Charity SoRP
Master Course
Ken Brew
The Background to the
Charities SoRP
Consultation on FRS102
Why EU adopted IFRS does not apply
to charities……
Ruled out by EU
IAS Regulation
Too long too
complex?
Does not
address Trust
accounting
We still
need a
Charities
SoRP
then….!
Developed for
global capital
markets
Ruled out for
Company
charities by the
Companies Act
2006
Does not
address nonexchange
transactions
The long and winding road that
leads….to your 2015 SoRP
2004 Convergence
with IFRS over
3-4 years
2011 – Consultation
on PBE Standard
2006 - ‘Big
Bang’ in 2009
2010 – Consultation
on FRSME (FRED 44)
(FRED 45)
2012 – Consultation
on draft of FRS 102
(FRED 48)
2013 – New
framework and FRS
102 issued
2007 - Await
outcome of SME
standard
2009 – Policy
proposals
‘Future of UK
GAAP’
2015 New
GAAP
(2016 gaap?)
applies fapc
1/01/15
2014
Charities
SoRP
The New Financial Reporting
Framework
FRS 100 sets out the framework
(FRSSE, FRS 102, IFRS) and
minor changes to the FRSSE
FRS 101 covers the accounting
for group entities applying IFRSs
and does not apply to charities
SORPs
FRS 102 sets out new UK GAAP
Charities SORP
HE/FE SORP
RSL SORP
The Financial Reporting Standard
(FRS 102)
FRS 102 is based on IFRS for
SMEs
A cut-down version of full
IFRS
Amended for UK reporting
needs
First UK standard to address
PBE reporting needs
Can be used by all nonlisted entities
Impact of consultation on FRS
102 …
PBE requirements
integrated into FRS 102
as a specialised
activities section
Revaluation of
investments, plant,
property and
equipment allowed
Formats consistent with
Companies Act
Capitalisation of
interest on
developments allowed
Definition of
‘performance-related
conditions’ and
‘restrictions’ brought in
line with SORP
Impact of consultation on FRS
102 …
Recognition of
donated services at
value to charity
Practical difficulties
of recognising goods
donated for resale or
distribution accepted
Merger accounting
allowed and
disclosures simplified
Recognition of grants
based on ‘matching’
limited to
government grants
FRS 102 - Implementation date
Mandatory
for
accounting
periods
beginning
on or after
1 January
2015
• Early application is permitted
• But for entities that are within
the scope of a SORP, early
application is permitted
providing it does not conflict with
the requirements of a current
SORP or legal requirements for
the preparation of financial
statements
No early adoption of FRS 102 for
charities
For non companies
charity regulations
require adoption of
‘methods and principles’
of SORP 2005
• Therefore cannot
apply FRS 102 until
regulations amended
Some requirements of
SORP 2005 conflict with
FRS 102
• Therefore SORP
Committee advise
against early adoption
The Background to the
Charities SoRP
Consultation on the Charities SoRP
New Framework….A new SORP(s)
www.charitysorp.org
The SORP Consultation
Informed by an extensive research undertaken in 2008/09
www.charitycommission.gov.uk/media/95321/rs21text.pdf
The SORP consultation process launched on dedicated micro-site:
www.charitysorp.org
26 events held across the UK and Republic of Ireland (attracted over
1600 participants)
179 written responses
SoRP Consultation – the headlines
92% supported the modular SORP
69% agreed new SORP better addressed needs of smaller charities
73% supported use of terms ‘must’, ‘should’ and ‘may’
67% agreed new SORP covered all relevant issues
88% agreed that the SORP should fully support both FRSSE and FRS 102
93% agreed that income from government grants should be accounted
for in same way as donations
SoRP consultation issues (1)
Single column SoFA – 87% agreed with maintaining the current
columnar SoFA
Governance costs – 76% supported the new SoFA headings but
some questioned loss of the governance heading
Analysis of cost of raising funds in the SoFA - less analysis
provided on the face of the SoFA
Incorporated charities being treated as branches - 62% agreed
that incorporated charities could not be branches
SoRP Consultation issues (2)
Disclosure of material fraud – caused concerns and
some felt this issue was given unnecessary
prominence in the SORP
Disclosure of income from government –some
respondents pressed for a separate disclosure of
income from government sources
Push back against mandating disclosure of
institutional grants in a note to the accounts – now
information can be provided by web-link
SoRP Consultation issues (3)
The Trustees’ Annual Report
Strategic Report - advice added on how medium/ large companies
can modify their annual report to meet this requirement of
company law
Risk management - disclosures aligned to Strategic Report
requirements
Going concern - uncertainties ‘should’ be disclosed
Reserves policy – a statement required if a charity has no reserves
policy
Performance reporting - a ‘nudge’ towards reporting ‘impact’
despite some sector concerns
SoRP Consultation issues (4)
Executive Pay
Surprising only 37% supported the disclosure by larger charities of
both pay and post held by the highest paid member of staff
A number of respondents did however support the disclosure of
remuneration policies by larger charities
Disclosure of total employee benefits received by key management
personnel (FRS 102 only)
Banding information on salaries extended to all charities
Remuneration policy - larger charities will be required to disclose
their policies
SoRP Consultation issues (5)
Legacy recognition – respondents wanted clarity but flexibility further text added on use estimation techniques
Defined Benefit Pension Scheme – if accounted for a multiemployers scheme then deficit funding agreements accrued as
a liability (FRS 102)
Guidance added on accounting for retail gift aid schemes
More change to come for the
Charities SoRP
The Future of the FRSSE
But there is still a FRSSE!!
Once seen as the
no change option
But……
The FRSSE ….
