Charity Accounts and Audit Update Bill Telford BA FCA Telford - - PowerPoint PPT Presentation

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Charity Accounts and Audit Update

Bill Telford BA FCA

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Introduction

Chapter 1

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Charity sector under pressure

• Increased
• Scepticism
• Scrutiny
• Challenges by CC
• Registration
• Monitoring
• Implementation of new UK GAAP

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Recent issues

• Commercial agreements which are not necessarily

in the best interests of beneficiaries,

• Alleged financial mismanagement;
• Undue pressure on vulnerable donors;
• Excessive remuneration for chief executives;
• The blurring of charitable objectives and political

lobbying;

• Concerns about charities and terrorist financing;
• Changes in the relationship between the public

and private sector;

• The financial climate!

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Issues concerning the Charity Commission

• Public benefit and charitable objectives
• Funding non-charitable organisations
• Fee charging educational charities
• Business rate relief

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Issues concerning the Charity Commission

• Effective trustee management
• Managing charity finances, planning,

managing difficulties and insolvency (CC 12);

• Charity reserves: building resilience (CC

19);

• Charity governance, finance and

resilience: 15 questions trustees should ask

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Issues concerning the Charity Commission

• Counter terrorism legislation
• Fraud
• Financial difficulties
• Level of reserves

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Issues concerning Charity Commission

• Social investment
• A new statutory power for all charities to

make social investment

• Gift aid and trading charities
• Distributions

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Charity fundraising

Chapter 2

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Fundraising

• The disqualification of those who have

committed certain offences from acting as a trustee or taking certain roles within a charity;

• New rules relating to agreements with

charities with professional fundraisers and commercial participators; and

• New requirements for disclosures in the

trustees’ report of larger charities.

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Fundraising - Trustees’ duties

• Planning effectively;
• Supervising your fundraisers;
• Protecting your charity’s reputation, money

and other assets;

• Identifying and ensuring compliance with the

laws or regulations that apply specifically to your charity’s fundraising;

• Identifying and following any recognised

standards that apply to your charity’s fundraising;

• Being open and accountable

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Fundraising - Reporting requirements

• Large charities
• Required periods commencing on or after

1 November 2016

• Small charities?

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Reporting requirements

• The fundraising approach taken by the charity, by

anyone acting on its behalf, and whether a professional fundraiser or commercial participator carried out any fundraising activities;

• Details of any fundraising standards or scheme for

fundraising regulation that the charity has voluntarily subscribed to;

• Details of any fundraising standards or scheme for

fundraising regulation that any person acting on behalf

• f the charity has voluntarily subscribed to;
• Details of any failure by the charity, or by any person

acting on its behalf, to comply with fundraising standards or scheme for fundraising regulation that the charity or the person acting on its behalf has voluntarily subscribed to;

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Reporting requirements (2)

• Whether the charity monitored the fundraising activities
• f any person acting on its behalf and, if so, how it did

so;

• The number of complaints received by the charity, or

by a person acting on its behalf for the purposes of fundraising, about fundraising activity;

• What the charity has done to protect vulnerable people

and other members of the public from behaviour which:

• Is an unreasonable intrusion on a person’s privacy;
• Is unreasonably persistent; and
• Places undue pressure on a person to give money or
• ther property.

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Reporting matters of material significance to the Charity Commission

Chapter 3

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Matters of material significance

• Some changes to material from significant

e.g. losses through fraud, internal control weaknesses

• Some confirm reportable if come to light

during the audit

• Three new ones

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New matters of material significance

• On making a modified audit opinion,

emphasis of matter, or issuing a qualified independent examiner’s report identifying matters of concern to which attention is drawn, notification of the modification / emphasis of matter / or concern including notification of the action taken, if any, by the trustees subsequent to the audit opinion / examiner’s report;

• Evidence that, without reasonable cause,

trustees have not taken action on matters identified by the auditor or examiner in their scrutiny of accounts for a previous year; and

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New matters of material significance

• During the audit / independent examination

evidence that conflicts of interest have not been managed by the trustees in accordance with guidance issued by the charity regulator and / or related party transactions have not been fully disclosed in all the respects required by the SORP.

