GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND
NOT-FOR-PROFIT ENTITIES
A cross sector review of the new UK GAAP
comprising FRS 100, FRS 101 and FRS 102
Spring 2013
CONTENTS
PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART 1 – INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
16. Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
17. Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . 16
18. Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.
The new financial reporting framework. . . . . . . . . . . . . . . 2
2.
Use of full IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
19. Business combinations and goodwill. . . . . . . . . . . . . . . . . 17
3.
Changes from the previous proposals . . . . . . . . . . . . . . . . 2
20. Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.
Timeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
21. Provisions and contingencies . . . . . . . . . . . . . . . . . . . . . . . 20
5.
Commercial and practical considerations. . . . . . . . . . . . . 3
22. Liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.
Final thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
23. Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART 2 – ACCOUNTING DIFFERENCES
1.
Scope of FRS 102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.
Concepts and pervasive principles . . . . . . . . . . . . . . . . . . . 5
3.
Financial statement presentation . . . . . . . . . . . . . . . . . . . 5
4.
Statement of financial position (‘balance sheet’) . . . . . . 6
5.
Statement of comprehensive income
and income statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
24. Government grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
25. Borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
26. Share-based payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
27. Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
28. Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
29. Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
30. Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.
Statement of changes in equity and
statement of income and retained earnings. . . . . . . . . . . 7
31. Hyperinflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.
Statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
33. Related party disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.
Notes to the financial statements
(general requirements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
34. Specialised activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.
Consolidated and separate financial statements. . . . . . . 9
10. Accounting policies, estimates and errors. . . . . . . . . . . . . 10
11. Basic financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . 11
12. Other financial instrument issues . . . . . . . . . . . . . . . . . . . 13
13. Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
14. Investments in associates (consolidated financial
statements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15. Investments in joint ventures (consolidated
financial statements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
32. Events after the end of the reporting period . . . . . . . . . . 27
35. Transition to FRS 102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
APPENDIX 1
I&E account and balance sheet for a hypothetical charity . . . 30
APPENDIX 2
I&E account and balance sheet for a hypothetical
registered provider of social housing . . . . . . . . . . . . . . . . . . . . . 32
APPENDIX 3
I&E account and balance sheet for a hypothetical
education institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ACKNOWLEDGEMENTS
This document has been prepared with input from a large number of the BDO not-for-profit team, but especial thanks go to
James Nayler who undertook the bulk of the work.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
1
PREFACE
We are now in the final straight of the UK accounting
standard setter’s project to replace existing UK GAAP
with new rules based on IFRS. Indeed, for entities that
are not subject to SORPs, we have crossed the finish
line as consultation papers and exposure drafts have
given way to final standards applicable for periods
beginning on or after 1 January 2015 at the latest. For
charities, registered providers of social housing and
education institutions, attention turns to the
requirements of revised SORPs, development of which
can now continue in earnest.
This document is BDO's fourth annual publication on the new UK GAAP
and not-for-profit entities. Much has changed since 2009 when the ASB
first consulted on the replacement of UK GAAP for non-listed entities with
the IFRS for SMEs. The output of this consultation came towards the end
of 2010, which saw the first formalised proposals for a 3-tier approach to
financial reporting. This would have seen 'publicly accountable entities'
comply with full IFRS, and non-small, non-publicly accountable entities
prepare financial statements in accordance with an accounting standard
known as the FRSME. This was to be supplemented with a separate
exposure draft addressing the accounting for transactions commonly
entered into by public benefit entities known as the FRSPBE in early 2011.
The start of 2012 saw the FRSME and FRSPBE give way to revised
proposals in the form of FREDs 46, 47 and 48, the latter known as The
Financial Reporting Standard Applicable in the UK And Republic of Ireland
(or ‘The FRS’ for short).
Now at the start of 2013 we have the final product of these consultations
and exposure drafts. Much of what was proposed this time last year in
FREDs 46, 47 and 48 has come to fruition, with perhaps the biggest
change in the last 12 months not really being changes to the proposed
accounting rules, but the shake-up of the regulatory environment. This has
seen the disbandment of the UK’s Accounting Standards Board, with the
accounting standard setting powers now residing with the Financial
Reporting Council, which takes recommendations from the newly
established Accounting Council.
In this fourth publication we look at the changes to the proposals set out
this time last year, consider the issues that those tasked with revising the
charities, housing and education SORPs are likely to focus on as well as
provide an overview comparison of what the final proposals mean for
charities, registered providers of social housing and education
institutions. As ever, if you wish to discuss how the changes to UK GAAP
will affect you, please feel free to contact us.
Don Bawtree
Head of Not-For-Profit
GLOSSARY
ASB
Accounting Standards Board of the UK
IAS
International Accounting Standard
EBITDA
Earnings before interest, tax, depreciation and
amortisation
IASB
International Accounting Standards Board
IFRS
International Financial Reporting Standard
FRC
Financial Reporting Council
FRED
Financial Reporting Exposure Draft
IFRSs
International Financial Reporting Standards as adopted
for use in Europe by the European Union
FRS
Financial Reporting Standard
FRS 100
FRS 100 Application of Financial Reporting Requirements
IFRS for SMEs International Financial Reporting Standard for Small and
Medium-sized Entities
FRS 101
FRS 101 Reduced Disclosure Framework
PBE
Public Benefit Entity
FRS 102
FRS 102 The Financial Reporting Standard Applicable in
the UK and Republic of Ireland
PFI/PPP
Public Finance Initiative / Public Private Partnership
RP
Registered provider of social housing
FRSME
Draft Financial Reporting Standard for Medium-sized
Entities
SFA
Skills Funding Agency
FRSPBE
Draft Financial Reporting Standard for Public Benefit
Entities
SOCI
Statement of Comprehensive Income
SOFA
Statement of Financial Activities
FRSSE
Financial Reporting Standard for Smaller Entities
SORP
Statement of Recommended Practice
HE&FE
Higher Education and Further Education
SSAP
Statement of Standard Accounting Practice
HEFCE
Higher Education Funding Council for England
UITF
Urgent Issues Task Force
HEI
Higher Education Institution
UK GAAP
I&E
Income and Expenditure Account
Generally Accepted Accounting Practice in the
United Kingdom
2
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
PART 1 – INTRODUCTION
1. THE NEW FINANCIAL REPORTING
FRAMEWORK
On 22 November 2012 the FRC published FRS 100, which sets out the
new 3-tier framework for financial reporting in the UK. This framework,
set out in the diagram below, is unchanged from the proposals issued last
year in FRED 46.
May voluntarily apply
TIER 3
Apply FRSSE if
qualifying as a
small entity by
reference to size
criteria in
Companies Act
Qualifying
entities
Reduced disclosure
(FRS 101)
Qualifying
entities
May voluntarily apply
TIER 2
Apply FRS 102
if not qualifying
as small and not
required to apply
EU endorsed IFRS
May voluntarily apply
TIER 1
Apply EU endorsed
IFRS if required to
do so by legislation
or regulation
Reduced disclosure
(FRS 102)
On the same day the FRC also published FRS 101 (based on FRED 47 also
exposed in 2012), which sets out the disclosure exemptions available to tier 1
qualifying entities (subsidiaries' and parent entities) choosing to apply the
recognition and measurement rules of full IFRS in their indivdual financial
statements.
Finally, and most significantly, 14 March 2013 saw the FRC issue FRS 102.
Originally expected to be published at the same time as FRSs 100 and
101, the Accounting Council decided in October 2012 to expose
additional guidance on the accounting for multi-employer defined benefit
schemes and service concession arrangements (ie PFI- or PPP-type
contracts) from the perspective of the party awarding the contract. This
resulted in the publication of FRS 102 being delayed by a few months,
with its requirements reflecting not just the output from the major
consultation exercise on FRED 48 last year, but also the output from this
mini consultation.
2. USE OF FULL IFRS
It remains to be seen whether any not-for-profit entities will choose to
prepare accounts in accordance with full IFRS. Charities are currently
prohibited from preparing full IFRS accounts and there is little to suggest
this will change going forward. Whether other not-for-profit entities will
be permitted to prepare full IFRS financial statements for regulatory
purposes remains to be seen. To the extent they are permitted,
application difficulties may arise if the revised SORPs only interpret FRS
102 for their respective sectors.
We anticipate very few not-for-profit entities will prepare full IFRS
accounts even if permitted, and therefore believe application of FRS 101
in individual accounts of group entities will similarly be very limited.
An interesting conundrum will also arise if an entity finds itself required
to do full IFRS accounts under one set of regulations (say because it has a
listing on a regulated market whose rules or related legislation require
the submission of full IFRS accounts), while at the same time being
precluded from preparing full IFRS accounts for other regulatory
purposes. It may mean separate sets of accounts would have to be
prepared for each purpose, although we suspect very few not-for-profit
entities, if any, will find themselves in the position of being required to
prepare full IFRS accounts.
3. CHANGES FROM THE PREVIOUS
PROPOSALS
Whereas the proposals in FREDs 46-48 contained significant revisions to the
content of the earlier FRSME and FRSPBE, the final versions of FRSs 100, 101
and 102 broadly reflect the proposals contained in FREDs 46, 47 and 48
respectively. Nonetheless, there are some key changes to the previous
proposals that will affect not-for-profit entities, which we set out below.
GRANT ACCOUNTING AND INCOME FROM NON-EXCHANGE
TRANSACTIONS
FRED 48 proposed giving entities a choice between the accruals model
and performance model for grant accounting, whilst requiring the
performance model for income from non-exchange transactions.
However, there was no guidance in FRED 48 to help an entity establish
whether a particular receipt was to be classified as a grant (for which
there was to be accounting policy choice) or as income from a
non-exchange transaction (for which there was no accounting policy
choice). Therefore, FRS 102 clarifies that the accounting set out for grants
(ie a choice between the accrual and performance models) only applies to
government grants. In this context, government can include government
agencies whether local, national or international. Grants from
non-governmental sources would be treated the same as any
non-exchange transaction (such as a donation) and would be recognised
in the income statement once the entity has satisfied any performance
conditions attaching to their retention.
PERFORMANCE CONDITIONS AND RESTRICTIONS
FRED 48 defined a performance-related condition as ‘a requirement that
specifies that a resource is either to be used by the recipient as specified
or if not so used to be returned to the donor’. Such a definition was more
akin to what most not-for-profit entities would have considered a
‘restriction’. A restriction, by contrast, was defined in FRED 48 as ‘a
requirement that limits or directs the purpose for which a resource may
be used but does not require the resource to be returned if...not used as
specified’. Such a definition was anathema to many in the not-for-profit
sector as by definition all donations given under trust must be applied
towards the purposes for which they are given.
Following concerns raised by constituents in their responses to FRED 48,
FRS 102 redefines a restriction as a ‘requirement that limits or directs the
purposes for which a resource may be used that does not meet the
definition of a performance-related condition.’ A performance-related
condition is in turn defined as ‘a condition that requires the performance of
a particular level of service or units of output to be delivered, with payment
of, or entitlement to, the resources conditional on that performance.’
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
The upshot is that entities other than charities may see an acceleration in
their income recognition policies as non-governmental income subject
only to restrictions will be recognised as income when receivable, as
opposed to when the related expenditure is recognised in the I&E account
(eg through depreciation). The requirements of FRS 102, however, are
similar to the current charity SORP and therefore there should be greater
cross-sector alignment of revenue recognition policies.
CHARITIES
1 January 2014
31 December 2014
Comparative period
income statement
and cash flow
Date of transition
31 December 2015
Current period
income statement
and cash flow
Comparative
balance sheet date
First Financial
Statements under
FRS 102
MULTI-EMPLOYER DEFINED BENEFIT PENSIONS SCHEMES
In October 2012, the Accounting Council exposed an amendment to FRED 48
addressing an aspect of multi-employer defined benefit scheme accounting.
Most such schemes are typically accounted for as defined contribution
schemes under current UK GAAP on the basis that scheme assets and
liabilities cannot be reliably allocated to the participating entities. The specific
issue is whether a participating employer should recognise a liability to the
extent that an agreed funding plan has been put in place to plug existing
scheme deficits. FRS 102 requires a liability for any such commitment to be
recognised. This could have significant implications for not-for-profit entities,
particularly RPs and HEIs, as many have entered into such deficit reduction
commitments. Current UK GAAP (FRS 17) has not been amended to explicitly
require this treatment prior to being replaced by FRS 102.
SERVICE CONCESSION ARRANGEMENTS
FRED 48 contained guidance on how to account for service concession
arrangements for the construction, upgrade, operation and maintenance of
infrastructure assets. These arrangements generally encompass PFI and PPP
contracts (although not exclusively). However, whereas FRED 48 only
addressed the accounting from the operator’s perspective, FRS 102 also
includes guidance from the perspective of the grantor, ie the party awarding
the contract. Whilst this may not seem to be immediately relevant to notfor-profit entities, some do enter into similar arrangements, and therefore
could be relevant to the not-for-profit sector. For instance, an HEI (grantor)
may enter into an arrangement with, say, a private sector entity or RP
(operator) to renovate student accommodation in return for granting
various rights and responsibilities over the property for a period of time.
4. TIMELINE
The backstop date for adoption of UK GAAP is unchanged from last year’s
proposals, namely periods beginning on or after 1 January 2015. However,
the final standard now permits entities subject to a SORP to apply the
accounting framework early to any accounting period ending on or after
31 December 2012 providing the accounting requirements do not conflict
with a currently effective SORP or other legal requirements. Given that
currently effective SORPs do conflict with certain aspects of FRS 102, the
practical consequence of this may be limited, with charities, RPs and
HE&FE institutions likely to wait for the publication of revised SORPs at
the earliest before transitioning to the new accounting framework.
Assuming most not-for-profit entities will, post publication of revised
SORPs, choose to wait until the latest possible date before applying the
new UK GAAP, this gives rise to the following timelines for typical
year-end dates.
3
REGISTERED PROVIDERS OF SOCIAL HOUSING
1 April 2014
31 March 2015
Comparative period
income statement
and cash flow
Date of transition
31 March 2016
Current period
income statement
and cash flow
Comparative
balance sheet date
First Financial
Statements under
FRS 102
EDUCATION INSTITUTIONS
1 August 2014
31 July 2015
Comparative period
income statement
and cash flow
Date of transition
31 July 2016
Current period
income statement
and cash flow
Comparative
balance sheet date
First Financial
Statements under
FRS 102
Whichever financial statements are first prepared in accordance with the
new UK GAAP, it should be remembered that to be able to prepare a
comparative income statement and cash flow in the first financial
statements affected, it will also be necessary to prepare a balance sheet
at the start of the comparative period, ie the ‘date of transition’. To all
intents and purposes the date of transition means the balance sheet date
two years before the date of the first financial statements prepared in
accordance with FRS 102.
5. COMMERCIAL AND PRACTICAL
CONSIDERATIONS
There are a number of commercial and practical considerations to think
about when transitioning to the new accounting framework set out in FRSs
100, 101 and 102. Some of these are outlined below.
FINANCIAL POSITION AND PERFORMANCE
The recognition and measurement of assets, liabilities, income and
expenditure will change, as well as their presentation. This will affect the
reported performance, net assets and reserves of not-for-profit entities.
Organisations will therefore need to consider the effect this may have on
stakeholders and funders.
TRAINING NEEDS
Finance teams, finance committees, audit committees and voluntary
boards will need to be trained in the new accounting rules applicable to
the accounting framework adopted. Systems will also need to be put in
place to ensure that, for consolidation purposes, the right information is
collected by group accountants.
4
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
Large and complex groups may, for good reasons, have group entities
applying different accounting frameworks to each other or to rules applied
on consolidation. Such organisations will need to consider whether the
responsibility for reconciling entity numbers to the consolidated reporting
rests with the entity or with the group accountants. The decisions made
will have repercussions for the training requirements.
TAX IMPLICATIONS
There could be potential implications on the tax liabilities of non
charitable group entities arising from changes to accounting profit and,
consequently, the amount of gift aid donations to be paid. It will also be
very important to revisit tax structures that are dependent on current UK
GAAP to determine whether the change in accounting would change the
effectiveness of these structures in mitigating tax.
LOAN COVENANTS
If loan covenants are set by reference to UK GAAP amounts in either
audited financial statements or management accounts, it will be
necessary to consider whether the new accounting rules will adversely
affect an entity’s ability to meet those loan covenants. In the current
economic climate there is a risk that the banks will take the opportunity
to renegotiate loan terms.
ONE-OFF TRANSITION COSTS
Entities may incur one-off costs as a result of needing the help of external
advisers to assist in the transition to the new UK GAAP.
EXEMPTIONS FROM FULL RETROSPECTIVE APPLICATION
The basic principle is that comparatives and current period numbers in
the first financial statements affected must be presented using the same
accounting policies. In order for a comparative income statement to be
presented in those financial statements it requires a transition date
balance sheet to be prepared, which will be two years prior to the first
balance sheet date for which numbers are required in accordance with the
new regime. However, various exemptions and exceptions from full
retrospective application are available in FRS 102, which are discussed in
more detail in Part 2 Section 35 of this guide. Entities will need to
consider which of these exemptions they are going to apply.
FUTURE DEVELOPMENTS
A number of significant accounting changes have recently either been
brought into full IFRS or are anticipated to come into effect in the near
future. These include the accounting for leases, subsidiaries, joint
ventures, revenue and financial instruments. Consistent with the
proposals in FRED 48, many of the changes have not been factored into
FRS 102. However, given the IASB's intention to update the IFRS for SMEs
for changes made to full IFRS and the Accounting Council's policy of
aligning the new UK GAAP with the IFRS for SMEs to the extent
compatible with law, it is possible that FRS 102 will be subject to further
revisions soon after its effective date. Therefore, entities should keep an
eye on accounting developments in full IFRS in order to anticipate likely
changes to FRS 102 in the coming years.
In addition, although the FRSSE is being retained and would be available
for use by any small entity (determined by reference to size criteria in
companies’ legislation), in time the FRSSE may also be withdrawn
meaning that small entities choosing to apply the FRSSE under the new
accounting framework would sooner or later be required to apply the
accounting in FRS 102.
6. FINAL THOUGHTS
The replacement of current UK GAAP with the new framework set out in
FRSs 100, 101 and 102 could provide a significant challenge to many notfor-profit entities. The experience of listed companies that had to
transition from UK GAAP to full IFRS in recent years is that early
consideration of the issues and a project plan to manage the transition
pays dividends in the long-run. Those that waited until preparation of the
first financial statements affected before tackling the project ended up
wishing they had started earlier. The same is likely to be true for those
entities now faced with transitioning from current UK GAAP to FRS 102.
