Ken Brew

Charity SoRPMaster Course

Consultation on FRS102

The Background to the Charities SoRP

We still need a

Charities SoRP

then….!

Ruled out by EU IAS Regulation

Ruled out for Company

charities by the Companies Act

2006

Does not address non-

exchange transactions

Developed for global capital

markets

Does not address Trust

accounting

Too long too complex?

Why EU adopted IFRS does not apply to charities……

2004 - Convergence

with IFRS over 3-4 years

2006 - ‘Big Bang’ in 2009

2007 - Await outcome of SME

standard

2009 – Policy proposals

‘Future of UK GAAP’

2010 – Consultation on FRSME (FRED 44)

2011 – Consultation on PBE Standard (FRED 45)

2012 – Consultation on draft of FRS 102

(FRED 48)

2013 – New framework

and FRS 102 issued

2014 Charities

SoRP

2015 New GAAP

(2016 gaap?) applies fapc

1/01/15

The long and winding road that leads….to your 2015 SoRP

FRS 100 sets out the framework (FRSSE, FRS 102, IFRS) and

minor changes to the FRSSE

FRS 101 covers the accounting for group entities applying IFRSs and does not apply to charities

FRS 102 sets out new UK GAAP

SORPsCharities SORP

HE/FE SORPRSL SORP

The New Financial Reporting Framework

The Financial Reporting Standard (FRS 102)

FRS 102 is based on IFRS for SMEs

A cut-down version of full IFRS

Amended for UK reporting needs

First UK standard to address PBE reporting needs

Can be used by all non-listed entities

Impact of consultation on FRS 102 …

PBE requirements integrated into FRS 102

as a specialised activities section

Revaluation of investments, plant,

property and equipment allowed

Capitalisation of interest on

developments allowed

Formats consistent with Companies Act

Definition of ‘performance-related

conditions’ and ‘restrictions’ brought in

line with SORP

Impact of consultation on FRS 102 …

Recognition of donated services at

value to charity

Practical difficulties of recognising goods donated for resale or distribution accepted

Merger accounting allowed and

disclosures simplified

Recognition of grants based on ‘matching’

limited to government grants

FRS 102 - Implementation date

• Early application is permitted• But for entities that are within

the scope of a SORP, early application is permitted providing it does not conflict with the requirements of a current SORP or legal requirements for the preparation of financial statements

Mandatory for

accounting periods

beginning on or after 1 January

2015

No early adoption of FRS 102 for charities

• Therefore cannot apply FRS 102 until regulations amended

For non companies charity regulations require adoption of

‘methods and principles’ of SORP 2005

• Therefore SORP Committee advise against early adoption

Some requirements of SORP 2005 conflict with

FRS 102

Consultation on the Charities SoRP

The Background to the Charities SoRP

New Framework….A new SORP(s)www.charitysorp.org

The SORP Consultation

Informed by an extensive research undertaken in 2008/09 www.charitycommission.gov.uk/media/95321/rs21text.pdf

The SORP consultation process launched on dedicated micro-site: www.charitysorp.org

26 events held across the UK and Republic of Ireland (attracted over 1600 participants)

179 written responses

SoRP Consultation – the headlines92% supported the modular SORP

69% agreed new SORP better addressed needs of smaller charities

73% supported use of terms ‘must’, ‘should’ and ‘may’

67% agreed new SORP covered all relevant issues

88% agreed that the SORP should fully support both FRSSE and FRS 102

93% agreed that income from government grants should be accounted for in same way as donations

SoRP consultation issues (1)

Single column SoFA – 87% agreed with maintaining the current columnar SoFA

Governance costs – 76% supported the new SoFA headings but some questioned loss of the governance heading

Analysis of cost of raising funds in the SoFA - less analysis provided on the face of the SoFA

Incorporated charities being treated as branches - 62% agreed that incorporated charities could not be branches

SoRP Consultation issues (2)

Disclosure of material fraud – caused concerns and some felt this issue was given unnecessary prominence in the SORP

Disclosure of income from government –some respondents pressed for a separate disclosure of income from government sources

Push back against mandating disclosure of institutional grants in a note to the accounts – now information can be provided by web-link

SoRP Consultation issues (3) The Trustees’ Annual Report

Strategic Report - advice added on how medium/ large companies can modify their annual report to meet this requirement of company law

Risk management - disclosures aligned to Strategic Report requirements

Going concern - uncertainties ‘should’ be disclosed

Reserves policy – a statement required if a charity has no reserves policy

Performance reporting - a ‘nudge’ towards reporting ‘impact’ despite some sector concerns

SoRP Consultation issues (4) Executive Pay

Surprising only 37% supported the disclosure by larger charities of both pay and post held by the highest paid member of staff

A number of respondents did however support the disclosure of remuneration policies by larger charities

Disclosure of total employee benefits received by key management personnel (FRS 102 only)

Banding information on salaries extended to all charities

Remuneration policy - larger charities will be required to disclose their policies

SoRP Consultation issues (5)

Legacy recognition – respondents wanted clarity but flexibility - further text added on use estimation techniques

Defined Benefit Pension Scheme – if accounted for a multi-employers scheme then deficit funding agreements accrued as a liability (FRS 102)

Guidance added on accounting for retail gift aid schemes

The Future of the FRSSE

More change to come for the Charities SoRP

But there is still a FRSSE!!

Once seen as the no change option

But……

The FRSSE ….

