On 5 October 2018, Update Bulletin 2 was issued, making amendments to the SORP arising from the triennial review of FRS 102. The update bulletin also seeks to clarify several areas of the SORP to ensure it is consistent with the requirements of FRS 102.

In this article, we explore the amendments which are most likely to affect charities. Amendments to the Scope and Application Module and Glossary are not specifically referred to below. 

What are the changes?

Three categories of amendment are highlighted by the Update Bulletin: 

• Clarifying amendments – amendments which ensure the SORP is consistent with existing reqirements of FRS 102;
• Significant amendments – amendments considered to be more significant and likely to have an impact on the accounts of charities; and
• Other amendments – amendments considered to less significant or editorial in nature or will have an impact on a limited number of charities.

Clarifying amendments are effective for accounting periods beginning on or after 5 October 2018, although charities are reminded that they reflect requirements already in force under FRS 102. 

Significant and other amendments are effective for reporting periods beginning on or after 1 January 2019. Charities may choose to adopt significant and other amendments earlier; however in doing so, all amendments in both sections must be adopted at the same time.

Clarifying amendments

Module 3: Accounting standards, policies, concepts and principles, including adjustment of estimates and errors

When the SORP was first published, there was much discussion around the requirement to provide comparatives, with many commentators noting that it was likely to increase ‘clutter’ in accounts, rather than reducing it, which seemed at odds with the general direction of travel.

Update Bulletin 2 inserts a new paragraph into the SORP, reinforcing the requirement to provide comparative information for all amounts presented in the accounts and notes, unless stated otherwise in FRS 102 or the SORP.

The only disclosures which do not require comparatives as stated in FRS 102 are those relating to fixed assets and provisions. The SORP expands on this further and in addition, does not require comparatives for funding commitment disclosures.

Most charities will be broadly compliant with this amendment, although many will not have comparative funds notes included, which will now need to show a full comparative. 

Module 5: Recognition of income, including legacies, grants and contract income

Module 5 has been updated to reflect the outcome of discussions across the accounting, legal and charity sectors over the past few years in relation to the treatment of Gift Aid from subsidiary companies. This established that a Gift Aid payment should be treated as a distribution from the trading subsidiary and that the parent charity only has a right to receive payment when the subsidiary has a legal obligation to distribute its profits. Previously this module did not explicitly state this. 

Consequently, Module 5 has been updated to clarify that income from Gift Aid from subsidiaries may only be recognised when there is a legal obligation to make this payment. 

Module 13: Events after the reporting period has also been amended to clarify that a constructive (as opposed to a legal) obligation to receive Gift Aid from a subsidiary is not an adjusting post balance sheet event. 

Significant amendments

Module 10: Balance Sheet

The SORP initially included an exemption for charities in relation to the depreciation of assets comprising two or more major components with substantially different useful economic lives, to be depreciated over the same period if it was impractical or involved undue cost or effort to depreciate the components of the assets over their respective useful lives. 

This exemption was inconsistent with FRS 102, which removed such exemptions previously afforded under old UK GAAP. This means that charities will need to review their fixed assets to determine if there are components which need to be depreciated over separate periods and adjust these accordingly. Common items for adjustment are central heating systems that are depreciated over the life of the building in which they are installed but which are likely to be replaced several times over the building’s life.

Where charities rent investment properties to other entities within the same corporate or charitable group, there is now an accounting policy choice to enable charities to recognise such properties at cost less depreciation and impairment or at fair value. Note that this choice is not available where investment properties are rented to third parties. Such properties continue to be accounted for at fair value.

The undue cost or effort exemption previously afforded to charities with mixed use properties (those which are split between use as a functional asset and investment property) and allowing them to be accounted for as a tangible fixed asset, has now been removed.

Module 14: Statement of cash flows

A requirement to prepare a reconciliation of net debt as a note to the cash flow statement has been introduced, with the Update Bulletin including an example in Table 10A of how it may be set out.

Table 10A has a significant number of columns to demonstrate how most items should be dealt with in this disclosure. However, it is unlikely that most charities will regularly require more than the cash flows and possibly the foreign exchange movements in their disclosures.

Module 27: Charity mergers

The amendment to Module 27 adds the transfer of activities to a wholly owned subsidiary as an example of when merger accounting may be applied. This aims to reflect a more common example of a charity reconstruction.

Other amendments

Module 11: Accounting for financial assets and financial liabilities

In addition to reflecting minor drafting changes to FRS 102 in the SORP, the main change to Module 11 is the addition of paragraph 11.35A, which is intended to encourage charities to make additional disclosures where they hold financial instruments and the risks arising from these are particularly significant. Many charities are already choosing to make such disclosures, where relevant, and therefore we are unlikely to see significant changes across the sector.

Module 11 also removes the requirement to disclose separately financial instruments measured at amortised cost and at cost less impairment, so that only financial instruments measured at fair value require additional disclosure. This is likely to be welcomed by the sector to simplify and remove unnecessary repetition from the notes to the accounts. 

Module 18: Accounting for heritage assets and Module 21: Accounting for social investments

Both Module 18 and Module 21 have been amended to widen the points of reference for estimating the fair value of heritage assets and social investments and are unlikely to lead to significant change for affected charities.

Module 24: Accounting for groups and the preparation of consolidated accounts

The amendment to Module 24 states that charities may exclude a subsidiary from consolidation (i.e. the preparation of group accounts) where it is not material for the purpose of providing a true and fair view. However, charities may only exclude two or more subsidiaries if they are not material to the financial statements when considered together.

This amendment is unlikely to bring about significant change, as it clarifies the practice which has been adopted by some charities as acceptable under the SORP.

Katharine Patel is head of the charity and not-for-profit team at Buzzacott.