Financial Reporting Update - PKF Littlejohn...Impact on charity financial reporting Key SORP...

Financial Reporting Update

19 September 2014

PKF Littlejohn LLP

Welcome

Seminar overview

• The current UK financial reporting regime

• Changes to UK GAAP

• Impact on charity financial reporting

• Introduction of new SORPs

• Transition tips

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Current Financial Reporting Regime

Current position

• United Kingdom Generally Accepted Accounting Practice (UK GAAP)

• Statements of Standard Accounting Practice (SSAPs)

• Financial Reporting Standards (FRSs)

• Urgent Issue Task Force (UITFs)

• Sector specific guidance – Statements of Recommended Practice (SORP)

• Charities’ SORP 2005 (following SORPs in 1995 and 2000)

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Changes to UK GAAP

What has changed?

• Introduction of International Financial Reporting Standards

• FRS 100, 101 and 102 introduced – March 2013

• FRS102 replaces existing UK GAAP, except for the FRSSE

• Required update to charities’ SORP 2005

• Exposure draft issued in summer 2013

• Feedback from sector in autumn 2013

• Two SORPs issued in July 2014

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Changes to UK GAAP

Two SORPs?

1. Charities’ SORP based on FRS 102 (FRS102 SORP)

2. Charities’ SORP based on FRSSE (FRSSE SORP)

• The two SORPs are structured similarly but there are differences in:

• Presentation

• Terminology

• Accounting policies

• Disclosure

• If FRSSE SORP is silent on a treatment then must go to FRS 102 SORP

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Changes to UK GAAP

The hierarchy

FRS 102

SORP

FRS 102

International Financial Reporting Standards

FRSSE

SORP

FRSSE

FRS 102 SORP

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Changes to UK GAAP

When do you need to start thinking about the changes?

• Now!

• Application of new regime for accounting periods beginning on or after 1

January 2015

• Potentially, therefore, almost three quarters through comparative year

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Impact on charity financial reporting

Legal status/size <£250k income Small charity Large charity

Unincorporated Not applicable FRSSE SORP or

FRS 102 SORP

FRS 102 SORP

Incorporated FRSSE SORP or

FRS 102 SORP

FRSSE SORP or

FRS 102 SORP

FRS 102 SORP

Definition of small charity in line with Companies Act, therefore two out of three of:

Turnover < £6.5m

Net assets < £3.2m

Employees < 50

in both current and previous periods.

Which SORP should you follow?

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Which SORP should you follow?

• 98% of charities will be able to choose

• Much in common between the two SORPs but some distinctions

• Can’t pick and choose between the two

• FRSSE SORP – fewer disclosures, however...

• FRSSE to be withdrawn in 2016 so further change

• FRC latest thinking is to amend FRS 102

• FRSSE will be a separate section

• Update FRSSE SORP/FRS102 SORP?

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Understanding the structure of the SORPs

• Modular

• Core modules applicable to all entities applying that SORP

• Modules on specific issues that only apply if relevant

• Requirements are categorised as:

• Must - non adherence is a departure from the SORP

• Should – indicative of good practice but not regarded as non compliance if don’t

adhere

• May – preparer can chose

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Core modules applicable to all charities

Accounting for investments

Accounting for branches, charity

groups and combinations

Accounting for special types of assets

- Heritage assets

- Funds held as custodian

Special transactions relating to charity

operations

- Incorporated charities

- Grant funders

- Retirement benefits

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Key SORP terminology

• The SORPs refer to larger charities - in this case it is in accordance with

charity law, being a charity subject to audit having:

Income > £500k; or

Income > £250k and Total assets > £3.26m

• Larger charities must make enhanced disclosures

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Changes common to both SORPs

1. Restate prior year

• For example, financial year ending 31 December 2015:

• restate comparative figures for year ending 31 December 2014

• requires restatement of opening balance sheet at 1 January 2014

• Reconciliation of changes to previously stated results:

• Opening comparative balance sheet

• Closing comparative balance sheet

• Result for the period

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Example: Reconciliation of restated surplus

£’000

Surplus for the year as previously stated X

Adjustment arising from recognition of legacy X

Adjustment arising from accruing for additional staff costs (X)

Adjustment arising from fair value adjustment on fixed assets X

Surplus for the year as restated X

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Changes common to both SORPs

2. Presentational differences from SORP 2005

• presentation of comparatives for funds

• governance costs disappear

3. Income recognition

• Virtually certain Probable

4. Content of Trustees’ Report

• Minor changes to format

5. Enhanced disclosures for larger charities

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Julia Croucher

Senior Audit Manager

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Applying FRS 102 SORP

Areas to be covered

• Trustees Annual Report

• Statement of Financial Activities

• Statement of Cash Flows

• Balance Sheet

• Disclosures

• Group considerations

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Trustees’ annual report (module 1)

• Most requirements do not change.