The FRSSE is no longer the “no change” option

The FRSSE will be withdrawn within 12 months!

Consultation had indicated that the SORP should reflect both the FRSSE and FRS 102

Although nearly every charity is qualified to use the FRSSE only an estimated 38% had previously cited it in their accounts.

The FRS 102 based SORP unaffected by changes anticipated to the FRSSE in the next year or two

How the FRSSE currently deals with the new financial reporting framework

Follow the FRSSE for the issues it addresses

If FRSSE is silent, use existing accounting policies provide they meet accepted practice (old GAAP)

For new transactions have regard to current practice (FRS 102)

The FRSSE SORP will require current practice (FRS 102) for sector specific issues

Therefore was not really a stand alone standard….old GAAP!

What might a new FRSSE look like?

Probably - new FRSSE will adopt ‘measurement’ and ‘recognition’ principles of FRS 102 – creating a single framework

But disclosures in notes will be limited under EU Accounting Directive

Effectively a FRS 102 ‘lite’ ?

Possibly a new section in FRS 102?

New ‘FRSSE SORP’ will layer on charity specific requirements ( as EU Accounting Directive scopes out not-for-profit entities)

Timeline for new FRSSE ?

Implementation of new EU Accounting Directive -2014/15

FRC develop new FRSSE2014/15

Revision of the SORP for a

new FRSS in 2015?

Mandatory application for

accounting periods starting 1 January 2016

Follow developments……

•Google - ‘SORP Committee Meetings and Papers’ and •www.charitysorp.org

SORP and consultation responses

•Google- ‘FRC New UK GAAP’

To access new standard and

past FREDs and consultations

Feb 2014

Some differences between FRS102 and FRSSE

• FRS102 does not permit changes to Investment Property values to be taken to reserves.

• FRS102 has no 90% benchmark on finance leases• FRS102 does not require names of Related parties but does

require specific aggregate information• FRS102 has a mandatory accrual on employee benefits• FRS102 has a widespread use of “Fair value” – could be

onerous on financial instruments• FRS102 assumes a maximum 5 year life on intangible assets• FRS102 has mandatory cash flow statements• FRS102 covers more areas…..

Implementing FRS 102

“Special” transactions

The Impact of FRS 102 on Public Benefit Entities

Feb 2014

PUBLIC BENEFIT ENTITY…

• an entity whose primary objective is to provide goods or services for the general public, community or social

benefit and where any equity is provided with a view to supporting the entity’s primary objectives

• Rather than with a view to providing a financial return to equity providers, shareholders or members

Feb 2014

The essence of PBE

• The important factor is what the primary purpose of such an entity is, and that it does not exist primarily to provide economic benefit to its investors

Feb 2014

Public Benefit Entities

• SoRP is a good thing!

• “There was clear evidence that the (existing) SoRPs were highly regarded and had improved the quality of financial reports…

Feb 2014

PBE Specific issues – FRED 45see paragraphs 125 to 160 in FRS102

• Concessionary Loans (PBE34.87 to 34:97)

• Property held for the provision of social benefits (Paras16.3A and 17)

• Entity Combinations (PBE34:75 to 34:86)

• Impairment of assets: public benefit considerations (Paras 140 to 148)

• Funding commitments (PBE34:57 to 34:63)

• Incoming resources from non-exchange transactions (PBE34:64 to 34:74)

So what charity issues does FRS 102 address?

• Cut-down version of FRS 30• Applies to all entities

Heritage assets

• Applies to all entitiesImpairment and service potential

• Goods for resale or distribution• Services• Legacies

Income from non-exchange

transactions

• Mergers and Gifts• Combinations at nominal value

PBE combinations

So what charity issues does FRS 102 address?

• At transaction value, or• Amortised cost

Concessionary loans

• Constructive obligationsFunding commitments

• Government grants• Accrual model (matching with

expenditure)• Performance model

Grant income

Feb 2014

Concessionary Loans

• Where Interest below market rate…• Initially amount paid or received – (note balance)• Subsequent carrying value reflects reduced interest

payable/receivable, effective interest rate• Recognise any impairment loss immediately• Separate line for disclosure of such loans• Notes to show terms and conditions – interest, security,

repayment terms• Maybe shown in aggregate if not misleading• Give details if loans granted but not yet taken up

Feb 2014

Property held for the provision of social benefits

• Properties held for the primary provision of social benefits, e.g. social housing, shall not be classified as investment properties and therefore

• shall be accounted for as property, plant and equipment

Feb 2014

Entity Combinations• If transfer is at nil or nominal consideration then it is a gift and not a fair value

exchange • If FV assets > liabilities recognise a gain shown as income.

• If FV assets < liabilities the deficit is accounted for as a loss.

• For mergers : In the receiving entity show:– (a) the names and descriptions of the entities;– (b) the date of the transaction;– (c) an analysis of the principal components

• (i) after the date of the transaction which includes the gifted entity; and• (ii) up to the date of the transaction.

– (d) The aggregate carrying value of the net assets of each entity at the date of the transaction.

Feb 2014

Impairment of assets: public benefit considerations

• that if, and only if, the recoverable amount < carrying value of an asset

• then reduce the carrying amount to recoverable amount, and recognise the reduction as an impairment loss immediately in profit or loss.

• What if use of asset is restricted?• What if asset held for service potential not for future

cash flows? Not just PBE’s!• Use of service potential may be appropriate, no

details about precise methods.