The FRSSE is no longer
the “no change” option
The FRSSE will be withdrawn within 12 months!
Consultation had indicated that the SORP should reflect both
the FRSSE and FRS 102
Although nearly every charity is qualified to use the FRSSE only
an estimated 38% had previously cited it in their accounts.
The FRS 102 based SORP unaffected by changes anticipated to
the FRSSE in the next year or two
How the FRSSE currently deals with the
new financial reporting framework
Follow the FRSSE for the issues it addresses
If FRSSE is silent, use existing accounting policies provide they meet
accepted practice (old GAAP)
For new transactions have regard to current practice
(FRS 102)
The FRSSE SORP will require current practice (FRS 102) for sector
specific issues
Therefore was not really a stand alone standard….old GAAP!
What might a new FRSSE look like?
Probably - new FRSSE will adopt ‘measurement’ and ‘recognition’
principles of FRS 102 – creating a single framework
But disclosures in notes will be limited under EU Accounting
Directive
Effectively a FRS 102 ‘lite’ ?
Possibly a new section in FRS 102?
New ‘FRSSE SORP’ will layer on charity specific requirements ( as
EU Accounting Directive scopes out not-for-profit entities)
Timeline for new FRSSE ?
Implementation
of new EU
Accounting
Directive 2014/15
FRC develop
new FRSSE
2014/15
Revision of the
SORP for a new
FRSS in 2015?
Mandatory
application for
accounting
periods starting
1 January 2016
Follow developments……
SORP and
consultation
responses
To access new
standard and past
FREDs and
consultations
• Google - ‘SORP Committee
Meetings and Papers’ and
• www.charitysorp.org
• Google- ‘FRC New UK
GAAP’
Some differences between
FRS102 and FRSSE
• FRS102 does not permit changes to Investment Property
values to be taken to reserves.
• FRS102 has no 90% benchmark on finance leases
• FRS102 does not require names of Related parties but
does require specific aggregate information
• FRS102 has a mandatory accrual on employee benefits
• FRS102 has a widespread use of “Fair value” – could be
onerous on financial instruments
• FRS102 assumes a maximum 5 year life on intangible
assets
• FRS102 has mandatory cash flow statements
• FRS102 covers more areas…..
Feb 2014
The Impact of FRS 102 on
Public Benefit Entities
Implementing FRS 102
“Special” transactions
PUBLIC BENEFIT ENTITY…
• an entity whose primary objective is to provide
goods or services for the general public, community or
social benefit and where any equity is provided with a
view to supporting the entity’s primary objectives
• Rather than with a view to providing a financial return
to equity providers, shareholders or members
Feb 2014
The essence of PBE
• The important factor is what the primary purpose of
such an entity is, and that it does not exist primarily to
provide economic benefit to its investors
Feb 2014
Public Benefit Entities
• SoRP is a good thing!
• “There was clear evidence that the (existing) SoRPs
were highly regarded and had improved the quality of
financial reports…
Feb 2014
PBE Specific issues – FRED 45
see paragraphs 125 to 160 in FRS102
• Concessionary Loans (PBE34.87 to 34:97)
• Property held for the provision of social
benefits (Paras16.3A and 17)
• Entity Combinations (PBE34:75 to 34:86)
• Impairment of assets: public benefit
considerations (Paras 140 to 148)
• Funding commitments (PBE34:57 to 34:63)
• Incoming resources from non-exchange
transactions (PBE34:64 to 34:74)
Feb 2014
So what charity issues does FRS
102 address?
Heritage assets
• Cut-down version of FRS 30
• Applies to all entities
Impairment and
service potential
• Applies to all entities
Income from nonexchange transactions
PBE combinations
• Goods for resale or distribution
• Services
• Legacies
• Mergers and Gifts
• Combinations at nominal value
So what charity issues does
FRS 102 address?
Concessionary
loans
• At transaction value, or
• Amortised cost
Funding
commitments
• Constructive obligations
Grant income
• Government grants
• Accrual model (matching with
expenditure)
• Performance model
Concessionary Loans
• Where Interest below market rate…
• Initially amount paid or received – (note balance)
• Subsequent carrying value reflects reduced interest
payable/receivable, effective interest rate
• Recognise any impairment loss immediately
• Separate line for disclosure of such loans
• Notes to show terms and conditions – interest,
security, repayment terms
• Maybe shown in aggregate if not misleading
• Give details if loans granted but not yet taken up
Feb 2014
Property held for the
provision of social benefits
• Properties held for the primary provision of social
benefits, e.g. social housing, shall not be classified as
investment properties and therefore
• shall be accounted for as property, plant and
equipment
Feb 2014
Entity Combinations
•
If transfer is at nil or nominal consideration then it is a gift and not a fair
value exchange
•
If FV assets > liabilities recognise a gain shown as income.
•
If FV assets < liabilities the deficit is accounted for as a loss.
•
For mergers : In the receiving entity show:
– (a) the names and descriptions of the entities;
– (b) the date of the transaction;
– (c) an analysis of the principal components
• (i) after the date of the transaction which includes the gifted entity; and
• (ii) up to the date of the transaction.
– (d) The aggregate carrying value of the net assets of each
entity at the date of the transaction.
Feb 2014
Impairment of assets:
public benefit considerations
• that if, and only if, the recoverable amount <
carrying value of an asset
• then reduce the carrying amount to recoverable
amount, and recognise the reduction as an
impairment loss immediately in profit or loss.
• What if use of asset is restricted?
• What if asset held for service potential not for
future cash flows? Not just PBE’s!
• Use of service potential may be appropriate, no
details about precise methods.