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Directions and guidance for independent examiners

Chapter 4

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Updating framework for examination

• include revisions in the Directions, and the

guidance on applying those directions, and therefore, the work which needs to be carried out.

• In addition to changes in the Directions there will

be changes in eligibility to carry out an independent examination where income if greater than £250,000.

• It will also be possible for an independent

examination to be carried out on consolidated accounts.

• Finally, there is a proposal for a revised

independent examiner’s report

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Independent examiner’s report to the trustees of XYZ Charitable company

I report on the accounts of the company for the year ended 30 April 2017 which are set out on pages xx to xx. Responsibilities and basis of report As the charity’s trustees (and also as directors of the company for the purposes of company law) you are responsible for the preparation of the accounts in accordance with the requirements

• f the Companies Act 2006.

Having satisfied myself that the charity is not subject to the requirement for an audit under company law and is eligible for independent examination, I have examined your charity’s accounts as required by section 145 of the Charities Act 2011 (‘the Act’). In carrying out my examination I have followed the Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act.

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My role is to state whether any material matters have come to my attention giving me cause to believe:

1.

that accounting records were not kept as required by section 386 of the Companies Act 2006; or

2.

that the accounts do not accord with those records; or

3.

that the accounts do not comply with the accounting requirements of section 396 of the Companies Act 2006 and the methods and principles of the Charities Statement

• f Recommended Practice applicable to charities

preparing their accounts in accordance with the Financial Reporting Standard applicable in The United Kingdom and Republic of Ireland; or

4.

that there is further information needed for a proper understanding of the accounts.

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Independent examiner’s statement

Since your charity’s gross income exceeded £250,000 your examiner must be a member of a listed body. I confirm that I am qualified to undertake the examination because I am a registered member of [named body e.g. ICAEW] which is one of the listed bodies. I have completed my examination and I have no concerns in respect of any of the matters listed in (1) to (4) above and in connection with following the Directions of the Charity Commission I have found no matters that require drawing to your attention.

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Reporting public benefit

Chapter 5

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Public benefit framework

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New UK GAAP, charities and SORPs

Chapter 6

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Introduction

• Receipts and payments account
• No changes in eligibility
• No changes in accounting!
• Accruals accounts
• Choices

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New GAAP

FRS 100 IFRS FRS 101 FRS 102 FRS 102 FRS 102 Reduced disclosure FRS 102 for small entities FRS 105 for micros

?

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Charity SORPs FRS 102 FRS 102 SORP All charities Small charities FRSSE SORP

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Charity SORPs FRS 102 FRS 102 SORP All charities Small charities FRSSE SORP

SORP Update Bulletin 1 a) Drop FRSSE SORP; b) Increase definition of larger charity to income > £500,000 c) Require all larger charities to prepare a cash flow statement d) Minor revisions to clarify and align with FRS 102 revisions.

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Charity SORPs FRS 102 FRS 102 SORP All charities Small charities FRSSE SORP

SORP Update Bulletin 1 a) Drop FRSSE SORP; b) Increase definition of larger charity to income > £500,000 c) Require all larger charities to prepare a cash flow statement d) Minor revisions to clarify and align with FRS 102 revisions.

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www.charitiessorp.org

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Small company size criteria

New Old Turnover £10.2m £6.5m Balance sheet total (gross assets) £5.1m £3.26m Employees 50 50

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Effective date

• Accounting periods commencing on or

after 1 January 2016

• Early adopt for periods commencing on
• r after 1 January 2015
• Accounting purposes only

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Unincorporated charities

• Audit limit increased to £1m for periods

ending on or after 31 March 2015

• No change for assets  need audit

income > £250,000 and assets > £3,260,000

• Group accounts not required if income <

£1 m

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Illustration 1

• A charitable company has income of £8

million and gross assets of £4 million. It has a 30 September year end and the directors / trustees have asked for your advice on the options available for the 30 September 2016 year-end.

