ICAS comments on proposed amendments to the Charities SORP

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By Christine Scott, Head of Charities and Pensions

13 April 2018

Christine Scott reports on the ICAS Charities Panel’s comments on proposed amendments to the Charities SORP.

Amendments to the Charities SORP (FRS 102) (the SORP) are being proposed by the Charity Commission for England and Wales (CCEW) and OSCR. These fall into two categories:

• Clarifying amendments.
• Significant and other amendments arising from the triennial review of FRS 102.

Amendments arising from changes to FRS 102 will apply to accounting periods commencing on, or after, 1 January 2019. The clarifying amendments relate to existing requirements where there is uncertainty as to the appropriate accounting treatment.

The full response can be found here.

It is not clear if the online version of the SORP is to be updated for the proposed changes and the Charities Panel is calling for this to be done.

Clarifying amendments

1. Comparative information must be provided for all amounts presented in the accounts and in the notes unless otherwise stated in the SORP or FRS 102.

ICAS comments: We understand that the requirement to include such extensive comparatives for funds is driven by FRS 102 rather than the SORP.  We believe that this requirement is overly burdensome for charities, particularly those charities with many restricted funds and it is our experience that this can add several pages to a charity’s accounts without necessarily providing information of value to accounts’ users.

2. The undue ‘cost or effort’ exemption for depreciating assets comprising of two or more major components which have substantially different useful economic lives is being removed to comply with FRS 102.

ICAS comments: We support this amendment.  This is a necessary clarification, as FRS 102 has no ‘undue cost or effort’ exemption in respect of property, plant and equipment comprising of two or more major components.

3. Requirements on accounting for events after the balance sheet date are amended to reflect that gift aid due to a charitable parent from a trading subsidiary can only be recognised at the balance sheet date if the trading subsidiary has a legal obligation to make the payment.
   
   ICAS comments: The changes made to FRS 102, arising from FRED 68, deal solely with payments to a charitable parent by a trading subsidiary, where a deed of covenant is not in place. Therefore, there is an absence of comprehensive and clear guidance on how a charitable parent should account for corporate gift aid payments whether they are made under a deed of covenant or not.  We believe that the SORP should provide such guidance.

Significant amendments

1. The scope and application module is amended to set out the commencement date for amendments arising from the triennial review of FRS 102.

ICAS comments: We believe that far more clarity is needed to explain to charities and their advisers when each of the changes to the SORP made in 2018 apply, across each UK charity law jurisdiction.

2. The SORP is amended to introduce an accounting policy choice which allows charities which rent investment properties to other group entities to measure those investment properties either at cost, less depreciation and impairment, or at fair value.
   
   ICAS comments: We welcome the introduction of an accounting policy choice so that a charity can measure investment properties rented to another group entity at cost, less depreciation and impairment.


3. Charities, preparing a statement of cash flows, are to be required to include a reconciliation of net debt as a note to this statement.
   
   ICAS comments: The inclusion by charities of an analysis of changes in net debt raises a question as to whether it is appropriate for all charities with a gross annual income of over £500,000 to produce a statement of cash flows, as this creates an additional regulatory burden intended, by the Financial Reporting Council, to apply to much larger entities.


4. The SORP is to be amended to include the transfer of activities to a subsidiary undertaking as an example of a reconstruction that may be accounted for as a merger.

ICAS comments: Further amendments to the SORP are needed to ensure that charities apply merger accounting in the appropriate circumstances.

5. The definition of ‘service potential’ in FRS 102 has been updated and this is to be reflected in the SORP: “Service potential is the capacity to provide services that contribute to achieving a charity’s objectives. Service potential enables a charity to achieve its objectives without necessarily generating net cash inflows.”
   
   ICAS comments: We support the change of definition, which is more suitable in the charity context from the previous definition.