Feb 2014
Funding commitments
• An entity shall recognise a liability, where it has made
a commitment that it will provide resources to another
party, if, and only if:
– (a) the obligation is such that the entity cannot realistically
withdraw from it; and
– (b) the commitment does not depend on the performance of
the recipient.
Feb 2014
Funding commitments (cont.)
• Disclose:
– (a) the commitment made;
– (b) the time-frame of that commitment;
– (c) any performance-related conditions attached to that
commitment; and
– (d) details of how that commitment will be funded.
• Can disclose in aggregate if not misleading.
• However, separate disclosure shall be made for
recognised and unrecognised commitments
Feb 2014
Incoming resources from
non-exchange transactions
• A non-exchange transaction is a transaction whereby
an entity receives value from another entity without
directly giving approximately equal value in exchange
or gives value to another entity without directly
receiving approximately equal value in exchange.
Feb 2014
Non-exchange transactions
• If non-performance then recognise a liability
when that repayment becomes probable.
• Donations of services recognised as
of income and expense if measurable.
• If services are used to produce an asset,
then capitalise as part of the cost of that asset.
• Non-exchange transactions should be measured
at the fair value of the resources received or receivable.
Feb 2014
Non-Exchange Transactions
per FRS 102 PBE34:67
An entity shall recognise receipts of resources from nonexchange transactions as follows:
(a)
Transactions that do not impose specified future
performance-related conditions on the recipient
are recognised in income when the resources are
received or receivable.
(b)
Transactions that do impose specified future
performance-related conditions on the recipient are
recognised in income only when the performancerelated conditions are met.
(c)
Where resources are received before the revenue
recognition criteria are satisfied, a liability is
recognised.
The Charities SoRP
At Last the SoRP itself!
The Fund Framework
All Funds
Unrestricted
Funds
NonDesignated
Funds
Restricted
Funds
Designated
Funds
Restricted
Income
Funds
Restricted Funds:
Can ONLY (normally) be restricted by DONOR
CAN be created by making appeal so take care with appeal surpluses or deficits
Feb 2014
Endowment
Funds
Income
Capital
Income
Unrestricted
Permanent
Endowment
Income
Restricted
Expendable
Endowment
Proposed Accounts requirements
England and Wales (excludes CIOs)
Income
Accounts
≤ £10k
£10k£25k
£25k-£250k
Cash basis (non-company)
Accruals basis (company)
Trustees’
annual report
£250k£500k
Accruals basis
Simpler?
Simple
Report to
regulator
None
Update
form
Independent
Person
Full
Full
Independent Examination*
Scrutiny
£500k
Qualified
Accountant
Simple return,
report and accounts
Independe
nt Audit
Return,
report &
accounts
If Income >£250k and assets >£3.26m audit required. Company charities may have IE.
Feb 2014
SoRP Consistent Terminology
MUST
SHOULD
MAY
• Compliance necessary in order to show “a true
and fair view”
• Non-adherence is a departure from the SoRP
• Good practice
• Not a departure from the SoRP
• Optional
• Indicates that there are alternative approaches
available
SoRP Consultation - Modules
• Modular approach
• “Pick and mix” online
• 29 Modules
–
–
–
–
14 Core
3 Special transactions (including grant making)
2 Types of assets (Heritage and Acting as Custodian)
3 Investments
(Total Return, Pooling, Social investment)
– 7 Group Accounts
Feb 2014
Charities SoRP 14 Core Modules
Statements
Underlying concepts
Accounting Treatments for
Charities
1.
Trustees’
Annual Report
3. Accounting
Standards, policies,
concepts and
principles…
8. Allocating costs
by activity
within SoFA
4.
SoFA
5. Recognition
of Income
6. Donated goods
and services
10. Balance Sheet
7. Recognition of
expenditure
9. Disclosure of
trustee and staff
remuneration
14. Statement of
Cash Flows
11. Accounting for
financial assets
and liabilities
13. Events since
the year end
2. Fund Accounting
12. Impairment of assets
Charities SoRP -15 “Special” Modules
Charity Operations
Types of Asset and
investments
Branches, groups and
Combinations
15. Charities and
company law
18 Heritage Assets
23 Combinations
overview
16. Presentation
of Grant making
19 Custodian
Trustee
24 Accounting for
Groups
17. Retirement and
postemployment
benefits
20 Total Return on
Investments
25 Branches and
Joint arrangements
21 Social Investments 26 Subsidiaries
22. Pooling
Investment
Funds
27 Mergers
28 Associates
29 Joint ventures
SoRP 2005 vs Consultation
• 1) Trustees’ annual report
– charities that have no reserves policy must disclose this fact;
– larger charities must explain their approach to risk
management;
– charities where there is doubt as to their being a going
concern must explain these uncertainties; and
– the names of all trustees must be disclosed.
Feb 2014
Accountability
•
•
•
•
•
•
On what?
By whom?
To achieve what?
Why?
How well?
To what effect?
None of which is normally revealed
in a set of accounts
Feb 2014
Accountability
Trustee issues
•
•
•
•
•
•
TAR – tell a story (Collective responsibility)
Seeking transparency – an open attitude
Consider Public benefit
Explain, explain, explain!
Avoid “Elephant in the sitting room!”
Change in the batting order
Feb 2014
Trustees’ annual report
A document to suit the charity
Who are we?
Reference and Administration
How do we work?
Structure, Governance and
Management
What are we doing?
Objectives and Activities – Public
benefit
What did we do and how
well did we do it?
Achievements and Performance
How did we afford it?
Financial Review
What are we planning?