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Audit

Audit Company law Turnover £10.2m Balance sheet £5.1m Employees 50 Charity law Turnover > £1,000,000 Turnover > £250,000 and B/s > £3,260,000

Periods commencing on or after 1 January 2016 Accounts filed after 31 March 2015

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Larger charities

• Used to be (and still is in FRSSE SORP)

defined as a charity needing an audit

• Now defined as one with income greater

than £500,000.

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Impact of being a larger charity

• Need a cash flow statement
• Have additional disclosure requirements

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• 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

• bjectives rather than with a view to

providing a financial return to equity providers, shareholders or members.

Public benefit entities

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1

• FRS 102 as everyone else
• Holiday pay accrual, pension deficit

2

• FRS 102 PBE sections

3

• SORP
• Charities, RSL, HFE

Compliance trail

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1

• FRS 102 as everyone else
• Holiday pay accrual, pension deficit

2

• FRS 102 PBE sections

3

• SORP
• Charities, RSL, HFE

Compliance trail

SORP may narrow / expand options in FRS 102 but not override / depart

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Other issues

• Groups
• SORP Update Bulletin
• Unincorporated charities and transition

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The SORPs

Chapter 7

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SORP ‘requirements’

• Use of ‘must’, ‘should’, and ‘may’
• Note smaller charities are encouraged to

make additional disclosures when necessary

• CC Help-sheets
• 1 – Maps SORP 2005 to FRS 102 SORP
• 2 - Outlines major differences between

SORP 2005 and FRS 102 SORP

• 3 - Outlines major differences between

FRS 102 SORP and FRSSE SORP

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Trustees’ report (Module 1)

Chapter 8

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Applicability of guidance

All

Trustees report

Unincorporated

Trustees report only

Company

Trustees’ report +

Small

Directors report

Not small

Directors report and strategic report

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Significant changes from SORP 2005

• The charity must explain any policy it has for

holding reserves and state the amounts of those reserves and why they are held.

• If the trustees have decided that holding reserves

is unnecessary, the report must disclose this fact and provide the reasons behind this decision.

• The concession allowing the disclosure of the

names of trustees to be limited to a maximum of 50 has been dropped and instead all trustees who acted in the year or who are in position at the date the report is signed must be listed.

• This change was to ensure that details of all

trustees are reported.

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Larger charities only

• Must provide an explanation of their social investment policies

and explain how any programme related investments contributed to the achievement of its aims and objectives.

• Must explain the financial effect of significant events. This is in

addition to reporting the significant charitable activities undertaken (which is carried over from SORP 2005).

• The statement concerning risk management made by larger

charities is dropped and instead larger charities are required to provide a description of the principal risks and uncertainties facing the charity and its subsidiary undertakings, as identified by the charity trustees, together with a summary of their plans and strategies for managing those risks.

• Larger charities must disclose their arrangements for setting

the pay and remuneration of the charity’s key management personnel and any benchmarks, parameters or criteria used in setting their pay.

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All charities with permanent endowment

• If using total return additional disclosures

in Module 21 which can be included in Trustees’ Report or notes to accounts

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Differences between FRS 102 and FRSSE SORP

• None

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Illustration 2

• A charity’s trustees have prepared a trustees’

report which has omitted certain information required by the SORP. In addition, the report excludes the required disclosures relating to future developments and related risks.

• The report also indicates that the charity had

a good year but actually had a very bad year!

• What are the implications for the auditor in the

following situations:

a) The charity is unincorporated? b) The charity is a limited company?