Feb 2014

Funding commitments

• An entity shall recognise a liability, where it has made a commitment that it will provide resources to another party, if, and only if:– (a) the obligation is such that the entity cannot

realistically withdraw from it; and– (b) the commitment does not depend on the

performance of the recipient.

Feb 2014

Funding commitments (cont.)

• Disclose:– (a) the commitment made;– (b) the time-frame of that commitment;– (c) any performance-related conditions attached to that commitment; and– (d) details of how that commitment will be funded.

• Can disclose in aggregate if not misleading.• However, separate disclosure shall be made for recognised

and unrecognised commitments

Feb 2014

Incoming resources from non-exchange transactions

• A non-exchange transaction is a transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange.

Feb 2014

Non-exchange transactions• If non-performance then recognise a liability when that repayment becomes probable.

• Donations of services recognised as of income and expense if measurable.

• If services are used to produce an asset, then capitalise as part of the cost of that asset.

• Non-exchange transactions should be measured at the fair value of the resources received or receivable.

An entity shall recognise receipts of resources from non-exchange transactions as follows:

(a) Transactions that do not impose specified future performance-related conditions on the recipient are recognised in income when the resources are received or receivable.

(b) Transactions that do impose specified future performance-related conditions on the recipient are recognised in income only when the performance- related conditions are met.

(c) Where resources are received before the revenue recognition criteria are satisfied, a liability is recognised.

Non-Exchange Transactions per FRS 102 PBE34:67

At Last the SoRP itself!

The Charities SoRP

Feb 2014

The Fund Framework

All Funds

Unrestricted Funds

Restricted Funds

Non- Designated

Funds

Designated Funds

Restricted Income Funds

Endowment Funds

Income Restricted

Income Unrestricted

Expendable Endowment

Permanent Endowment

Restricted Funds: Can ONLY (normally) be restricted by DONOR CAN be created by making appeal - so take care with appeal surpluses or deficits

Capital Income

Feb 2014

Income ≤ £10k £10k-£25k £25k-£250k £250k-

£500k £500k

AccountsCash basis (non-company)Accruals basis (company)

Accruals basis

Simpler? Full

Trustees’ annual report

Simple Full

Scrutiny None

Independent Examination*

Independent AuditIndependent

Person

Qualified Accountan

t

Report to regulator

Update form

Simple return, report and accounts

Return, report & accountsIf Income >£250k and assets >£3.26m audit required. Company charities may have IE.

Proposed Accounts requirementsEngland and Wales (excludes CIOs)

•Compliance necessary in order to show “a true and fair view”•Non-adherence is a departure from the SoRPMUST•Good practice•Not a departure from the SoRPSHOULD•Optional•Indicates that there are alternative approaches available MAY

SoRP Consistent Terminology

Feb 2014

SoRP Consultation - Modules

• Modular approach• “Pick and mix” online• 29 Modules

– 14 Core– 3 Special transactions (including grant making)– 2 Types of assets (Heritage and Acting as Custodian)– 3 Investments

(Total Return, Pooling, Social investment)– 7 Group Accounts

Charities SoRP 14 Core Modules

Statements Underlying concepts Accounting Treatments for Charities

1. Trustees’ Annual Report

3. Accounting Standards, policies, concepts and principles…

8. Allocating costs by activity within SoFA

4. SoFA 5. Recognition of Income

6. Donated goods and services

10. Balance Sheet 7. Recognition of expenditure

9. Disclosure of trustee and staff remuneration

14. Statement of Cash Flows

11. Accounting for financial assets and liabilities

13. Events since the year end

2. Fund Accounting 12. Impairment of assets

Charities SoRP -15 “Special” Modules

Charity Operations Types of Asset and investments

Branches, groups and Combinations

15. Charities and company law

18 Heritage Assets 23 Combinations overview

16. Presentation of Grant making

19 Custodian Trustee 24 Accounting for

Groups17. Retirement and post- employment benefits

20 Total Return on Investments 25 Branches and

Joint arrangements

21 Social Investments 26 Subsidiaries

22. Pooling Investment Funds

27 Mergers28 Associates29 Joint ventures

Feb 2014

SoRP 2005 vs Consultation

• 1) Trustees’ annual report

– charities that have no reserves policy must disclose this fact; – larger charities must explain their approach to risk

management; – charities where there is doubt as to their being a going

concern must explain these uncertainties; and – the names of all trustees must be disclosed.

Feb 2014

Accountability

• On what?• By whom?• To achieve what?• Why?• How well?• To what effect?

None of which is normally revealed in a set of accounts

Feb 2014

Accountability

Trustee issues

• TAR – tell a story (Collective responsibility)• Seeking transparency – an open attitude• Consider Public benefit• Explain, explain, explain!• Avoid “Elephant in the sitting room!”• Change in the batting order

Feb 2014

Trustees’ annual report A document to suit the charity

Who are we? Reference and Administration

How do we work? Structure, Governance and Management

What are we doing?Objectives and Activities – Public benefit

What did we do and how well did we do it?

