In March 2013, the Financial Reporting Council (FRC) published FRS 102, the new financial reporting standard applicable in the UK and Republic of Ireland (New UK GAAP). This is to be mandatory for accounting periods after 1 January 2015.
The direction of travel for UK GAAP has become clearer. The starting point for FRS 102 was the IASB’s (International Accounting Standards Board) IFRS (International Financial Reporting Standard) for SMEs, hence new UK GAAP resembles IFRS. However, the requirements are not identical. In practice this means that when an entity moves from current UK GAAP to new UK GAAP it will need to consider the impact of the relevant accounting differences.
FRS 102 provides integrated guidance for public benefit entities and the charities’ statement of recommended practice (SORP) will be updated in line with FRS 102. This new SORP has been issued for consultation which is due to close in November 2013. It should also be noted that the current financial reporting standards for small entities (FRSSE) is still available for small charities.
The significant differences between new UK GAAP and old UK GAAP on the introduction of FRS 102 are as follows:
The concept of valuing publically traded equity investments at their market value (fair value) is not new to the charity sector. But any revaluation gains or losses will now be recorded in income rather than in the other recognised gains and losses section of the statement of financial activities. This effectively moves those gains and losses resulting simply from changes in current market value and which are outside the control of the charity “above the line”, although it will have no impact on reported net assets.
Revaluation gains and losses on equity investments and investment properties
Any changes in the fair value of investment properties will also be reported “above the line”. However, those investment properties where the fair value cannot be measured reliably without undue cost or effort can be accounted for using the cost model.
FRS 102 requires that donated services, which would otherwise had been purchased, should be measured at the value to the entity and that all other incoming resources from “non exchange transactions” should be measured at the fair value of the resources received or receivable.
Donated goods and services
On a practical basis this means that donated items to be used in the course of a charity’s work will now be required to be valued and recognised on receipt to the extent that they are material. Earlier drafts of the standard raised concerns that donated goods for resale in charity shops would have to be valued on receipt. However, the final standard allows an exemption so that where the item’s value cannot be estimated reliably, the income can be recognised on sale. This now exempts charity shops from the requirement to value donated stock at the end of each year.
As the contributions made by volunteers cannot be reasonably quantified, the value of those services should not be recognised but should be disclosed in the accounts.
FRS 102 introduces an accounting policy choice for government grants to either use the performance model or the accrual model; although, the revised SORP is not expected to allow the use of the accrual model even for government grants.
The performance model requires grant income to be recognised as soon as the grant is received or receivable where there are no performance related conditions. Where conditions are imposed the grant may only be recognised when the performance conditions are met. This will lead to the deferral of grant income over a number of reporting periods. Where the grant could be recalled if the cash is not all spent, the charity will be required to recognise both the entitlement to the whole of the income and a provision for any liability to repay.
The existence of a restriction on the use of a grant does not prohibit a grant from being recognized when it is receivable.
FRS 102 gives clearer guidance on the disclosure and accounting treatment for a commitment in Appendix A to section 34. It emphasises the treatment of commitments and in particular, the distinction between an obligation and a commitment.
Where there is an obligation, either legal or constructive, a charity must recognise a liability which will be the present value of the commitment (i.e. based on discounted cash flows).
However, if an obligation is subject to the satisfactory completion of performance related conditions by the donee then it will not be recognised as a liability but disclosed as a commitment.
FRS 102 requires charities to disclose the commitment made, its time frame and any performance related conditions attached to that commitment with details of how it will be funded.
Separate disclosure of recognised and unrecognised commitments is also required.
The introduction of FRS 102 may require deficit funding agreements reached between a multi-employer scheme and the charity to be recognised as liabilities in the charity depending on the extent to which it is clear that the agreed contributions cover past service deficits.
Multi-employer Pension Schemes
This may have an impact on reported income and the net assets of the charity.
FRS 102 will require charities to prepare a cash flow statement as there are no exemptions unlike current UK GAAP. Charities adopting the FRSSE are exempt from the requirement to prepare a cash flow statement.
Cash flow statements
A number of other areas to look out for:
— Income recognition criteria under FRS 102 focus on when
income receivable is “probable” rather than “virtually certain”. In many cases there will be no difference. However, in cases where recognition is delayed until receipt (for example, some charities recoginise legacy income in this way) there will be acceleration in income recognition.
— Another area of change is employee benefits. Short term benefits, notably holiday pay, which can be carried over from one year to the next will be recognised as a liability.
— Where the useful economic life of goodwill and intangibles cannot be reliably estimated, amortisation must be calculated over no more than five years rather than the twenty year maximum life allowed under current UK GAAP.
Key areas impacted by change by the transitions FRS 102
This will affect subsidiaries and gift aid payments. Some transitional adjustments will be taxed immediately while others will be spread and some will have no tax affect at all. This will have to be considered when cash flow budgeting and forecasting.
Covenants on loan agreements should be assessed carefully to ensure that the adoption of the new frame work will not cause a breach.
The new regime will require a change in the reporting systems and this may well lead to an opportunity to rationalise existing structures.
FRS 102 is mandatory for accounting periods after 1 January 2015; this may seem far away but the new framework will impact upon the comparative figures for 2014. Charities should start to consider the impact the new reporting framework has and plan accordingly.