SORP Update Bulletin 1 Charity SORPs 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. All charities FRS 102 SORP Small FRS 102 charities FRSSE SORP Telford Financial Training Ltd
www.charitiessorp.org Telford Financial Training Ltd
Small company size criteria New Old Turnover £10.2m £6.5m Balance sheet total £5.1m £3.26m (gross assets) Employees 50 50 Telford Financial Training Ltd
Effective date o Accounting periods commencing on or after 1 January 2016 o Early adopt for periods commencing on or after 1 January 2015 o Accounting purposes only Telford Financial Training Ltd
Unincorporated charities o Audit limit increased to £1m for periods ending on or after 31 March 2015 o No change for assets need audit income > £250,000 and assets > £3,260,000 o Group accounts not required if income < £1 m Telford Financial Training Ltd
Illustration 1 o 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. Telford Financial Training Ltd
Periods Audit Accounts filed commencing on or after 31 March after 1 January 2015 2016 Audit Company law Charity law Turnover > Turnover Employees Balance sheet Turnover > £250,000 and B/s £5.1m £1,000,000 £10.2m 50 > £3,260,000 Telford Financial Training Ltd
Larger charities o Used to be (and still is in FRSSE SORP) defined as a charity needing an audit o Now defined as one with income greater than £500,000. Telford Financial Training Ltd
Impact of being a larger charity o Need a cash flow statement o Have additional disclosure requirements Telford Financial Training Ltd
Public benefit entities o An entity, o whose primary objective is to provide goods or services for the general public, community or social benefit and o 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. Telford Financial Training Ltd
Compliance trail • FRS 102 as everyone else • Holiday pay accrual, pension deficit 1 • FRS 102 PBE sections 2 • SORP • Charities, RSL, HFE 3 Telford Financial Training Ltd
Compliance trail • FRS 102 as everyone else • Holiday pay accrual, pension deficit 1 • FRS 102 PBE sections 2 SORP may narrow / expand options • SORP • Charities, RSL, HFE 3 in FRS 102 but not override / depart Telford Financial Training Ltd
Other issues o Groups o SORP Update Bulletin o Unincorporated charities and transition Telford Financial Training Ltd
The SORPs Chapter 7 Telford Financial Training Ltd
SORP ‘requirements’ o Use of ‘must’, ‘should’, and ‘may’ o Note smaller charities are encouraged to make additional disclosures when necessary o CC Help-sheets o 1 – Maps SORP 2005 to FRS 102 SORP o 2 - Outlines major differences between SORP 2005 and FRS 102 SORP o 3 - Outlines major differences between FRS 102 SORP and FRSSE SORP Telford Financial Training Ltd
Trustees’ report (Module 1) Chapter 8 Telford Financial Training Ltd
Applicability of guidance All Trustees report Unincorporated Company Trustees’ report + Trustees report only Small Not small Directors report and Directors report strategic report Telford Financial Training Ltd
Significant changes from SORP 2005 o The charity must explain any policy it has for holding reserves and state the amounts of those reserves and why they are held. o If the trustees have decided that holding reserves is unnecessary, the report must disclose this fact and provide the reasons behind this decision. o 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. o This change was to ensure that details of all trustees are reported. Telford Financial Training Ltd
Larger charities only o 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. o 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). o 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. o 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. Telford Financial Training Ltd
All charities with permanent endowment o If using total return additional disclosures in Module 21 which can be included in Trustees’ Report or notes to accounts Telford Financial Training Ltd
Differences between FRS 102 and FRSSE SORP o None Telford Financial Training Ltd
Illustration 2 o 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. o The report also indicates that the charity had a good year but actually had a very bad year! o What are the implications for the auditor in the following situations: a) The charity is unincorporated? b) The charity is a limited company? Telford Financial Training Ltd
Fund accounting (Module 2) Chapter 9 Telford Financial Training Ltd
Funds Funds Unrestricted Restricted General Designated Income Endowment Donor Appeal Fixed Assets Free Permanent Expendable imposed related Telford Financial Training Ltd
Fund accounting o General o Investment return on income and endowment funds o Expenses on income and endowment funds o Fixed assets and funds Telford Financial Training Ltd
Transfers between funds o To transfer assets from unrestricted funds to finance a deficit on a restricted fund; o 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; o Where restricted funds have ben lawfully released and transferred to unrestricted funds; o Where the trustees have exercised a power to declare a special trust over a gift initially recognised as unrestricted; or o 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. Telford Financial Training Ltd
Other issues o Funds in surplus / deficit o Trustees’ power to declare special trusts o Disclosure of funds Telford Financial Training Ltd