Plans for Future Periods
What else do we look after
Custodianship
T2
Feb 2014
Statement of Financial Activities
per SoRP 2005
Incoming resources
Incoming resources from generated funds
A1a
Voluntary income
A1b
Activities for generating funds
A1c
Investment income
A2 Incoming resources from charitable activities
Other incoming resources
Total incoming resources
Resources expended
Costs of generating funds
B1a
Costs of generating voluntary income
B1b
Fundraising trading: cost of goods sold and other
costs
B1c
Investment management costs
Other costs of generating funds
B2 Charitable activities
B3 Governance costs
Total resources expended
Feb 2014
SoRP 2005 vs Consultation
• 2) Statement of financial activities (SOFA)
– The income and expenditure headings in the SOFA have
been changed and simplified.
– New heading “cost of raising funds” and
– governance costs are not shown separately on the face of
the SOFA but are treated as a component of support costs.
– Investment gains and losses now counted as a component of
net incoming resources / resources expended.
Feb 2014
Income and endowments from:
Donations and legacies
Charitable activities
Other trading activities
Investments
Other
Total Income
Expenditure on:
Raising funds
Charitable activities
Other
Total Expenditure
Net gains/(losses)
on investments
Net income (expenditure)
Unrestricted
funds
Restricted
funds
Endowment
funds
Total funds
Prior period
total funds
Structure of the SoFA
£
£
£
£
£
Module 1 TAR
Reserves
Paragraphs 1:22 and 1:48
MUST
SHOULD
• Explain any policy for holding reserves
• State the amount of reserves and why they are held
• If decided not to hold reserves, disclose fact and explain
• State total funds at the end of the period
• Identify restricted or fixed assets or programme related investments
• Identify and explain designated funds and timing of spend
• Calculate the amount of reserves at the end of the period
• Compare this with the reserves policy and provide explanations of
how it will be brought into line in future
Real examples from
audited charities
• Stating the obvious
• The charity’s intention is that there is sufficient
free reserves to ensure that it can continue its
investment in its activities, meet its short and
long term liabilities and to repay…or refinance
its borrowings. The key to this is the group’s
cash flow……
Feb 2014
Real examples from
audited charities
• The coy reserves policy!
• A level of charitable funds equivalent to two
months Group expenditure is appropriate. It
has been decided to exclude the pension fund
deficit…At the end of 2009, the level of
charitable funds fell short of its target by 20%.
• £38.567M x2/12 x 80% = £5.142million!!!
• I think?!
Feb 2014
Real examples from
audited charities
• The opaque (but revealing) policy
• The Foundation sets a charitable expenditure budget
each year, after taking account of its aim to generate
a sustainable level of income equivalent to 4% of the
3-year rolling average market value of investments
Feb 2014
Reserves Policy
•
The directors are currently formulating a policy
whereby the free reserves held by the
organisation should be approx 3 months of nondiscretionary resources expended, which
equates to £205,000.
•
This would enable current activities to continue
in the short term should funding drop
significantly.
•
At present the free reserves, at £57,575 do not
reach this target level and the directors are
considering ways in which additional funds
should be raised.
•
Both the policy and its implementation are
under regular scrutiny.
Feb 2014
Trustees’ Annual Report
Reserves are charity’s freely available income funds
Permanent endowment funds
Definition normally
excludes
Expendable endowment funds
Restricted funds
And unrestricted funds
not readily available for
spending
Funds only available by disposing of:
 Fixed assets for charity use
 Programme related investments
But charities may have
more or less reserves
available e.g..
Expendable endowments
Unrestricted funds earmarked or
designated for essential spending
Feb 2014
T8
Identifying the Free Reserves?
Unrestricted
Fixed assets
175
Investments
250
NCAs
40
LT Loans
Total
Designated
Restricted
Endowed
150
150
325
500
160
900
200
(100)
365
Total
(100)
150
Designated funds comprise:
Continuity reserve
50
Leasehold sinking fund 100
Feb 2014
310
500
1,325
Identifying the Free Reserves?
Unrestricted
Fixed assets
175
Investments
250
NCAs
40
LT Loans
Total
Designated
Restricted
Endowed
150
150
0
500
160
250
40
(100)
365
Total
0?
150
Designated funds :
Contingency reserve
50
Leasehold sinking fund
100
Feb 2014
310
500
1,325
SoRP 2005 vs Consultation
• 3) The statement of cash flows
– The statement of cash flows must be provided by any charity
preparing its accounts under FRS 102.
Feb 2014
Possible adjustments on transition
Restating
certain assets
and liabilities
at a different
value
Recognising
assets/liabilities
not previously
recognised
Not
recognising
assets/liabiliti
es previously
recognised
Recognising
adjustments on
transition in
retained profits
Reclassifying items
Total funds
Prior Year
funds
£
£
Net cash provided by (used in) operating activities
Cash flows from investing activities:
X
(X)
Dividends, interest and rents from investments
Proceeds from the sale of property, plant and
equipment
Purchase of property, plant and equipment
Proceeds from sale of investments
Purchase of investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Repayments of borrowing
Cash inflows from new borrowing
Receipt of endowment
X
X
X
X
(X)
(X)
X
-
-
(X)
X
X
(X)
(X)
X
-
X
X
Net cash provided by (used in) financing activities
X
X
Change in cash and cash equivalents in the
reporting period
Cash and cash equivalents at the beginning of the
reporting period
Change in cash and cash equivalents due to
exchange rate movements
Cash and cash equivalents at the end of the
reporting period
X
X
X
X
X
(X)
X
X
Table 8 Statement of Cash Flows
Note
Cash flows from operating activities:
(Table 9)
(Table 10)
(Table 10)
Table 9:Reconciliation of net income
(expenditure)to net cash flow from operating
activities
Current year
Prior Year
£
£
X
X
Depreciation charges
X
X
(Gains)/losses on investments
X
X
(X)
(X)
X
(X)
(Increase)/decrease in stocks
(X)
(X)
(Increase)/decrease in debtors
(X)
(X)
Increase/(decrease) in creditors
X
(X)
Net cash provided by (used in) operating activities
X
(X)
Net income/(expenditure) for the reporting period (as
per the statement of financial activities)
Adjustments for:
Dividends, interest and rents from investments
Loss/(profit) on the sale of fixed assets
SoRP 2005 vs Consultation
• 4) Changes to definitions and accounting policies
– Single-sided transfers are not permitted in the SOFA.