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Fund accounting (Module 2)

Chapter 9

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Funds

Funds Unrestricted General Fixed Assets Free Designated Restricted Income Donor imposed Appeal related Endowment Permanent Expendable

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Fund accounting

• General
• Investment return on income and

endowment funds

• Expenses on income and endowment

funds

• Fixed assets and funds

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Transfers between funds

• To transfer assets from unrestricted funds to finance a deficit
• n a restricted fund;
• To transfer the value of fixed assets from restricted funds to

unrestricted funds when the asset has been purchased out of restricted fund donations but is held for a general and not a restricted purpose;

• Where restricted funds have ben lawfully released and

transferred to unrestricted funds;

• Where the trustees have exercised a power to declare a

special trust over a gift initially recognised as unrestricted; or

• Where charity law permits the proceeds of restricted funds to

be spent for an alternative purpose (such as the cy pres procedures in England and Wales) for example the alternative use of the proceeds of a failed appeal, or the alternative use of excess of funds raised from an appeal.

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Other issues

• Funds in surplus / deficit
• Trustees’ power to declare special trusts
• Disclosure of funds

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Accounting standards, policies, concepts and principles (Module 3)

Chapter 10

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Charities SORP

• Basis of preparation note
• SORP, FRS 102, applicable law and

regulations

• Going concern disclosures
• Including statement that no uncertainties
• Additional disclosures
• Charity is a PBE
• Judgements and estimations
• Key assumptions

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The SoFA (Module 4)

Chapter 11

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Profit and loss account

STRGL

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Profit and loss account

OCI

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Guidance

• Immaterial funds
• Exceptional items – FRSSE only
• Accounting for material items – FRS 102
• nly
• Extraordinary items
• None
• Discontinued items
• Smaller charities below audit threshold

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Income recognition (Module 5)

Chapter 12

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The key distinction(s)

• Types of transactions
• Exchange transactions
• Income from provision of goods and services
• Non-exchange transactions
• Gifts
• Conditions and restrictions
• Performance conditions affect when

income is recognised

• Restrictions affect where it is recognised

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• “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.”

• The accounting may therefore be required

by the donor or recipient.

• Excludes government grants covered by

Section 24

• Includes but is not limited to legacies and

donations (cash and kind)

Non-exchange transactions

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• Transactions that do not impose specified

future performance-related conditions on the recipient are recognised in income when the resources are received or receivable.

• Transactions that do impose specified future

performance-related conditions on the recipient are recognised in income only when the performance-related conditions are met.

• Where resources are received before the

revenue recognition criteria are satisfied, a liability is recognised.

Recognition

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General principles – SORP 2005

• Entitlement –
• Normally arises when there is control over

the rights or other access to the resources, enabling the charity to determine its future application

• Certainty –
• When there is a reasonable certainty that

the incoming resource will be received;

• Measurement –
• When the monetary value of the incoming

resource can be measured with sufficient reliability

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General principles – SORP 2015

• 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 –
• monetary value or amount of the income can be

measured reliably and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

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Deferral of income

• Income received in advance
• Only defer if funds dependent on future

delivery of performance

• Subject to conditions wholly outside

control of charity

• If wholly outside control of charity
• Disclose as a contingent asset if receipt

probable once conditions are met

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• Grants are non-exchange transactions
• Performance model must be used
• Accruals model may not
• If grant is in made to secure the provision
• f goods and services it may be presented

in income from charitable activities

Grants

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Grants

• When is charity entitled to grant?
• How do conditions affect recognition of a

grant?

• Make it restricted?
• Mean it can’t be recognised and must be

deferred?

• Have no effect?

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Illustration 3

• Charity C intends to raise funds to

purchase a fixed asset which has a ten year life and it expects to fund the appeal partly via an appeal and partly by obtaining a grant.

• How should it be dealt with under the

Charities SORP?