Achievements and Performance

How did we afford it? Financial Review

What are we planning? Plans for Future Periods

What else do we look after Custodianship

T2

Feb 2014

Statement of Financial Activitiesper SoRP 2005

Incoming resources Incoming resources from generated funds

A1a Voluntary income A1b Activities for generating funds A1c Investment income A2 Incoming resources from charitable activities

Other incoming resources Total incoming resources

Resources expended Costs of generating funds

B1a Costs of generating voluntary income B1b Fundraising trading: cost of goods sold and other

costs

B1c Investment management costs Other costs of generating funds

B2 Charitable activities B3 Governance costs

Total resources expended

Feb 2014

SoRP 2005 vs Consultation

• 2) Statement of financial activities (SOFA)– The income and expenditure headings in the SOFA have

been changed and simplified. – New heading “cost of raising funds” and– governance costs are not shown separately on the face of

the SOFA but are treated as a component of support costs. – Investment gains and losses now counted as a component of

net incoming resources / resources expended.

 Structure of the SoFA  Unrestricted funds

 Restricted funds

 Endowment funds

 Total funds

 Prior period total funds

  £ £ £ £ £

Income and endowments from:          

Donations and legacies          

Charitable activities          

Other trading activities          

Investments          

Other          

Total Income          

Expenditure on:          

Raising funds          

Charitable activities          

Other          

Total Expenditure          

Net gains/(losses) on investments

         

Net income (expenditure)          

• Explain any policy for holding reserves• State the amount of reserves and why they are held• If decided not to hold reserves, disclose fact and

explainMUST

•State total funds at the end of the period•Identify restricted or fixed assets or programme related investments•Identify and explain designated funds and timing of spend•Calculate the amount of reserves at the end of the period•Compare this with the reserves policy and provide explanations of how it will be brought into line in future

SHOULD

Module 1 TAR Reserves

Paragraphs 1:22 and 1:48

Feb 2014

Real examples from audited charities

• Stating the obvious

• The charity’s intention is that there is sufficient free reserves to ensure that it can continue its investment in its activities, meet its short and long term liabilities and to repay…or refinance its borrowings. The key to this is the group’s cash flow……

Feb 2014

Real examples from audited charities

• The coy reserves policy!• A level of charitable funds equivalent to two months

Group expenditure is appropriate. It has been decided to exclude the pension fund deficit…At the end of 2009, the level of charitable funds fell short of its target by 20%.

• £38.567M x2/12 x 80% = £5.142million!!!• I think?!

Feb 2014

Real examples from audited charities

• The opaque (but revealing) policy

• The Foundation sets a charitable expenditure budget each year, after taking account of its aim to generate a sustainable level of income equivalent to 4% of the 3-year rolling average market value of investments

Feb 2014

Reserves Policy

• The directors are currently formulating a policy whereby the free reserves held by the organisation should be approx 3 months of non-discretionary resources expended, which equates to £205,000.

• This would enable current activities to continue in the short term should funding drop significantly.

• At present the free reserves, at £57,575 do not reach this target level and the directors are considering ways in which additional funds should be raised.

• Both the policy and its implementation are under regular scrutiny.

Feb 2014

Trustees’ Annual Report

Definition normally excludes

Permanent endowment funds

Expendable endowment funds

Restricted funds

And unrestricted funds not readily available for spending

Funds only available by disposing of: Fixed assets for charity use Programme related investments

But charities may have more or less reserves available e.g..

Expendable endowments

Unrestricted funds earmarked or designated for essential spending

Reserves are charity’s freely available income funds

T8

Feb 2014

Identifying the Free Reserves?

Unrestricted

Designated Restricted Endowed Total

Fixed assets 175 150 325

Investments 250 150 500 900

NCAs 40 160 200

LT Loans (100) (100)

Total 365 150 310 500 1,325

Designated funds comprise:

Continuity reserve 50 Leasehold sinking fund 100

Feb 2014

Identifying the Free Reserves?

Unrestricted

Designated Restricted Endowed

Total

Fixed assets 175 150 0

Investments 250 150 500 250

NCAs 40 160 40

LT Loans (100) 0?

Total 365 150 310 500 1,325

Designated funds :Contingency reserve 50

Leasehold sinking fund 100

Feb 2014

SoRP 2005 vs Consultation

• 3) The statement of cash flows– The statement of cash flows must be provided by any charity

preparing its accounts under FRS 102.

Recognising assets/liabilities not previously recognised

Restating certain assets and liabilities at a different value

Recognising adjustments on transition in retained profits

Possible adjustments on transition

Table 8 Statement of Cash Flows Total funds Prior Year

fundsNote

£ £

Cash flows from operating activities:

Net cash provided by (used in) operating activities X (X) (Table 9)

Cash flows from investing activities:

Dividends, interest and rents from investments X X

Proceeds from the sale of property, plant and equipment

X X

Purchase of property, plant and equipment (X) (X)

Proceeds from sale of investments X -

Purchase of investments - (X)

Net cash provided by (used in) investing activities X X

Cash flows from financing activities:

Repayments of borrowing (X) (X)

Cash inflows from new borrowing X -

Receipt of endowment X X

Net cash provided by (used in) financing activities X X

Change in cash and cash equivalents in thereporting period

X X (Table 10)

Cash and cash equivalents at the beginning of the reporting period

X X

Change in cash and cash equivalents due toexchange rate movements

X (X)

Cash and cash equivalents at the end of thereporting period

X X (Table 10)

Current year Prior Year

£ £

Net income/(expenditure) for the reporting period (asper the statement of financial activities)

X X

Adjustments for:

Depreciation charges X X

(Gains)/losses on investments X X

Dividends, interest and rents from investments (X) (X)

Loss/(profit) on the sale of fixed assets X (X)

(Increase)/decrease in stocks (X) (X)

(Increase)/decrease in debtors (X) (X)

Increase/(decrease) in creditors X (X)

Net cash provided by (used in) operating activities X (X)

Table 9:Reconciliation of net income (expenditure)to net cash flow from operating activities

Feb 2014

SoRP 2005 vs Consultation

• 4) Changes to definitions and accounting policies

– Single-sided transfers are not permitted in the SOFA.