– The basis of going concern must be considered.
– Income is first recognised when its receipt is “probable” (this
point has been clarified).
Feb 2014
SoRP 2005 vs Consultation(cont.)
• 4) Changes to definitions and accounting policies
– Where practicable, donated goods for sale are measured at
fair value on receipt.
– Where practicable, donated goods for distribution are
recognised at the time of receipt at fair value.
– There is a more extensive requirement for discounting for the
time value of money with respect to both income and
expenditure where settlement is delayed by more than 12
months and the effect is material.
Feb 2014
Income Recognition
• Income is recognised in the Statement of Financial
Activities (SoFA) when a transaction or other event
results in an increase in the charity’s assets or a
reduction in its liabilities.
Feb 2014
Income Recognition
• Income must only be recognised in the accounts of a
charity when all of the following criteria are met:
•
– Entitlement – control over the rights or other access to the
economic benefit has passed to the charity.
– Probable – it is more likely than not that the economic
benefits will flow to the charity.
– Measurement – the monetary value or amount of the income
or costs can be measured reliably
Feb 2014
Grants or Contracts
• The central question is
• WHEN do we recognise the Incoming Resource?
• The answer is
• WHEN the ASSET is created.
• But how does it work in practice? ……….
Feb 2014
Grants or Contracts
• There are two types of incoming resource
• CONTRACTS and GRANTS
• CONTRACTS exist where there is an Agreement that
the charity will provide specific services (or goods) in
exchange for a payment.
• Payment is due when PERFORMANCE is completed.
Feb 2014
Grants or Contracts
• CONTRACTS
• When performance is complete the asset has been created and
the resource is available for the charity’s future use.
• Recognise income only when the performance is completed.
– On a long-term contract recognise income when there is certified partperformance
– Payment received in advance is deferred until performance is
satisfactorily completed
• Sometimes contracts are called
– “Grants with performance conditions”
Feb 2014
Grants or Contracts
• GRANTS
• Grants are received when a charity is given resource
to spend on the charity’s objects (UF/RF) but nothing
is given back in exchange. No goods or services are
provided in return.
• The accounting treatment depends on whether or not
there are any CONDITIONS preventing the charity
from spending the resource.
Feb 2014
Grants or Contracts
• GRANT with NO CONDITIONS
– Record the whole incoming resource in the SoFA when it is
receivable. Recognise income immediately. The asset is
created.
• GRANT with CONDITIONS
– If the condition is within the charity’s control.
(E.g. display accounts ) then recognise immediately.
– Otherwise treat as a Contract…….
Feb 2014
SoRP Consultation – “Grant”
conditions
Performance
Non-performance
Service Level required
Obtain matched funding
Obtain planning permission
etc.
Time conditions specified by
donor
Units of output supplied
Feb 2014
Grants or Contracts
• ACCOUNTING TREATMENT OF CONTRACTS
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Measure over time of the contract
Keep track of costs and liabilities
Match costs to funds
Recognise income when performance is complete
Defer receipt from SoFA initially – reduces net Assets
Review ongoing performance at the year-end
Feb 2014
Grants or Contracts
Purpose/
Transaction
Unrestricted
Restricted
Grant
Yes
Yes
Contract
Yes
No?
Feb 2014
Charities SoRP
• What does the SoRP Consultation say…about grants
and Contracts
• MODULE 5
• Recognition of income, including
legacies, grants and contract income
Feb 2014
Charities SoRP – Module 5
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MODULE 5
understanding the nature of income;
general rules for income recognition;
general principles for recognising income from donations and grants;
identification of terms and conditions;
performance-related conditions;
other terms and conditions that limit the recognition of income;
deferring income where conditions that limit recognition are not met;
terms and conditions that do not prevent recognition;
recognising income from legacies;
income from donated goods, facilities and services;
income from contracts for the supply of goods and services;
income from membership subscriptions;
income from interest, royalties or dividends;
settlement of insurance claims; and
disclosures and notes to the accounts.
Feb 2014
Charities SoRP - “5.19”
• Is the funding agreement is a performance-related grant or
a contract.
• Important distinction because the consequence of noncompliance with performance conditions and the liability for
non-performance differ.
– Contract Law - buyer to seek costs, damages and recompense
for any failure or breach of contract by the seller,
– Grant
- failure may lead to a partial or full repayment
of the grant if there are repayment conditions.
Feb 2014
Charities SoRP - Terminology
• There are two broad categories of income:
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income from exchange transactions (contract income)
income from non-exchange transactions (gifts).
Something for nothing!....TERMINOLOGY
A non-exchange transaction is a transaction whereby an
entity receives value from another entity without directly
giving approximately equal value in exchange or gives value
to another entity without directly receiving approximately
equal value in exchange.
Feb 2014
Charities SoRP – Restricted Funds
• A donation or grant that can be used for any purpose
of the charity is unrestricted income.
• However, a donation or grant may be restricted to a
specific purpose of a charity.
– A restriction may result from a specific appeal by the charity,
or
– from the decision of the grant maker or donor to support a
specific purpose of the charity rather than making funds
available for the charity’s general use.
