

wm

en

tfu

nd

s

Tota

l fu

nd

s

Pri

or

pe

rio

dTo

tal f

un

ds

Further

details

£ £ £ £ £ £

Net gains/(losses) on investments B4

Net income/(expenditure)

Transfers between funds C

Other recognised gains/ (losses):

Gains/(losses) on revaluation of fixed

assets

D1

Actuarial gains/(losses) on defined benefit

pension schemes

D2

Other gains/(losses) D3

Net movement in funds

Reconciliation of funds: E

Total funds brought forward

Total funds carried forward


Income Recognition: SORP 2005

Income – FRS 5 detailed explanations

EntitlementCertaintyMeasurement

Conditions

Certain & controllableLack of related expenditure is not a reason for deferral



•SORP 5.3 (FRS102)

•Two broad categories of income(1) Exchange transactions (contract)

Goods & services supplied under a contract IncomeIncome received is approx. equal in value to the goods or services supplied

(2) Non Exchange transactions (gifts)Charity receives value from the donor without providing equal value in exchange

•Grants could be “Income from Charitable Activities” if paid to secure particular goods or services

•Restricted grants with no performance related condi tions could be “Income from donations & legacies”

•Transaction accounted for in accordance with substa nce no simply legal form



Income is recognised in the accounts of a charity when all the following criteria are met:

Entitlement

Control over the rights to economic benefit has passed to the charity

Probable

It is more likely than not that economic benefit associated with the transaction or gift will flow to the charity

Measurement

The monetary value or amount of income and the costs incurred & or to complete the transaction can be measured reliably.

All income reported GROSS


General principles for recognising income from grants:

• Recognised when there is evidence of entitlement to the grant and its amount can be measured reliably.

• Evidence of entitlement usually exists when the formal offer of funding is received.

• Must be accounted for and presented based on its substance i.e. restricted/unrestricted.

• Grant conditions should be reviewed to identify any performance conditions or other terms and conditions that may prevent income recognition.

Some grants can include terms and conditions which must be met before the charity is entitled to it.

4. Income Recognition - Grants


Examples of conditions affecting income recognition include:

• receipt of grant being dependant on achieving a certain level of service • the need to raise matched funding.

Examples of conditions which do not prevent recognition:

• Submission of accounts• Certification of expenditure

A grant being restricted to a particular activity does not create a performance condition (FRS 102 paragraph PBE34.68).

Grants without conditions should not be deferred even if it is received in advance of the related expenditure being incurred. The timing of the related expenditure is at the charity’s discretion and is not reason enough to defer.

Income Recognition – Grant conditions


Disclosure and notes to the accounts

• Disclosure of government grants and deferred income is required by FRS 102. • There must be explanations in the accounts regarding the accounting policies

adopted in relation to the recognition of each material item of income stating whether the performance model or accruals model approach has been taken (FRS 102 paragraph 24.6).

• There must be explanations in the notes to the accounts for any income that has been deferred, explaining why it has been.

• There should be an analysis of the movement in the deferred income account with prior year comparatives.

Income Recognition – Disclosure Grants & Deferrals


Income recognition under FRS 102:

• Transactions which have no future performance related conditions are recognised in income when proceeds are received/receivable.

• Transactions which have specified future performance related conditions are recognised when conditions are met.

• A liability should be recognised where proceeds have been received before the revenue recognition criteria has been met.

(FRS 102 paragraph 24.5B)

Income Recognition


Charity A receives £400,000 in FY15/16, to help support people living with Hepatitis. The related expenditure is due to be incurred over two years: £200,000 in 2015/16 and £200,000 in 2016/17.

The payment of the grant is based on the provision of an annual progress and expenditure reports by March each year and mid year reports to be submitted by September each year.Under FRS 102In 2015/16 Balance Sheet SOFAIncorporation of grant income:Bank + £400,000Grant income + £400,000Recognise expenditure incurred:Expenses + £200,000Bank + £200,000

In 2016/17Recognise expenditure incurred:Expenses + £200,000Bank + £200,000

Income Recognition –2 Year Grant - Charity A


Under FRS 102

In 2015/16 Balance Sheet SOFA

Incorporation of grant income:

Bank + £400,000

Grant income + £400,000

Recognise expenditure incurred:

Expenses + £200,000

Bank + £200,000

In 2016/17

Recognise expenditure incurred:

Expenses + £200,000

Bank + £200,000

As the conditions attached to the grant are wholly within the control of the charity, the full

£400,000 should be recognised in 2015/16. Although the related expenditure will not be fully

incurred until 2016/17, this is not reason enough to defer the grant income.