– The basis of going concern must be considered.

– Income is first recognised when its receipt is “probable” (this point has been clarified).

Feb 2014

SoRP 2005 vs Consultation(cont.)

• 4) Changes to definitions and accounting policies

– Where practicable, donated goods for sale are measured at fair value on receipt.

– Where practicable, donated goods for distribution are recognised at the time of receipt at fair value.

– There is a more extensive requirement for discounting for the time value of money with respect to both income and expenditure where settlement is delayed by more than 12 months and the effect is material.

Feb 2014

Income Recognition

• Income is recognised in the Statement of Financial Activities (SoFA) when a transaction or other event results in an increase in the charity’s assets or a reduction in its liabilities.

Feb 2014

Income Recognition

• Income must only be recognised in the accounts of a charity when all of the following criteria are met:

• – Entitlement – control over the rights or other access to the

economic benefit has passed to the charity.

– Probable – it is more likely than not that the economic benefits will flow to the charity.

– Measurement – the monetary value or amount of the income or costs can be measured reliably

Feb 2014

Grants or Contracts

• The central question is • WHEN do we recognise the Incoming Resource?

• The answer is• WHEN the ASSET is created.

• But how does it work in practice? ……….

Feb 2014

Grants or Contracts

• There are two types of incoming resource• CONTRACTS and GRANTS

• CONTRACTS exist where there is an Agreement that the charity will provide specific services (or goods) in exchange for a payment.

• Payment is due when PERFORMANCE is completed.

Feb 2014

Grants or Contracts

• CONTRACTS• When performance is complete the asset has been created

and the resource is available for the charity’s future use.

• Recognise income only when the performance is completed.– On a long-term contract recognise income when there is certified part-

performance– Payment received in advance is deferred until performance is

satisfactorily completed

• Sometimes contracts are called – “Grants with performance conditions”

Feb 2014

Grants or Contracts

• GRANTS• Grants are received when a charity is given resource

to spend on the charity’s objects (UF/RF) but nothing is given back in exchange. No goods or services are provided in return.

• The accounting treatment depends on whether or not there are any CONDITIONS preventing the charity from spending the resource.

Feb 2014

Grants or Contracts

• GRANT with NO CONDITIONS– Record the whole incoming resource in the SoFA when it is

receivable. Recognise income immediately. The asset is created.

• GRANT with CONDITIONS– If the condition is within the charity’s control.

(E.g. display accounts ) then recognise immediately.– Otherwise treat as a Contract…….

Feb 2014

SoRP Consultation – “Grant” conditions

Performance Non-performance

Service Level required

Units of output supplied

Obtain matched fundingObtain planning permission etc.Time conditions specified by donor

Feb 2014

Grants or Contracts

• ACCOUNTING TREATMENT OF CONTRACTS

– Measure over time of the contract– Keep track of costs and liabilities– Match costs to funds– Recognise income when performance is complete– Defer receipt from SoFA initially – reduces net Assets– Review ongoing performance at the year-end

Feb 2014

Grants or Contracts

Purpose/Transaction

Unrestricted Restricted

Grant Yes Yes

Contract Yes No?

Feb 2014

Charities SoRP

• What does the SoRP Consultation say…about grants and Contracts

• MODULE 5• Recognition of income, including

legacies, grants and contract income

Feb 2014

Charities SoRP – Module 5

• MODULE 5• understanding the nature of income;• general rules for income recognition; • general principles for recognising income from donations and grants;• identification of terms and conditions; • performance-related conditions; • other terms and conditions that limit the recognition of income; • deferring income where conditions that limit recognition are not met;• terms and conditions that do not prevent recognition; • recognising income from legacies; • income from donated goods, facilities and services; • income from contracts for the supply of goods and services; • income from membership subscriptions; • income from interest, royalties or dividends; • settlement of insurance claims; and • disclosures and notes to the accounts.

Feb 2014

Charities SoRP - “5.19”

• Is the funding agreement is a performance-related grant or a contract.

• Important distinction because the consequence of non-compliance with performance conditions and the liability for non-performance differ.

– Contract Law - buyer to seek costs, damages and recompense

for any failure or breach of contract by the seller,

– Grant - failure may lead to a partial or full repayment

of the grant if there are repayment conditions.

Feb 2014

Charities SoRP - Terminology

• There are two broad categories of income:

– income from exchange transactions (contract income) – income from non-exchange transactions (gifts).– Something for nothing!....TERMINOLOGY– A non-exchange transaction is a transaction whereby an

entity receives value from another entity without directly giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange.

Feb 2014

Charities SoRP – Restricted Funds

• A donation or grant that can be used for any purpose of the charity is unrestricted income.

• However, a donation or grant may be restricted to a specific purpose of a charity. – A restriction may result from a specific appeal by the charity,

or – from the decision of the grant maker or donor to support a

specific purpose of the charity rather than making funds available for the charity’s general use.

• 5.6

Feb 2014

Restriction vs. performance condition

• A restriction on the use of a grant or donation to a particular purpose or activity of a charity does not create a performance condition.