Accounting standards, policies, concepts and principles (Module 3) Chapter 10 Telford Financial Training Ltd
Charities SORP o Basis of preparation note o SORP, FRS 102, applicable law and regulations o Going concern disclosures o Including statement that no uncertainties o Additional disclosures o Charity is a PBE o Judgements and estimations o Key assumptions Telford Financial Training Ltd
The SoFA (Module 4) Chapter 11 Telford Financial Training Ltd
Telford Financial Training Ltd
Profit and loss account STRGL Telford Financial Training Ltd
Profit and loss account OCI Telford Financial Training Ltd
Guidance o Immaterial funds o Exceptional items – FRSSE only o Accounting for material items – FRS 102 only o Extraordinary items o None o Discontinued items o Smaller charities below audit threshold Telford Financial Training Ltd
Income recognition (Module 5) Chapter 12 Telford Financial Training Ltd
The key distinction(s) o Types of transactions o Exchange transactions o Income from provision of goods and services o Non-exchange transactions o Gifts o Conditions and restrictions o Performance conditions affect when income is recognised o Restrictions affect where it is recognised Telford Financial Training Ltd
Non-exchange transactions o “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.” o The accounting may therefore be required by the donor or recipient. o Excludes government grants covered by Section 24 o Includes but is not limited to legacies and donations (cash and kind) Telford Financial Training Ltd
Recognition o Transactions that do not impose specified future performance-related conditions on the recipient are recognised in income when the resources are received or receivable. o Transactions that do impose specified future performance-related conditions on the recipient are recognised in income only when the performance-related conditions are met. o Where resources are received before the revenue recognition criteria are satisfied, a liability is recognised. Telford Financial Training Ltd
General principles – SORP 2005 o Entitlement – o Normally arises when there is control over the rights or other access to the resources, enabling the charity to determine its future application o Certainty – o When there is a reasonable certainty that the incoming resource will be received; o Measurement – o When the monetary value of the incoming resource can be measured with sufficient reliability Telford Financial Training Ltd
General principles – SORP 2015 o Entitlement – o Control over the rights or other access to the economic benefit has passed to the charity; o Probable – o It is more likely than not that the economic benefits will flow to the charity o Measurement – o 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 Telford Financial Training Ltd
Deferral of income o Income received in advance o Only defer if funds dependent on future delivery of performance o Subject to conditions wholly outside control of charity o If wholly outside control of charity o Disclose as a contingent asset if receipt probable once conditions are met Telford Financial Training Ltd
Grants o Grants are non-exchange transactions o Performance model must be used o Accruals model may not o If grant is in made to secure the provision of goods and services it may be presented in income from charitable activities Telford Financial Training Ltd
Grants o When is charity entitled to grant? o How do conditions affect recognition of a grant? o Make it restricted? o Mean it can’t be recognised and must be deferred? o Have no effect? Telford Financial Training Ltd
Illustration 3 o 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. o How should it be dealt with under the Charities SORP? Telford Financial Training Ltd
Charity raising funds for new asset Appeal Grant - Income o Income o Performance model o Receipt o Receipt o Expenditure o Accruals model o Capitalise and o Over life of asset depreciate Telford Financial Training Ltd
Legacies SORP 2005 SORP 2015 o When charity has • Revised SORP allows received notification recognition based on in writing from past experience / personal modelling representative 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 Telford Financial Training Ltd
Changes from SORP 2005 o Provides that in certain circumstances income from contracts can be classified as restricted income rather than unrestricted income. o 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). o Provides more guidance than SORP 2005 on how time related conditions may prevent income recognition. Telford Financial Training Ltd
Changes from SORP 2005 o 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’. o Requires extended credit terms be reflected in the calculation of the present value of income receivable (in line with FRS 102) for exchange transactions. o Incorporates specific guidance on income from insurance claims reflecting the FRS 102 requirement that receipt must be virtually certain. Telford Financial Training Ltd
Differences between FRS 102 SORP and FRSSE SORP o Same approach o More disclosures in FRS 102 SORP o Deferred income required by FRS 102 o Encouraged by FRSSE Telford Financial Training Ltd
Income from donated services and facilities (Module 6) Chapter 13 Telford Financial Training Ltd