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Charity raising funds for new asset

Appeal Grant - Income

• Income
• Receipt
• Expenditure
• Capitalise and

depreciate

• Performance model
• Receipt
• Accruals model
• Over life of asset

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Legacies

SORP 2005

• When charity has

received notification in writing from personal representative

SORP 2015

• Revised SORP allows

recognition based on past experience / modelling

Both SORPS - If received after year end or notified as receivable after the year end and clear it was agreed by executors before the balance sheet date should be treated as an adjusting event

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Changes from SORP 2005

• Provides that in certain circumstances income

from contracts can be classified as restricted income rather than unrestricted income.

• Prohibits the adoption of the ‘accrual model’

for the recognition of income from government grants (this option is not available under SORP 2005 in any case).

• Provides more guidance than SORP 2005 on

how time related conditions may prevent income recognition.

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Changes from SORP 2005

• Provides more guidance on recognising income

from legacies including the use of a portfolio approach for immaterial legacies and provides a three point test as to when receipt of a legacy is ‘normally probable’.

• Requires extended credit terms be reflected in the

calculation of the present value of income receivable (in line with FRS 102) for exchange transactions.

• Incorporates specific guidance on income from

insurance claims reflecting the FRS 102 requirement that receipt must be virtually certain.

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Differences between FRS 102 SORP and FRSSE SORP

• Same approach
• More disclosures in FRS 102 SORP
• Deferred income required by FRS 102
• Encouraged by FRSSE

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Income from donated services and facilities (Module 6)

Chapter 13

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Charities SORP FRS 102 - Gifts in kind

SORP 2005 SORP 2015 Assets given for distribution When distributed Fair value on receipt unless impractical to do so Assets for use by the charity When receivable When receivable On trust for conversion into cash When receivable but may not be practicable When receivable unless impractical

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Donated services and facilities

SORP 2005 SORP 2015 General principle Include at value to the charity Include at value to charity Voluntary help Do not include but note in notes or Trustees’ Report Do not include but note in notes to accounts

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Illustration 4

• A charity needs to rent office space as it

has outgrown the treasurer’s bedroom.

• It has been offered the use of spare office

space by a local supporter who has upmarket office space.

• A commercial rate for renting these

premises would be £10,000.

• The charity would rent something cheaper

at £3,000.

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• The nature and amounts of resources

receivable from non-exchange transactions recognised in the financial statements;

• Any unfulfilled conditions or other

contingencies attaching to resources from non-exchange transactions that have not been recognised in income; and

• An indication of other forms of resources

from non-exchange transactions from which the entity has benefited.

Disclosure

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Recognition of expenditure including grant making (Module 7)

Chapter 14

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• Little guidance other than general

recognition tests for assets and liabilities

• General principles
• Obligation
• Probable
• Measurement

FRS 102

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Changes from SORP 2005

• The FRS 102 SORP requires the discounting of

liabilities and provisions for the time value of money where settlement is delayed for more than 12 months and the effect is material.

• This treatment was referred to in SORP 2005 in

connection with grant commitments (paragraph 323) but is now more extensively applied to be consistent with FRS 102.

• The FRS 102 SORP provides guidance on

accounting for onerous contracts and employee benefits.

• In line with FRS 102, the FRS 102 SORP

requires the accrual of a liability for paid annual leave and sick leave, if material.

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Comparison with FRSSE

• Both SORPs require the discounting of liabilities and

provisions for the time value of money where settlement is delayed for more than 12 months but the suggested discount rates differ with the FRSSE making reference to government bonds and FRS 102 to a market rate of interest or the opportunity cost of investment income forgone, as applicable.

• The FRS 102 SORP includes a section on the

treatment of employee benefits which is not found in the FRSSE. The accrual of paid annual leave (holiday pay) and paid sick leave, where material, is required by FRS 102 but is not required by the FRSSE.

• FRS 102 requires more extensive disclosures than the

FRSSE regarding the uncertainties relating to commitments and any reimbursements.