• A restriction creates a requirement that limits or directs the purpose for which a resource may be used but it does not require a specific level of performance or output from the recipient charity.

• 5.18

Feb 2014

SUBSTANCE/LEGAL FORM

• Transactions must be accounted for and presented in accordance with their SUBSTANCE and not simply their LEGAL FORM.

• Charities must therefore consider the substance of any conditions attaching to donations or grants and to the substance of any contractual terms when determining their entitlement to income.

• Similarly, the substance of any restriction placed on the use of income must be considered when determining whether or not income is presented as restricted funds in a charity’s accounts.

• 5.7

Feb 2014

• In particular, a charity, should consider: • Whether entitlement to income is subject to fulfilling

performance-related conditions. Performance-related conditions distinguish a contract or performance-related grant from an outright gift such as an unconditional grant.

• The terms of a donation or grant that impose a restriction on use which is narrower than the general purposes of the charity. Terms placed on gifts that limit a charity’s discretion over how income must be used are presented as restricted income in the accounts.

• 5.7 (Cont.)

Restricted Contract Income!

Feb 2014

• The terms of a CONTRACT that limit payments to amounts expended by the charity on purposes specified in the contract and restrict the charity’s use of any surplus. INCOME that is RESTRICTED by contractual terms may be presented as restricted in the accounts if the restrictions are in SUBSTANCE THE SAME AS would apply to a RESTRICTED donation or GRANT.

• 5.7 (Cont.)

Restricted Contract Income!

Feb 2014

SoRP 2005 vs Consultation

• 5) Changes to definitions and policies (cont.)– Properties with a mix of investment and functional use are

normally apportioned between tangible fixed assets and investment properties on the balance sheet.

– A new category of “mixed motive” investments is introduced. – The definition of related parties has been aligned with the

definition set out in FRS 102 and section 118 of the Charities Act 2011.

– Internally generated databases cannot normally be capitalised. – A provision must be recognised for those defined benefit pension

schemes accounted for as a defined contribution scheme where there is an agreement in place to make additional contributions to reduce a fund deficit.

• Know of the existence of a valid Will AND• Know about the death of the benefactor

ENTITLEMENT

• MUST show ENTITLEMENT PLUS• “PROBABILITY of receipt” PLUS• Ability to ESTIMATE with sufficient ACCURACY the

amount receivable

TO RECOGNISE INCOME

• There has been Grant of Probate AND• Executors have established that there are sufficient

assets in the Estate AND• Any conditions attached are within the control of the

charity or have been met

RECEIPT PROBABLE

when

Income Recognition Legacies

• Payment is received or notified after the reporting date and before accounts are authorised BUT payment was agreed by the executors prior to the end of the reporting period., THEN treat as ADJUSTING EVENT and accrue it as income. Always use FAIR VALUE.

• If charity has entitlement but the AMOUNT is uncertain then disclose as a CONTINGENT ASSET

• LARGE charities may use a PORTFOLIO approach• If to be received > 12 months from the reporting date then

DISCOUNTING can be used but unwind against legacy income.• If there is IMPAIRMENT then make the adjustment between

income (not expenditure) and debtors.

Income Recognition : Legacies (cont).

Additional definitions and disclosures

Charities SoRP

• De facto trustee is a person who has not been validly appointed as a trustee but – is acting as the trustee of the charity and is exercising the

functions that could only be properly discharged by a trustee. This may have come about due to an error, omission or oversight in the appointment process of that trustee.

• May also be known as a de facto director.• Key point is that they are included in disclosure

requirements for Trustee and Staff remuneration

New definition – “De facto” trustee

Common basic financial instruments

Basic Financial Instruments

Cash

Debtors including trade debtors and loans receivable

Creditors including trade creditors and loans payable

Overdraft (loan repayable on demand)

Qualifying long term loans*

Bank deposit

Investment in non-puttable ordinary or preference shares

Loans advanced by the charity on market terms*

* Must meet the FRS 102 debt instrument criteria

Common other financial instruments

Other Financial Instruments

Advance fee scheme in a School

- Account according to the substance of the transaction

Foreign Exchange contracts etc.

Loans with “Put and Call” options

- Need to consider “hedging” aspects per S12 of FRS102

• Charity selling goods for third parties are• Legally acting as agent…entitled to commission only• Until donor waives repayment…then a donation (GA!)• All handled under “Income from other trading”• Large charities may use estimation techniques• Income from FAIR VALUE of donated goods

recognised when sold….• Or in two stages received (if FAIR VALUE

ESTIMATION is possible) and then when sold

UK Retail Gift Aid System

• A. any trustee and custodian trustee

• B. the donor of any land to the charity (on or after establishment; and

• C. any person who is:

– 1. a child, parent, grandchild, grandparent, brother or sister of trustee (A) or land donor (B)– 2. an officer, agent or a member of the key management personnel of the charity;– 3. the spouse or civil partner of any of the above persons (A, B, C1 and C2);– 4. carrying on business in partnership with any of the above persons (A, B, C1, C2 and C3);– 5. a person, or a close member of that person’s family, with control or joint control over the charity– 6. a person, or a close member of that person’s family, with significant influence over the charity

• ‘Close member of a person’s family’ refers to:

– a. that person’s children or spouse;– b. the children, stepchildren or illegitimate children of that person’s spouse or domestic partner;– c. dependents of that person; and– d. that person’s domestic partner who lives with them as husband or wife or in an equivalent

same-sex relationship.

