1. Charity SoRP Master Course
Ken Brew

2. The Background to the Charities SoRP
Consultation on FRS102

3. Why EU adopted IFRS does not apply to charities……
We still need a Charities SoRP then….!
Ruled out by EU IAS Regulation
Ruled out for Company charities by the Companies Act 2006
Does not address non-exchange transactions
Developed for global capital markets
Does not address Trust accounting
Too long too complex?

4. The long and winding road that leads….to your 2015 SoRP
Convergence with IFRS over 3-4 years
‘Big Bang’ in 2009
Await outcome of SME standard
2009 – Policy proposals ‘Future of UK GAAP’
2010 – Consultation on FRSME (FRED 44)
2011 – Consultation on PBE Standard (FRED 45)
2012 – Consultation on draft of FRS 102 (FRED 48)
2013 – New framework and FRS 102 issued
2014 Charities SoRP
2015 New GAAP (2016 gaap?) applies fapc 1/01/15

5. The New Financial Reporting Framework
FRS 100 sets out the framework (FRSSE, FRS 102, IFRS) and minor changes to the FRSSE
FRS 101 covers the accounting for group entities applying IFRSs and does not apply to charities
FRS 102 sets out new UK GAAP
SORPs
Charities SORP
HE/FE SORP
RSL SORP

6. The Financial Reporting Standard (FRS 102)

7. FRS 102 is based on IFRS for SMEs
A cut-down version of full IFRS
Amended for UK reporting needs
First UK standard to address PBE reporting needs
Can be used by all non-listed entities

8. Impact of consultation on FRS 102 …
PBE requirements integrated into FRS 102 as a specialised activities section
Revaluation of investments, plant, property and equipment allowed
Capitalisation of interest on developments allowed
Formats consistent with Companies Act
Definition of ‘performance-related conditions’ and ‘restrictions’ brought in line with SORP

9. Impact of consultation on FRS 102 …
Recognition of donated services at value to charity
Practical difficulties of recognising goods donated for resale or distribution accepted
Merger accounting allowed and disclosures simplified
Recognition of grants based on ‘matching’ limited to government grants

10. FRS 102 - Implementation date
Early application is permitted
But for entities that are within the scope of a SORP, early application is permitted providing it does not conflict with the requirements of a current SORP or legal requirements for the preparation of financial statements
Mandatory for accounting periods beginning on or after 1 January 2015

11. No early adoption of FRS 102 for charities
Therefore cannot apply FRS 102 until regulations amended
For non companies charity regulations require adoption of ‘methods and principles’ of SORP 2005
Therefore SORP Committee advise against early adoption
Some requirements of SORP 2005 conflict with FRS 102

12. The Background to the Charities SoRP
Consultation on the Charities SoRP

13. New Framework….A new SORP(s) www.charitysorp.org

14. The SORP Consultation
Informed by an extensive research undertaken in 2008/09
The SORP consultation process launched on dedicated micro-site:
26 events held across the UK and Republic of Ireland (attracted over 1600 participants)
179 written responses

15. SoRP Consultation – the headlines
92% supported the modular SORP
69% agreed new SORP better addressed needs of smaller charities
73% supported use of terms ‘must’, ‘should’ and ‘may’
67% agreed new SORP covered all relevant issues
88% agreed that the SORP should fully support both FRSSE and FRS 102
93% agreed that income from government grants should be accounted for in same way as donations

16. SoRP consultation issues (1)
Single column SoFA – 87% agreed with maintaining the current columnar SoFA
Governance costs – 76% supported the new SoFA headings but some questioned loss of the governance heading
Analysis of cost of raising funds in the SoFA - less analysis provided on the face of the SoFA
Incorporated charities being treated as branches - 62% agreed that incorporated charities could not be branches

17. SoRP Consultation issues (2)
Disclosure of material fraud – caused concerns and some felt this issue was given unnecessary prominence in the SORP
Disclosure of income from government –some respondents pressed for a separate disclosure of income from government sources
Push back against mandating disclosure of institutional grants in a note to the accounts – now information can be provided by web-link

18. SoRP Consultation issues (3) The Trustees’ Annual Report
Strategic Report - advice added on how medium/ large companies can modify their annual report to meet this requirement of company law
Risk management - disclosures aligned to Strategic Report requirements
Going concern - uncertainties ‘should’ be disclosed
Reserves policy – a statement required if a charity has no reserves policy
Performance reporting - a ‘nudge’ towards reporting ‘impact’ despite some sector concerns

19. SoRP Consultation issues (4) Executive Pay
Surprising only 37% supported the disclosure by larger charities of both pay and post held by the highest paid member of staff
A number of respondents did however support the disclosure of remuneration policies by larger charities
Disclosure of total employee benefits received by key management personnel (FRS 102 only)
Banding information on salaries extended to all charities
Remuneration policy - larger charities will be required to disclose their policies

