OSCR clarifies position on early adoption of Charities SORP Update Bulletin
Following the publication of SORP Update Bulletin 1, OSCR has clarified that Scottish charities are not permitted to adopt the Bulletin early.
Update Bulletin 1 makes a number of changes to the Charities Statement of Recommend Practice (SORP) (FRS 102), to reflect changes to the Financial Reporting Standard applicable in the UK and the Republic of Ireland (FRS) 102. The changes to the Charities SORP (FRS 102) apply to accounting periods commencing on or after 1 January 2016.
There had been a degree of uncertainty as to whether the Bulletin could be adopted early by Scottish charities. OSCR’s statement now clarifies that Scottish charities cannot early adopt the Update Bulletin on the grounds that this is not permissible under Scottish charity law.
Amendment regulations to the Charities Accounts (Scotland) Regulations 2006 only permit the changes to the Charities SORP (FRS 102) to apply to periods commencing on or after 1 January 2016. Incidentally, the amendment regulations also effect the withdrawal of the Charities SORP (FRSSE) for Scottish charities from the same date.
The most significant change to the Charities SORP (FRS 102) intended to be brought about by the Update Bulletin is an exemption for smaller charities from preparing a statement of cash flows. OSCR’s statement therefore specifies that Scottish charities applying FRS 102 must include a statement of cash flows in their accounts for periods commencing on or after 1 January 2015 and before 1 January 2016. There is an exception to the rule, not widely available, which is explained below.
The Update Bulletin amends the definition of ‘smaller’ to provide a consistent definition across the UK. Charities wishing to take advantage of any concessions afforded by the Charities SORP (FRS 102), and their advisers, should be mindful of the revised definition.
Definition of ‘smaller’ within the Charities SORP (FRS 102)
For periods commencing on or after 1 January 2015 but before 1 January 2016, a smaller charity is a charity which meets the size criteria for audit exemption within its jurisdiction and for its legal form.
For periods commencing on or after 1 January 2016 a smaller charity is a charity with gross income of £500,000 or less.
How does the statement of cash flows requirement work?
The drafting of the current version of the Charities SORP (FRS 102) has caused a bit of confusion as Module 14, which deals specifically with the preparation of the statement of cash flows, refers to an exemption being available. However, the introductory material in the SORP states that all charities must prepare a statement of cash flows (paragraph 26).
Module 14, paragraph 14.1 states that:
“Charities preparing their accounts under FRS 102 must provide a statement of cash flows except where the disclosure exemptions permitted by this SORP have been taken.”
ICAS has clarified with OSCR, a member of the joint SORP-making body, that the disclosure exemptions referred to is the concession in paragraph 7.1A of Section 7 of FRS 102 on 'Statement of cash flows', which states that:
"This section ……do[es] not apply to…… investment funds that meet all of the following conditions:
- Substantially all of the entity’s investments are highly liquid;
- Substantially all of the entity’s investments are carried at market value; and
- The entity provides a statement of changes in net assets."
In charity terms, this exemption can be taken by a charity which operates as a closed common investment fund.
Another aspect of FRS 102 which seemed to offer hope of an exemption to some subsidiaries with charitable status is effectively shut down by the Charities SORP (FRS 102).
Under paragraph 1.12 of FRS 102, a ‘qualifying entity’ is afforded a number of exemptions including a statement of cash flows exemption. The definition of a ‘qualifying entity’ in FRS 102 is: “A member of a group where the parent of that group prepares publically available consolidated financial statements which are intended to give a true and fair view and that member is included in the consolidation”
However, the more onerous requirement in paragraph 26 of the Charities (SORP FRS 102) trumps this exemption, meaning that a charitable subsidiary included in the consolidated accounts of a parent must include a statement of cash flows in their individual accounts.
Charities applying the FRSSE and the Charities SORP (FRSSE)
Scottish charities using the Financial Reporting Standard for Smaller Entities (FRSSE) and applying the Charities SORP (FRSSE) for periods commencing before 1 January 2016 can continue to prepare these without a cash flow statement.