New definition of Related Parties

• A charity is not necessarily related to another charity simply because a particular person happens to be a trustee of both.

• It will only be ‘related’ if the relationship means that one charity, in furthering its charitable aims, is under the direction or control of the trustees of another charity.

• “In considering a possible related party relationship, a charity must assess the substance of the relationship and not merely its legal form.”

Not Related Parties?

• the entity and the reporting charity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);

• one entity is an associate or joint venture of the other entity (or a member of the group in which the other entity is the parent or a member);

• both entities are joint ventures of the same third entity;• one entity is a joint venture of a third entity and the other entity is an

associate of the third entity;• the entity is a post-employment benefit plan for the benefit of employees

of either• the reporting entity or an entity related to the reporting entity;• an entity that is controlled or jointly controlled by a person, or two or more

persons, identified in A, B or C;

(Corporate) Related Parties if…….

• the DESCRIPTION of a RELATIONSHIP between the parties• (including the interest of the related party or parties in the transaction);• a description of the transaction(s);• the AMOUNTS involved;• outstanding BALANCES with related parties and provisions for doubtful

debts;• any amounts written off from such balances during the reporting period;• the terms and conditions, including any security and the nature of the

consideration to be provided in settlement;• details of any guarantees given or received; and• ANY OTHER elements of the transactions which are necessary for the

understanding of the accounts; and• this SORP REQUIRES the disclosure of the NAME(S) of the transacting

related party or parties.

Related Parties disclosures…..

• The reporting charity must not state that related party transactions were made at open market value or on terms equivalent to those that prevail in arm’s length transactions unless such terms can be substantiated.

• If there have been no related party transactions in the reporting period that require disclosure, this SORP requires that this fact must be stated.

Related Parties (cont.)

• If there is no evidence of influence…

• Donations without conditions that change the charity’s activities such as:– requiring the charity to purchase goods or services from a specified supplier; – making an interest bearing loan to the charity;– or requiring that payments be made to a specified third party.

However charities must show the total amount of unconditional donations

• Services provided by trustee on a voluntary basis,

• Contracts of employment (except trustee)

• Other items– Purchase of minor articles (charity shop),– receipt of services (per beneficiaries), – out of pocket expenses (but note disclosure of trustees expenses),– amounts waived unless material.

Related Parties Exemptions

• Important to show that the charity is operating for the public benefit and trustees are acting in the interests of their charity and not for private benefit.

 • For this reason, this SORP requires that disclosure must

be made of transactions involving trustees, related parties, staff remuneration and ex-gratia payments.

 • The payments made to the auditor or independent

examiner must also be disclosed.

Employee and Trustee Remuneration

• A transaction involving a trustee or other related party must always be regarded as material regardless of its size.

• Must make the same disclosures for de- facto trustees.

Most trustees are volunteers however, • provided the arrangement is legally authorised, a trustee

may be remunerated for their role as a trustee. • On occasions, a trustee may also be employed in some

other role, by the charity or a related entity.

Paying Trustees?

• SORP requires Accounting Note that EITHER MUST

None One or more

Trustee payments disclosure

• for each individual trustee who received remuneration or other benefits showMUST show

LEGAL AUTHORITY

TRUSTEE NAME

REASON FOR PAYMENT

AMOUNT

MAY show

Payments to trustees

• the fact that there are no employees who received employee benefits (excluding employer pension costs) of more than £60,000 (€70,000); OR

• the number of employees whose total employee benefits (excluding employer pension costs) for the reporting period fell within each band of £10,000 (€10,000) from £60,000 (€70,000) upwards.

All charities MUST disclose

•disclose the total amount of any employee benefits received by trustees and its other key management personnel MUST

•give consideration to the information needs of their funders and other stakeholders in making their accounting disclosures.•E.g. Chief Executive Officer or highest paid staff member, SHOULD •Disclose the amount of employee benefits paid to its key management personnel on an individual basis.MAY

FRS102 “Key Management Personnel”trustees and senior employees

• A liability for paid annual leave and paid sick leave is recognised, if it is a material component of total expenditure, and not discounted for the time value of money.

Accrual for Holiday Pay

• ‘Social investments’ are either programme related and mixed motive investments (new category)

 • Programme related investments are held to further the

charitable purposes of the investing charity. There may be a financial return but it is incidental

 • Mixed motive investments are a form of social

investment made in part to further the charitable purposes of the investing charity and in part to generate a financial return.

SOCIAL INVESTMENT

• A charity making or in receipt of social investments or undertaking complex contractual arrangements needs to consider carefully the nature of the arrangement and account for the substance of it.:

• Examples include:• repayable loans,• non-repayable loans (quasi equity),• concessionary loans, equity investments, property letting, • performance related income or profit-sharing arrangements

or partnerships

SOCIAL INVESTMENTS (cont.)

• To account for the investment or contractual arrangement correctly, a charity needs to be able to identify:

• the nature of the asset or entitlement to income acquired;• the basis upon which any financial return is calculated;• the method(s) to be used to measure financial return;• the nature of any liabilities or obligations acquired;• the method(s) to be used to measure any liability or

obligation; and• their motive(s) for acquiring the investment.

ACCOUNTING FOR SOCIAL INVESTMENTS

• Property may be Programme Related Investment only when it is held specifically to enable a third party to undertake particular activities using the property that contribute to the investing charity’s charitable purposes.

