Charities SORP (FRSSE): the end is nigh
Christine Scott says a consultation is now under way on a single accounting framework for charities preparing 'true and fair' accounts.
Now that the Financial Reporting Council has set out its plans for the Financial Reporting Standard for Smaller Entities' (FRSSE's) successor, the Charities SORP-making body has launched a consultation on the withdrawal of the Charities Statement of Recommended Practice (SORP) (FRSSE) and whether or not it should be replaced.
Withdrawal of the FRSSE
The withdrawal of the FRSSE, for periods commencing on or after 1 January 2016, has been well trailed. The changes, along with the introduction of a regime for micro-entities, are largely a consequence of the new EU Accounting Directive. And, while the Accounting Directive applies to companies only, with charitable companies scoped out, its impact on UK GAAP nevertheless has implications for the majority charities preparing 'true and fair' accounts.
Changes to UK GAAP impacting on charities in 2016
The main changes expected to impact on charities are:
The addition of new Section 1A: Small Entities to FRS 102
The Financial Reporting Standard applicable in the UK and Republic of Ireland as a replacement for the FRSSE.
The withdrawal of the FRSSE and its replacement with Section 1A of FRS 102 means that all charities will have to apply FRS 102 from 1 January 2016. This latest consultation by the Charities SORP-making body makes proposals about the extent to which Section 1A will be available to the sector. The body's preferred option is for all charities to apply the Charities SORP (FRS 102) in full, with an exemption only from the preparation of a statement of cash flows for charities with a gross income of under £500,000.
An increase in the threshold for defining a small company
Two elements of the small company threshold (for accounting purposes) are increasing: to turnover of £10.2m; and a balance sheet total £5.1m. The employee total remains at 50.
Entities which are not companies but which meet the new small company threshold are permitted to apply Section 1A but for charities this is subject to the outcome of this latest consultation.
There are a number of minor amendments to company law which will result in changes to FRS 102 from 1 January 2016 over and above the withdrawal of the Charities SORP (FRSSE). These changes will be reflected in the Charities SORP (FRS 102). Therefore, the Charities SORP-making body has issued a draft bulletin setting out the proposed changes as part of this consultation process.
Other proposed changes for 2016
The Charities-SORP-making body is taking the opportunity to revise the definition of a larger charity which is applied by the Charities SORP. The Charities SORP makes concessions available to charities which are not considered to be larger charities. These concessions relate to the content of the trustees' annual report and the presentation of the Statement of Financial Activities.
At present, the definition of 'larger' is linked to the charity law audit threshold which applies to a particular charity, meaning that there is no consistent definition for the sector as a whole. For example, the audit threshold is lower for Scottish charities than for England & Wales charities.
The recent increase in the charity law audit threshold for England and Wales, from gross income of £500,000 to gross income of £1,000,000, has prompted the decision to introduce a standalone definition of 'larger'.
Plans to exempt charities with a gross income of under £500,000 from preparing a statement of cash flows, would effectively introduce a third concession to those specifically offered by the Charities SORP.
Contribute to the consultation
The deadline for comments on the Charities SORP-making body's proposals is 18 September 2015. ICAS members who would like to contribute to the ICAS response are requested to send comments to email@example.com by Friday 28 August.
The changes which will take place on 1 January 2016 are in addition to implementation of two new Charities SORPs on 1 January 2015: the Charities SORP (FRS 102) and the Charities SORP (FRSSE).
For charities eligible to use the Charities SORP (FRSSE), its withdrawal after one year of implementation may prompt some to move from the Charities SORP 2005 directly to the Charities SORP (FRS 102). The alternative is to apply the Charities SORP (FRSSE) in 2015 and then the Charities SORP (FRS 102) in 2016, thus making significant changes to their accounts in two successive years.
The decision will depend on the individual circumstances of each charity and the extent to which it is feasible to gather all the information necessary to move directly to the Charities SORP (FRS 102), including the preparation of prior year comparatives.
Among many potential issues which could influence the decision, the treatment of defined benefit pension liabilities is a key one for any charity participating in a multi-employer scheme. While charities will have to recognise their share of a scheme's net deficit or, alternatively, recovery plan liabilities from 2016, there will be wriggle room for some charities this year.
ICAS has published detailed guidance on accounting for pension liabilities under the new Charities SORPs to assist charities and their advisors to identify the appropriate treatment.
While the recognition of pension liabilities for the first time does not impact on the underlying financial strength of a charity, their recognition could have an impact on relationships with financial supporters and could trigger a breach of any loan covenants. Therefore, charities should bear this in mind when weighing up which SORP to follow in 2015.