• Larger charities will be required to provide more information.

• ‘Medium’ and ‘large’ incorporated charities(as defined by Companies Act)

need to prepare a strategic report

• All charities must:

• State a reserves policy to either disclose the amount held and reason for it, or

report the reason for not holding any reserves.

• Report the names of all trustees who acted in the year or who are in position

at the date of signing (previously to a maximum of 50).

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Trustees’ annual report (module 1)

Large charities (Charities Act definition) must:

• Explain social investment policy

• Explain how programme related investments contributed to achieving aims

and objectives

• Explain the financial effect of significant events

• Provide a description of principal risks and uncertainties and strategies

developed for managing these risks

• Disclose the arrangements for setting pay for key management personnel

and how this is benchmarked

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Statement of financial activities (module 4)

• Simplified format – plain English headings

• Requirement to present all prior year fund columns rather than just the totals

• Governance costs included in support costs

• Gains and losses on investments held at fair value move above net

incoming/outgoing resources

• Discontinued operations to be shown in a separate column

• Transfers between reserves must net to nil

• Changes to income recognition

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Income recognition (module 5)

There will be a significant change to income recognition

• FRS 102 – probable, SORP 2005 – virtually certain

• Impact on legacies – three point test

• Performance related grants

• Recognition of donated goods

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Legacies (module 5)

• Previously recognised on the earlier of receipt or date of approval of a

distribution. Now there is a three point test (para. 5.31)

• grant of probate

• executors have established that there are sufficient funds to pay the legacy

• any conditions attached to the legacy have been met or are within the control

of the charity

• This could mean adjusting for information received post year end

• Consider subscribing to a legacy agency; or

• Take a portfolio approach

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Performance related grants (module 5)

• Income might be recognised sooner under FRS102 SORP

• Charity deems all conditions met recognise under new SORP

• Previously required confirmation from donor before recognition

• For funders – no real difference in how the grant making expenditure is

recognised

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Donated goods (module 6)

• Previously recognised upon distribution or sale

• Distributable goods now recognised as stock and income on receipt

• Goods for sale now recognised at ‘net expected proceeds’ on receipt.

• Caveat – unless it is impractical (in which case recognition is upon

distribution or sale)

• May be no change – but you need to prove that changing the basis is

impractical

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Statement of Cash Flows

All charities using FRS102 SORP must prepare a statement of cash flows

• The headings for cash movements are

• operating activities, eg cash receipts of donations

• investing activities, eg acquisition of investments or fixed assets

• financing activities, eg interest paid

• Cash flows from operating activities will be shown in a reconciliation note

similar to the current SORP requirements.

• Group exemptions exist for subsidiary companies

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Balance sheet

• No changes to format

• Social investments are a separate class of investment

• Discounting of financial instruments

• Internally generated databases cannot be capitalised

• Investment properties

• Employment benefits

• Defined benefit pension costs

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Investment properties (in module 11)

• Initial recognition at cost then fair value

• Fair value is deemed to be a market valuation by an independent expert – or

disclosure as to why this has not been done

• Previously allowed ‘any reasonable approach’ to market value

• Mixed use investment properties apportioned (previously based on main use)

• Property let or occupied by another group undertaking is always an

investment property

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Investment properties (in module 11)

• Property cost £1million

• 75% used by the charity and 25% let to third parties

• Previously the full £1million could have been included in fixed asset

properties and depreciated

• Under FRS102:

• £750,000 will be a fixed asset and depreciated

• £250,000 will be investment property – and subject to regular independent market

valuation

• The percentage split must be reviewed regularly

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Employee benefits (module 7)

Recognise a liability at the balance sheet date for entitlements which have not

yet been paid

• Wages and salaries – included at the amount expected to be paid

• Unpaid annual leave and paid sick leave must be accrued IF MATERIAL

• Termination benefits – best estimate of expected costs to settle – discounted

if settlement in more than 12 months

• Post employment benefits

• All charities will need to disclose the numbers of staff receiving above

£60,000 (in bands of £10,000)

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Employee benefits (module 7)

• The charity has a year end of 31 March 2016, holiday year runs to 30 June

2016

• At 31 March there was 100 days of untaken leave and 20 days of estimated

untaken paid sick leave

• How to estimate cost:

• Determine how much leave/sick leave is to be taken per person

• Multiply by the daily rate of that person

• Journal Dr staff costs, Cr accruals [if material]

• NB Consider aligning the financial and holiday year

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Defined benefit pensions (module 17)

• No significant change for most schemes

• For multi-employer schemes which are not possible to split:

• Continue to account for as defined contribution

• Where additional contributions are made as part of a deficit recovery

plan(based on current and past service of employees), a liability is recognised

• Value of outstanding additional contributions

• Discounted to net present value

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Transactions with Trustees, Related Parties and Staff Remuneration

• Definition now includes “key management personnel” being the trustees and

senior management to whom the trustees have delegated significant

authority or responsibility for day to day management..

• Unconditional donations from trustees must be disclosed in aggregate

• Must disclose the aggregate of total employee benefits received by key

management personnel. This includes payments to pension schemes

• Trustee expenses to be disclosed include costs reimbursed and costs paid

direct to third parties (amounts waived to be disclosed if material)

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Groups and consolidation (modules 23 & 24)

• An interest acquired in a charity is treated as a merger

• It is not possible to recognise a one sided entry

• Negative goodwill for acquisition of a charity is recognised in full in the SOFA

in the year of acquisition

• For non-charitable acquisitions, amortisation of goodwill for a maximum of

five years

• Flow chart available for determining relevant modules for groups (module 23)

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Applying FRSSE SORP

Key influences on decision

• Likely to be minimal changes to your existing accounting policies

• No Statement of Cash Flows

• No disclosure of key management total remuneration and benefits

But........

• The FRSSE will be withdrawn in 2016 which could result in

restatement in successive years.

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Applying FRSSE SORP

Presentation differences from FRS 102 SORP

• SOFA

• gains and losses on investments excluded from net income

• ‘other gains and losses’ not a category

• disclose ‘exceptional’ items rather than ‘material’ items

• No Statement of Cash Flows required (encouraged but not required)

• If decide to apply then based on existing UK GAAP

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Applying FRSSE SORP

Accounting policy differences from FRS 102 SORP

• Not permitted to revalue intangible fixed assets

• Goodwill less than 20 years (rather than 5 years)

• Treatment of investment properties let and occupied by another group

undertaking

• Option to record unlisted investments at cost

• Going concern – FRS 102 SORP specifically states consider 12 months from

date of approval

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Applying FRSSE SORP

Accounting policy differences from FRS 102 SORP

• Discount rates

• FRSSE: government bonds

• FRS102: market rate or at opportunity cost

• Multi-employer defined benefit pension schemes

• Continue with current policy relating to deficit recovery payments

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Applying FRSSE SORP

Disclosure differences from FRS 102 SORP

• Transactions with Trustees, related parties and staff remuneration

• No requirement to disclose unconditional donations made by Trustees

• No requirement to disclose total employee benefits paid to key management

personnel

• Much less detailed disclosures on financial instruments

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Tips for Transition

What should you do?

• Decide which SORP to apply

• Trustee approval

• Identify the differences in accounting policies

• If options on accounting policy, then will need to select which is most appropriate

• Assess impact of changes

• Prepare opening balance sheet, comparative figures and reconciliations

under new regime

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Tips for Transition

What should you do?

• Explain changes to Trustees

• Discuss with funders

• Discuss with bank and lenders

• Impact on loan covenants?

• Ensure that systems are in place to capture the necessary information

PLAN EARLY!

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How can we help?

• Sounding board

• Consideration of options on accounting policies

• Presentation of information

• Interpreting changes for Trustees/funders

• Review and identify areas of the financial statements that require attention

• Factsheet on changes

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Help

Where to seek guidance

• SORP micro site: www.charitysorp.org

• Full SORPs

• Build your own SORP

• Helpsheets

• Financial Reporting Council www.frc.org.uk

• Changes to FRS 102

• Updates on FRSSE

http://www.charitysorp.org/





http://www.frc.org.uk/







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This seminar and the accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding

of issues relating to accounting applicable to entities in general, and therefore cannot be relied upon to cover specific situations; applications of the

principles would depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are only based on an

outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice

tailored to your circumstances. We recommend that you obtain professional advice before acting, or refraining from acting, on any of the contents.

We would be pleased to advise you on the application of the principles demonstrated at the seminar, or on any other matters, to your specific

circumstances, but in the absence of such specific advice, we cannot be responsible or held liable.

© PKF Littlejohn

Thank you

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Financial Reporting Update - PKF Littlejohn...Impact on charity financial reporting Key SORP...

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