• 5.6
Feb 2014
Restriction vs. performance
condition
• A restriction on the use of a grant or donation to a
particular purpose or activity of a charity does not
create a performance condition.
• A restriction creates a requirement that limits or
directs the purpose for which a resource may be used
but it does not require a specific level of performance
or output from the recipient charity.
• 5.18
Feb 2014
SUBSTANCE/LEGAL FORM
• Transactions must be accounted for and presented in
accordance with their SUBSTANCE and not simply their
LEGAL FORM.
• Charities must therefore consider the substance of any
conditions attaching to donations or grants and to the
substance of any contractual terms when determining their
entitlement to income.
• Similarly, the substance of any restriction placed on the
use of income must be considered when determining
whether or not income is presented as restricted funds in a
charity’s accounts.
• 5.7
Feb 2014
Restricted Contract Income!
• In particular, a charity, should consider:
• Whether entitlement to income is subject to fulfilling
performance-related conditions. Performance-related
conditions distinguish a contract or performance-related
grant from an outright gift such as an unconditional grant.
• The terms of a donation or grant that impose a restriction
on use which is narrower than the general purposes of the
charity. Terms placed on gifts that limit a charity’s
discretion over how income must be used are presented
as restricted income in the accounts.
• 5.7 (Cont.)
Feb 2014
Restricted Contract Income!
• The terms of a CONTRACT that limit payments to
amounts expended by the charity on purposes
specified in the contract and restrict the charity’s use
of any surplus. INCOME that is RESTRICTED by
contractual terms may be presented as restricted in
the accounts if the restrictions are in SUBSTANCE
THE SAME AS would apply to a RESTRICTED
donation or GRANT.
• 5.7 (Cont.)
Feb 2014
SoRP 2005 vs Consultation
• 5) Changes to definitions and policies (cont.)
– Properties with a mix of investment and functional use are
normally apportioned between tangible fixed assets and
investment properties on the balance sheet.
– A new category of “mixed motive” investments is introduced.
– The definition of related parties has been aligned with the
definition set out in FRS 102 and section 118 of the Charities Act
2011.
– Internally generated databases cannot normally be capitalised.
– A provision must be recognised for those defined benefit
pension schemes accounted for as a defined contribution
scheme where there is an agreement in place to make
additional contributions to reduce a fund deficit.
Feb 2014
Income Recognition Legacies
ENTITLEMENT
• Know of the existence of a valid Will AND
• Know about the death of the benefactor
TO RECOGNISE
INCOME
• MUST show ENTITLEMENT PLUS
• “PROBABILITY of receipt” PLUS
• Ability to ESTIMATE with sufficient ACCURACY the
amount receivable
RECEIPT
PROBABLE when
• There has been Grant of Probate AND
• Executors have established that there are sufficient
assets in the Estate AND
• Any conditions attached are within the control of
the charity or have been met
Income Recognition : Legacies (cont).
• Payment is received or notified after the reporting date and
before accounts are authorised BUT payment was agreed
by the executors prior to the end of the reporting period.,
THEN treat as ADJUSTING EVENT and accrue it as
income. Always use FAIR VALUE.
• If charity has entitlement but the AMOUNT is uncertain
then disclose as a CONTINGENT ASSET
• LARGE charities may use a PORTFOLIO approach
• If to be received > 12 months from the reporting date then
DISCOUNTING can be used but unwind against legacy
income.
• If there is IMPAIRMENT then make the adjustment
between income (not expenditure) and debtors.
Charities SoRP
Additional definitions and disclosures
New definition – “De facto” trustee
• De facto trustee is a person who has not been validly
appointed as a trustee but
– is acting as the trustee of the charity and is exercising the
functions that could only be properly discharged by a trustee.
This may have come about due to an error, omission or
oversight in the appointment process of that trustee.
• May also be known as a de facto director.
• Key point is that they are included in disclosure
requirements for Trustee and Staff remuneration
Common basic financial instruments
Basic Financial Instruments
Cash
Debtors including trade debtors and loans receivable
Creditors including trade creditors and loans payable
Overdraft (loan repayable on demand)
Qualifying long term loans*
Bank deposit
Investment in non-puttable ordinary or preference shares
Loans advanced by the charity on market terms*
* Must meet the FRS 102 debt instrument criteria
Common other financial instruments
Other Financial Instruments
Advance fee scheme in a School
- Account according to the substance of the transaction
Foreign Exchange contracts etc.
Loans with “Put and Call” options
- Need to consider “hedging” aspects per S12 of FRS102
UK Retail Gift Aid System
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Charity selling goods for third parties are
Legally acting as agent…entitled to commission only
Until donor waives repayment…then a donation (GA!)
All handled under “Income from other trading”
Large charities may use estimation techniques
Income from FAIR VALUE of donated goods
recognised when sold….
• Or in two stages received (if FAIR VALUE
ESTIMATION is possible) and then when sold
New definition of Related Parties
•
A. any trustee and custodian trustee
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B. the donor of any land to the charity (on or after establishment; and
•
C. any person who is:
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1. a child, parent, grandchild, grandparent, brother or sister of trustee (A) or land donor (B)
2. an officer, agent or a member of the key management personnel of the charity;
3. the spouse or civil partner of any of the above persons (A, B, C1 and C2);
4. carrying on business in partnership with any of the above persons (A, B, C1, C2 and C3);
5. a person, or a close member of that person’s family, with control or joint control over the charity
6. a person, or a close member of that person’s family, with significant influence over the charity
‘Close member of a person’s family’ refers to:
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a. that person’s children or spouse;
b. the children, stepchildren or illegitimate children of that person’s spouse or domestic partner;
c. dependents of that person; and
d. that person’s domestic partner who lives with them as husband or wife or in an equivalent
same-sex relationship.