Income Recognition –2 Year Grant - Charity A ( cont.)


Charity B receives a grant of £100,000 to build a new community centre with no further conditions attached.

The charity incurs costs of £300,000 to build the community centre and depreciates over a useful life of 20

years.

Under FRS 102

Balance sheet SOFA

Recognition of factory:

Fixed assets + £300,000

Cash - £300,000

Recognition of grant:

Cash + £100,000

Grant income + £100,000

Recognition of depreciation charge:

Depreciation + £ 15,000

Fixed assets + £15,000

The whole grant is recognised in the SOFA immediately as there are no provisions requiring deferral of the

grant received other than the community centre being built, which has occurred.

Income Recognition–Entitlement & Conditions Charity B


Income Recognition –Entitlement & Conditions (Cont)

If there was a condition attached and the charity had an obligation to use the community centre for a particular length of time then the grant would be recognised later. Recognition of the grant is based on the terms and conditions rather than the expected useful life.


Charity C is offered an employability grant of £1,250,000 p.a. from the Big Lottery Fund on 31 March 2016. The grant will be paid in 4 equal instalments, the first being on 31 March 2017 and annually thereafter. There are a number of outcomes and project indicators that must be met in order to receive each payment, which are as follows:-

YOUTH UNEMPLOYMENT Yr 1 Yr2 Yr 3 Yr 4• referred to training schemes 30 30 50 50• improving CVs and completing job applications 35 70 70 35• experiencing improved self confidence 40 80 80 40• engaging with transitional support worker 50 50 50• who have sustained employment 50 50 50• move into employment, training or education 120

Under FRS 102

As the conditions attached to the grant are not within the control of the charity, only the first instalment of £1,250,000 received in the year should be recognised in 2016/17. The remaining amounts should be recognised as and when the charity meets the conditions.

Income Recognition –T & Cs - Charity C


Legacy Income Recognition: FRS 102Probability, Entitlement & Measurement

Under SORP 2005 income was recognised when receipt was “virtually

certain”

Under FRS102 it becomes "probable”

Evidence of entitlement and reliable monetary measurement remain the

same

For accounting purposes, entitlement exists when the charity has

evidence the gift is left to them

executor is satisfied it will not be required to settle claims on estate.

Receipt is probable when

there has been a grant of probate

executors have established there are sufficient assets in the estate,

after settling any liabilities, to pay the legacy

• any conditions attached to the legacy are met

or within charity’s control.


Measurement - Legacies

Re Measurement knowing probate is granted is insufficient –maybe assets need to be sold to meet debts:

Legacy subject to interest of a life tenant only recognised as income on the death of the life tenantShould only be recognised when it can be measured or estimated with sufficient reliabilityFair value receivable will generally be the expected cash amount to be distributed to the charity from the estate

If it cannot be measured accurately then it should be disclosed as a contingent asset until criteria for income recognition is met.

Can use an estimation technique to value legacies as income.


Definition of a liability has been expanded to reflect change in recognition criteria for income.

A liability and related expenditure should be recognised when the following criteria are met:

• Obligation• Present legal or constructive obligation existing at the

reporting date as a result of a past event• Probable

• More likely than not that the transfer of economic benefits will be required in settlement

• Measurement• There is an ability to measure or estimate the amount

reliably

Recognition of Expenditure


Charity D pledges to award a grant of £500,000 to Charity D in two instalments of £250,000 in 2016/17 and £250,000 in 2017/18. There are no conditions attached to the grant.

Under FRS 102

In 2016/17 Balance sheet SOFAIncorporation of grant paid:Grants paid + £250,000Bank + £250,000Recognising future commitment:Grants paid + £250,000Future commitments due + £250,000

As the Charity C has awarded the grant with no conditions it is probable that the full amount of £500,000 will be paid to Charity D and therefore will have to recognise the grant when it is awarded rather than when it is paid.