As ever, if you have any queries arising from this publication, or wish to
consider further the impact these proposals would have on your financial
reporting, please do not hesitate to get in touch with your usual BDO
contact.
PART 2 –
ACCOUNTING
DIFFERENCES
We have analysed the accounting differences into 35 sections, one for
each of the sections in FRS 102. Each section discusses the requirements
of FRS 102 and compares it to current accounting practice adopted by
charities, RPs and education institutions.
We have updated last year’s publication by including a description of the
key changes made to the previous proposals set out in FRED 48. For
completeness we have retained a comparison where relevant with full
IFRS. Although it now seems unlikely that any not-for-profit entity will
have to apply full IFRS, the extent to which any not-for-profit entity will
be able, or want, to apply what could be viewed as the ‘gold standard’ of
financial reporting is unknown.
Where appropriate, the heading of each section makes use of the
following key to indicate the level of relevance to not-for-profit entities.
Number of
entities affected
Charities
HE&FE
Institutions
Registered
Providers
Many
Some
Few
Most sections also end with a bullet point summary making use of a
traffic light system to identify the likely significance of the change in
accounting for entities applying FRS 102.
High significance
Medium significance
Low significance
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
1. SCOPE OF FRS 102
BACKGROUND
FRS 102 is the new accounting standard that is to be applied by:
n any entity that is not required to apply IFRSs or otherwise chooses not
to apply IFRSs
n any small entity that, although eligible to apply the FRSSE, chooses
not to do so.
Although the current charity SORP briefly addresses accounting under the
FRSSE, most charities do not apply the FRSSE albeit that many are
permitted to do so. It is unclear how many charities will apply the FRSSE
rather than FRS 102. On the basis that the current charity SORP is
arguably in line with the FRSSE, small charities may choose to apply the
FRSSE on the basis that it would not seen any change to their current
accounting policies. However, this could just be postponing adoption of
FRS 102 as it it possible that in due course the FRSSE will be withdrawn.
OPERATING SEGMENT DISCLOSURE
Any entity that has listed debt or is in the process of issuing listed debt,
must additionally apply IFRS 8 Operating Segments. In the not-for-profit
sector this will predominantly apply to RPs, some of whom may find they
have to disclose more information about their results and net assets. In
their financial statements at present, RPs are already required to give a
detailed breakdown of their income and expenditure, but it is not
necessarily the case that these disclosures are fully in accordance with the
requirements of IFRS 8.
REDUCED DISCLOSURE FRAMEWORK FOR QUALIFYING ENTITIES
A qualifying entity is defined as a 'member of a group where the parent of
that group prepares publicly available consolidated financial statements,
which are intended to give a true and fair view (of the assets, liabilities,
financial position and profit or loss) and that member is included in the
consolidation.’ Such an entity need not provide the following disclosures
otherwise required by FRS 102:
n The requirement in section 4 ‘Statement of Financial Position’ to
disclose a reconciliation of the number of shares outstanding at the
beginning and end of the period (only relevant if the entity is
incorporated with share capital)
n Section 7 ‘Statement of Cash Flows’
n Sections 11 and 12 dealing with financial instruments, provided the
equivalent disclosures required by these sections are included in the
consolidated financial statements of the group in which the entity is
consolidated. However, entities may have to comply with certain
Companies Act 2006 disclosure requirements otherwise dealt with
in Section 11
n Section 26 ‘Share-based Payment’ (unlikely to be of relevance to
not-for-profit entities)
n The requirement in Section 33 'Related Party Disclosures' to disclose
compensation of key management personnel (although this may still
be separately required by separate legislation or regulation, such as
the Companies Act 2006). A qualifying entity must comply with the
other disclosure requirements of Section 33.
‘Qualifying entity’ is therefore referring to both the separate financial
statements of the parent of a group as well as its subsidiaries. Note that
for non-wholly owned subsidiaries the disclosure concessions are only
available if a certain proportion of minority shareholders do not object.
No disclosure exemptions are available in the group accounts of
intermediate parent entities voluntarily preparing consolidated financial
statements.
5
2. CONCEPTS AND PERVASIVE
PRINCIPLES
This section of FRS 102 describes the objective of financial statements
and the qualities that make the information in such financial statements
useful, eg relevance, reliability, materiality, and substance over form. It
also acknowledges that the benefits derived from producing financial
information in accordance with FRS 102 should exceed the cost of
providing the information. This section also sets out the concepts and
basic principles underlying such financial statements, including:
n definitions for assets, liabilities, income and expense
n setting the tone for when transactions should be recognised
n discussing the appropriate basis of measuring items in the financial
statements (historical cost or fair value).
This is not fundamentally different from the ASB’s Interpretation for
Public Benefit Entities of its Statement of Principles for Financial
Reporting save that the latter has some change of emphasis and
re-expression to make it more relevant to public benefit entities. The
Statement of Principles will cease to be effective once FRS 102 is
adopted.
3. FINANCIAL STATEMENT
PRESENTATION
This section explains what is meant by fair presentation of financial
statements, what compliance with FRS 102 requires and what a complete
set of financial statements is. Compliance with FRS 102, with additional
disclosure where necessary, is presumed to result in the financial
statements showing a true and fair view. Only in extremely rare
circumstances is it envisaged that it might be necessary to invoke a true
and fair override.
FRS 102 contains no requirements as to narrative reporting outside of the
financial statements (eg operating and financial reviews, trustee reports,
etc), although the Accounting Council does identify this as a topic that
may be developed in future updates of the standard.
FRS 102 contains certain accounting treatments reserved only for PBEs.
These are discussed in more detail later in this document. However,
Section 3 specifically requires any entity applying these reserved
accounting treatments to make an explicit and unreserved statement
that it is a PBE.
6
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
PUBLIC BENEFIT ENTITIES (PBEs)
FRS 102 defines a PBE as 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.’
A footnote to the definition clarifies that the term public benefit entity
‘does not necessarily imply that the purpose of the entity is for the
benefit of the public as a whole. For example, many PBEs exist for the
direct benefit of a particular group of people, although it is possible that
society as a whole also benefits indirectly. The important factor is what
the primary purpose of such an entity is, and that it does not exist
primarily to provide economic benefits to its investors. Organisations
such as mutual insurance companies, other mutual co-operative entities
and clubs that provide dividends or other economic benefits directly and
proportionately to their owners, members or participants are not PBEs.’
Whilst it therefore seems clear that charities, RPs and HEIs would all fall
to be treated as PBEs there are perhaps other types of not-for-profit
entities where it is less clear cut and judgement may need to be made.
For example, trade unions arguably provide economic benefits to
members, but not necessarily proportionately. Similarly judgements
may need to be made by other types of membership organisation such
as professional bodies, political parties, clubs and societies.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
Pension
liability
Subsumed within
provisions for
liabilities.
Presented
Presented
separately on face separately on face
of balance sheet. of balance sheet.
Endowment
assets for
HE&FE
institutions
Allocated
Presented as a
according to the
separate line
nature of the
item.
underlying
endowment asset
(implied).
Allocated
according to the
nature of the
underlying
endowment asset
(implied).
Programme
related
investment
for charities
Allocated
according to the
nature of the
underlying asset
(implied).
Allocated
according to the
nature of the
underlying asset
(implied).
Presented as a
separate line
item.
Social
Presented gross as Netted against
housing grant a liability separate underlying
(SHG) in RPs from the
property asset.
underlying
property asset.
EU endorsed
IFRS
Presented gross as
a liability separate
from the
underlying
property asset.
4. STATEMENT OF FINANCIAL POSITION
(‘BALANCE SHEET’)
5. STATEMENT OF COMPREHENSIVE
INCOME AND INCOME STATEMENT
FRS 102 cross refers to the balance sheet formats in companies’
legislation. As the balance sheets of most not-for-profit entities currently
tend to broadly follow the formats in companies legislation, we do not
anticipate much change save for the following observations:
ONE OR TWO STATEMENT APPROACH
n the requirement to present the defined benefit pension liability (if
any) on the face of the balance sheet comes from FRS 17 Retirement
benefits, and is not in FRS 102. Consequently, using the balance sheet
formats in companies’ legislation, it may be that entities will subsume
such pension liabilities within the ‘provision for liabilities’ line
n the HE&FE SORP requires endowment assets to be shown separately
from other assets in the balance sheet. It is unclear whether such assets
would need to be allocated to the appropriate asset category
(eg cash) and not presented as a separate line item
n The current charity SORP addresses the accounting for programme
related investments, requiring such assets to be presented in the
balance sheet as a sub-category of ‘investments’. If the underlying
asset is more akin to, say, an item of property, plant and equipment,
then it might be expected that going forward it would be presented
accordingly. Reference should be made to the most recent guidance
from the Charity Commission on investments (CC14)
n Social Housing Grant (SHG) is likely to be presented gross in the balance
sheet of RPs as a liability rather than netted against social housing
properties.
There may, however, be significant changes in presentation for entities
whose current balance sheet formats do not resemble the formats set out
in companies’ legislation.
FRS 102 permits performance to be presented in one of two ways. Firstly, it
allows the presentation of a single statement of comprehensive income
(SOCI). This is similar to the SOFA prepared by charities with ‘traditional’
items of income and expense presented in the top part of the SOFA, giving
rise to a net income figure. The bottom part is reserved for other gains and
losses (broadly speaking items that under current UK GAAP would be
presented in a separate statement of total recognised gains and losses).
These other gains and losses are referred to in FRS 102 as items of ‘other
comprehensive income’ which, when added on to the net income figure,
give an entity’s total comprehensive income for the period.
As an alternative to a single SOCI, an income statement can be presented
on its own with a separate statement containing the items of other
comprehensive income. This is effectively the same approach as is
currently applied by RPs and education institutions with separate
presentation of (i) an I&E and (ii) a statement of total recognised gains
and losses.
In the rest of this document, reference to ‘income statement’ means the
top part of the SOCI if the single statement approach is adopted, or the
separate income and expenditure account if the two statement approach
is adopted. Similarly, reference to ‘other comprehensive income’ means
the bottom part of the SOCI (single statement approach), or the separate
statement of other comprehensive income (two statement approach).
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
GENERAL PRESENTATION
As with the presentation requirements for the balance sheet, FRS 102
requires use of the formats set out in companies’ legislation irrespective of
whether the entity is legally constituted as a company. However, unlike
their balance sheet formats, the I&E formats used by not-for-profit entities,
and set out in SORPs, have a noticeably different ‘feel’ from the profit and
loss accounts presented by many companies. Indeed, the supplementary
material published with FRED 48 noted that one of potential impacts of the
proposals on a large charity (whether or not it is incorporated as a company)
is that it will need to review the current format of its primary statements to
ensure compliance with the formats specified in Company Law.
Arguably though, current formats would still be available for use on
transition to FRS 102 as companies’ legislation permits companies to adapt
the formats where appropriate, if required by the special nature of an
entity’s business. It might be possible, therefore, to argue that the majority
of I&Es presented by not-for-profit organisations are to a large extent
compliant with the formats in companies’ legislation. Although considered
separate from the I&E account, it remains a moot point whether transfers
between a charity's funds and reserves can be presented at the foot of a
single statement like the SOFA, or whether such movements need to be
presented as a separate primary statement.Those tasked with writing the
revised charity, housing and education SORPs are, no doubt, considering
primary statement presentation as part of their work.
ADDITIONAL LINE ITEMS AND EXCEPTIONAL ITEMS
As with current UK GAAP, FRS 102 permits presentation of additional line
items, headings and subtotals when such presentation is relevant to an
understanding of the entity’s financial performance. It does not use the term
‘exceptional item’, but if an item of income or expense is of such importance
to the users’ understanding of the financial statements it should be
presented separately and so the concept of an exceptional item does exist.
Although FRS 102 does not require disclosure of an operating surplus figure,
it does require that any entity choosing to present such a performance
measure should include debits such as ‘inventory write-downs and
restructuring and relocation expenses’ whether or not ‘they occur
irregularly or infrequently or are unusual in amount’. This differs from
current UK GAAP where FRS 3 Reporting Financial Performance specifically
requires three exceptional expenses to be presented after operating profit:
n profits or losses on the sale or termination of an operation
n costs of a fundamental reorganisation or restructuring having a
material effect on the nature and focus of the reporting entity's
operations
n profits or losses on the disposal of fixed assets.
The Charity Commission has recently issued guidance stating that a loss
arising from fraud does not constitute charitable application of funds. It
remains to be seen whether the revised charity SORP will address which
line item in the I&E account such losses should be included under FRS 102.
NOTE OF HISTORICAL COST PROFITS AND LOSSES
FRS 102 does not require presentation of a note of historical cost profits
and losses.
7
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Presentation
of gains and
losses
Choice of (i) a
single statement
of comprehensive
income or (ii) an
income statement
presented as a
standalone
statement with a
separate
statement of
other
comprehensive
income.
I&E presented
separately from
statement of
recognised gains
and losses, except
for a charity’s
SOFA which also
incorporates a
reconciliation of
funds.
Choice of (i) a
single statement
of comprehensive
income or (ii) an
income statement
presented as a
standalone
statement with a
separate
statement of
other
comprehensive
income.
Exceptional
items
All exceptional
items charged in
arriving at
operating surplus
/ (deficit).
Certain
exceptional items
must be charged
after operating
surplus / (deficit).
All exceptional
items charged in
arriving at
operating surplus
/ (deficit).
Note of
historical
cost profits
and losses
Not required.
Required.
Not required.
6. STATEMENT OF CHANGES IN EQUITY
AND STATEMENT OF INCOME AND
RETAINED EARNINGS
The term ‘equity’ is not really used by not-for-profit entities, but is
essentially the difference between an entity’s assets and liabilities and
therefore represents its funds or reserves. FRS 102 requires a statement of
changes in equity as a primary statement, with movements on each
component of equity (ie each fund or reserve) being shown separately for
both the current and prior period. Under current UK GAAP and the SORPs,
entities usually present a statement of movement on each fund in the
notes (for the current period only), with a single statement of the
movement in aggregate funds presented as either a primary statement or
in the notes in accordance with FRS 3 (current and prior period).
Where the changes in an entity’s reserves or funds arise only as a result of:
n profit or loss (ie income less expenditure) for the period, with no items
of other comprehensive income;
n dividends payable (unlikely to be relevant for not-for-profit entities);
or
n the effects of material prior period adjustments
then FRS 102 allows an entity to show a single statement of income and
retained earnings. This is the single statement of comprehensive income
referred to in section 5, extended further down the statement for these
three items to give the total change in net assets during the period.
8
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
If an entity makes transfers between funds and reserves in the period
without affecting aggregate net assets, FRS 102 would not seem to
permit a single statement of income and retained earnings. The same is
true when there are no transfers between reserves, only an allocation
of total comprehensive income to specific reserves. It is expected that
most not-for-profit entities would want to show this information
clearly and therefore choose to present a separate statement of
changes in their reserve and funds position. This is particularly true for
charities where total return accounting might apply in respect of their
endowment funds. FRS 102 makes no reference to designated funds,
which are only internal earmarking decisions common in some not-forprofit entities. However, it does not preclude their presentation in the
statement of financial position, or transfers between them being made.
SUMMARY
Issue
Presentation
of changes in
funds and
reserves
FRS 102
Presented
separately as a
primary statement
except in certain
circumstances
where it can be
appended to the
single statement
of comprehensive
income to form a
single Statement
of Income and
Retained Earnings.
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Presented as
either a primary
statement or in
notes, except for
charity SORP
where it forms
part of the SOFA.
Presented
separately as
a primary
statement.
REVISIONS MADE TO PROPOSALS IN FRED 48
FRS 102 contains some guidance on when it is permitted to net off
cash payments and receipts, namely when:
n They reflect the activities of the customer rather than the entity
(such as the acceptance and repayment of demand deposits by a
bank); or
n The cash flow turnover is quick, the amounts large and the
maturities short (such as the purchase and sale of investments).
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Categories of
cash flows
All cash flows
categorised as
operating,
investing or
financing
activities.
Potentially nine
separate cash
flow headings.
All cash flows
categorised as
operating,
investing or
financing
activities.
Definition of
cash
Includes cash
equivalents, ie
available in three
months without
penalty.
Only includes
cash available on
demand without
penalty.
Includes cash
equivalents, ie
available in three
months without
penalty.
Presentation
Presented on the
of cash flows
face of the cash
from operating flow statement.
activities
Reconciliation of
net operating
income to cash
flow from
operating
activities usually
presented in the
notes.
Presented on the
face of the cash
flow statement.
Cash flow
from
endowment
income
Presented as
financing cash
flows.
Presented as
operating cash
flows.
Reconciliations Not required.
of net debt
Required.
Not required.
Parent
company cash
flow
statement
No specific
exemption, but
practice has
developed such
that it is not
given.
Required.
7. STATEMENT OF CASH FLOWS
The format of the cash flow statement in FRS 102 is divided into only
three sections, with all cash flows being classified as relating to operating,
investing or financing activities. This contrasts with current UK GAAP
(FRS 1 Cash flow statements) where cash flows are allocated to potentially
nine separate sections of the cash flow statement. Other differences are:
n ‘cash’ for cash flow statement purposes prepared under UK GAAP
means those balances that are available on demand without penalty,
whereas the statement of cash flows prepared under FRS 102 is a
statement of movements in cash and cash equivalents (with deposits
accessible within a three month time-frame suggested as meeting the
definition of cash equivalents)
n the analysis of cash flows from operating activities are generally
presented on the face of the statement, rather than relegated to the
notes as often happens under current UK GAAP
n cash flows from endowment income recognised in the income
statement might be presented as operating cash flows under FRS 102
rather than cash flows from financing activities
n FRS 102 requires no reconciliations of net debt.
Presented as
operating cash
flows.
Not required
under reduced
disclosure
exemptions set
out in section 1.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
8. NOTES TO THE FINANCIAL STATEMENTS
(GENERAL REQUIREMENTS)
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
Volume of
disclosures in
consolidated
financial
statements
Potentially less
extensive than UK
GAAP, although
will still need to
give any additional
disclosures
required by
legislation and
regulators.
More extensive
Extensive
than FRS 102, less disclosure
extensive than
requirements.
IFRSs.
Operating
segments
Apply IFRS 8 if
have listed debt
or are in the
process of issuing
listed debt.
RPs must provide
breakdown of
operating results.
Apply IFRS 8 if
have listed debt or
are in the process
of issuing listed
debt.
Volume of
disclosures in
subsidiary
financial
statements
Reduced
disclosure
framework
available.
No reduced
disclosure
framework,
although certain
exemptions exist
in standards and
companies’
legislation.