Charities SORP FRS 102 - Gifts in kind SORP 2005 SORP 2015 Assets given for When distributed Fair value on distribution receipt unless impractical to do so Assets for use by When receivable When receivable the charity On trust for When receivable When receivable conversion into but may not be unless impractical cash practicable Telford Financial Training Ltd
Donated services and facilities SORP 2005 SORP 2015 General principle Include at value to Include at value to the charity charity Voluntary help Do not include but Do not include but note in notes or note in notes to Trustees’ Report accounts Telford Financial Training Ltd
Illustration 4 o A charity needs to rent office space as it has outgrown the treasurer’s bedroom. o It has been offered the use of spare office space by a local supporter who has upmarket office space. o A commercial rate for renting these premises would be £10,000. o The charity would rent something cheaper at £3,000. Telford Financial Training Ltd
Disclosure o The nature and amounts of resources receivable from non-exchange transactions recognised in the financial statements ; o Any unfulfilled conditions or other contingencies attaching to resources from non-exchange transactions that have not been recognised in income; and o An indication of other forms of resources from non-exchange transactions from which the entity has benefited. Telford Financial Training Ltd
Recognition of expenditure including grant making (Module 7) Chapter 14 Telford Financial Training Ltd
FRS 102 o Little guidance other than general recognition tests for assets and liabilities o General principles o Obligation o Probable o Measurement Telford Financial Training Ltd
Changes from SORP 2005 o 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. o 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. o The FRS 102 SORP provides guidance on accounting for onerous contracts and employee benefits. o In line with FRS 102, the FRS 102 SORP requires the accrual of a liability for paid annual leave and sick leave, if material. Telford Financial Training Ltd
Comparison with FRSSE o 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. o 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. o FRS 102 requires more extensive disclosures than the FRSSE regarding the uncertainties relating to commitments and any reimbursements. Telford Financial Training Ltd
Funding commitments (FRS 102 34.57 – 34.63) Chapter 15 Telford Financial Training Ltd
Recognition o 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: o the definition and recognition criteria for a liability have been satisfied; o the obligation (which may be a constructive obligation ) is such that the entity cannot realistically withdraw from it; and o the entitlement of the other party to the resources does not depend on the satisfaction of performance- related conditions . (FRS 102 34.59) o Commitments that are performance-related will be recognised when those performance-related conditions are met.(FRS 102 34.60) Telford Financial Training Ltd
Measurement o Present value of resources committed Telford Financial Training Ltd
Disclosures o The commitment made; o The time-frame of that commitment; o Any performance-related conditions attached to that commitment; and o Details of how that commitment will be funded. Telford Financial Training Ltd
Illustration 5 o A charity has agreed to fund Professor Hufflepuff’s research for a cure into motor neurone disease for the next five years. o 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 Telford Financial Training Ltd
Allocating costs by activity in the SoFA (Module 8) Chapter 16 Telford Financial Training Ltd
Disclosure of trustees and staff remuneration, related party and other transactions (Module 9) Chapter 17 Telford Financial Training Ltd
Coverage o Trustees’ remuneration and benefits; o Trustees’ expenses; o Transactions with related parties that require disclosure; o Transactions with related parties that do not require disclosure; o Disclosure of related party transactions; Telford Financial Training Ltd
Coverage o Disclosure of audit, independent examination and other financial service fees; o Disclosure of ex-gratia payment o Disclosure of staff costs and employee benefits; and o Remuneration and benefits received by key management personnel. Telford Financial Training Ltd
Changes from SORP 2005 o The disclosures required for trustees equally apply to de-facto trustees. o Clarification that trustee expenses include costs reimbursed and costs paid direct to third parties. o 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). o Unless immaterial, the total amount of expenses waived by trustees must be disclosed (required by FRS 102). o Contributions by a charity to a pension fund for the benefit of employees must now be disclosed (required by FRS 102). Telford Financial Training Ltd
Changes from SORP 2005 o Details of redundancy and termination payments for staff must be disclosed (required by FRS 102). o All charities must disclose if the number of staff is paid £60,000 or more in bands of £10,000 from £60,000 upwards. o The total paid to key management personnel must be disclosed (required by FRS 102). o 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. Telford Financial Training Ltd
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