Expenditure Recognition – example


Expenditure- Employee benefits

FRS102

Wages & salariesPaid Annual leavePaid Sick leaveTermination benefits Post employment benefits (DB scheme) as at reporting dateReview Holiday year now – avoid adjustment later or restatementChange Holiday year.Materiality


Defined contribution scheme• Pension payments on retirement dependent on contributions

made and the value of investments at the date of retirement

• No legal or constructive obligation on the employer to pay further contributions for employees if the fund does not have sufficient assets to pay all employee benefits relating to current or prior period service

Defined benefit scheme• Pension payments determined by salary (final salary, career

average salary) and the number of years of pensionable service

• Employer has given a guarantee for an amount / level of pension and requires to pay contributions to ensure that is achieved

• Deficits on the scheme based on actuarial valuations require to be funded by the employer

Pensions – DC & DB SchemesPensions – DC & DB Schemes


PensionsPensions


Defined contribution scheme (DC)

• No change in the method of accounting from SORP 2005 to SORP 2015 (FRSSE & FRS102)

• Contributions payable to the pension scheme are charged to the Statement of Financial Activities in the period to which they relate

• Disclosures required are:- Nature of the schemeCost for the periodContributions due / prepaid at balance sheet date

Pensions – Interaction with SORPsPensions – Interaction with SORPs


Defined benefit scheme (DB)

• SORP 2015 (FRS 102 and FRSSE) requires the surplus / deficit on DB schemes to be brought onto the charity’s balance sheet

• Actuarial report required • contains the information to be incorporated into

the accounts,• compares the fair value of the scheme assets at

the reporting date; and• the present value of obligations under the

scheme

• The resulting liability or asset should be brought onto the charity’s balance sheet

• Normally will be included under unrestricted funds

Pensions – Interaction with SORPsPensions – Interaction with SORPs


Defined benefit scheme (DB)• As part of the transition to FRS 102 SORP 2015 :

• Comparative figures re-stated • Effects on prior year reported surplus & reserves to be

shown in the reconciliations.

• Any movements in the asset / liability from the prior year will be accounted for through the SOFA

• Above net income – service costs and net interest income / expense

• Below net income – any actuarial gains and losses

• Significant level of disclosures required in the accounts

• Important to review the assumptions used by the actuary in arriving at the scheme asset / liability

• Cost implications for obtaining the actuarial report

Pensions – DB disclosurePensions – DB Disclosure


• Bringing a deficit / liability on balance sheet for the first time may have a significant impact on the charity’s balance sheet

• Need to review bank covenants / loan agreement to ensure that the accounting adjustments do not make the charity breach covenants

• Discuss with funders to mitigate funding being withdrawn

• Implications for going concern

• Impact on credit rating

Pensions – further considerations


MEDB Schemes – LGPS issues

A Charity is a participating employer in an LGPS fund (the Fund) and has three active members. The Fund is a multi-employer last man standing defined benefit (DB) scheme.

Charity recognises its share of the Fund’s net liabilities in accordance with FRS 17. Fund has revised its Funding Strategy Statement (FSS) and now requires employers with less than five active members to fund both past service and future service on a cessation basis rather than an on-going basis. The cessation basis is to apply from 31 March 2015.

Funding on a cessation basis is considerably more expensive. Past service liabilities have increased from £200,000 to £800,000 and interest is to be charged at 3.5% over the period of repayment. In addition employer contributions have increased from 17% of pensionable pay per annum to 34%.

PWC report LGPS Deficit Managementhttp://www.lgpsboard.ord/index.php/sub-comms/deficit-management


Pension - Gilt Yields

15 year gilt yields – last 10 yearsBased on figures for October 2016


• Restatement re FRS102• Risk statement

• Principal risks & mitigation• Commerciality / competition

• Going Concern• Social Investment• Grant making• Investment policy

Model Accounts – Arts Theatre Trust

• Benchmarking etc.• Share of DB liability• Impact of added disclosure

• Volunteers• Donations by Trustees• Trustees expenses waived

Key Management Personnel

“ those persons have authority and responsibility for planning, directing and controlling the activities of the charity, directly or indirectly, including any director ( whether executive or otherwise )… includes trustees.. members of staff…to whom the trustees have delegated significant authority or responsibility in the day to day running of the charity “