N/A. Reduced
disclosure
framework is a UK
GAAP concept.
Disclosure of
key
assumptions
concerning
the future
Required.
Not explicitly
required.
Required.
This section of FRS 102 specifically requires disclosure of:
n judgements made by management in the process of applying the
entity’s accounting policies
n key assumptions concerning the future, and other key sources of
estimation uncertainty at the reporting date that have a significant
risk of causing material adjustments to the carrying amounts of assets
and liabilities.
Current UK GAAP (FRS 18 Accounting policies) only requires disclosure of
significant estimation techniques.
In addition to these general requirements each financial statement area
addressed by FRS 102 (see sections 9 to 35 below) requires certain
disclosures to be made. Of course all disclosure items are not going to be
relevant to any single entity (eg an entity without a defined benefit
pension scheme can ignore all disclosures relating to such schemes).
However, not-for-profit entities should still be cognisant of other
disclosure requirements imposed by the revised SORPs, legislation and
the following regulatory requirements, as these will still be needed in
annual financial statements:
n Charities - Charities (Accounts and Reports) Regulations 2008 and the
Charities Accounts (Scotland) Regulations 2006
n Registered Providers of Social Housing - Accounting Direction for
Private Registered Providers of Social Housing 2012
n Education Institutions - Accounts Directions issued by the SFA
and HEFCE.
In addition, as noted in Section 1 above, any entity that has listed debt or is
in the process of issuing debt must comply with IFRS 8 Operating Segments.
9
EU endorsed
IFRS
9. CONSOLIDATED AND SEPARATE
FINANCIAL STATEMENTS
ACCOUNTING FOR SUBSIDIARIES
The principles contained in FRS 102 concerning the accounting for
subsidiaries are very similar to those in current UK GAAP (FRS 2
Accounting for subsidiary undertakings) in terms of determining the
existence of control and parent-subsidiary relationships as well as the
actual consolidation accounting procedures to apply.
Consistent with the proposals contained in FRED 48, FRS 102 does not
contain any further specific guidance on the meaning of control within a
PBE context, and therefore any supplementary guidance would need to
be provided by the revised SORPs if thought necessary.
SEPARATE FINANCIAL STATEMENTS
If a parent entity prepares consolidated financial statements, FRS 102
does not require it to publish its own separate financial statements,
instead noting that the requirements for the presentation of separate
financial statements is set out in relevant legislation. The charity and
HE&FE SORPs follow the approach in companies’ legislation requiring
only the parent entity’s individual balance sheet to be presented provided
its result for the period is disclosed. RPs incorporated under the Industrial
and Provident Societies Acts are required to present a parent’s individual
accounts in full as well as its consolidated accounts. There is no indication
at present that this approach to presentation of separate financial
statements will change.
10
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINTLY
CONTROLLED ENTITIES
Under FRS 102 an entity may account in its separate financial statements
for interests in subsidiaries, associates and jointly controlled entities at:
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Parent
entity’s
financial
statements
No requirement to
present a parent
entity’s individual
accounts if
consolidated
accounts are
prepared, although
may continue to be
required by legislation
or regulators.
Usually required to
present information
in relation to the
parent (varies
depending on type
of entity).
No requirement to
present a parent
entity’s individual
accounts if
consolidated
accounts are
prepared, although
may continue to be
required by legislation
or regulators.
Accounting
for
investments
in
subsidiaries,
associates
and jointly
controlled
entities
(separate
financial
statements of
parent)
Choice of cost or fair
value. Where fair
value is chosen,
changes in fair value
are recognised as an
item of other
comprehensive
income or within
profit or loss. The
choice is to be
applied consistently
to all investments
within a particular
class.
Choice of cost or fair
value through
reserves. Revaluation
model applied on an
investment by
investment basis.
Fair value or cost
model applied
consistently to all
investments within a
particular class.
n cost
n fair value with changes recognised as an item of other comprehensive
income other than decreases in fair value below cost which must be
recognised in the income statement; or
n fair value with changes in fair value recognised in the income
statement.
The policy selected must be applied consistently to all investments in a single
class (subsidiaries, associates or jointly controlled entities). The accounting
for investments in associates and jointly controlled entities in consolidated
financial statements is addressed in sections 14 and 15 respectively.
REVISIONS MADE TO PROPOSALS IN FRED 48
FRS 102 contains additional guidance on accounting for the changes in
stake in another entity, dealing with situations where control is
retained, obtained or lost. FRED 48 was silent on the accounting for
changes in stake. Where the investor has control both before and after
an increase or decrease in stake, FRS 102 requires the minority interest
balance to be adjusted to reflect the revised proportion of net assets
they own, with any difference between consideration paid or received
adjusted in reserves. Although this treatment is consistent with full
IFRS it is different to current UK GAAP, which requires this difference
to be recorded as a profit or loss on disposal (in the case of a reduction
in stake) or an adjustment to goodwill (in the case of increased stake).
Under FRS 102, gains and losses on disposal of an interest are only
recognised if the size of the stake sold results in the investor losing
control such that the investee is no longer consolidated.
Goodwill will only arise when an investor takes an increased stake if,
as a result of the transaction, the investor obtains control of the
investee and therefore falls to be consolidated for the first time. In this
situation, FRS 102 is aligned with current UK GAAP.
Furthermore, FRS 102 now contains an exemption from consolidation
for any entity that is small and not ineligible under legislation. Under
the proposals in FRED 48, a small entity wishing to obtain an
exemption from consolidation would have had to have chosen to
apply the FRSSE under the new accounting framework.
10. ACCOUNTING POLICIES, ESTIMATES
AND ERRORS
This section of FRS 102 distinguishes the required accounting for changes
in accounting policies, changes in estimates made in previous periods and
restatements of prior period errors. FRS 102 requires a prior period
adjustment for any material prior period error. Current UK GAAP (FRS 3
Reporting financial performance) requires a prior period adjustment for
correction of fundamental errors where they ‘are of such significance as to
destroy the true and fair view and hence the validity of those financial
statements’. This is likely to increase the frequency of any errors found
having to be corrected by means of a prior period adjustment, as a
fundamental error is generally accepted as meaning an error of greater
significance than a material error. Revisions to estimates made in prior
periods, however, are not the same as errors and, as with UK GAAP, are
dealt with prospectively in the period the revision arises.
No significant areas of difference between current UK GAAP and FRS 102
have been identified with regard to revisions of accounting estimates or
changes in accounting policy. However, reference should be made to
section 35 below, which deals with accounting policy changes arising on
transition from current UK GAAP to FRS 102.
REVISIONS MADE TO PROPOSALS IN FRED 48
FRS 102 specifies that, although a change in accounting policy, a
decision to switch the basis of measurement of property, plant and
equipment (or intangible assets) from cost to fair value is to be dealt
with as a revaluation in the year of change rather than as a prior
period adjustment. This makes it less onerous for an entity to chose to
adopt a policy of revaluation for such assets and is in line with both
full IFRS and common practice under current UK GAAP
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
SUMMARY
Issue
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Adjust by means
of a prior period
adjustment if the
error is material.
Adjust by means
of a prior period
adjustment if the
error is
fundamental.
Adjust by means
of a prior period
adjustment if the
error is material.
Two years of No requirement.
comparatives
No requirement.
Required for
prior period
adjustments,
whether as the
result of a change
in accounting
policy or the
correction of a
material error.
Errors found
relating to
prior periods
FRS 102
11. BASIC FINANCIAL INSTRUMENTS
INTRODUCTION
The accounting for financial instruments is split over two sections:
n Section 11 dealing with basic financial instrument; and
n Section 12 dealing with other financial instrument issues.
Alternatively, FRS 102 permits an entity to use the full IFRS standards
dealing with financial instruments (IAS 39 Financial Instruments and its
replacement IFRS 9 from 2015) instead of the rules contained wholly
within Sections 11 and 12 of FRS 102. The main benefit of applying the full
IFRS standards is that an entity may find it is slightly less exposed to
having to account for financial assets and liabilities at fair value. The
downside is that the full IFRS standards are notoriously complex. Given
the fluidity of developments in accounting for financial instruments in full
IFRS, coupled with our expectation that most not-for-profit entities will
not choose to apply the accounting rules in IAS 39 and IFRS 9, we have
restricted our discussion to the rules in FRS 102.
Under Section 11, a basic financial instrument is defined, broadly, as:
n Cash
n Loans payable and receivable with fairly straightforward returns
(generally a fixed rate or a floating rate determined by reference to,
say, LIBOR rates). This would include trade payables and trade
receivables
n Investments in ordinary equity shares
n Commitments to make or receive a loan.
Accounting for most financial instruments under current UK GAAP has
developed by convention due to a general lack of guidance in accounting
standards and SORPs. However, those accounting conventions are not
always consistent with the rules on financial instruments in FRS 102. That
is not to say the accounting for financial instruments will necessarily
change dramatically on transition from current UK GAAP for all entities,
11
but the extent to which entities will be affected is going to be driven by
the types of financial instruments they have and the complexity of the
contracts they have entered into. However, typical areas where entities
may see a change from current practice is the accounting for:
n Investments in other entities
n loans granted at off-market rates of interest (both loans payable and
loans receivable) unless the entity meets the definition of a public
benefit entity
n trade debtors and related bad debt provisions
n disclosure
INVESTMENTS
The charity, HE&FE and housing SORPs take a different approach to the
accounting for investments. Both the charity and housing SORPs require
all investments to be measured at fair value. The HE&FE SORP adopts a
mixed cost and fair value measurement approach driven by whether the
investments are classified as current assets (cost) or fixed assets (fair
value if listed).
Changes in fair value are also treated differently. The charity SORP
requires changes in fair value (other than permanent diminutions in value)
to be shown in the ‘gains and losses on investments’ line in the bottom
part of the SOFA. The HE&FE and housing SORPs require fair value gains
and losses to be recognised in the statement of total recognised gains
and losses, except for falls in value below original cost, which are
recognised in the income statement. FRS 102 by contrast requires all
changes in the fair value of equity investments to be shown in the income
statement. Investments in all non-complex debt instruments, on the
other hand, are measured at amortised cost.
The treatment of investments that do not meet the definition of financial
instruments (eg certain program related investments and mixed motive
investments of charities) is likely to be driven by the nature of the
underlying assets. Those tasked with writing the revised charity SORP may
need to consider whether the guidance in CC14 issued by the Charity
Commission is consistent with the requirements of FRS 102.
CONCESSIONARY LOANS
Unless an entity meets the definition of a PBE, debt instruments (payable
and receivable) are initially measured at fair value. This would impact the
accounting for loans, including intragroup loans, where the interest rate
on inception is below the prevailing market rate of interest. It entails
discounting the cash flows under the loan arrangement at a market rate
of interest which gives rise to income (for loans payable) and expense (for
loans receivable) at the point the loan is made. Subsequently, the
prevailing market rate of interest on inception of the loan is imputed to
accrete the loan up to the amount ultimately payable or receivable on
settlement.
Entities that meet the definition of a PBE, or are a member of a PBE group,
are not required to follow this treatment for loans provided at off-market
rates (termed ‘concessionary loans’). Instead, as an alternative, they may
measure all such loans at the amounts borrowed or lent, subsequently
adjusted to reflect accrued interest payable or receivable (which would be
nil for an interest free loan). This is the same as current UK GAAP, save that
concessionary loans must be presented as a separate line-item on the face
of the balance sheet, with relevant information being disclosed in the
notes (eg interest rate payable and security for the loan).
12
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
BAD DEBT PROVISIONS
Under FRS 102, an entity must have objective evidence that a a debt is
impaired before it is provided against. Evidence would include known
financial difficulty of the debtor or significant breach of contractual terms,
such as not paying within the terms of any credit period given. What this
means in practice, however, is that it would not be possible to raise
general bad debt provisions against the whole portfolio of debtors. Any
general provisions could only be applied against the portfolio of debtors in
default based on past experience. This basis of bad debt provisioning may
be different to the basis applied under current UK GAAP.
OFFSETTING
Like current UK GAAP (FRS 25 Financial instruments: presentation), FRS
102 contains specific rules on when a financial asset and financial liability
may be offset, stating that it is only possible when the entity:
n currently has a legally enforceable right to set off the recognised
amounts; and
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Equity
investments
(other than
investments
in
subsidiaries,
associates
and joint
ventures)
Measured at fair
value with
changes in value
recognised in the
income
statement.
Changes in fair
value generally
not recognised in
I&E. HE&FE SORP
does not require
all investments to
be measured at
fair value.
Measured at fair
value with
changes in value
recognised in the
income statement
or reserves.
Investment
loans
Measured at
amortised cost.
Measured at fair
Measured at
value with
amortised cost or
changes in fair
fair value.
value generally
not recognised in
I&E. HE&FE SORP
does not require
all investments to
be measured at
fair value.
Concessionary
loans (ie loans
at below
market rates,
including
interest free
loans)
Choice for PBEs of
either (i) recognise
at the amount
borrowed or lent
with interest
charge reflecting
the rate charged;
or (ii) initially
recognise at fair
value with interest
imputed over the
term to
repayment.
Recognised at the
amount borrowed
or lent. Interest
charge reflects
the rate charged.
Initially recognise
at fair value with
market rate of
interest on
inception of the
loan imputed over
the term to
repayment.
Bad debt
provisioning
Provide only
when there is
objective
evidence of
impairment.
No specific rules.
Amount of
provision
determined by
expectation.
Provide only when
there is objective
evidence of
impairment.
Disclosure
To include
Limited disclosure Extensive
accounting
requirements.
disclosure
policies, carrying
requirements.
amount by
category, basis of
derecognising
financial assets,
collateral,
defaults and
breaches on
financial
liabilities, analysis
of gains and
losses on financial
instruments,
information
about fair value.
n intends either to settle on a net basis, or to realise the asset and settle
the liability simultaneously.
This makes it hard to offset amounts payable and receivable from the
same party, for example cash surpluses and overdrafts / loan balances.
This is true even when the balances are with the same bank and a master
netting arrangement is in place with interest only accruing on the net
amount. This is because, even in such arrangements, the second of the
above two conditions is unlikely to be met, particularly when considering
cash balances held by one group entity and overdrafts / loans held by
another. It is likely the consolidated balance sheet would, therefore,
need to reflect the cash and overdraft / loan balances on a gross basis.
DISCLOSURE
Entities will find that, generally, disclosure requirements are more
extensive under FRS 102, largely bcause there is very little requirement
for any financial instrument disclosures under current UK GAAP for
unlisted entities.
REVISIONS MADE TO PROPOSALS IN FRED 48
Under the proposals in FRED 48, complications would have arisen
where a concessionary loan is made by an entity that, although not
meeting the definition of a PBE in its own right, was a member of a
PBE group. It would have resulted in the non-PBE group entity having
to initially account for the loan at fair value and thereafter impute the
prevailing market rate of interest in its individual financial statements
even though on consolidation such accounting would have been
reversed. In FRS 102, however, the accounting for concessionary loans
applicable to PBEs may also be applied in the individual financial
statements of any entity that is a member of a PBE group.
Also, the proposals in FRED 48 did not contain the guidance set out
above for offsetting financial assets and liabilities.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
12. OTHER FINANCIAL INSTRUMENT
ISSUES
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Derivative
instruments
Measured at fair
value. Gains and
losses recognised
in income
statement unless
hedge accounting
applied, in which
case movements
in fair value are
recognised as an
item of other
comprehensive
income to the
extent effective.
Derivatives
generally
accounted for
synthetically by
assuming that the
derivative changes
the terms and
conditions of the
hedged contract.
Measured at fair
value. Gains and
losses recognised
in income
statement unless
hedge accounting
applied.
Hedge
accounting
Limited number
of scenarios in
which hedge
accounting is
permitted. In
addition,
documentation
must be put in
place at start of
hedge with an
expectation that
the hedging
relationship will
be effective.
Limited
requirements in
SSAP 20 dealing
with foreign
exchange hedges.
Detailed rules on
the circumstances
on which hedge
accounting can be
applied. In addition
to documenting
the hedge and
expecting the
hedging
relationship will be
effective, the
degree of hedge
effectiveness must
be tested on a
prospective and
retrospective basis.
Rules likely to be
revised in the near
future.
Embedded
derivatives
Existence
potentially results
in the entire
contract being
measured at fair
value with changes
in fair value
recognised in the
income statement.
Generally not
accounted for
separately from
the host contract.
No requirement
to measure the
entire contract at
fair value if they
are present.
Existence
potentially results
in the embedded
derivative having
to be accounted
for separately at
fair value.
Index-linked
debt
Unclear whether
these are to be
treated as basic
instruments (no
change from
current UK GAAP)
or non-basic
instruments
(measured at fair
value with
changes in fair
value recognised
in the income
statement).
Debt contract
recognised at
amortised cost,
with effect on
interest or capital
arising through
changes in
inflation reflected
in the year of
change.
Depends on facts
and circumstances
and judgements
made. Often
treated in same
way as UK GAAP,
although
sometimes the fair
value of the indexlinked component
required to be
accounted for
separately from the
host debt contract
as an ‘embedded
derivative’ at fair
value, with changes
in fair value of that
component
recognised in the
income statement.
DERIVATIVES AND HEDGE ACCOUNTING
Derivative instruments are not classified as ‘basic’ financial instruments
under FRS 102 and are therefore always measured at fair value in the
balance sheet. The approach known as ‘synthetic accounting’ used in UK
GAAP (where, say, a variable rate loan and a floating-to-fixed rate swap
are combined for accounting purposes and treated as a single fixed rate
loan) is not permitted. Instead the hedging instrument and hedged
contract must be accounted for separately. It is possible to achieve a
similar income statement effect under FRS 102 as is achieved under UK
GAAP (‘hedge accounting’), but it is necessary to adhere to certain
procedures and processes. In such circumstances the volatility arising
from changes in fair value of the derivative is dealt with as an item of
other comprehensive income rather than recognised in the income
statement.
Where hedge accounting is not applied, then all changes in the fair value
of derivatives are recognised in the income statement.
EMBEDDED DERIVATIVES
The existence of certain contract clauses that cause the cash flows of a
contract, including a debt, purchase or sale contract, to behave in part
like a derivative could also result in that contract failing to meet the
conditions needed to be classified as a basic financial instrument within
the scope of section 11. Although not a term used in FRS 102, these
clauses are sometimes referred to as ‘embedded derivatives’. Their
presence could result in the whole contract being subject to fair value
accounting, ie remeasured to fair value at each reporting date with
changes in fair value reported in the income statement. In addition, any
contract for the supply of goods and services that imposes risks on either
party to the contract that are not typical of such contracts might cause
that contract to be subject to fair value accounting.