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Funding commitments (FRS 102 34.57 – 34.63)

Chapter 15

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• An entity shall recognise a liability and, usually, a

corresponding expense, when it has made a commitment that it will provide resources to another party, if, and only if:

• the definition and recognition criteria for a liability

have been satisfied;

• the obligation (which may be a constructive
• bligation) is such that the entity cannot realistically

withdraw from it; and

• the entitlement of the other party to the resources

does not depend on the satisfaction of performance- related conditions. (FRS 102 34.59)

• Commitments that are performance-related will be

recognised when those performance-related conditions are met.(FRS 102 34.60)

Recognition

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• Present value of resources committed

Measurement

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• The commitment made;
• The time-frame of that commitment;
• Any performance-related conditions

attached to that commitment; and

• Details of how that commitment will be

funded.

Disclosures

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• A charity has agreed to fund Professor Hufflepuff’s

research for a cure into motor neurone disease for the next five years.

• How should this be accounted for on the following

alternative assumptions:

• a. The charity has agreed £100,000 a year with no

conditions

• b. The charity has agreed full funding with no

conditions

• c. The charity has the right not to continue with the

funding if the research does not proceed satisfactorily or in the light of alternative projects becoming available

Illustration 5

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Allocating costs by activity in the SoFA (Module 8)

Chapter 16

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Disclosure of trustees and staff remuneration, related party and other transactions (Module 9)

Chapter 17

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Coverage

• Trustees’ remuneration and benefits;
• Trustees’ expenses;
• Transactions with related parties that

require disclosure;

• Transactions with related parties that do

not require disclosure;

• Disclosure of related party transactions;

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Coverage

• Disclosure of audit, independent

examination and other financial service fees;

• Disclosure of ex-gratia payment
• Disclosure of staff costs and employee

benefits; and

• Remuneration and benefits received by

key management personnel.

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Changes from SORP 2005

• The disclosures required for trustees equally apply to

de-facto trustees.

• Clarification that trustee expenses include costs

reimbursed and costs paid direct to third parties.

• Whilst the details of individual donations without

conditions made by trustees need not be disclosed, the total amount donated must be disclosed (required by FRS 102).

• Unless immaterial, the total amount of expenses

waived by trustees must be disclosed (required by FRS 102).

• Contributions by a charity to a pension fund for the

benefit of employees must now be disclosed (required by FRS 102).

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Changes from SORP 2005

• Details of redundancy and termination payments

for staff must be disclosed (required by FRS 102).

• All charities must disclose if the number of staff is

paid £60,000 or more in bands of £10,000 from £60,000 upwards.

• The total paid to key management personnel must

be disclosed (required by FRS 102).

• The glossary definition of a related party is now

more closely aligned with the definition provided in section 33 of FRS 102 and charity law, particularly section 118 of the Charities Act 2011 (England and Wales) and section 68 of the Charities and Trustee Investment (Scotland) Act 2005.

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Moving to FRS 102 SORP from FRSSE SORP

• The disclosure of the aggregate value of

unconditional donations made by trustees is required.

• The disclosure of a charity’s contributions

to a pension fund for the benefit of employees.

• The terms and conditions of transactions

with, and the details of any guarantee given or received from, related parties.

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Moving to FRS 102 SORP from FRSSE SORP

• More information on the nature, accounting

policy and funding of termination payments.

• Disclosure of the total amount of employee

benefits received by key management personnel

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The balance sheet (Module 10)

Chapter 18

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Changes from SORP 2005

• Investment properties are measured initially at cost

and subsequently at fair value at the reporting

• date. SORP 2005 permitted ‘any reasonable

approach to market valuations’ but FRS 102 requires valuations to be made by an independent expert or disclosure that this has not been done.

• The class of mixed use investment property is

introduced with the property apportioned between its investment use and operational use unless this is impractical in which case it is treated as a tangible fixed asset. SORP 2005 had required such mixed used properties to be classified based

• n main use of the property (SORP 2005,

paragraph 257).

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Changes from SORP 2005

• Property which is let or occupied by

another group undertaking must now be treated as investment property.