• Restatement FRS102• Pages 1/16 & 20

• Investment Policy• Page 5

• Risk Statement• Pages 11

• Reserves Policy & Going Concern• Pages 6 & 16

• Achievements/ Performance • Page 3

• Financial Review• Page 4

• Plans for Future • Page 6

• Volunteers• Pages 3 & 20

• KMP• Pages 9/11 & 24

Pensions – Interaction with SORPsModel Accounts – FRS102

• Financial Instruments• Pages 19 & 30

• Pensions • Page 19

• Donations by trustees/ expenses• Page 24

• Government Grants • Page 25

Arts Theatre Trust FRS102: http://charitysorp.org/media/632825/arts_theatre_trust_frs102.pdf


• Restatement FRS102• Pages 1 & 16



• Restatement FRS102 (Cont.)• Pages 16 & 20


• Investment Policy• Page 5


• Risk Statement• Pages 11



• Reserves Policy & Going Concern• Page 6:



• Reserves Policy & Going Concern (cont.)• Page16:



• Achievements/ Performance • Page 3



• Financial Review• Page 4



• Plans for Future • Page 6


• Volunteers• Pages 3 & 20


• KMP• Pages 9/11& 24



Pensions – Interaction with SORPsModel Accounts – FRS102• Financial Instruments

• Pages 19 & 30


• Pensions • Page 19



• Government Grants • Page 25


• Donations by trustees/ expenses• Page 24


Other Examples re disclosure

1. Marie Curie 2016 Accounts: https://www.mariecurie.org.uk/globalassets/media/documents/who-we-are/vision-and-strategic-plan/annual-report-2015-16.pdf

2. Enable Scotland 2016 Accounts: http://www.enable.org.uk/accounts/Documents/ENABLE%20SCOTLAND%20CONSOLIDATED%20ANNUAL%20ACCOUNTS%2031%20MARCH%202016.pdf


On transition the changes to the SORP have different effect on the financial statements.

Charity with the year end of 31/12/15. In 2014 accounts, Property included in fixed assets at cost less aggregated depreciation.

Disclosure not in Model Accounts 1.Mixed used Property

However:-Half used as Head Office – this portion

remains as Property, Plant and Equipment.

Half rented to another company – this portion treated as invested property

Mixed use property:FRS102 SORP – Section 10.47FRS102 – Section 16.4

£K

Cost £200K

Aggregate depreciation £56K

Net Book Value £144K


7. Disclosure not in Model Accounts 1.Mixed used Property - SOFA

PP

E

Inve

stm

ent

Pro

perty

Tota

l fun

ds

£k £k £k

Cost: 100k 100k 200k

Aggregate Depreciation to 31/3/15 (28k) (28k) (56k)

Depreciation charged in 2015 accounts 2k 2k 4k

NBU 1/4/14 74k 74k 148k

Need to determine position at date of transition – 1 /1/2014

Trustees have assessed valuation at 1/4/14 as £240k:- £120k related to investment property element


Disclosure not in Model Accounts 1.Mixed used Property - Reconciliation of Funds on transition

OLD

UK

G

AA

P

Effe

ct o

f Tr

ansi

tion

to

FRS

102

FRS

102

£k £k £k

Property, Plant & Equipment 148k (74k) 74k

Investment Property Nil 120k 120k

Reserves + 46k

Reconciliation of Income & Expenditure – y/e 31/12/15

Depreciation Charge 4k (2k) 2k

Reconciliation of funds at 31/12/15

Property, Plant & Equipment 144k (72k) 72k

Investment Property Nil 120k 120k

Reserves + 48k


MEDB pension scheme

• The charity operates a defined benefit pension scheme• Not previously accounted for under FRS17• Surplus/ Deficit most be brought onto the balance sheet• MEDB 31/4/14 £124k deficit• 31/3/15 £254k deficit• 31/3/16 £518k asset

FRS 102 SORP – section 17.6 – accounting for defined benefit plans

FRS 102 – section 28.14 – post-employment benefits: defined benefit plans

Disclosure not in Model Accounts 2.MEDB – Restatement required


FRS102

SORP

31/3/16

FRS102

SORP

31/3/15

OLD SORP

31/3/14

Net pension (asset)/ liabilities £ (518) k £254k NIL

Disclosure not in Model Accounts 2. MEDB - Restatement of Balance Sheet


OLD

UK GAAP

Effect of

Transition to

FRS102

FRS 102

Net pension (asset)/ liabilities Nil £124k £124k

Reserves (£124k)