Although most PBEs have probably not entered into contracts with
features that would result in the entire contract having to be measured at
fair value, auditors might still want to see evidence that organisations can
demonstrate this is the case for contracts in place.
INDEX-LINKED DEBT
One type of loan finance commonly taken out by RPs is index-linked
debt. To date, it has been thought that such loan contracts breach the
conditions for being treated as basic instruments and therefore fall to be
accounted for at fair value at each balance sheet date with changes in fair
value reported in the income statement. Indeed, this is what
supplementary guidance issued with the IFRS for SMEs (on which FRS 102
is based) indicates. However, more recently approved rules in IFRS 9
Financial Instruments (the full IFRS standard applicable from 1 January
2015) indicates that perhaps they can be considered as basic instruments
after all.
Similar considerations apply to an RP's index-linked homebuy loan
receivables.
It remains to be seen how this part of FRS 102 will be interpreted in
relation to index-linked instruments or whether the revised housing
SORP will set out a specific treatment. Clearly most RPs would not,
however, want such contracts to be accounted for at fair value.
13
14 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
SUMMARY
13. INVENTORY
As with the proposals in FRED 48, FRS 102 contains a requirement to
measure donated stock at fair value on receipt. However, this is caveated
by stating that such items should only be recognised if they can be
measured reliably. Furthermore, the concepts of materiality and
cost/benefit should be considered when deciding which donated items
should be recognised. It is likely, therefore, that most charities engaged in
retail operations will argue on either or both of these grounds for not
recognising unsold donated stock at the balance sheet date, with the
effect that there will be no change to current accounting practice.
However, when it comes to donated goods held for distribution as part of
a charity’s activities there may be a significant change. This is discussed
further in section 23 below.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Donated
goods held
for resale
Recognise if fair
value can be
reliably measured
and benefits of
recognising at fair
value outweigh
associated costs.
Not recognised,
with income
arising only on
sale of the goods
received.
Not addressed.
Donated
goods held
for
distribution
Recognise if fair
value can be
reliably measured
and benefits of
recognising at fair
value outweigh
associated costs.
Not recognised.
Not addressed.
14. INVESTMENTS IN ASSOCIATES
(CONSOLIDATED FINANCIAL
STATEMENTS)
The key area of difference identified is that under current UK GAAP (FRS 9
Associates and joint ventures) the share of associates’ losses must be
recognised in full, even if it results in the investment in associate being
presented as a net liability in the balance sheet. This contrasts with FRS
102 where the share of losses in excess of the cost of investment would
not be recognised unless the investor has a legal or constructive obligation
to make good those losses.
Sometimes a not-for-profit entity may have entered into arrangements
which enable it to exert significant influence over another entity (say
through representation on the board), but because of the nature of the
“investee” there isn't any equity stake taken, most likely because it may
be a charity or company limited by guarantee such that economic returns
do not attach to any equity instruments in issue.
The revised SORPs could usefully provide guidance on the accounting for
such entities over which significant influence is exerted, but where the
economic benefits (if any) from exerting that influence are generated
indirectly rather than directly through an underlying equity stake.
Issue
FRS 102
Current UK
GAAP and
SORPs
Share of
losses
No recognition of Share of all losses
share of losses in
recognised.
excess of cost of
investment except
if an obligation
exists to make
good those losses.
EU endorsed
IFRS
No recognition of
share of losses in
excess of cost of
investment except
if an obligation
exists to make
good those losses.
15. INVESTMENTS IN JOINT VENTURES
(CONSOLIDATED FINANCIAL
STATEMENTS)
Current UK GAAP (FRS 9 Associates and joint ventures) identifies two
types of joint venture activity. The first, joint ventures (JVs), are accounted
for using the gross equity method in an investor’s consolidated accounts.
The second type of arrangement identified by FRS 9 is a joint arrangement
that is not an entity (JANE). JANEs are distinguished from JVs in that the
former do not carry on a trade or business of their own, rather are more
like a cost- or risk-sharing means of carrying out a process in the
participants’ trades or businesses. The acronym JANE is arguably a
misnomer as some arrangements need to be accounted for as a JANE even
though a separate entity may have been legally constituted.
JANEs are typically found in property development activities of RPs and
shared activities in HEIs. FRS 9 requires an investor to account directly for
their own assets, liabilities and cash flows rather than a share of profits, as
this better reflects the substance of the arrangement. FRS 102, by
contrast, identifies three different types of joint venture arrangements:
jointly controlled entities (JCEs), jointly controlled operations (JCOs) and
jointly controlled assets (JCAs). The difference with current UK GAAP is
that anything constituted as a separate legal entity must be accounted for
as a JCE, even if the substance of the arrangement is such that it does not
carry on a trade or business of its own. Furthermore, JCEs are accounted
for under the equity method – the concept of gross equity accounting
does not exist in FRS 102.
The accounting requirements for JCOs and JCAs are similar to those for JANEs,
save that the classification as JCO or JCA is driven by the absence of a
separate legal entity rather than the absence of a trade or business distinct
from the venturers. As with the accounting for associates, current UK GAAP
requires the share of JVs’ losses in excess of cost to be recognised, even if it
results in a net liability in the balance sheet. This contrasts with FRS 102
where the share of JCEs’ losses in excess of cost would generally not be
recognised.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
SUMMARY
DEFINITION OF INVESTMENT PROPERTY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Types of
arrangement
Distinction made
between JCEs,
JCAs and JCOs.
Distinction made
between JVs and
JANEs.
Distinction made
between JCEs,
JCAs and JCOs
(periods beginning
on or before 31
December 2012)
and between joint
ventures and joint
operations
(periods beginning
on or after
1 January 2013).
Accounting
principle
Basis of
Accounting
Share of
losses
15
Classification of
JCA or JCO only
possible if the
arrangement does
not involve the
creation of a
separate legal
entity.
Classification
based on
substance of
arrangement.
Classification
based on legal
form (periods
beginning on or
before 31
December 2012)
and based on
substance of
arrangement
(periods beginning
on or after
1 January 2013).
Equity method for
JCEs; account
directly for
underlying
transactions of
JCOs and JCAs.
Gross equity
method for JVs;
account directly
for underlying
transactions of
JANEs.
Pre 2013:
proportional
consolidation or
equity method for
JCEs; account
directly for
underlying
transactions of
JCOs and JCAs.
Post 2013:
distinguishes
between joint
ventures (equity
account) and joint
operations
(account directly
for underlying
transactions).
No recognition of Share of all losses
JCEs’ share of
recognised.
losses in excess of
cost of
investment.
No recognition of
JCEs’ (pre 2013) or
JVs' (post 2013)
share of losses in
excess of cost of
investment.
16. INVESTMENT PROPERTY
MEASUREMENT BASIS
As with UK GAAP (SSAP 19 Accounting for investment properties),
investment properties are measured at fair value under FRS 102. However
an option to account for investment property at depreciated cost is also
available if revaluation would entail undue cost or effort. It remains to be
seen how ‘undue cost or effort’ will be interpreted and, therefore,
whether many entities will avail themselves of this option.
The development of the past housing SORPs involved considerable
debate over whether social housing properties should be classified as
investment property under SSAP 19 or owner-occupied property under
FRS 15 Tangible fixed assets. The conclusion reached was the latter on the
basis that the primary purpose of the properties is the provision of social
housing rather than to earn rentals. FRS 102 similarly proposes that
properties held for the primary provision of social benefits will be
accounted for as owner-occupied, rather than as investment, property.
While this may come as a relief to those who would not have wanted to
incur the expense associated with annual revaluations of investment
property, there are perhaps two other key considerations:
n Given that RPs’ new lettings and re-lets could result in up to 80% of
the full market rent being charged, it becomes less clear that the
primary purpose of all social housing properties owned by RPs is the
provision of social benefits. Therefore, for some properties at least, the
debate may still be open as to whether they should be accounted for
as investment property. This is an issue on which the replacement
housing SORP could usefully give further clarification
n There are some very significant changes being considered by the IASB to
the leasing standard in full IFRS which would be relevant to any RP
choosing (or able) to apply that accounting framework. How the
accounting for social housing properties would be affected in their
capcacity as lessors of property, plant and equipment remains unclear.
Whether any changes to full IFRS on the accounting for leases by lessors
is incorporated into FRS 102 in the future similarly remains unclear.
PROPERTIES RENTED TO OTHER MEMBERS OF THE SAME GROUP
SSAP 19 specifically precludes properties rented to other members of the
same group from being accounted for as investment property. The
definition in FRS 102 contains no such exception, resulting in properties
rented to other group members having to be accounted for as investment
property in the individual accounts of the entity concerned. This might be
one area in which it would be valid to claim that applying fair value causes
undue cost or effort. This is because any such valuation movements
would have to be reversed on consolidation given that from a
consolidated perspective the property would be classified as owner
occupied to which a policy of cost must be applied.
ACCOUNTING FOR CHANGES IN FAIR VALUE
Where investment properties are measured at fair value, FRS 102 requires
gains and losses to be reported in the income statement. Charities
currently present such gains and losses in the bottom part of the SOFA
and other not-for-profit entities recognise them in the statement of total
recognised gains and losses.
LEASEHOLD INVESTMENT PROPERTY
If leasehold property is held as investment property, under UK GAAP it is
often valued on the basis of net rentals receivable. FRS 102 requires gross
presentation with the value of the leasehold interest being presented as
an asset and revalued each year, with the liability to pay rent on the head
lease accounted for separately as a finance lease obligation measured at
amortised cost.
16
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
MIXED USE PROPERTIES
FRS 102 requires an entity to account for a property that is both rented to
others (ie investment property) and occupied for own purposes to be
accounted for separately. Under current UK GAAP most entities would
account for the property as either investment property or owner
occupied (but not both) based on the preponderance of use. This is
considered further in Section 17 below.
SUMMARY
Issue
FRS 102
Classification Not classified as
of social
investment
housing
property.
properties
Changes in
fair value
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Not classified as
investment
property.
Not addressed.
Recognised in the Recognised in
Recognised in the
income statement. statement of total income statement.
recognised gains
and losses (or
bottom half of
SOFA).
FRS 102, however, requires mixed use properties to be split into their
respective components and accounted for separately. The only basis for not
doing such a split, other than materiality, is that to attempt a revaluation of
the portion held for investment would give rise to ‘undue cost or effort’.
REVALUATION MODEL
As with FRS 15 Tangible fixed assets, FRS 102 permits classes of tangible
fixed assets to be measured at valuation or depreciated cost. The
guidance in FRS 102 on the revaluation model is much less extensive than
that contained in FRS 15 with the key differences being it:
n sets no minimum requirements as to the frequency of revaluation,
only that revaluations should be undertaken sufficiently frequently to
ensure the carrying amount does not differ materially from the
balance sheet date fair value. FRS 15, by contrast, requires a valuation
every five years with an interim valuation undertaken in the third year
of every five year cycle
n requires valuations to be on the basis of fair value, rather than the FRS
15 bases of existing use value (EUV) and depreciated replacement cost
for non-specialised properties and specialised properties respectively.
Fair value is defined by reference to what price a willing buyer would
pay in an orderly market transaction.
HERITAGE ASSETS
Properties
rented to
other group
entities
Subject to costbenefit
considerations,
accounted for as
investment
property in
individual
accounts and
property, plant
and equipment in
group accounts.
Classified as
owner-occupied
property in both
the individual and
group accounts.
Accounted for as
investment
property in
individual
accounts and
property, plant
and equipment in
group accounts.
The requirements of FRS 102 are derived from the requirements of current
UK GAAP (FRS 30 Heritage assets). FRS 102 is clear that an item is only a
heritage asset if it is maintained principally for its contribution to
knowledge and culture. Historic buildings that are used, for example, by
education establishments as part of their operations would not be
heritage assets. Similarly, works of art that are used to adorn walls for
aesthetic appearance only would not be classed as heritage assets. An
entity may, of course, consider it appropriate to provide additional
information about such assets similar to that which would be provided for
heritage assets.
Leasehold
investment
property
Account
separately for
gross value of
property interest
and obligations
payable on the
head lease.
Usually account
Account
for the net
separately for
leasehold interest. gross value of
property interest
and obligations
payable on the
head lease.
Consequently, no significant difference has been identified in the
accounting for heritage assets between current UK GAAP and FRS 102,
save that the latter requires separate presentation of heritage assets on
the face of the balance sheet. However, the charity SORP also relates the
classification of an asset as a heritage asset back to an entity’s objects.
FRS 102 does not include such a requirement, and so it will be interesting
to see if this link to an entity's objects is retained in the revised charity
SORP.
17. PROPERTY, PLANT AND EQUIPMENT
MIXED USE PROPERTIES
Some entities own property that is partially occupied by the organisation
for its own purposes and partially rented to third parties. Under current
UK GAAP some entities apportion the property between an investment
element and a non-investment element, accounting for the former as
investment property and the latter as a tangible fixed asset. Indeed, the
charity SORP requires this treatment if the components are clearly
identifiable. The housing SORP is silent on the matter, with some
choosing to account for properties as owner-occupied property even
though there may be an investment property element (such as ground
floor shops, doctor surgeries and community centres) on the basis that
the property is predominantly used for social housing purposes and
needed in providing amenities to the community served. The HE&FE
SORP is similarly silent on the issue.
LIBRARIES
Some not-for-profit entities, most obviously education institutions,
generally do not recognise an asset for libraries of books and periodicals.
In jurisdictions which have already applied IFRS, some entities do account
for such assets. Arguably, such items meet the definition of an asset
under FRS 102 and, if material in aggregate, should be recognised. In
many cases, considerable time and resource may be needed to obtain the
depreciated cost of libraries. However, it may be possible, by analogy to
look to the accounting for donated goods (see section 13), which does
not require recognition of such assets when the cost of preparing the
information outweighs the benefits to be received. The accounting for
libraries may be an area which will be addressed in the revised HE&FE
SORP.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
STOCK TRANSFERS
SUMMARY
RPs occasionally exchange housing stock with each other, often to ensure
the location of the properties owned match with their respective
geographical area of expertise.
There is little guidance at the moment on how to account for such
transactions, and so this may be something the revised housing SORP
could consider. There are probably 2 key considerations:
n Firstly, the amount at which the properties transferred in should be
recognised. On the one hand, on a historical cost basis, arguably their
cost is the same as the net book value of the properties transferred
out. By contrast, and perhaps more in line with the accounting for
other exchange transactions covered in FRS 102, their deemed cost
should be their fair value on receipt. This would give rise to a profit or
loss based on the difference between the fair value of the properties
received and the net book value of the properties transferred out.
n Secondly, how to deal with SHG attaching to such properties,
specifically whether it is also transferred between the RPs and
separately recognised as SHG in the recipient RP. This is more of a legal
issue governed by the original award of the grant and/or the specific
terms of the exchange contract than an accounting one, and the
accounting should simply follow the underlying legal analysis.
SUMMARY
Issue
FRS 102
17
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Revaluation
basis
Fair value.
Existing use value. Fair value.
Mixed use
property
Account for owneroccupied and
investment
portions
separately.
Split accounting
permitted, or
alternatively
account for entire
property based on
the predominance
of use.
Account for owneroccupied and
investment
portions
separately.
Heritage
assets
Presented as a
separate class of
asset on the face of
the balance sheet.
Subsumed within
tangible fixed
assets on the face
of the balance
sheet.
Accounting for
heritage assets not
addressed.
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS)
Intangibles
identified on
acquisitions
and insubstance
gifts
Initially
recognised at fair
value whether or
not recognised in
the acquiree’s
balance sheet.
Thereafter
amortised over
estimated useful
economic life.
Usually subsumed
within goodwill.
Initially recognised
at fair value
whether or not
recognised in the
acquiree’s balance
sheet. Thereafter
amortised over
estimated useful
economic life.
Useful
economic
lives
Presumed to be
5 years if they
cannot otherwise
be reliably
estimated.
Intangible assets
with indefinite
useful economic
lives or lives in
excess of 20 years
are subject to
impairment
testing.
Intangible assets
with indefinite
useful economic
lives are subject to
impairment
testing.
19. BUSINESS COMBINATIONS
AND GOODWILL
FRS 102 identifies three types of combination that a PBE may enter into:
n Acquisitions
n Combinations which are in substance a gift
n Mergers
For any entity that does not meet the definition of a PBE, business
combinations must be accounted for as acquisitions unless the combining
entities are under common control, such as group reorganisation
situations.
ACQUISITIONS
18. INTANGIBLE ASSETS
Broadly, the accounting for intangible assets under FRS 102 is the same
as current UK GAAP. Notable differences are:
n Certain combinations of PBEs could result in the recognition of
intangible assets separate from goodwill in the financial statements of
the acquirer. These intangibles would then be amortised over their
estimated useful economic lives. This is discussed further in Section 19
below.
n Where they cannot be reliably estimated, intangible assets are
presumed to have a useful economic life of 5 years
The acquisition method of accounting will apply to situations where one
entity has taken over another in an arm’s length transaction for valuable
consideration. Such transactions do occur in the not-for profit sector and
require the acquiree’s identifiable assets and liabilities to be subject to a
fair value exercise. Under the acquisition method the acquiree’s income
and expenditure is only incorporated into the acquirer’s consolidated
income statement from the date of the combination.
The excess of any consideration paid over the net fair value of the
identifiable assets, liabilities and contingent liabilities acquired is
classified as goodwill and is depreciated over its useful economic life.
If an entity is unable to make a reliable estimate of its useful economic
life, it is amortised over five years.
Although not recognised in their balance sheet, much of an acquiree’s
value might relate to intangible assets (brand names, logos, copyrights,
inherent contract value, etc).When accounting for an acquisition under
FRS 102, it is likely that more of an acquiree’s intangibles would be
recognised on consolidation than is the case under current UK GAAP.
There are three reasons for this:
n Current UK GAAP only permits intangibles to be recognised where
they are separable (ie can be disposed of separately without disposing
of the acquired entity’s business). FRS 102 contains no such restriction
18
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
n FRS 102 asserts that ‘An intangible asset acquired in a business
combination is normally recognised as an asset because its fair value
can be measured with sufficient reliability’. By contrast, current UK
GAAP implies that only entities regularly engaged in the purchase of
unique intangibles are likely to be able to measure such intangibles
with sufficient reliability
n Current UK GAAP does not permit the amount of any negative
goodwill arising on acquisition to be increased through the recognition
of intangible assets. FRS 102, however, contains no such restriction.
If an intangible asset has been identified then, assuming it can be
measured reliably, it should be recognised on acquisition at fair value
even if it creates or increases negative goodwill.
