21 Feb 2019
Charities SORP Update Bulletin 2
On 5 October 2018, Update Bulletin 2 to the Charities SORP (the “SORP”) was released, which makes changes to the SORP.
Some of the changes outlined in the bulletin are “clarifying amendments”. These identify and correct areas that are believed to be unclear or have been generally misinterpreted by the charity sector. It will probably be appropriate for these changes to be implemented with immediate effect.
Other amendments are to incorporate changes to the overarching Accounting Standard FRS 102. These changes can also be implemented now; however all amendments will be compulsory for accounting periods beginning on or after 1 January 2019. For most charities that do not early adopt, the first accounting period affected will be the year ended 31 December 2019 or the first period end that falls after this date.
Some of the highlights of the bulletin are as follows:
Gift aid payments from subsidiaries to a charitable parent (clarifying amendment)
Clarification has been given on the circumstances when unpaid profits held in a trading subsidiary should be shown as owing to the parent charity. In the past, the majority of charities have assumed that there is a constructive liability between the parent and the trading subsidiary, and any unpaid profits were duly shown as payable. This treatment has now been rebutted, and such profits will generally be left in the trading subsidiary until the next financial period.
It is important to point out that this change is unlikely to change the tax position. HMRC will still allow the payment to be deducted from the taxable profits for the year provided it is paid to the charity within 9 months of the year end.
Charities renting investment property to another group entity (significant amendment)
The update bulletin now permits charities that rent investment property to another group entity to measure the investment property at either cost (as a functional asset) or at fair value (as an investment). Previously charities were only allowed to value such properties as an investment – valued at fair value. We welcome this change as it will free charities from having such properties professionally valued (and incurring the costs involved).
Increased disclosure requirements (clarifying amendments)
When FRS 102 was first introduced, there was a requirement that the prior year figures (comparative figures) in the accounts needed to be disclosed in full. This resulted in many charities reproducing their Statement of Financial Activities from the previous year as a note to the accounts. The update bulletin has made it clear that full comparative information is needed for all items included in the accounts, including the details of movements in funds. As a result, the full details of the previous year’s funds needs reproducing by way of a note.
Removal of “undue cost” exemptions
There were several aspects of the SORP that were previously voluntary, if applying the rules created undue cost or work. A couple of these useful exemptions are now being scrapped – in particular;
- component accounting must now be applied where two or more major components of the same fixed asset have different useful economic lives and;
- where a property has a mixed use, the “investment” element must now be valued separately at fair value.
There are also various other amendments to the SORP which are either editorial in nature or are considered to be less significant. These are only likely to have an impact on the accounts of a limited number of charities and cover areas such as:
- The definition of a financial institution, which has been widened and could impact charitable incorporated friendly societies and other charities which make social investments as a principal activity
- The definition and disclosure requirements of financial assets and liabilities, which have been amended to reflect changes within FRS 102
- The measurement criteria for heritage assets and social investments
- The exclusion of immaterial subsidiaries from consolidated financial statements provided this does not impact a true and fair view
- Guidance on how to recognise intangible assets acquired from non-charitable subsidiaries
- The need to include a reconciliation of net debt within the notes to the statement of cash flows (where a cash flow required)
- The expansion of the examples of charity reconstructions that should be accounted for using merger accounting
- A requirement for unconsolidated interests in special purpose entities to be disclosed where consolidated accounts are prepared.
A copy of Update Bulletin 2 is available on the Charities SORP website (www.charitysorp.org)