Disclosure not in Model Accounts 2. MEDB – Reconciliation of funds on transition at 1/4/14


OLD

UK GAAP

Effect of

Transition to

FRS102

FRS 102

Charge to SOFA £130k £130k

Disclosure not in Model Accounts 2. MEDB – Reconciliation of funds income of expenditure y/e 31/3/15

Allocated between: -• Additional charge to pension costs. (current service cost less,

contribution charged to I&E. i.e. £215k-£158k

• Pension finance charge • Actuarial losses Pension costs 57k

Interest 7k

Other recognised gains and losses 66k

130k


Year ended 31/3/16Bespoke actuarial assumptionsMoved from deficit of £254k to asset of

£518k Movement to account for through SOFA

of £772k

Issue with the pension fund assetFRS 102 allows a surplus to be recognised as an asset but only if: surplus recoverable:-

Through reduced future contributions; or Through refund from plan (FRS 102 paragraph 28.15(b)If not recoverable, asset not recognised.Curtailment of £518k

Disclosure not in Model Accounts 2. MEDB – Reconciliation of funds income of expenditure y/e 31/3/16

Allocated between:-Additional charge to pension costs (current service cost less contributions charged to I&E. i.e. £318k - £195k Pension finance chargeActuarial gains

Pension costs £123k

Interest £11k

Other recognised gains and losses (£906k)

(£772k)


But recovery plan detailing deficit funding contributions payable in place.

• Accounted for as a defined contribution scheme. Under old SORP.

• Under new SORP, as deficit funding agreement in place, NPV of deficit funding contributions on balance sheet as a liability

• Payments are discovered to the NPV using market yield on high quality corporate bonds

• Each year, a finance cost charged to SOFA to reduce discount to £nil over period of funding agreement.

• Report showing NPV calculations and movements in opening and closing provisions provided by actuary.

Disclosure not in Model Accounts 3. MEDB – Share of Net Assets/Liabilities Not Available


7. Disclosure not in Model Accounts 3. MEDB – NPV of DEFICIT

Funding Contributions 1. 31/3/14 £251k2. 31/3/15 £260k3. 31/3/16 £323k

Restatement of Balance Sheet FRS102

SORP

31/3/16

FRS102

SORP

31/3/15

OLD SORP

31/3/15

Pension liabilities 323k 260k NIL

Reconciliation of funds on transition at

1/4/14

UK GAAP Effect of

transition to

FRS 102

FRS 102

Pension liabilities Nil 251k 251k

Reserves (251k)


Disclosure not in Model Accounts 3. MEDB – NPV of DEFICIT (cont.)

Reconciliation of funds Income &

Expenditure – Y/E 31/3/15

OLD

UK GAAP

Effect of

transition to

FRS 102

FRS 102

Charge to I&E (£260k-£251k) - 9k 9k

Allocated between: -

Contributions paid (offset against Provision) (19)

Interest charge (unwinding of discount factor)8

Actuarial Gains/Losses 20

Reconciliation of funds at 31/3/15

Pension Liability Nil 260k 260k

Reserves (260k)


Disclosure not in Model Accounts 3. MEDB – NPV of DEFICIT (cont.)

Income of expenditure y/e 31/3/16

Contributions paid (offset against provision) (19k)

Interest charge 6k

Actuarial Gains/Losses 76K

63K

Balance sheet at 31/3/16

Provision at 31/3/15 £260k

Movement £63k

Provision at 31/3/16£323k


Disclosure not in Model Accounts 4. Basic Loans – Straight Line

1. On 1/1/15 a company receives a loan of £1m with arrangement fees £12.5k, Interest is charged at 7% per annum

2. The company will make interest only repayments over the next five years. The capital element will be repaid at the end of year 5.