It could be a mistake to assume that in an entity combination involving
PBEs there is no value to recognise in relation to the intangibles of the
entity identified as the acquiree (in an acquisition) or the donor entity (an
in-substance gift – see opposite). A decision to mothball intangibles such
as brands and logos post combination would give rise to a post
combination impairment of such assets rather than attributing them with
a fair value of nil on the date of acquisition.
Due to the requirement to recognise various intangible assets separately,
the amount attributable to goodwill generally represents the value of the
acquiree's assembled workforce and expected synergistic benefits arising
from the acquisition. These items do not meet the criteria for recognition
as separate intangible assets under FRS 102.
Under current UK GAAP (FRS 10 Goodwill and intangible assets) and
FRS 102, negative goodwill up to the fair value of the non-monetary
assets acquired is recognised in the income statement in the periods in
which the non-monetary assets are recovered, whether through
depreciation or sale. Any negative goodwill in excess of the fair values of
the non-monetary assets acquired is recognised in the income statement
in the periods expected to benefit. Full IFRS, by contrast, does not permit
negative goodwill to be carried forward in the balance sheet. Rather it
requires the immediate recognition of a gain in the income statement.
MERGERS
Under FRS 102, only a combination involving PBEs can be accounted for
using the merger method of accounting. For a combination to be
classified as a merger, all of the following criteria must be met:
n no party to the combination is portrayed as either acquirer or
acquiree, either by its own board or management or by that of another
party to the combination
n there is no significant change to the class of beneficiaries of the
combining entities or the benefits provided as a result of the
combination
n all parties to the combination, as represented by the members of the
board, participate in establishing the management structure of the
combined entity and in selecting the management personnel, and such
decisions are made on the basis of a consensus between the parties to
the combination rather than purely by exercise of voting rights.
The criteria in FRS 6 Acquisitions and mergers concerning the relative
sizes of the combining entities has not been carried forward into FRS 102
and has instead been replaced by an assessment of whether there has
been a significant change to the beneficiaries of the combining entities.
The accounting for mergers is unchanged from that set out in FRS 6 and
requires book values (as adjusted to ensure uniformity of accounting
policies) rather than fair values of the combining entities be used in
preparing the enlarged group’s financial statements.
Comparatives are presented as if the two combining entities had always
formed a single reporting entity, although FRS 102 contains an explicit
requirement that such comparatives be headed up as ‘combined’ on the
grounds that the merged reporting entity did not exist in the comparative
period and that the comparative numbers reported are a combination of
previously reported figures for the merging entities.
COMBINATIONS WHICH ARE IN SUBSTANCE GIFTS
Some combinations do not meet the conditions to be classified as a
merger, and at the same time acquisition accounting might also not be
appropriate due to the absence of any consideration paid in effecting the
combination. Where this is the case, the combination might in substance
be indistinguishable from a gift by one entity of its assets to another. In
such combinations FRS 102 requires the receiving entity to measure the
assets received (including intangibles if they can be measured reliably)
and liabilities assumed at their fair value, with the net amount recognised
as a gain in the income statement. The housing SORP Update 2010
introduced a similar treatment for accounting periods beginning on or
after 1 April 2011 as did the charity SORP Information Sheet 2.
FRS 102 notes that except for treating the fair value of assets received as a
gift, all other aspects of the transaction should be accounted for as an
acquisition. Consequently it would seem that the receiving entity should
similarly recognise all intangible and heritage assets received in such
combinations at fair value, irrespective of whether such assets were
recognised in the balance sheet of the donor entity.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
20. LEASES
SUMMARY
Issue
19
FRS 102
Direct costs
Capitalised.
of acquisition
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Capitalised.
Expensed.
Under FRS 102 the broad approach to classifying leases as finance or
operating is the same as current UK GAAP (SSAP 21 Accounting for leases
and hire purchase contracts). There are, however, some areas of potential
difference in the detail that could affect some not-for-profit entities.
LEASEHOLD PREMIUMS PAID
Goodwill
Unless it can be
Default life of 20
estimated reliably, years generally
useful economic
used.
life is limited to
5 years.
Goodwill not
amortised, rather
subject to
mandatory annual
impairment review.
Negative
goodwill
Negative goodwill
deferred in
balance sheet and
released to
income statement
over appropriate
periods.
Credited
immediately to
income statement
in full.
Negative goodwill
deferred in
balance sheet and
released to
income statement
over appropriate
periods. Prior to
housing SORP
Update 2010 RPs
recognised
negative goodwill
in reserves,
although for
periods after
1 April 2011
generally credited
in full direct to I&E
if a non-exchange
transaction.
OPERATING LEASE INCENTIVES
FRS 102 requires lease incentives to be spread over the lease term, which
will generally be to the first break clause (if any) unless it is reasonably
certain at inception of the lease that the break clause will not be exercised.
This contrasts with current UK GAAP, which spreads lease incentives over
the period to the first market rent review. Therefore, only when the first
rent review coincides with the first break clause in a lease will there
generally be no difference between current UK GAAP and FRS 102.
This change could be significant for any PBE that rents a large number of
commercial properties, eg charities with retail operations.
ARRANGEMENTS THAT CONTAIN A LEASE
Merger
accounting
Permitted for PBEs Permitted.
and common
control
transactions.
Not permitted.
Combination
that is in
substance
a gift
Identified and
permitted.
Not addressed.
Intangibles
identified on
acquisitions
and
combinations
that are in
substance
gifts
Initially recognised Usually subsumed
at fair value
within goodwill.
whether or not
recognised in the
acquiree’s balance
sheet. Thereafter
amortised over
estimated useful
economic life (or
over 5 years if the
useful economic
life cannot be
reliably estimated).
Identified and
permitted by
Housing SORP
Update 2010 and
Charity SORP
Information
Sheet 2.
Under current UK GAAP leasehold premiums are normally presented as
tangible fixed assets (namely the underlying property interest acquired)
and depreciated over the lease term. On transition to full IFRS many listed
entities presented such assets as prepayments of rent and so it might be
expected that a similar approach will be taken under FRS 102. This also
has the effect of reclassifying some of the leasehold premium balance as
a current asset, ie the portion that will be expensed in the next
accounting period.
Initially recognised
at fair value
whether or not
recognised in the
acquiree’s balance
sheet. Thereafter
amortised over
estimated useful
economic life.
FRS 102 contains guidance borrowed from full IFRS on whether certain
arrangements, although not in the legal form of a lease, nonetheless
convey the rights to use of an asset in return for payments in the same
way as a lease. Typically, they may be found in some outsourcing
arrangements. The payments made and the length of the contract mean
that assets used to service a contract by a supplier are to all intents and
purposes transferred to the customer as if they were leased, only as part
of a much wider service contract. In such circumstances it might be
necessary for lease liabilities and leased assets to be recognised on
inception of the arrangement, with judgement needed to be applied to
determine how much of the overall contract payment is in substance
lease payments.
Types of arrangements this may affect are catering and IT contracts
whereby the contract price covers the cost of specific equipment installed
by the third party supplier to provide the contracted services.
DISCLOSURE
For lessees FRS 102 requires the total future minimum lease
commitments to be disclosed, analysed by when the leases expire. By
contrast, current UK GAAP requires disclosure of the annual lease
commitment, analysed by when the lease expires. In this respect, FRS 102
provides information on the total off-balance sheet finance obtained
through operating leases as opposed to the approach in current UK GAAP
of focussing on the future annual expense and cash outflow.
20 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
Entities may also find that they are caught by disclosures in their capacity
as lessor, which are more extensive than are required under current UK
GAAP. In addition to a general description of significant leasing
arrangements FRS 102 requires a maturity analysis of the total future
minimum lease payments receivable to be disclosed, effectively the equal
and opposite disclosure that lessees must provide. This could affect RPs in
particular, where there is a minimum future rental due under noncancellable tenancy agreements.
REVISIONS MADE TO PROPOSALS IN FRED 48
FRS 102 contains the requirements outlined above for operating lease
incentives and arrangements that contain a lease. FRED 48 was silent
on these matters.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Leasehold
premiums
paid
Leasehold
premiums paid
likely to be
classified as
prepayments.
Leasehold
premiums paid
generally
classified as a
property asset.
Leasehold
premiums paid
classified as
prepayments.
Spread over the
lease term.
Spread over the
Spread over the
period to first rent lease term.
review.
Lease
incentives
Arrangements Potential need to Not addressed.
that contain account for leases
a lease
embedded into
other contracts.
Potential need to
account for leases
embedded into
other contracts.
Disclosure of
operating
lease
commitments
Disclosure
required of the
total future
minimum lease
commitment.
Disclosure
required of the
annual lease
commitment.
Disclosure
required of the
total future
minimum lease
commitment.
Disclosure of
operating
lease
receivables
Disclosure
required of the
total future
minimum lease
receivable.
Disclosure of
aggregate rentals
receivable in the
period.
Disclosure
required of the
total future
minimum lease
receivable.
21. PROVISIONS AND CONTINGENCIES
GENERAL
The general principles in FRS 102 for the accounting for provisions and
contingencies are very similar to UK GAAP (FRS 12 Provisions, contingent
liabilities and assets) and therefore one might not expect many changes
in this area.
FUNDING COMMITMENTS
FRS 102 contains separate accounting rules dealing with funding
commitments. The term ‘funding commitment’ is not defined, but applies
when an entity has committed to provide resources (except for loan
commitments) to other entities and would therefore seem to be directly
applicable to grant-making entities. ‘Entity’ as used in the context of the
recipient would seem to include individuals. FRS 102 notes that funding
commitments will only be recognised as a liability when:
n the definition and recognition criteria for a liability have been satisfied;
n the obligation (which may be a constructive obligation) is such that
the entity cannot realistically withdraw from it; and
n the entitlement of the other party to the resources does not depend
on the satisfaction of performance-related conditions (as defined).
Commitments that are subject to performance-related conditions (see
section 23) would only be recognised as those conditions are satisfied. It
is noted in this context that a restriction on the manner in which funds
are to be spent does not constitute a performance-related condition.
Therefore the existence of restrictions would not preclude recognition of
a liability. However, in order to recognise a liability it is necessary to have
communicated that commitment to the intended recipient.
A general statement of intent to provide resources to certain classes of
beneficiaries in accordance with its objectives does not give rise to the
recognition of a funding liability. Similarly, a promise to provide cash
conditional on the receipt of some future income does not necessarily
give rise to a liability. Some entities may have entered into commitments
that are in excess of available funds such that recognition of the
commitment would give rise to overall net liabilities. In such situations it
seems clear that the ability to honour such commitments are in turn
dependent on future income and should, therefore, not be recognised.
In addition, FRS 102 makes it clear that the recognition of a funding
commitment will generally give rise to an associated expense. Therefore
it is not expected that the debit entry would be accounted for as an asset
(such as a prepayment) on the grounds that the benefit to the grantor, or
the recipient, accrues in a future period. It will be interesting to see if any
of the revised SORPs identify any circumstances when recognition of a
funding commitment would not give rise to an expense.
REVISIONS MADE TO PROPOSALS IN FRED 48
Due to the way in which performance conditions and restrictions have
been re-defined in FRS 102, the proposed accounting for funding
commitments has been much improved. It has also been clarified that
the recognition of a funding liability will usually give rise to an
associated expense as opposed to some other asset to be expensed in
future periods. There would now appear to be little difference between
FRS 102 and current UK GAAP.
In addition, the accounting for financial guarantees provided by most
entities has been brought within the scope of the Section 21 as
opposed to being accounted for as financial instruments within the
scope of Sections 11 and 12. This makes the accounting much simpler
than it might otherwise have been.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
21
22. LIABILITIES AND EQUITY
ENDOWMENTS
No significant areas of difference in the accounting for liabilities and
equity under current UK GAAP as applied by PBEs have been identified.
The accounting by education institutions for endowments looks likely to
undergo a change. The HE&FE SORP requires institutions to categorise
donations as either income or endowments. Donations classified as
income are recognised in the I&E account, whereas donations classified
as endowments are recognised in the statement of total recognised gains
and losses. It is difficult to see how it would be possible under FRS 102 to
classify the receipt of donations as an item of other comprehensive
income, rather it would need to be presented within the income
statement when it qualifies to be recognised.
23. REVENUE
The accounting for revenue from commercial activities is unlikely to be
affected on transition to FRS 102. However, it does include specific
guidance for PBEs on the accounting for incoming resources from nonexchange transactions that will need to be considered.
NON-EXCHANGE TRANSACTIONS
A non-exchange transaction is defined as ‘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.’ Although defined in the
context of both income and expenditure, FRS 102 only provides
accounting guidance in respect of income from such transactions,
identifying donations (of cash, goods or services) and legacies as a nonexhaustive list of examples. The accounting for non-exchange
transactions would also apply to grant income received from parties
other than government (see Section 24 below).
INCOME FROM NON-EXCHANGE TRANSACTIONS SUBJECT TO
PERFORMANCE CONDITIONS
Income is not recognised from non-exchange transactions until
performance-related conditions have been met, with a performancerelated condition defined as a 'condition that requires the performance of
a particular level of service or units of output to be delivered, with
payment of, or entitlement to, the resources conditional on that
performance.' This is the same definition as used in conjunction with the
accounting requirements for funding commitments (see Section 21
above), arguably a non-exchange transaction on the expenditure side
although not specifically referred to as such.
INCOME FROM NON-EXCHANGE TRANSACTIONS SUBJECT
TO RESTRICTIONS
The guidance on incoming resources from non-exchange transactions also
addresses the accounting for income subject to a 'restriction', which is
defined as ‘a requirement that limits or directs the purpose for which a
resource may be used that does not meet the definition of a
performance-related condition.'
The existence of restrictions attaching to incoming resources does not
prohibit income being recognised when the resource is receivable.
Although this is consistent with the charity SORP, other not-for-profit
entities may see an acceleration of revenue recognition. For example, a
donation to a university for the construction of a new sports hall would not
be recognised as income to match with the period the sports hall is either
built or depreciated. This is because the requirement to build a sports hall
would only constitute a restriction and not a performance-related
condition. This analysis is, however, subject to the income not being
classified as a government grant (see section 24) for which a policy of
matching income with expenditure is still permitted by FRS 102.
Furthermore, endowments that are subject to restrictions would be
recognised in the income statement in full once entitlement is
established and receipt is probable. This would be the case even if the
endowment is to be spent on the purchase of a long-term fixed asset,
such as an item of property, plant or equipment.
DONATED GOODS
FRS 102 specifies that income from non-exchange transactions must only
be recognised when the resource received can be measured reliably,
taking into account whether the benefits to recognise the resource
outweigh the costs. It notes that the most common example is that of
high volume, low value second-hand goods donated for sale. In such
circumstances the income will be recognised when sold, as is commonly
the case under current UK GAAP. However, FRS 102 does not prohibit an
entity from undertaking such a valuation exercise and recognising an
asset for donated goods accordingly.
Where goods are donated for charitable use (eg food aid for onward
distribution) rather than specifically for sale, such assets would also be
required to be recognised at fair value subject to being capable of reliable
measurement and the benefits of recognition outweighing the associated
cost. Where the assets are subject to performance conditions , then it
would seem necessary to recognise both the asset and deferred income.
The difficulty comes in determining what the entity would otherwise have
purchased. Furthermore, it would appear that FRS 102 requires
recognition at the fair value of the items received, not the fair value of the
goods which would otherwise have been bought had they not been
donated. Such accounting would represent a significant change from
current UK GAAP, which would only reflect income and expense at the
point the donated goods were transferred for the use of the intended
beneficiaries measured at the deemed value to the entity.
DONATED SERVICES AND VOLUNTEER TIME
FRS 102 requires the recognition of donated services if their value can be
reasonably quantified. It further states that donated services that can be
reasonably quantified include facilities such as office accommodation,
services provided as part of a trade or profession and services that would
otherwise have been purchased by the entity had they not been donated.
As the current charity SORP contains similar requirements there is
unlikely to be a change in the accounting for donated services.
FRS 102 also states that ‘it is expected that contributions made by
volunteers cannot be reasonably quantified, therefore these services
shall not be recognised’. As with the current charity SORP
requirements, it might be expected that volunteer time will not be
recognised as a result of this guidance. However, the wording used is
arguably not categorical in prohibiting recognition of volunteer time. It
will be interesting to see whether any entity will argue that volunteer
time can be reliably measured and therefore recognise it as income in
the financial statements, or whether any of the revised SORPs will be
more explicit in prohibiting the recognition of volunteer services.
22 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
24. GOVERNMENT GRANTS
LEGACIES
Under FRS 102 a legacy is recognised when it is probable that the legacy
will be received and its value can be measured with sufficient reliability.
It states that this will usually be the case following probate once the
executor of the estate has established there will be sufficient funds to pay
the legacy. It further states that evidence the executor has determined a
payment can be made may arise on agreement of the estate’s accounts or
notification that payment will be made. Of course, an executor must
produce a statement of account in order to obtain probate (at least in the
UK) and so arguably it is not entirely clear how this links in to the
principle of recognising the income when it is probable it will be received.
In many cases there may be very little doubt as to either the legitimacy of
a will or the sufficiency of funds in an estate to pay a legacy on the death
of a legator. Arguably, therefore, the legacy should be recognised closer
to death in such circumstances because receipt is probable, albeit not
immediately receivable due to the probate process.
The current charity SORP requires legacies to be recognised when the
income is reasonably certain, which appears to impute a higher threshold
for income / asset recognition than contained in the principles of FRS 102.
It will therefore be interesting to see whether the revised SORP is updated
in any way for legacy income recognition or provides additional, more
specific guidance, on the appropriate timing of recognising income from
legacies.
REVISIONS MADE TO PROPOSALS IN FRED 48
Revisions have been made to the definitions of both 'performancerelated condition' and 'restrictions' that could significantly impact not
only the timing of recognition compared to the proposals in FRED 48,
but also compared with current UK GAAP for some entities.
SUMMARY
DISTINCTION BETWEEN GRANTS AND NON-EXCHANGE
TRANSACTIONS
A government grant is defined as ‘assistance by government in the form
of transfers of resources to an entity in return for past or future
compliance with certain conditions relating to the operating activities of
the entity. Government refers to government, government agencies and
similar bodies whether local, national or international.’ This would appear
to include bodies such as the United Nations, European Union, and the
Homes and Communities Agency.
Grants are accounted for under one of two models with the chosen model
applied to all grants as an accounting policy choice:
n the performance model, whereby income is recorded as performance
conditions are met
n the accrual model, which requires the grant to be classified as either
relating to revenue expenditure or asset expenditure. Grants relating
to revenue expenditure are recognised in income on a systematic basis
over the periods in which the entity recognises the related costs for
which the grant is intended to compensate. Grants relating to assets
are recognised on a systematic basis over the expected useful life of
the asset. The accrual model therefore matches the recognition of the
grant in the income statement with the related expenditure.
