Developments in the not-for-profit sector

FRC Triennial Review 2017: Amendments to FRS 102

Read our Charity alert on the triennial review and the update on gift aid payments.

Read the FRC 2017 Triennial Review (Amendments to FRS 102 the Financial Reporting Standard applicable in the UK and Republic of Ireland – Incremental Improvements and Clarifications - December 2017).

In December 2017 the Financial Reporting Council (‘FRC’) published its amendments to FRS 102. The amendments are mainly editorial in nature and are intended to clarify rather than change the accounting. These amendments also include changes relating to gift aid payments by subsidiaries to their charitable parents (based on the proposals in FRED 68), clarifying the accounting for the gift aid payment and amending treatment of the tax effects.

Other principal amendments which may have an impact on the financial statements are:

• An accounting policy choice is introduced for entities that rent investment property to another group entity, whereby they can choose to measure the investment property either at cost (less depreciation and impairment) or at fair value.
• The introduction of a description of a basic financial instrument, as well as conditions for classification, may result in a small number of additional financial instruments now being considered to be basic.
• For small entities a loan from a director or their close family members may be initially measured at transaction price rather than present value.
• Entities will be required to recognise fewer intangible assets acquired in a business combination separately from goodwill.
• A net debt reconciliation will be required with the cash flow statement (similar to old UK GAAP).

Revised guidance for charity auditors: Practice Note 11 (revised)

Read our Charity alert on the revised guidance for charity auditors and practice note 11 (revised)

Read the Practice Note 11 (revised).

The Financial Reporting Council published Practice Note 11 (Revised) in November 2017 (“PN11”). The new, shorter, practice note is aligned with the updated International Standards on Auditing UK (“ISAs (UK)”) and gives specific charity guidance on each individual ISA (UK) in the same way as its predecessor. The guidance sets out areas where auditors are expected to challenge trustees and management; and so highlights matters where management and trustees should consider their response before the audit.

Some of the key points from the update include:

• The trustees’ annual report is considered ‘statutory other information’ for all charities not just charitable companies.
• Only revenue recognition is presumed to give rise to a significant risk in all charity audits.
• An appendix is included highlighting conditions and events that may indicate risks of material misstatement.
• The tone of the guidance on auditor’s response to risk section is changed from a list of procedures to considerations of a fuller initial risk assessment; guidance on assessing audit risks for heritage assets and grants payable has been added.
• Guidance relating to gift aid, taxable trading and data protection are included in matters to consider in relation to laws and regulations.
• The going concern guidance is updated to reflect the requirement for trustees to carry out their own assessment (SORP 2015 3.14) and for auditors to assess trustees’ information and judgments, challenging, for example, the relationship with the reserves policy, or restricted and unrestricted cash flows.
• The updated guidance from the Charity Commission on reporting ‘matters of material significance’ is reflected.
• Example audit reports and engagement letter paragraphs are no longer provided.

SORP Bulletin 2 consultation

Read our Charity alert on the SORP bulletin 2 consultation.

Read the proposed SORP Bulletin 2.

SORP Bulletin 2 consultation updates the Charities SORP (FRS 102) (the ”SORP”) for the amendments and clarifications set out in the Triennial Review 2017 issued by the Financial Reporting Council in December 2017. The consultation closes on the 4 April.

This second SORP bulletin sets out the proposed amendments in three sections: 

• those changes which are required to ensure that the SORP is consistent with the original drafting intention of the FRS 102 - to be applied immediately;
• those changes which are significant and likely to have an impact on the accounts; and
• those amendments which are considered less significant and editorial in nature.

As the points noted in the latter two sections relate to amendments to FRS 102 the effective dates for these changes are reporting periods beginning on or after 1 January 2019 with early adoption permitted provided all amendments are applied at the same time.

The key changes that would be applied immediately relate to:

• the disclosure of comparative information; 
• removal of undue cost or effort exemption for depreciating assets with major components with significantly different lives; and
• providing more clarity on the treatment of gift aid payments and the impact on the tax treatment.

The last change means that only gift aid payments which are legal obligations should be accrued for at the year end - constructive obligations are no longer included in the list of examples of adjusting events occurring after the end of the reporting period.

Other significant proposals, with the 2019 effective date, include:

• Permitting charities that rent investment property to another group entity to measure the investment property either at cost (less depreciation and impairment) or at fair value;
• Removing the undue cost or effort exemption for the investment property component of mixed use property hence changing the requirement to measurement at fair value;
• Removing the disclosure of stock recognised as an expense;
• Including a description of a basic financial instrument, as well as conditions for classification, which may result in a small number of additional financial instruments being considered basic;
• Requiring a reconciliation of net debt as a note to the statement of cash flows; and
• Including the transfer of activities to a subsidiary undertaking as an example of charity reconstruction that should be accounted for as a merger.