Not Related Parties?
• A charity is not necessarily related to another charity
simply because a particular person happens to be a
trustee of both.
• It will only be ‘related’ if the relationship means that
one charity, in furthering its charitable aims, is under
the direction or control of the trustees of another
charity.
• “In considering a possible related party relationship, a
charity must assess the substance of the relationship
and not merely its legal form.”
(Corporate) Related Parties if…….
• the entity and the reporting charity are members of the same
group (which means that each parent, subsidiary and fellow
subsidiary is related to the others);
• one entity is an associate or joint venture of the other entity (or a
member of the group in which the other entity is the parent or a
member);
• both entities are joint ventures of the same third entity;
• one entity is a joint venture of a third entity and the other entity is
an associate of the third entity;
• the entity is a post-employment benefit plan for the benefit of
employees of either
• the reporting entity or an entity related to the reporting entity;
• an entity that is controlled or jointly controlled by a person, or two
or more persons, identified in A, B or C;
Related Parties disclosures…..
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the DESCRIPTION of a RELATIONSHIP between the parties
(including the interest of the related party or parties in the transaction);
a description of the transaction(s);
the AMOUNTS involved;
outstanding BALANCES with related parties and provisions for doubtful
debts;
any amounts written off from such balances during the reporting period;
the terms and conditions, including any security and the nature of the
consideration to be provided in settlement;
details of any guarantees given or received; and
ANY OTHER elements of the transactions which are necessary for the
understanding of the accounts; and
this SORP REQUIRES the disclosure of the NAME(S) of the transacting
related party or parties.
Related Parties (cont.)
• The reporting charity must not state that related party
transactions were made at open market value or on
terms equivalent to those that prevail in arm’s length
transactions unless such terms can be substantiated.
• If there have been no related party transactions in the
reporting period that require disclosure, this SORP
requires that this fact must be stated.
Related Parties Exemptions
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If there is no evidence of influence…
•
Donations without conditions that change the charity’s activities such as:
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requiring the charity to purchase goods or services from a specified supplier;
making an interest bearing loan to the charity;
or requiring that payments be made to a specified third party.
However charities must show the total amount of unconditional donations
•
Services provided by trustee on a voluntary basis,
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Contracts of employment (except trustee)
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Other items
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Purchase of minor articles (charity shop),
receipt of services (per beneficiaries),
out of pocket expenses (but note disclosure of trustees expenses),
amounts waived unless material.
Employee and Trustee Remuneration
• Important to show that the charity is operating for the
public benefit and trustees are acting in the interests
of their charity and not for private benefit.
• For this reason, this SORP requires that disclosure
must be made of transactions involving trustees,
related parties, staff remuneration and ex-gratia
payments.
• The payments made to the auditor or independent
examiner must also be disclosed.
Paying Trustees?
• A transaction involving a trustee or other related party must
always be regarded as material regardless of its size.
• Must make the same disclosures for de- facto trustees.
Most trustees are volunteers however,
• provided the arrangement is legally authorised, a trustee
may be remunerated for their role as a trustee.
• On occasions, a trustee may also be employed in some
other role, by the charity or a related entity.
Trustee payments disclosure
MUST
• SORP requires Accounting Note that EITHER
None
One or
more
• of the trustees have been paid any remuneration or
received any other benefits from an employment
with their charity or a related entity; or
Payments to trustees
MUST show
• for each individual trustee who received remuneration or other
benefits show
LEGAL AUTHORITY
TRUSTEE NAME
REASON FOR PAYMENT
AMOUNT
• remuneration, pension contribution or any other benefit
MAY show
• distinguish between as trustee and other services
All charities MUST disclose
• the fact that there are no employees who received
employee benefits (excluding employer pension
costs) of more than £60,000 (€70,000); OR
• the number of employees whose total employee
benefits (excluding employer pension costs) for the
reporting period fell within each band of £10,000
(€10,000) from £60,000 (€70,000) upwards.
FRS102 “Key Management Personnel”
trustees and senior employees
MUST
• disclose the total amount of any employee benefits received
by trustees and its other key management personnel
SHOULD
• give consideration to the information needs of their funders
and other stakeholders in making their accounting
disclosures.
• E.g. Chief Executive Officer or highest paid staff member,
MAY
• Disclose the amount of employee benefits paid to its key
management personnel on an individual basis.
Accrual for Holiday Pay
• A liability for paid annual leave and paid sick leave is
recognised, if it is a material component of total
expenditure, and not discounted for the time value of
money.
SOCIAL INVESTMENT
•
‘Social investments’ are either programme related
and mixed motive investments (new category)
• Programme related investments are held to further
the charitable purposes of the investing charity. There
may be a financial return but it is incidental
• Mixed motive investments are a form of social
investment made in part to further the charitable
purposes of the investing charity and in part to
generate a financial return.
SOCIAL INVESTMENTS (cont.)
• A charity making or in receipt of social investments or
undertaking complex contractual arrangements needs to
consider carefully the nature of the arrangement and
account for the substance of it.:
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Examples include:
repayable loans,
non-repayable loans (quasi equity),
concessionary loans, equity investments, property letting,
performance related income or profit-sharing
arrangements or partnerships
ACCOUNTING FOR
SOCIAL INVESTMENTS
• To account for the investment or contractual arrangement
correctly, a charity needs to be able to identify:
• the nature of the asset or entitlement to income acquired;
• the basis upon which any financial return is calculated;
• the method(s) to be used to measure financial return;
• the nature of any liabilities or obligations acquired;
• the method(s) to be used to measure any liability or
obligation; and
• their motive(s) for acquiring the investment.