Grants that do not meet the definition of a government grant would have
to be accounted for as a non-exchange transaction in accordance with
Section 23, which only permits use of the performance model. With there
being a clear distinction being made between the accounting for
government grants and grants from others, some not-for-profit entities
may see a significant shift in the basis on which non-government grants are
recognised.
SOCIAL HOUSING GRANT (SHG)
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Presentation
of
endowment
income
received by
HE&FE
institutions
Receipt deferred in
balance sheet if
subject to
‘performance
conditions’
otherwise
recognised in the
income statement.
HE&FE SORP
requires
endowments to
be recognised in
the statement of
total recognised
gains and losses.
Receipt of
endowments
recognised in the
income statement.
Recognition of
restricted
endowment
income
Recognised as
income when
receipt is probable
and amount can
be measured
reliably.
HEIs match
Not addressed.
recognition of
income and
expense in the I&E
account.
Donated
assets held
for
distribution
Recognised on
receipt at actual
fair value.
Recognised on
Not addressed.
distribution at
value to the entity.
Volunteer
time
High hurdle
recognition test.
High hurdle
recognition test.
Not addressed.
Legacies
Littte guidance on
the appropriate
timing of
recognition.
Diversity in
practice.
Not addressed.
Under the housing SORP, if the policy is to measure social housing
properties at depreciated cost then SHG is netted against the cost of the
acquired property or homebuy loan making use of a ‘linked presentation’
approach on the face of the balance sheet. Where a policy of revaluing
social housing policies is applied, SHG is initially netted against the
property, but on first revaluation of the property effectively gets
wrapped up within the revaluation reserve.
As with current accounting standards FRS 102 does not deal specifically
with how to account for SHG. It will be left to the housing SORP to
provide guidance by reference to the general principles in FRS 102. This
looks like it could be a very challenging task and stems largely from one
key difference between FRS 102 and current UK GAAP, namely that FRS
102 would seem to prohibit netting SHG against the assets being funded
through the grant. Instead, SHG would need to be initially recorded as a
separate balance on the balance sheet within creditors (if the accruals
model is applied to government grants) or direct in income (if the
performance model is applied). This latter treatment arises because SHG
is arguably subject only to restrictions, namely to be used to fund
housing, rather than subject to any performance-related conditions. As
discussed above, the existence of restrictions does not preclude the
recognition of income in the I&E account.
Perhaps the first issue for the housing SORP working party to consider,
therefore, is whether to mandate use of either the accruals model or the
performance model to ensure the accounting for SHG is consistent
across the RP sector. Whichever model an entity chooses (or the revised
SORP mandates) there will be new accounting to get to grips with,
conceptual challenges to overcome and a number of known unknowns.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES 23
For example, under the accruals model:
n Will SHG be allocated to the same components as under current UK
GAAP, albeit presented separately on the balance sheet, or will it not
be allocated to certain components? If SHG is not allocated to some
components, then it is possible for immediate credits to income to
arise if the amount of SHG is greater than components to which it can
be allocated
n The gross asset becomes depreciable, rather than the amount net of
SHG. The I&E impact may be unchanged because there would be an
equal release of SHG to the I&E account, but EBITDA would be
affected
n There could be a greater possibility of property impairments, perhaps
immediately on purchase or construction, as the carrying amount of
the assets (being gross of SHG) may be greater than the net present
value of cash flows plus planned subsidy. Depending on which
components SHG is allocated to, the amount of SHG to release may
not match the amount of any impairment
n What happens on a sale of a grant-funded property? Does SHG come
back on balance sheet (perhaps as an adjustment to the profit on
disposal) to be released as the replacement property is depreciated?
After all, the SHG funds the replacement property as much as it
funded the property sold. Alternatively, should SHG already released
to I&E as the original property was depreciated remain in reserves?
This is on the basis that the repayment of SHG is wholly within the
control of the RP as long as it recycles the proceeds into a
replacement property and consequently does not meet the definition
of a liability under FRS 102
n If SHG is brought back onto the balance sheet as a separate creditor,
guidance may be needed on the debit entry on transition to FRS 102
for those entities applying a policy of revaluation of social housing
properties. Grossing up properties further wouldn’t seem to be
appropriate as it would mean the revised carrying amount may be
greater than fair value (the measurement basis for properties carried
at valuation under FRS 102), giving rise to an immediate impairment.
The performance model would appear not to give rise to the same
complexities. Indeed, as noted above, it would appear the SHG is subject
only to restrictions rather than performance conditions and so would be
recognised in income on receipt. However, it would give rise to greater
volatility in the I&E account as the RP would recognise large credits in
the year SHG is received. This in turn results in larger depreciation
charges on the gross carrying amount of the asset in subsequent periods.
One argument to remove many, if not all, of the above complications
arising on accounting for SHG under FRS 102 is to simply view it as an
interest free loan. Arguably SHG is not grant in the same sense as most
other grants given out by government in that it is ultimately always
subject to repayment. This would mean that concessionary loan
accounting could apply (see Section 11), with the effect that SHG
remains on balance sheet as a liability until it is cancelled. Furthermore,
as SHG is cancelled to the extent that sales proceeds on disposal are less
than original cost, the residual value of a property is equal to the SHG
meaning that the depreciable cost of properties is in turn equal to an
amount net of SHG, ie the same as current UK GAAP. It would be
interesting to know whether such an interpretation would be
permissible under the revised housing SORP or, alternatively, the
reasons why it would not be permissible.
REVISIONS MADE TO PROPOSALS IN FRED 48
The choice of the performance and accruals model in FRED 48 applied
to all grants, irrespective of whether the funds were coming from
government bodies or others. This gave rise to problems of
interpretation because it was not clear how a grant from a nongovernmental body could be distinguished from a non-exchange
transaction (see section 23 above) for which there is no choice of
accounting treatment (only the performance model is available).
Although this problem has been fixed in FRS 102, the whole subject of
accounting for grants may be subject to revision in the future as it is is
difficult to see any conceptual reason why grant income is potentially
accounted for differently depending on who has provided the funding.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Accounting
model
Choice of
performance
model or accrual
model.
Charity SORP
requires all grants
to be recognised
on receipt, except
to the extent
repayment is
considered
probable. Other
not-for-profit
entities apply
matching concept
to recognition of
grants received in
the income
statement.
Recognition of
grant income in
the income
statement
matched to the
recognition as an
expense of the
related
expenditure.
SHG
Likely to be
presented
separately from
the related
property. The
implications under
each of the
performance and
accrual models
will likely be
addressed in the
revised housing
SORP.
Netted against
the cost or value
of the funded
property, with
depreciation
charged on the
net amount.
Where a RP
applies a policy of
cost, the housing
SORP requires a
linked
presentation on
the face of the
balance sheet.
Presented
separately from
the related
property.
Subsequent
accounting not
addressed.
24 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
25. BORROWING COSTS
No significant areas of difference in the accounting for liabilities and
equity under current UK GAAP as applied by PBEs have been identified.
26. SHARE-BASED PAYMENT
This section is unlikely to be of relevance to not-for-profit entities.
The main difference is that on grounds of ‘undue cost or effort’ it is
permissible to use directors’ valuation of instruments granted rather than
performing a fair value exercise.
The HE&FE SORP incorporates the term ‘income generating unit’ as used
in FRS 11 to determine appropriate groupings of assets for carrying out
impairment reviews. Although this will often be the same as a cash
generating unit, the SORP notes that ‘as many income generating units
should be identified as is reasonably practical’. This acknowledgement of
‘reasonably practical’ does not exist in FRS 102 and therefore might result
in income generating units having to be broken down into more than one
cash generating unit.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
Link to
accounting
for SHG
To be clarified by
new housing
SORP.
Amount of
Income and
impairment factors expense matched.
in any SHG.
27. IMPAIRMENT OF ASSETS
RECOVERABLE AMOUNT
The broad approach to impairment under FRS 102 is the same as UK
GAAP (FRS 11 Impairment of fixed assets and goodwill), ie impairments
are recognised when the recoverable amount of an asset falls below its
book value. Recoverable amount is in turn defined under both reporting
frameworks as the higher of (i) net realisable value less costs to sell and
(ii) the present value of cash flows generated from continued use of an
asset (its ‘value in use’). Furthermore, as with current UK GAAP, FRS 102
acknowledges that a cash flow driven valuation may not be appropriate
for assets held for their service potential. This is the case for many assets
held by not-for-profit entities and therefore it suggests other approaches,
such as depreciated replacement cost, may be used if more appropriate.
Level at
Individual asset or
which
cash generating
impairment is unit level.
carried out
EU endorsed
IFRS
For RPs, assets are Individual asset or
grouped according cash generating
to the way they
unit level.
are managed in
practice.
28. EMPLOYEE BENEFITS
HOLIDAY PAY
LINK TO SHG ACCOUNTING
RPs have tended to assess recoverability of social housing properties by
reference to the amount of inherent planned subsidy. However, the carrying
amount of the asset tested for impairment under this approach is reduced
by any associated SHG. The accounting adopted for SHG could, therefore,
have a knock-on effect to the accounting for impairments. This is because if
the gross carrying value of the property is now subject to impairment (as
opposed to an amount net of any SHG), then this increases the recoverable
amount of the property for impairment testing purposes.
The property may now be impaired because the future cash flows plus the
amount of planned subsidy could be less than the gross carrying value of
the property. Under current UK GAAP it may not be impaired because it is
less than the net carrying amount of the property (ie after deduction of
SHG). Although the recognition of an impairment charge might be offset
by a release of SHG, EBITDA could be affected which is an important
consideration for RPs with EBITDA related loan covenants.
Again, such issues will probably need to be addressed by the new
housing SORP.
LEVEL AT WHICH IMPAIRMENT IS TESTED
In undertaking an impairment review FRS 102 requires individual assets
to be reviewed for impairment to the extent their recoverable amount can
be estimated. Where it is not possible to estimate the recoverable
amount of individual assets, impairment reviews are carried out at the
‘cash generating unit’ level. This is the smallest group of assets that
generate cash flows independently from other groups of assets.
There could be significant implications for some RPs that, under the
current SORP, group assets together for impairment review purposes
based on the way they are managed in practice. This could either be on a
scheme by scheme or a single portfolio basis. The replacement SORP may
need to consider whether this approach is acceptable under FRS 102.
As FRS 102 specifically refers to paid annual leave as a benefit given to
employees, it is likely that entities would need to record accruals in
respect of employees who have taken less than their accrued entitlement,
or prepayments in respect of employees who have taken more than their
accrued entitlement, at the balance sheet date.
Such adjustments are rarely made under current UK GAAP. Nonetheless,
some entities might be surprised at the size of the adjustment needed to
their transition balance sheets, particularly if they permit employees to
carry forward significant unused holiday or the holiday year does not
coincide with the accounting period. Education institutions, for example,
typically have a July accounting year-end but may have holiday years that
are the same as a calendar year. Assuming many employees take the bulk
of their annual leave entitlement in August this means that at the end of
July the institution could have a significant accrual to account for,
reducing net assets accordingly.
DEFINED BENEFIT SCHEMES
The accounting for defined benefit schemes under FRS 102 broadly
follows the same principles as current UK GAAP (FRS 17 Retirement
benefits). However, rather than recognising interest equal to the
difference between the unwinding of the discount on scheme liabilities
and the expected return on scheme assets (which is the approach in
current UK GAAP), FRS 102 requires a net interest expense or income to
be recognised based on the net deficit or surplus respectively in the
scheme. This approach aligns with revisions made recently to full IFRS.
There is no concept of a separate pension reserve in FRS 102 or full IFRS
and therefore it might be expected that these will be subsumed within an
entity’s retained surplus.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES 25
MULTI EMPLOYER SCHEMES
Current UK GAAP, FRS 102 and IFRSs all acknowledge the difficulties of
applying defined benefit accounting to multi-employer schemes. They
instead permit an entity to account for participation in such schemes as
defined contribution schemes if it is not possible to identify its share of
the underlying assets and liabilities of the scheme. The main difference,
however, is the treatment applied to deficits where a plan has been
agreed to fund an identified deficit. Where there is such an agreed deficit
funding plan, FRS 102 requires a liability to be recognised for the present
value of the contributions payable that arise from that agreement (to the
extent that they relate to the deficit) with the resulting expense
recognised in the income statement.
This accounting is likely to give rise to much more volatility in the I&E
account as deficit funding plans are revised with each triennial actuarial
valuation, and previously assessed liabilities are increased or decreased.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Holiday pay
accruals
Holiday pay to be
recognised as an
accrual or
prepayment as
appropriate.
Accrued and
prepaid holiday
pay generally not
accounted for.
Holiday pay to be
recognised as an
accrual or
prepayment as
appropriate.
Presentation
of actuarial
gains and
losses
Actuarial gains
and losses
recognised as an
item of other
comprehensive
income.
Actuarial gains
and losses
recognised in the
statement of total
recognised gains
and losses (or for
charities in
bottom part of
SOFA).
Actuarial gains
and losses
recognised as an
item of other
comprehensive
income.
Interest
income/
expense on
DB schemes
Present a net
interest
income/expense
based on opening
surplus/deficit
position.
Net finance cost
equal to
difference
between
unwinding of
discount on
scheme liabilities,
and expected
return on scheme
assets.
Present a net
interest
income/expense
based on opening
surplus/deficit
position.
Presentation
of a separate
pension
reserve
No concept of a
separate reserve.
Required by
HE&FE and
charity SORPs.
No concept of a
separate reserve.
Agreements
to fund
multiemployer
scheme
deficits
Liability
recognised.
Not specifically
Liability
addressed,
recognised.
possible
divergence in
practice, although
liability generally
not recognised by
entities.
Group
schemes
Where assets and
liabilities of
scheme cannot be
apportioned to
individual group
entities, the entity
legally responsible
for the plan is
required to reflect
the full cost.
Usually accounted
for as multiemployer schemes
by all group
entities.
GROUP SCHEMES
Many group schemes are also run on a basis that does not enable
individual entities in the group to identify their share of the underlying
assets and liabilities of that scheme. Although the consolidated financial
statements would reflect the full surplus or deficit in the scheme, each
participating entity is able to account for the scheme as a defined
contribution scheme under current UK GAAP. Under current UK GAAP,
however, there is only a requirement to allocate scheme assets and
liabilities to individual group entities (including the parent) when it is
possible to do so. Under FRS 102, an absence of an agreed method of
allocating surpluses and deficits between group entities results in the
sponsoring entity (usually the parent) having to recognise the scheme
surplus or deficit in full in its individual financial statements. In other
words, defined benefit scheme accounting under FRS 102 always applies
in at least one group entity's financial statements as well as the
consolidated financial statements.
REVISIONS MADE TO PROPOSALS IN FRED 48
Two key changes have been made to the proposals contained in FRED
48. Firstly, FRED 48 permitted certain simplifications to the
calculation of a defined benefit obligation where the projected unit
credit method caused an entity 'undue cost or effort'. This concession
has been removed in FRS 102 to be consistent with both current UK
GAAP and full IFRS, neither of which permit any such simplification.
Secondly, as noted above, FRS 102 requires a liability to be recognised
for agreements in place to fund scheme deficits of multi-employer
schemes, a requirement that was not in FRED 48.
Where assets and
liabilities of
scheme cannot be
apportioned to
individual group
entities, the entity
legally responsible
for the plan is
required to reflect
the full cost.
26 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
29. INCOME TAX
30. FOREIGN CURRENCY
CURRENT TAX
Charitable entities that have corporate trading subsidiaries usually apply
gift aid to the taxable profits otherwise arising in the trading entity,
resulting in no current tax liability. There is nothing to suggest that the
accounting will be any different for financial statements prepared in
accordance with FRS 102. However, these corporate subsidiaries could
have new accounting treatments to apply, which could result in the
restatement of prior periods’ accounting profits. Depending on how the
profit restatements arise there could be current tax implications for
companies using gift aid to manage their tax position.
DEFERRED TAX
The accounting for deferred tax in FRS 102 follows the ‘timing difference
plus’ approach, which recognises deferred tax to the extent that gains and
losses are recognised in a different period to which they are taxed. Although
current UK GAAP (FRS 19 Deferred tax) also adopts a timing difference
approach there are some key differences, notably that FRS 102 requires
deferred tax to be recognised on asset revaluations and the recognition of
new assets (such as intangibles) and fair value adjustments on business
combinations.
None of the SORPs currently address deferred tax in any great detail. It will
be interesting to see if greater detail is given in the revised SORPs.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
n/a
Arises due to
restatement of
prior periods’
taxable profits,
which may be
difficult to
manage using gift
aid.
Current tax
issues arising
on transition
from current
UK GAAP
Arises due to
restatement of
prior periods’
taxable profits,
which may be
difficult to
manage using
gift aid.
Basis of
recognising
deferred tax
Recognised on the Recognised on the Recognised on the
basis of ‘timing
basis of timing
basis of temporary
difference plus’
differences.
differences.
approach.
There are no significant differences between current UK GAAP and FRS
102 in the accounting for overseas transactions. However, there are
some differences with regards to the accounting for overseas operations,
which could affect those not-for-profit entities that operate abroad.
Firstly, FRS 102 defines a foreign operation as ‘a subsidiary, joint venture
or branch of a reporting entity, the activities of which are based or
conducted in a country or currency other than those of the reporting
entity.’ International charities, higher education institutions and other
organisations operating overseas like professional bodies may need to
consider whether their overseas activities should be accounted for as
foreign operations.
In terms of the accounting for foreign operations, two key differences
have been identified:
n When translating the income, expenditure and cash flows of foreign
operations, current UK GAAP permits an average rate to be used. FRS
102, by contrast, only permits the use of an average rate where it
approximates the exchange rates at the dates of the transactions
entered into by the foreign operation. If exchange rates fluctuate
significantly in an accounting period, then the use of a single average
rate for the whole period is likely to be inappropriate
n FRS 102 considers goodwill, other intangibles and fair value
adjustments arising on consolidation to be assets of the foreign
operation and therefore translated at the exchange rate ruling at the
balance sheet date. Under current UK GAAP, most entities translate
such items at historic rate (ie the rate ruling when the assets and
liabilities of the operation were first brought into account).
REVISIONS MADE TO PROPOSALS IN FRED 48
There are two main changes to the original proposals. Firstly, FRS 102
defines the term foreign operation, whereas FRED 48 did not.