 • Property may also be classified as mixed motive

investment when it is held for a combination of the financial return it generates and the contribution its use by another charity or third party makes to the investing charity’s purposes.

SOCIAL INVESTMENT : PROPERTY

• Property is held either – to further the objects (property, plant and equipment) or– The generate a return (investment property)

• If property is held for a mixed purpose then– It must be apportion between the two categories above– If not practicable then Tangible Assets PPE

• If property is held for own purposes plus let to third party who furthers our objects– It must be apportion between PPE and Mixed– If not practicable then Tangible Assets PPE

SOCIAL INVESTMENT: PROPERTY

•Needs GD authority•Needs CC permission•HC amounts ring-fenced?

ORIGINAL ENDOWMENT

PLUS SUBSEQUENT CAPITAL GIFTS

•Cumulative returns on investments•Less previous transfers to income•Record keeping is a challenge•Evolved by CC since 2002

UNAPPLIED TOTAL

RETURN

Total Return Approach to investment

• Situations may arise where

– the unavoidable costs of fulfilling a contract exceed– the expected economic benefit derived from it.

• In such circumstances, a charity must recognise these irrecoverable costs. – E.g. leaving a property with unexpired lease

(no possible sub-let)

Onerous contracts

•make provision for a material loss-making contract which cannot be cancelled without the payment of compensation. MUST •provision for the unavoidable loss.IMMEDIATE

•of the fixed assets used in supplying the contracted service(s) before calculating the provision.

IMPAIRMENT REVIEW

Onerous contracts (cont.)

• Provision is the lower of:

– Costs involved in completing the contract and – Cost of any compensation payable as result of withdrawing

from the contract.

 • For charities enhanced service levels to beneficiaries beyond contacts

do not create an onerous contract even when these costs cannot be recovered because they are part of charitable activities.

Onerous contracts provision

• Income (Almost) virtually certain• Paid Annual Leave accrual• FRS102 treatment of defined benefit pension scheme• Goods for resale• Concessionary Loans at Fair Value• Other financial instruments• Extended credit on contracts

……..require adjustment if FRS 102 adopted?!

Charities SoRP – Items most likely to……

• A heritage asset is a tangible or intangible asset with historical, artistic, scientific, technological, geophysical or environmental qualities that is held and maintained principally for its contribution to knowledge and culture.

Heritage Assets Module 18

• An asset may have the attributes of a heritage asset, e.g. be of historic or artistic importance, but unless

• It is ALSO held and maintained for its contribution to knowledge and culture then it will not fall within the definition of a heritage asset.

Attributesof a Heritage asset

• Assets with heritage attributes• may be used operationally for other purposes unconnected with the

promotion of knowledge and culture. In such instances, the asset is accounted for within tangible fixed assets or investments as appropriate.

Examples:• A historic building used by an educational establishment

– Attributes not heritage

•  Museum or gallery – collections held – Heritage– buildings or display cases – not usually heritage

•  Works of art or historic buildings – Investments not usually heritage

Examples of (Non) Heritage Assets

• Charities that do not have preservation or conservation purposes should account for an asset as a heritage asset only if that asset: 

– has historic, artistic, scientific, technological, geophysical or environmental qualities;

– contributes to knowledge and culture through its retention and use; AND

– is accessible to the public for viewing and/or research.

Heritage Assets

• Heritage assets are shown in a separate category• Shown at cost or FAIR VALUE

• Charities are not required to recognise heritage assets on the balance sheet if– information on their cost or valuation is not available and

such information cannot be obtained at a cost commensurate with the benefit to the users of the accounts and to the charity.

Heritage Asset - Disclosure

• Where reliable information on cost or value is not available

• charities will need to consider if the cost of obtaining a valuation is justified by the usefulness of the information to the users of the accounts and to the charity for its own stewardship purposes.

Heritage Assets - Disclosure

• Charities may adopt ANY reliable valuation technique to estimate the fair value of a heritage asset.

• E.g. the use of market value may provide a reasonable approach; or

• the use of depreciated replacement cost may be appropriate. • However, depreciated replacement cost may not be an

appropriate method where a building cannot be replicated using modern building methods or where the value of the original asset lies in its unique historic or heritage qualities.

• If a valuation method is adopted, it must be applied to all assets within a particular class or to a group of similar assets.

Heritage assets - Valuation

•a separate class in the balance sheet•With note for analysis of those classes or groups of heritage assets reported at cost and those reported at valuation;ASSET •include the value of any heritage asset gifted in the ‘INCOME FROM DONATIONS AND LEGACIES heading (SoFA)INCOME•recognise any change in the valuation of a heritage asset as a ‘GAIN or LOSS on REVALUATION OF FIXED ASSETS’ in the SoFA;

GAIN or LOSS IN CARRYING VALUE

•recognise any gain on the disposal of a heritage asset as ‘OTHER INCOME’ AND •recognise any loss on disposal, depreciation or impairment of a heritage asset as a COST OF CHARITABLE ACTIVITIES in the SoFA.

GAIN or LOSS ON DISPOSAL

Heritage Assets – Accounting Disclosures

Feb 2014

• My contact details – Kenbrewco@gmail.com 07748 758345

• Useful Websites– http://www.charity-commission.gov.uk/– www.charitysorp.org– www.frc.org.uk

– www.charitytrends.org