Straight line accounting treatment

Initial recording Dr Cash £1mCR Loan £1m

Annual accounting adjustmentsDR Interest £70kCR Bank £70k


Disclosure not in Model Accounts 5. Basic Loans – Amortised Cost

Step 1Work out the effective rate of interest – in excel

Total loan less arrangement feesTotal loan less arrangement fees

Annual repayments (actual cash flow)Annual repayments (actual cash flow)

Final instalment + redemption Final instalment + redemption

Effective interest rate formula =IRR(A1:A6)Effective interest rate formula =IRR(A1:A6)

A1 987,500

2 (70,000)

3 (70,000)

4 (70,000)

5 (70,000)

6 (1,070,000)

78 7.31%


Disclosure not in Model Accounts 5. Basic Loans – Amortised Cost

Step 2Annual accounting treatment:Year CV at start

Interest@ 7.31%

Actual cash flow

CV at end

01-Jan-15 987,500 72,160 70,000 989,660

31-Dec-15 989,660 72,318 70,000 991,979

31-Dec-16 991,979 72,488 70,000 994,466

31-Dec-17 994,466 72,669 70,000 997,136

31-Dec-18 997,136 72,864 70,000 1,000,000

362,500 350,000


Incorporation to SCIO / Company

1. Nov 20162. Unincorporated to a SCIO/ Coy3. 2 Options historically

1. “Conversion” or2. Status of a new charityOption 1 to be withdrawn:

Charity NoCharity NameBank AccountProperty/ asset conveyanceCare Commission issues

Toolkit due in 2017Impact on legacies ?Costs of transfer of assets ?Make Trustees not take actionInterim guidance issued 2.11.16


Banking Guidance

• Banking for Charities Feb 2016

– CFG/BBA/SCVO/OSCR

– Financial Controls CC8

– IT security issues

– Money Laundering

• Changes “it should be straightforward”

• SCIOs – most cases new account ?

• Presumes Bank knowledge

• FSCS protection

– £75,000 Deposits

– £50,000 Investments

• Charities covered as other organisations/ individuals

– Only up to small company threshold limits

– From 1.1.16. £10.2 m T/o, £5.1 m Assets , 50 staff.


Social Enterprise and Charities –The Third Sector

Organisations in the third sector share the common characteristics of being non-governmental organisations which are value-driven and which principally reinvest their surpluses to further social, environmental or cultural objectives.

Third sector often seen as comprising: Charities and voluntary organisations Social enterprises

But this is a big understanding: Social enterprise is a type of activity not a type of organisation. Many different types of organisations can engage in social enterprise activities (public sector, private sector, voluntary sector). Social enterprise can be an umbrella term for any kind of trading activity undertaken primarily for social purpose (rather than primarily for private profit).


The Key Legal Distinctions in Social Enterprise

TRADING ACTIVITIES UNDERTAKEN BY CHARITIES • The charity could have any legal form –e.g. charitable company, charitable association

or CIO. • The trading and the association tax issues are governed by the charitable status of the

organisation.

NON – CHARITABLE SOCIAL ENTERPRISES • Various possible structures including Co-operatives and CIC’s (Community interest

companies)• Can have paid board members • Charity tax concessions do not normally apply – normal business tax rules• Includes subsidiary companies owned by charities – trading subsidiaries.


FAQs re SE’sDefinitions• Charity Test

• Social mission to charitable purpose

• Asset lock• Primary purpose trading• Private benefit & delay in

public benefit

Social Enterprises (SE) & Charities

Social Enterprise in Scotland • 5,200 SEs

• 112k E/ees• 68k volunteers• £3.63bn. £1.3bn RSL• £1.68bn GVA• £8.77bn Combined Assets• Highlands & Islands - 22%• Housing 41%• Health & Social Care 26%• Arts / Creative 5%• 67% are Charities• Diversity +

OSCR SE Census 2015


• Charity law & regulation• Access to UK Gift Aid• EU Funding

• Matched funding• VAT• Public Sector procurement rules• State Aid• Employment law

• Free movement of labour• General Regulatory framework• Charity policy making issues

• UK – Dept. for Culture media & sport not Cabinet Office.

Brexit – Issues for Charities

• Charity tax reliefs• EEA

• Impact on beneficiaries• Inflation• Unemployment• Hatred/ discrimination

• MEDB• Gilt rates• Interest rates• Increasing deficits• Limited options to de risk

• SCVO Briefing papers


Martin & Aitken & Co Ltd ( www.maco.co.uk ) provides audit, accounting, corporate & personal tax, business services and fin ancial advice and services to individuals, businesses and third secto r organisations.

Martin Aitken & Co is registered to carry on audit work and regulated for a range of investment business activities by the In stitute of Chartered

Accountants of Scotland © 2016-17.

Hot Topics for 2017 - Martin Aitken & Co · 2017-02-23 · Income Recognition: SORP 2015 •SORP...

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