Secondly, FRED 48 required exchange gains and losses recognised as
other comprehensive income (ie those arising on the retranslation of
foreign operations) to be presented in the balance sheet as a separate
reserve. This presentation requirement has not been carried forward
into FRS 102.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
Retranslation
of income,
expenditure
and cash
flows of
foreign
operations
Use of average
Use of average
rate permitted
rate permitted.
only to the extent
it provides a
reasonable
approximation to
the actual rate on
the date of the
transactions of the
foreign operation
EU endorsed
IFRS
Use of average
rate permitted
only to the extent
it provides a
reasonable
approximation to
the actual rate on
the date of the
transactions of the
foreign operation.
Translation of Translated at rates Usually translated Translated at rates
goodwill,
ruling at the
at historic rate of ruling at the
intangibles
balance sheet date. exchange.
balance sheet date.
and other fair
value
adjustments
arising on
consolidation
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES 27
31. HYPERINFLATION
It is anticipated this section will affect very few not-for-profit entities.
The extent of any impact on transition to FRS 102 will depend largely on
whether an entity has applied FRS 24 Financial reporting in
hyperinflationary countries (a full IFRS-converged standard) or UITF
Abstract 9 Accounting for operations in hyperinflationary economies.
Where an entity has applied FRS 24 there will be relatively little impact.
If the entity has applied UITF Abstract 9 then there could be differences,
largely because it is less prescriptive than FRS 102 on how to eliminate
the distortions caused by hyperinflation.
32. EVENTS AFTER THE END OF THE
REPORTING PERIOD
FRS 21 Events after the balance sheet date, which has been effective since
2005, is a full IFRS-converged standard. As the principles in FRS 102 are
very similar to those contained in FRS 21, no significant areas of
difference have been identified.
n the Accounting Direction for Private Registered Providers of Social
Housing 2012 requires disclosure of the full time equivalent number of
staff whose remuneration payable in relation to the period of account
fell within each band of £10,000 from £60,000 upwards. It also
requires disclosure of the emoluments of the highest paid director
(excluding pension contributions) and details of the chief executive's
pension arrangements.
FRS 102, however, requires disclosure of the aggregate amount of all
forms of consideration paid and payable to key management personnel
for services rendered. Key management personnel are defined as ‘those
persons having authority and responsibility for planning, directing and
controlling the activities of the entity, directly or indirectly’, and
sometimes comprise a wider body than just the board of directors.
Therefore not-for-profit entities will need to consider whether the need
to disclose the remuneration of key management personnel imposes
additional disclosure requirements over and above those required by the
relevant regulatory body.
SUMMARY
REVISIONS TO PROPOSALS IN FRED 48
Issue
FRS 102
FRS 102 contains additional guidance clarifying that an entity should not
prepare its financial statements on a going concern basis if management
determines after the reporting period that it intends to liquidate the
entity or cease trading, or that it has no realistic alternative but to do so.
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Identity of
related party
Name of related
party does not
need to be
disclosed, only the
nature of the
relationship.
Both the name of
the related party
and the nature of
the relationship
need to be
disclosed.
Name of related
party does not
need to be
disclosed, only the
nature of the
relationship.
Disclosure of
transactions
with group
entities
No requirement
to disclose
transactions
between 100%
owned entities of
a group.
No requirement
to disclose
transactions
between 100%
owned entities of
a group.
No exemption
from disclosing
transactions in an
entity’s individual
financial
statements
between itself and
other entities
within the same
group.
Disclosure of
donations
from related
parties
No exemption.
Exemption given
in charity SORP.
No exemption.
Remuneration
of key
management
personnel
Details of key
management
remuneration
must be disclosed.
Disclosures driven
by relevant
legislation and
regulators. Not
necessarily the
case that these
capture all
members of ‘key
management
personnel’.
Details of key
management
remuneration
must be disclosed.
33. RELATED PARTY DISCLOSURES
There are two key disclosure differences identified between FRS 102 and
current UK GAAP (FRS 8 Related party disclosures). Firstly, FRS 8 requires
both the names of related parties and the nature of their relationship to
the reporting entity to be disclosed, whereas FRS 102 only requires
disclosure of the nature of the related party relationship. Secondly, the
charity SORP gives exemptions from disclosure of certain transactions,
including most donations made by related parties. No such exemption is
available under FRS 102.
Note also that other legislation and regulation may impose additional
related party disclosure requirements over and above those in FRS 102.
For example, the Accounting Direction for Private Registered Providers of
Social Housing 2012 sets out disclosure requirements in respect of
transactions with non-regulated entities.
KEY MANAGEMENT COMPENSATION
FRS 8 excludes from its scope remuneration paid to employees.
Disclosure of such information tends to be covered by other legislative or
regulatory requirements, thus:
n companies’ legislation sets out detailed requirements for
remuneration of directors of companies (including charitable
companies)
n the charity SORP requires disclosure of remuneration and expenses
received by trustees as well as the number of employees that receive
remuneration in excess of £60,000 (in bands of £10,000)
n the accounts directions issued by the HEFCE and the SFA require
disclosure in the financial statements of HE&FE institutions of
remuneration received by certain key members of staff and governors
28 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
34. SPECIALISED ACTIVITIES
Section 34 deals with the accounting for a number of ad hoc topics.
PUBLIC BENEFIT ENTITY ACCOUNTING
The accounting for three topics that are available only to an entity
meeting the definition of a PBE are dealt with in this section. It also deals
with the accounting for another two topics (heritage assets and funding
commitments) that are predominantly only going to be relevant to PBEs,
but are nonetheless available to all entities. As these topics can be related
directly to other sections of FRS 102 we have included a discussion of
them above as follows:
Concessionary loans
See section 11 ‘Basic
Financial Instruments’
Heritage assets
See section 17 ‘Property,
Plant and Equipment’
Public benefit entity combinations
See section 19 ‘Business
Combinations and
Goodwill’
Funding commitments
See section 21 ‘Provisions
and Contingencies’
Income from non-exchange transactions
See section 23 ‘Revenue’
EXTRACTIVE INDUSTRIES
The accounting set out in FRS 102 for extractive industries (ie mining) is
unlikely to be of relevance to not-for-profit entities. In summary, entities in
the extractive industry must apply the full IFRS standard, namely IFRS 6
Exploration for and Evaluation of Mineral Resources.
AGRICULTURE
Due to their involvement in in agricultural activity or animal welfare,
some charities and education institutions may need to consider the
definition of agricultural activity to determine if they are within the scope
of this section of FRS 102, particularly if any animals or agricultural
produce are sold as part of the entities' activities.
FRS 102 permits an accounting policy of either cost or fair value for each
class of biological asset.
REVISIONS MADE TO PROPOSALS IN FRED 48
FRED 48 did not provide an accounting policy choice, generally
requiring all biological assets to be accounted for at fair value with
changes in fair value recognised in the income statement.
SERVICE CONCESSION ARRANGEMENTS
A service concession arrangement is an arrangement where a public sector
body or PBE, known as the grantor, contracts with a private sector entity,
known as the operator, to construct (or upgrade), operate and maintain
infrastructure assets for a specified period of time. Infrastructure assets
are defined as 'infrastructure for public services such as roads, bridges,
tunnels, prisons, hospitals, airports, water distribution facilities, energy
supply and telecommunications networks'. Typically, service concession
arrangements would encompass most PFI- and PPP-type contracts. Some
not-for-profit entities, RPs and HEIs in particular, do enter into service
concession arrangements, with FRS 102 providing guidance on the
accounting by both the operator and the grantor.
Under current UK GAAP, there is guidance on such contracts in FRS 5
Accounting for the substance of transactions. The key consideration under
FRS 5 is whether an operator has assets (eg a property) used to provide
the contracted services, or alternatively a debtor, being the right to receive
payments for the contracted services (in which case the property is an
asset of the grantor). Which of the two contracting parties should be
recognising the asset and related liability is driven by an assessment of
who is exposed to the associated risks and rewards of that asset.
By contrast, FRS 102 only addresses the accounting for service concession
arrangements where (i) the grantor controls or regulates what services the
operator must provide, to whom, and at what price, and (ii) where the
arrangement is for a period less than the useful economic life of the
infrastructure assets, the grantor controls any significant residual interest
in the property at the end of the term of the arrangement.
Where these two conditions are met, the grantor rather than the operator
will recognise the asset(s) which is (are) the subject of the contract, and a
liability for the payments for its obligation under the service concession
arrangement. HEIs may find themselves in this situation if, say, they enter
into arrangements with other parties to refurbish, build, or take over
student accommodation at some point in the future in return for
payments or guaranteeing liabilities of the operator. Similarly, RPs could,
as part of their key worker accommodation offering, enter into a contract
with (say) an NHS hospital to provide accommodation to nurses, with the
question arising as to whether the RP should recognise the properties or a
debtor for rent and other amounts receivable (often called unitary
charges) over the life of the contract. The precise considerations may be
something that will be addressed in the revised HE&FE and housing
SORPs.
The operator follows one of two models depending on the nature of the
contract. Under the first model it recognises a debtor representing its
unconditional right to receive payment (often called a unitary charge) for
having constructed the property, and also for its subsequent operation and
maintenance. Judgement is likely to be needed in determining the revenue
in relation to the construction of the property and the revenue for
subsequent operation and maintenance.
Under the second model, the operator does not have a right to receive
fixed or determinable payments from the public body. Instead it is given a
right to charge end users. Under this model, the entity recognises an
intangible asset (the right to charge users) in exchange for having
constructed the asset. This gives rise to revenue both on recognition of the
intangible (with the construction costs being a cost of sale) and revenue
when the public is charged for using the asset, with the associated costs
comprising depreciation of the intangible asset. Therefore, over the life of
the contract, total revenue exceeds total cash inflows and total costs
exceeds total cash outflows, both augmented by an amount equal to the
fair value ascribed to the intangible asset on initial recognition.
REVISIONS MADE TO PROPOSALS IN FRED 48
The guidance on service concession arrangements has been extended
to include the accounting by both grantors and operators. FRED 48
previously only addressed the accounting by operators.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES 29
FINANCIAL INSTITUTIONS
35. TRANSITION TO FRS 102
Where an entity meets the definition of a financial institution, then it is
required to give various additional disclosures concerning financial
instruments. These disclosures may have relevance to certain not-forprofit entities that conduct financial services through subsidiaries.
When an entity transitions from current UK GAAP, the basic rule is that
the financial statements for both the current period and comparatives are
presented in accordance with the requirements of the new regime. In
order to present a comparative statement of comprehensive income and
cash flow it is therefore necessary to have a balance sheet two years’ prior
to the date of the first financial statements prepared under the new
financial reporting framework (the transition date balance sheet).
RETIREMENT BENEFIT PLANS
The accounting for the cost of providing post-employment retirement
benefits to its employees is covered by section 28 above. The guidance in
section 34 deals with the accounting to be applied in the financial
statements of retirement benefit plans.
SUMMARY
Issue
FRS 102
Current UK
GAAP and
SORPs
EU endorsed
IFRS
Biological
assets
Choice of cost or
fair value for each
class of biological
asset.
Measured at cost.
Measured at fair
value.
Types of
PFI/PPP
contracts
covered
Contracts that do
not result in
recognition of
property assets by
the operator.
All types.
Contracts that do
not result in
recognition of
property assets by
the operator.
Focus of
PFI/PPP
accounting
Assessment by
reference to
control to
determine if assets
and liabilities
should be
recognised. Asset
to be recognised
may be debtor or
intangible asset.
Assessment of risks
and rewards to
determine if assets
and liabilities
should be
recognised. Asset
to be recognised
may be debtor or
tangible fixed
asset.
Assessment by
reference to
control to
determine if assets
and liabilities
should be
recognised. Asset
to be recognised
may be debtor or
intangible asset.
Recognising that the costs of requiring entities to prepare opening
balance sheets on the basis that the entity had always complied with the
new framework would exceed the likely benefits, certain exemptions are
given from full retrospective application in preparation of the transition
balance sheet. The key reliefs are:
n business combinations effected before the date of transition do not
need to be restated to comply with the requirements of Section 19
above
n certain assets (such as property, plant and equipment) can be
measured at fair value on the date of transition and used as deemed
cost. Additionally, a previous UK GAAP valuation of certain assets at
the date of transition can be used as deemed cost. This simplifies
matters for entities that have previously revalued such assets but wish
to adopt a policy of cost going forward
n the accounting for service concession arrangements only has to be
applied to contracts entered into after the date of transition, with
current UK GAAP able to be applied to such contracts entered into
pre-transition
n deferred tax need not be recognised as at the date of transition if it
would involve ‘undue cost or effort’
n dormant entities need not restate any balances
n entities that previously did not capitalise borrowing costs may adopt a
policy of capitalisation on transition to FRS 102 without restating the
transition date balance sheet as if such a policy had always been applied
n Assessment of whether an arrangement contains a lease (Section 20)
may be made based on facts and circumstances at the date of transition
rather than the contract date.
In addition, there are situations where entities are not permitted to
restate the transition date balance sheet. In the context of PBEs, the key
situations are:
n accounting estimates made under current UK GAAP are revised only
prospectively
n hedge accounting applied under current UK GAAP is reflected in the
transition date balance sheet with the subsequent accounting
considering the rules in FRS 102 on financial instruments (ie whether
or not hedge accounting should be discontinued).
The following disclosures are required in the first financial statements
prepared in compliance with FRS 102:
n a description of the nature of each change in accounting policy
n a reconciliation of net assets determined in accordance with current
UK GAAP and FRS 102 for both the date of transition and the
comparative period
n a reconciliation of the income statement determined in accordance
with current UK GAAP and FRS 102 for the comparative period.
Appendices 1, 2 and 3 give an example of the way these disclosures
may be presented in an entity's first financial statements prepared under
FRS 102.
30 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
APPENDIX 1
RECONCILIATION OF HYPOTHETICAL CHARITY SOFA TO STATEMENT OF COMPREHENSIVE INCOME
As reported
As reported
under Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment
under
UK GAAP
FRS 102
1
2
3
4
5
6
7
8
9
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
INCOMING RESOURCES
Incoming resources from
generated funds
50,000
Incoming resources from
charitable activities
2,500
2,500
Other incoming resources
3,000
3,000
Total incoming resource
(2,500)
55,500
0
0
Costs of generating funds
20,000
(100)
2,000
Charitable activities
10,000
(2,500)
1,000
0
1,000
10,000
0
0
0
58,500
10,000
64,000
10,000
32,250
RESOURCES EXPENDED
Governance costs
2,000
(Gains)/losses on
investment assets
0
Interest expense
0
Other resources
expended
3,000
200
150
500
9,500
2,000
2,500
2,500
100
100
3,000
Total resources expended
35,000
(100)
2,000
0
200
500
150
100
2,500
10,000
50,350
Net income for the period
20,500
100
(2,000)
(2,500)
(200)
500
(150)
(100)
(2,500)
0
13,650
GROSS TRANSFERS
BETWEEN FUNDS
0
OTHER COMPREHENSIVE INCOME
Gains on revaluation of
fixed assets for charity's
own use
Gains/(losses) on
investment assets
5,000
1,000
6,000
(2,500)
Actuarial gains/(losses)
on defined benefit
pension schemes
Total comprehensive
income for the period
2,500
(350)
22,650
100
1,100
(2,000)
(2,500)
(200)
500
(150)
0
(250)
0
0
19,400
RECONCILIATION OF FUNDS
Total funds brought
forward
100,000
Total funds carried
forward
122,650
Adjustment 1
Adjustment 2
Adjustment 3
Adjustment 4
Adjustment 5
Adjustment 6
Adjustment 7
Adjustment 8
Adjustment 9
Net change on gains and depreciation in period arising from use of fair value not existing use value as valuation basis of owner occupied properties
Net movement in period on agreed funding of multi-employer scheme deficit
Net movement in period arising from earlier recognition of legacy income (subject to any specific guidance contained in revised charity SORP)
Net movement in period on staff holiday accrual
Net movement in period on donated goods held for distribution
Net movement in period on lease incentive accrual
Net effect in period of revised method for determining interest cost on defined benefit pension scheme accounting
Net change in fair value of equity investments and investment properties recognised in the income statement
Effect of an entity arguing it can reliably measure value of volunteer time (subject to any specific guidance contained in charity SORP)
Other adjustments may include, but are not restricted to: financial instruments, investment property, recognition of intangibles on certain combinations with other
entities, accounting for arrangements that contain a lease, grant income (subject to the revised SORP permitting the use of the accruals model), deferred tax,
re-assessment of foreign operations, and adjustments arising from any agricultural activity.
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
31
RECONCILIATION OF HYPOTHETICAL CHARITY BALANCE SHEET TO STATEMENT OF FINANCIAL POSITION
As reported
under
UK GAAP
£’000
Adjustment
1
£’000
100,000
5,000
Adjustment
2
£’000
Adjustment
3
£’000
Adjustment
4
£’000
Adjustment
5
£’000
Adjustment
6
£’000
Adjustment
7
£’000
As reported
under
FRS 102
£’000
(10,000)
95,000
LONG-TERM ASSETS
Tangible assets
Investment property
10,000
10,000
Investments
25,000
25,000
135,000
130,000
CURRENT ASSETS
Debtors due after more than one year
Debtors due in less than one year
25
2,000
9,500
11,525
2,500
2,000
500
5,000
Stocks and WIP [Inventory]
750
Investments
500
500
7,500
7,500
Cash at bank and in hand
3,500
4,250
11,275
CREDITORS: AMOUNTS FALLING DUE
WITHIN ONE YEAR
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT
LIABILITIES
CREDITORS: AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR
28,775
(10,000)
(2,000)
(1,000)
(2,500)
(15,500)
1,275
13,275
136,275
143,275
(30,000)
(8,000)
(5,500)
(43,500)
PROVISIONS FOR LIABILITIES
(3,250)
(6,525)
DEFINED BENEFIT PENSION LIABILITY
(6,525)
6,525
TOTAL ASSETS LESS TOTAL LIABILITIES
96,500
5,000
(10,000)
4,000
(6,500)
3,500
(6,500)
3,000
(2,500)
0
(9,775)
90,000
FUNDS
Endowment Funds
10,000
(5,000)
Restricted income funds
16,500
(5,000)
5,000
8,000
Unrestricted income funds
Net accumulated surplus
56,525
Revaluation reserve
20,000
Pension reserve
(6,525)
96,500
Adjustment 1
Adjustment 2
Adjustment 3
Adjustment 4
Adjustment 5
Adjustment 6
Adjustment 7
4,000
500
(2,500)
(6,525)
5,000
52,000
25,000
6,525
5,000
(10,000)
4,000
(6,500)
3,500
(2,500)
0
90,000
Change arising from use of fair value not existing use value as valuation basis of owner occupied properties
Recognition of liability for agreed funding of multi-employer scheme deficit
Effect of earlier recognition of legacy income (subject to any specific guidance contained in revised charity SORP)
Recognition of staff holiday accrual
Adjustment to basis of recognition of goods donated for distribution
Adjustment to basis of recognition of lease incentives
Presenting lease premiums as a prepayment of rent and transfer of defined benefit pension liability to provisions
Other adjustments may include, but are not restricted to: financial instruments, investment property, recognition of intangibles on certain combinations with other
entities, accounting for arrangements that contain a lease, grant income (subject to the revised SORP permitting the use of the accruals model), deferred tax,
re-assessment of foreign operations, and adjustments arising from any agricultural activity.