• Social investments are shown as a

separate class of investment.

• Debtors recoverable more than 12 months

after the year-end must be discounted to present value, if the effect is material.

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Comparison with FRSSE SORP (1)

• The FRSSE does not permit revaluation of

intangible fixed assets.

• Capitalised goodwill is not to have a life of

more than 20 years under the FRSSE but is assumed not to exceed 5 years under FRSSE 2015, except where the economic life can be reliably measured.

• Options of including tangible fixed assets and

stock at a fixed amount where certain criteria are met are only available under the FRSSE.

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Comparison with FRSSE SORP (2)

• FRS 102 does not permit the exclusion from the

category of investment property of property let and

• ccupied by another group undertaking.
• Although both SORPs require the initial recognition
• f unlisted investments at cost, FRS 102

subsequently requires that, where practicable, they be measured at fair value under FRS 102; however an alternate approach is permitted by the FRSSE.

• FRS 102 requires, in the absence of knowledge of

any pension scheme liability, that any contractual

• bligation to make additional payments to a

defined benefit pension scheme be recognised.

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Comparison with FRSSE SORP (2)

• FRS 102 does not permit the exclusion from the

category of investment property of property let and

• ccupied by another group undertaking.
• Although both SORPs require the initial recognition
• f unlisted investments at cost, FRS 102

subsequently requires that, where practicable, they be measured at fair value under FRS 102; however an alternate approach is permitted by the FRSSE.

• FRS 102 requires, in the absence of knowledge of

any pension scheme liability, that any contractual

• bligation to make additional payments to a

defined benefit pension scheme be recognised.

Many more disclosures under FRS 102 SORP: (a)Intangibles (b)Investments (c)Stock (d)Liabilities (e)Contingent items and commitments

Telford Financial Training Ltd

Financial assets and liabilities (Module 11)

Chapter 19

Telford Financial Training Ltd

Financial assets and liabilities

• Every charity will have some
• Most are basic and therefore treatment

unlikely to change

• Non-basic have to be at fair value
• Financing transactions will also change
• Extended credit
• Below market interest rates
• Some currently excluded will be required

Telford Financial Training Ltd

Telford Financial Training Ltd

Amount recognised

• Present value of future cash flows

discounted at a market rate of interest

• What about loans at below market rate as

part of charitable activities?

• Accounting policy choice

Telford Financial Training Ltd

Public benefit concessionary loans (FRS 102 34.87 – 34.97)

Chapter 20

Telford Financial Training Ltd

Definition

• Public benefit entity concessionary loans

are loans made or received between a public benefit entity or an entity within the public benefit entity group, and another party at below the prevailing market rate of interest that are not repayable on demand and are for the purposes of furthering the

• bjectives of the public benefit entity or

public benefit entity parent.

Telford Financial Training Ltd

• Follow S 11 or 12 FRS 102
• Follow S 34.90 to 34.97
• Must apply same policy to all such loans

Accounting policy choice

Telford Financial Training Ltd

A charity lends £5,000 to Mr & Mrs H Ardup. The loan is interest free and is repayable at the end of year 3.

Illustration 6

Telford Financial Training Ltd

Loan at market rate

Year Cash flow Discount factor PV Interest PV Capital PV total 1 500 0.909091 454.55 454.55 2 500 0.826446 413.22 413.22 3 Interest 500 0.751315 375.66 375.66 Capital £5,000 0.751315 3,756.57 3,756.57 T

• tal 6,500

1,243.43 3,756.57 5,000.00

Telford Financial Training Ltd

Below market rate – apply market rate

Year Cash flow Discount factor PV Capital PV total

Cash out 1.0000 5,000.00 5,000.00 1 2 3 Capital £5,000 0.751315 3,756.57 3,756.57 How to account for difference? 1,243.43

Telford Financial Training Ltd

• Initially measure at amount paid or

received

• Adjust for accrued interest payable or

receivable

• Recognise impairment loss where

necessary

The S 34 treatment

Telford Financial Training Ltd

Impairment of assets (Module 12)