SOCIAL INVESTMENT : PROPERTY
• Property may be Programme Related Investment only
when it is held specifically to enable a third party to
undertake particular activities using the property that
contribute to the investing charity’s charitable
purposes.
• Property may also be classified as mixed motive
investment when it is held for a combination of the
financial return it generates and the contribution its
use by another charity or third party makes to the
investing charity’s purposes.
SOCIAL INVESTMENT: PROPERTY
• Property is held either
– to further the objects (property, plant and equipment) or
– The generate a return (investment property)
• If property is held for a mixed purpose then
– It must be apportion between the two categories above
– If not practicable then Tangible Assets PPE
• If property is held for own purposes plus let to third party
who furthers our objects
– It must be apportion between PPE and Mixed
– If not practicable then Tangible Assets PPE
Total Return Approach to investment
ORIGINAL
ENDOWMENT PLUS • Needs GD authority
• Needs CC permission
SUBSEQUENT
CAPITAL GIFTS
• HC amounts ring-fenced?
UNAPPLIED TOTAL
RETURN
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Cumulative returns on investments
Less previous transfers to income
Record keeping is a challenge
Evolved by CC since 2002
Onerous contracts
• Situations may arise where
– the unavoidable costs of fulfilling a contract exceed
– the expected economic benefit derived from it.
• In such circumstances, a charity must recognise
these irrecoverable costs.
– E.g. leaving a property with unexpired lease
(no possible sub-let)
Onerous contracts (cont.)
MUST
IMMEDIATE
IMPAIRMENT
REVIEW
• make provision for a material loss-making
contract which cannot be cancelled without
the payment of compensation.
• provision for the unavoidable loss.
• of the fixed assets used in supplying the
contracted service(s) before calculating the
provision.
Onerous contracts provision
• Provision is the lower of:
– Costs involved in completing the contract and
– Cost of any compensation payable as result of withdrawing
from the contract.
•
For charities enhanced service levels to beneficiaries beyond contacts
do not create an onerous contract even when these costs cannot be
recovered because they are part of charitable activities.
Charities SoRP – Items most likely to……
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Income (Almost) virtually certain
Paid Annual Leave accrual
FRS102 treatment of defined benefit pension scheme
Goods for resale
Concessionary Loans at Fair Value
Other financial instruments
Extended credit on contracts
……..require adjustment if FRS 102 adopted?!
Heritage Assets
Module 18
• A heritage asset is a tangible or intangible asset with
historical, artistic, scientific, technological,
geophysical or environmental qualities that is held
and maintained principally for its contribution to
knowledge and culture.
Attributes
of a Heritage asset
• An asset may have the attributes of a heritage asset,
e.g. be of historic or artistic importance, but unless
• It is ALSO held and maintained for its contribution to
knowledge and culture then it will not fall within the
definition of a heritage asset.
Examples of (Non) Heritage Assets
• Assets with heritage attributes
• may be used operationally for other purposes unconnected with
the promotion of knowledge and culture. In such instances, the
asset is accounted for within tangible fixed assets or investments
as appropriate.
Examples:
• A historic building used by an educational establishment
– Attributes not heritage
•
Museum or gallery
– collections held – Heritage
– buildings or display cases – not usually heritage
•
Works of art or historic buildings
– Investments not usually heritage
Heritage Assets
• Charities that do not have preservation or
conservation purposes should account for an asset as
a heritage asset only if that asset:
– has historic, artistic, scientific, technological, geophysical or
environmental qualities;
– contributes to knowledge and culture through its retention
and use; AND
– is accessible to the public for viewing and/or research.
Heritage Asset - Disclosure
• Heritage assets are shown in a separate category
• Shown at cost or FAIR VALUE
• Charities are not required to recognise heritage
assets on the balance sheet if
– information on their cost or valuation is not available and
such information cannot be obtained at a cost commensurate
with the benefit to the users of the accounts and to the
charity.
Heritage Assets - Disclosure
• Where reliable information on cost or value is not
available
• charities will need to consider if the cost of obtaining a
valuation is justified by the usefulness of the
information to the users of the accounts and to the
charity for its own stewardship purposes.
Heritage assets - Valuation
• Charities may adopt ANY reliable valuation technique to
estimate the fair value of a heritage asset.
• E.g. the use of market value may provide a reasonable
approach; or
• the use of depreciated replacement cost may be
appropriate.
• However, depreciated replacement cost may not be an
appropriate method where a building cannot be replicated
using modern building methods or where the value of the
original asset lies in its unique historic or heritage qualities.
• If a valuation method is adopted, it must be applied to all
assets within a particular class or to a group of similar
assets.
Heritage Assets
– Accounting Disclosures
ASSET
•a separate class in the balance sheet
•With note for analysis of those classes or groups of heritage assets reported at cost
and those reported at valuation;
INCOME
•include the value of any heritage asset gifted in the ‘INCOME FROM DONATIONS
AND LEGACIES heading (SoFA)
GAIN or LOSS IN
CARRYING VALUE
•recognise any change in the valuation of a heritage asset as a ‘GAIN or LOSS on
REVALUATION OF FIXED ASSETS’ in the SoFA;
GAIN or LOSS ON
DISPOSAL
•recognise any gain on the disposal of a heritage asset as ‘OTHER INCOME’ AND
•recognise any loss on disposal, depreciation or impairment of a heritage asset as a
COST OF CHARITABLE ACTIVITIES in the SoFA.
• My contact details
– Kenbrewco@gmail.com 07748 758345
• Useful Websites
– http://www.charity-commission.gov.uk/
– www.charitysorp.org
– www.frc.org.uk
– www.charitytrends.org
Feb 2014