32 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
APPENDIX 2
RECONCILIATION OF HYPOTHETICAL REGISTERED PROVIDER OF SOCIAL HOUSING INCOME STATEMENT
Turnover
As reported
under
UK GAAP
£’000
Adjustment
1
£’000
30,000
(500)
Cost of sales
(8,000)
Operating costs
(17,500)
Other operating
income
0
Operating surplus
4,500
Share of post-tax
profit of JCEs
100
Interest receivable
and other income
2,000
Other finance
costs
(100)
(2,750)
Adjustment
7
£’000
Adjustment
8
£’000
Adjustment
9
£’000
As reported
under
FRS 102
£’000
29,500
(1,500)
(1,500)
(500)
0
200
2,000
600
1,500
600
(25)
(18,925)
30
200
5
0
100
2,730
100
5,305
30
60
2,300
(450)
(100)
(50)
(3,240)
50
Tax on surplus on
ordinary activities
(800)
10
Surplus for the
year
3,000
0
Adjustment 8
Adjustment 9
Adjustment
6
£’000
300
(10)
Adjustment 6
Adjustment 7
Adjustment
5
£’000
(100)
3,800
Adjustment 5
Adjustment
4
£’000
(8,000)
400
Surplus on
ordinary activities
before taxation
Adjustment 1
Adjustment 2
Adjustment 3
Adjustment 4
Adjustment
3
£’000
30
Surplus on
disposal of
housing properties
Interest payable
and similar
charges
Adjustment
2
£’000
(1,500)
(150)
1,500
600
200
5
(50)
0
4,395
(790)
(1,500)
(150)
1,500
600
200
5
(50)
0
Effect of applying equity accounting to JANEs on basis they meet the definition of JCEs
Recognition of PFI arrangement - amortisation of intangible received in exchange for construction of asset
Net change in fair value of interest rate swap (assuming hedge accounting not applied or not available) and index-linked bonds
Net effect of reclassifying certain properties and tenures as investment properties on the basis they are held primarily for rental income or
capital gain
Net effect in period of revised allocation of grant following re-classification of certain properties as investment properties (subject to further
clarification in revised housing SORP)
Net movement in period on agreed funding of multi-employer scheme deficit
Net effect in period of presenting properties gross of grant income, release of non-governmental grants subject only to restrictions and
knock-on impairment charges (subject to further clarification in revised housing SORP)
Net effect in period of revised method for determining interest cost on defined benefit pension scheme accounting
Reclassification of post-operating surplus exceptional item
Other adjustments may include, but are not restricted to: accounting for derivatives where hedge accounting is applied, recognition of intangibles on certain
combinations with other RPs, accounting for lease incentives, accounting for arrangements that contain a lease, numerous adjustments relating to SHG (subject to
any guidance included in revised SORP), accounting for stock transfers and attached SHG (subject to any guidance included in revised SORP), basis and timing of
measuring impairment losses (subject to any guidance included in revised SORP), holiday pay and deferred tax.
3,605
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES 33
RECONCILIATION OF HYPOTHETICAL REGISTERED PROVIDER OF SOCIAL HOUSING BALANCE SHEET TO STATEMENT OF
FINANCIAL POSITION
As reported
under
UK GAAP
£’000
Adjustment
1
£’000
Housing properties
200,000
(20,000)
Social housing grant
(100,000)
Adjustment
2
£’000
Adjustment
3
£’000
Adjustment
4
£’000
Adjustment
5
£’000
Adjustment
6
£’000
Adjustment
7
£’000
Adjustment
8
£’000
As reported
under
FRS 102
£’000
FIXED ASSETS
Intangible asset
2,000
Other grants
2,000
(20,000)
(10,000)
5,000
150,000
95,000
(20,000)
20,000
Investment properties
40,000
40,000
Other items of property,
plant and equipment
6,000
6,000
Investments - homebuy
loans advanced
10,000
10,000
Grants received related to
homebuying loans
(7,000)
Investment in JCE
7,000
20,600
20,600
228,600
89,000
CURRENT ASSETS
Properties for sale
Debtors
Cash at bank and in hand
CREDITORS: AMOUNTS
FALLING DUE WITHIN ONE
YEAR
10,000
(1,000)
4,000
(400)
(2,200)
6,800
3,600
2,000
16,000
(200)
1,800
12,200
(12,000)
300
(250)
(200)
(1,000)
(13,150)
NET CURRENT ASSETS
4,000
(950)
TOTAL ASSETS LESS
CURRENT LIABILITIES
93,000
227,650
CREDITORS: AMOUNTS
FALLING DUE AFTER MORE
THAN ONE YEAR
(70,000)
700
(4,750)
(1,800)
(96,000)
(171,850)
PROVISIONS FOR
LIABILITIES
(2,000)
(3,000)
DEFINED BENEFIT PENSION
LIABILITY
(3,000)
3,000
Total net assets
18,000
RESERVES
Share capital
Designated reserve
Revenue reserve
Adjustment 6
Adjustment 7
Adjustment 8
(200)
(5,000)
20,000
5,000
(2,000)
15,000
0
50,800
0
0
2,750
2,750
15,250
18,000
Adjustment 1
Adjustment 2
Adjustment 3
Adjustment 4
Adjustment 5
0
(5,000)
0
(200)
(5,000)
20,000
5,000
(2,000)
15,000
(200)
(5,000)
20,000
5,000
(2,000)
15,000
48,050
0
50,800
JANE accounting re-presented as JCE accounting
Recognition of PFI arrangement - intangible received in exchange for construction of asset
Recognition of interest rate swaps and index-linked debt at fair value
Recognition of certain properties and tenures as investment properties on the basis they are held primarily for rental income or capital gain
Effect of re-allocating grant following re-classification of certain properties as investment properties (subject to further clarification in revised
housing SORP)
Recognition of liability for agreed funding of multi-employer scheme deficit
Effect of presenting properties gross of grant income, release of non-governmental grants subject only to restrictions and knock-on impairment
charges (subject to further clarification in revised housing SORP)
Transfer of defined benefit pension liability to provisions
Other adjustments may include, but are not restricted to: accounting for derivatives where hedge accounting is applied, recognition of intangibles on certain
combinations with other RPs, accounting for lease incentives, accounting for arrangements that contain a lease, numerous adjustments relating to SHG (subject to any
guidance included in revised SORP), accounting for stock transfers and attached SHG (subject to any guidance included in revised SORP), basis and timing of measuring
impairment losses (subject to any guidance included in revised SORP), holiday pay and deferred tax.
34 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
APPENDIX 3
RECONCILIATION OF HYPOTHETICAL HIGHER EDUCATION INSTITUTION INCOME STATEMENT
As reported
As reported
under Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment
under
UK GAAP
FRS 102
1
2
3
4
5
6
7
8
9
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
Income
Funding body grants
60,000
Tuition fees and education contracts
(inc share of JV)
36,000
Research grants and contracts
30,000
Other income
40,000
5,000
65,000
(2,100)
33,900
30,000
900
40,900
Profit on disposal of property
Endowment and investment income
Total income (inc share of JV)
Less share of joint venture income
Net income
3,000
169,000
0
0
900
(500)
(2,500)
4,500
(2,500)
(2,100)
750
750
750
170,550
0
(2,100)
0
2,100
166,900
Expenditure
Staff costs
90,000
Other operating expenses
60,000
(500)
Depreciation and amortisation
10,000
100
150
1,000
91,150
59,500
(200)
9,900
Fundamental restructuring costs
Interest and other finance costs
Total expenditure
Income less expenditure
Share of profit of JCE
3,000
2,500
(50)
3,000
2,450
162,500
150
(400)
(200)
1,000
0
0
0
(50)
3,000
166,000
4,400
(150)
400
1,100
(1,000)
4,500
(2,500)
0
50
(2,250)
4,550
400
400
Share of loss in associate
(100)
Taxation
(200)
Surplus after tax
4,500
(150)
Surplus attributable to non-controlling interest
(100)
(10)
Surplus for the year before exceptional items
4,400
100
0
(200)
400
1,100
(1,000)
4,500
(2,500)
100
50
(2,250)
4,750
Surplus attributable to the parent
Disposal of fixed assets
Fundamental restructuring costs
750
(750)
(3,000)
3,000
Surplus on continuing operations after
depreciation of assets at valuation, disposal of
assets and tax
2,150
(Deficit) / surplus transferred to accumulated
income in endowment funds
(100)
Surplus for the year retained within general
reserves
2,050
Adjustment 1
Adjustment 2
Adjustment 3
Adjustment 4
Adjustment 5
Adjustment 6
Adjustment 7
Adjustment 8
Adjustment 9
(110)
4,640
Net movement in period on staff holiday accrual
Net effect in period of adopting a policy of capitalising libraries and associated depreciation
Net gain in period on investment property element of mixed-use property, and removal of associated depreciation
Net movement in period on agreed funding of multi-employer scheme deficit
Net movement in period arising from deferral of income from non-exchange transactions subject to performance conditions and release of deferred
income subject only to restrictions
Net fair value gains in period on fixed and current asset equity investments
Adjustment in period to restrict share of associates' losses recognised and cessation of gross equity method for JCEs
Net effect in period of revised method for determining interest cost on defined benefit pension scheme accounting
Reclassification of exceptional items as operating expenses
Other adjustments may include, but are not restricted to: accounting for financial instruments such as derivatives, recognition of intangibles on certain combinations with
other HEIs, deferred tax, recognition in I&E of government grant (subject to revised SORP permitting continued use of the accrual method), JV accounting, accounting for
lease incentives, accounting for arrangements that contain a lease, recognition of legacy income (subject to any specific guidance included in the revised SORP), deferred
tax, foreign operations, agricultural activity, and service concession arrangements (depending on whether the entity chooses to adopt transitional arrangements).
BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES 35
RECONCILIATION OF HYPOTHETICAL HIGHER EDUCATION INSTITUTION BALANCE SHEET TO STATEMENT OF FINANCIAL POSITION
As reported
As reported
under Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment
under
UK GAAP
FRS 102
1
2
3
4
5
6
7
8
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
LONG-TERM ASSETS
Intangible assets
1,000
Tangible Assets
1,000
110,000
7,500
Investment property
(6,000)
111,500
8,000
Investments
8,000
2,000
1,000
Investments in joint venture
Share of gross assets
1,000
4,000
500
500
1,750
(1,750)
Share of gross liabilities
(1,250)
113,500
1,250
ENDOWMENT ASSETS
1,500
(1,500)
125,000
CURRENT ASSETS
Debtors
13,250
Investments
25,000
Cash at bank and in hand
10,000
49,750
CREDITORS: AMOUNTS FALLING DUE
WITHIN ONE YEAR
NET CURRENT LIABILITIES
TOTAL ASSETS LESS CURRENT LIABILITIES
CREDITORS: AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR
PROVISIONS FOR LIABILITIES
(50,000)
13,250
3,500
500
(2,000)
(1,000)
10,500
52,250
(53,000)
(250)
(750)
113,250
124,250
(30,000)
(9,000)
(39,000)
(3,250)
500
ACCRUALS AND DEFERRED INCOME
DEFINED BENEFIT PENSION SCHEME
LIABILITY
28,500
(20,000)
(22,750)
(5,000)
(5,000)
(20,000)
TOTAL NET ASSETS
60,000
DEFERRED CAPITAL GRANTS
30,000
20,000
(2,000)
7,500
2,000
(10,000)
(5,000)
4,500
500
0
57,500
(30,000)
ENDOWMENTS
Expendable
1,000
(750)
250
Permanent
500
(250)
250
RESERVES
Income and expenditure account
Pension reserve
Minority interests
TOTAL FUNDS
Adjustment 1
Adjustment 2
Adjustment 3
Adjustment 4
Adjustment 5
Adjustment 6
Adjustment 7
Adjustment 8
47,500
(1,950)
7,500
2,000
(10,000)
26,000
4,500
500
(20,000)
(20,000)
56,050
20,000
1,000
(50)
60,000
(2,000)
950
7,500
2,000
(10,000)
(5,000)
4,500
500
0
57,500
Recognition of staff holiday accrual
Recognition of library stocks as a long-term asset
Investment property element of mixed-use property measured at fair value
Recognition of liability for agreed funding of multi-employer scheme deficit
Deferral of income from non-exchange transactions subject to performance conditions and release of deferred income subject only to restrictions
Effect of measuring equity investments at fair value
Elimination of share of net liabilities of associate
Transfer of defined benefit pension liability to provisions, endowments to underlying asset class, and cessation of gross equity method for JCEs
Other adjustments may include, but are not restricted to: accounting for financial instruments such as derivatives, recognition of intangibles on certain combinations with other
HEIs, deferred tax, recognition in I&E of government grant (subject to revised SORP permitting continued use of the accrual method), JV accounting, accounting for lease
incentives, accounting for arrangements that contain a lease, recognition of legacy income (subject to any specific guidance included in the revised SORP), deferred tax, foreign
operations, agricultural activity, and service concession arrangements (depending on whether the entity chooses to adopt transitional arrangements).
36 BDO / GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND NOT-FOR-PROFIT ENTITIES
OUR NOT-FOR-PROFIT SEMINARS
SEMINARS HELD AT:
55 Baker Street, London, W1U 7EU.
Please arrive 15 minutes before the start time to register.
Breakfast is provided prior to the morning seminars.
Pre-booking essential
TO REGISTER
THURSDAY 10 OCTOBER
HEI Audit Committee Seminar
Breakfast seminar 8.00am – 9.30am
An overview of members’ responsibilities and update on key sector issues.
WEDNESDAY 13 NOVEMBER
Social housing tax update
Breakfast seminar 8.30am – 10.00am
There are three simple ways to reserve your place at these events:
Call Jane West on 01293 591 000
Email jane.west@bdo.co.uk
Visit www.bdo.co.uk/events
Our annual update for registered providers of social housing covering
latest developments in corporation tax, VAT and employment taxes.
THURSDAY 28 MARCH
Public Benefit Accounting Group
9.30am – 1.00pm (lunch included)
SEMINARS HELD AT:
BIRMINGHAM
This meeting provides an opportunity to discuss the impact of the new
Financial Reporting Standard (FRS 102) on Not-for-Profit organisations
THURSDAY 28 MARCH
Charity Finance Update
Afternoon seminar 4.00pm – 6.00pm
Our six monthly update on finance developments in the charity sector
covering reporting, tax and governance issues.
TUESDAY 14 MAY
VAT and PAYE review
Breakfast seminar 8.30am – 10.00am
A detailed look at changes and new developments with VAT and PAYE.
Relevant to all Not-for-Profit organisations.
TUESDAY 25 JUNE
FE Audit Committee Seminar
Breakfast Seminar 8.00am – 9.30am
An overview of members’ responsibilities and update on key sector issues.
TUESDAY 2 JULY
HEI Audit Committee Seminar
Breakfast seminar 8.00am – 9.30am
An overview of members’ responsibilities and update on key sector issues.
WEDNESDAY 18 SEPTEMBER
Charity Finance Update
Breakfast seminar 8.30am – 10.00am
Our six monthly update on finance developments in the charity sector
covering reporting, tax and governance issues.
TUESDAY 24 SEPTEMBER
FE Audit Committee Seminar
Breakfast Seminar 8.00am – 9.30am
An overview of members’ responsibilities and update on key sector issues.
BDO, 125 Colmore Row, Birmingham B3 3SD
Please arrive 15 minutes before the start time to register.
Breakfast is provided prior to the morning seminars.
Pre-booking essential
TO REGISTER
There are three simple ways to reserve your place at these events:
Call Jane West on 01293 591 000
Email jane.west@bdo.co.uk
Visit www.bdo.co.uk/events
TUESDAY 26 MARCH
WEDNESDAY 25 SEPTEMBER
Charity Finance updates
Afternoon seminars 4.00pm – 6.00pm
Our six monthly update on finance developments in the charity sector
covering reporting, tax and governance issues.
TUESDAY 16 APRIL
TUESDAY 1 OCTOBER
Afternoon seminars 4.00pm – 6.00pm
Social Housing Audit Committee seminars
An overview of members’ responsibilities and update on key sector issues.
TUESDAY 11 JULY
Trustee Training
Afternoon seminar 4.00pm – 6.00pm
Our annual update tailored for trustees looking at best practice and
recent developments in governance.
WEDNESDAY 13 NOVEMBER
Fraud and Controls seminar
Afternoon seminar 4.00pm – 6.00pm
It is always necessary to maintain the key controls within your
organisation in order to minimise the risk of fraud. In this seminar we will
provide attendees with the opportunity to hear our views on controls and
share case studies where it all goes wrong.
ABOUT BDO
BDO provides a comprehensive range of business advice and accounting services throughout the UK and world-wide. BDO is an
award-winning UK Member Firm of BDO International, the world’s fifth largest accountancy network, with more than 1,000 offices
in over 100 countries.
Encompassing charities, education, social housing and membership organisations, our not-for-profit organisations group combines
detailed sector knowledge with the global reach of the BDO International network.
If you would like more information on our services, please contact your local BDO contact or one of the partners listed below:
DON BAWTREE, Partner, Head of Not-for-profit
don.bawtree@bdo.co.uk
ANDREW STICKLAND, Partner, Charities
andrew.stickland@bdo.co.uk
JAMES ASTON MBE, Partner, Education
james.aston@bdo.co.uk
PHILIP REGO, Partner, Social Housing
philip.rego@bdo.co.uk
ANDREW MCNAMARA, Partner, Scotland Not-for-profit
andrew.mcnamara@bdo.co.uk
www.bdo.co.uk
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to
cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please
contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any
liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited
by guarantee, and forms part of the international BDO network of independent member firms. A list of members’ names is open to inspection at our registered office,
55 Baker Street, London W1U 7EU.
BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name of the BDO network and for each of the BDO Member Firms.
BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent
member firms.
Copyright © March 2013. BDO. All rights reserved.
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