Chapter 21

Telford Financial Training Ltd

Events after the reporting period (Module 13)

Chapter 22

Telford Financial Training Ltd

Cash flow statement (Module 14)

Chapter 23

Telford Financial Training Ltd

The cash flow statement

FRS 1 FRS 102

• Cash flows from operating

activities

• Dividends from joint ventures

and associates

• Returns on investments and

servicing of finance

• Taxation
• Capital expenditure and

financial investment

• Acquisitions and disposals
• Equity dividends paid
• Management of liquid resource
• Financing
• Operating activities
• Investing activities
• Financing activities

Telford Financial Training Ltd

SORP Cash flow

Telford Financial Training Ltd

Telford Financial Training Ltd

Telford Financial Training Ltd

Charities established under company law (Module 19)

Chapter 24

Telford Financial Training Ltd

Presentation and disclosure of grant- making activities (Module 16)

Chapter 25

Telford Financial Training Ltd

Retirement and post-employment benefits (Module 17)

Chapter 26

Telford Financial Training Ltd

Heritage assets (Module 28)

Chapter 27

Telford Financial Training Ltd

Accounting for funds received as agent or as a custodian (Module19)

Chapter 28

Telford Financial Training Ltd

Accounting for investments (Modules 20- 22), investment policy and reporting

Chapter 29

Telford Financial Training Ltd

Charities and investment matters

• Published October 2011
• Confirms that policies may be:
• Financial
• Programme related
• Mixed motive
• Ethical investments allowed
• Conflicts with aims
• Might lose supporters
• No financial detriment

133

Must be clear about motives and be able to justify using charity resources in best interests

Telford Financial Training Ltd

Trustees and investments

• Set objectives
• Monitor
• Performance
• Investment managers
• Internal arrangements
• Trustees report
• Outline policies
• Statement about performance
• Explain ethical investment

Telford Financial Training Ltd

The investment decision

Investment Financial Social Mixed motive Programme related

Telford Financial Training Ltd

The investment decision

Investment Financial Social Mixed motive Programme related

Principal objective to generate funds for charitable activities

Telford Financial Training Ltd

The investment decision

Investment Financial Social Mixed motive Programme related

A type of social investment made directly in pursuit of the charitable objectives and purpose

Telford Financial Training Ltd

Specific social investment considerations

• Property
• Concessionary loans
• Guarantees

Telford Financial Training Ltd

• Programme related only when held

specifically to enable a third party to undertake particular activities using the property that contribute to the investing charity’s charitable purpose.

• May be classified as mixed motive

Social investment in property

Telford Financial Training Ltd

• Must be presented as a separate line or in

the notes

• Depending on materiality
• Applies to programme related and mixed motive

separately

Presentation

Telford Financial Training Ltd

• Allowed
• Not a separate class requiring separate

line in balance sheet

• Need to be explained in notes

Ethical investments

Telford Financial Training Ltd

• Programme related must move to financial

if cease to be held to further the aims of charity

• Unless temporary
• May not reclassify financial as social
• Ethical or mission-based must not be

classified as social

Reclassification

Telford Financial Training Ltd

• Fair value if can be measured reliably
• Otherwise cost less impairment
• Impair if objective evidence

Measurement of shares

Telford Financial Training Ltd

Auditors and investments

• Valuations and disclosures
• True and fair
• Trustees report
• Consistency with financial statements
• Watch derivatives….

Similar considerations for independent examiners but no need to verify

Telford Financial Training Ltd

Auditors and investments

• Valuations and disclosures
• True and fair
• Trustees report
• Consistency with financial statements
• Watch derivatives….

Telford Financial Training Ltd

Charities and group accounts (Modules 23 -29)

Chapters 30 - 37

Telford Financial Training Ltd

Charity Accounts and Audit Update

Bill Telford BA FCA