20. SoRP Consultation issues (5)
Legacy recognition – respondents wanted clarity but flexibility - further text added on use estimation techniques
Defined Benefit Pension Scheme – if accounted for a multi-employers scheme then deficit funding agreements accrued as a liability (FRS 102)
Guidance added on accounting for retail gift aid schemes

21. More change to come for the Charities SoRP
The Future of the FRSSE

22. But there is still a FRSSE!!
Once seen as the no change option
But……

23. The FRSSE ….

24. The FRSSE is no longer the “no change” option
The FRSSE will be withdrawn within 12 months!
Consultation had indicated that the SORP should reflect both the FRSSE and FRS 102
Although nearly every charity is qualified to use the FRSSE only an estimated 38% had previously cited it in their accounts.
The FRS 102 based SORP unaffected by changes anticipated to the FRSSE in the next year or two

25. How the FRSSE currently deals with the new financial reporting framework
Follow the FRSSE for the issues it addresses
If FRSSE is silent, use existing accounting policies provide they meet accepted practice (old GAAP)
For new transactions have regard to current practice
(FRS 102)
The FRSSE SORP will require current practice (FRS 102) for sector specific issues
Therefore was not really a stand alone standard….old GAAP!

26. What might a new FRSSE look like?
Probably - new FRSSE will adopt ‘measurement’ and ‘recognition’ principles of FRS 102 – creating a single framework
But disclosures in notes will be limited under EU Accounting Directive
Effectively a FRS 102 ‘lite’ ?
Possibly a new section in FRS 102?
New ‘FRSSE SORP’ will layer on charity specific requirements ( as EU Accounting Directive scopes out not-for-profit entities)

27. Timeline for new FRSSE ?
Implementation of new EU Accounting Directive -2014/15
FRC develop new FRSSE
2014/15
Revision of the SORP for a new FRSS in 2015?
Mandatory application for accounting periods starting 1 January 2016

28. Follow developments……
SORP and consultation responses
Google - ‘SORP Committee Meetings and Papers’ and
To access new standard and past FREDs and consultations
Google- ‘FRC New UK GAAP’

29. Some differences between FRS102 and FRSSE
FRS102 does not permit changes to Investment Property values to be taken to reserves.
FRS102 has no 90% benchmark on finance leases
FRS102 does not require names of Related parties but does require specific aggregate information
FRS102 has a mandatory accrual on employee benefits
FRS102 has a widespread use of “Fair value” – could be onerous on financial instruments
FRS102 assumes a maximum 5 year life on intangible assets
FRS102 has mandatory cash flow statements
FRS102 covers more areas…..
Feb 2014

30. The Impact of FRS 102 on Public Benefit Entities
Implementing FRS 102
“Special” transactions

31. PUBLIC BENEFIT ENTITY…
an entity whose primary objective is to provide
goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity’s primary objectives
Rather than with a view to providing a financial return to equity providers, shareholders or members
Feb 2014

32. The essence of PBE
The important factor is what the primary purpose of such an entity is, and that it does not exist primarily to provide economic benefit to its investors
Feb 2014

33. Public Benefit Entities
SoRP is a good thing!
“There was clear evidence that the (existing) SoRPs were highly regarded and had improved the quality of financial reports…
Feb 2014

34. PBE Specific issues – FRED 45 see paragraphs 125 to 160 in FRS102
Concessionary Loans (PBE34.87 to 34:97)
Property held for the provision of social benefits (Paras16.3A and 17)
Entity Combinations (PBE34:75 to 34:86)
Impairment of assets: public benefit considerations (Paras 140 to 148)
Funding commitments (PBE34:57 to 34:63)
Incoming resources from non-exchange transactions (PBE34:64 to 34:74)
Feb 2014

35. So what charity issues does FRS 102 address?
Heritage assets
Cut-down version of FRS 30
Applies to all entities
Impairment and service potential
Income from non-exchange transactions
Goods for resale or distribution
Services
Legacies
PBE combinations
Mergers and Gifts
Combinations at nominal value

36. So what charity issues does FRS 102 address?
Concessionary loans
At transaction value, or
Amortised cost
Funding commitments
Constructive obligations
Grant income
Government grants
Accrual model (matching with expenditure)
Performance model

37. Concessionary Loans Where Interest below market rate…
Initially amount paid or received – (note balance)
Subsequent carrying value reflects reduced interest payable/receivable, effective interest rate
Recognise any impairment loss immediately
Separate line for disclosure of such loans
Notes to show terms and conditions – interest, security, repayment terms
Maybe shown in aggregate if not misleading
Give details if loans granted but not yet taken up
Feb 2014

38. Property held for the provision of social benefits
Properties held for the primary provision of social benefits, e.g. social housing, shall not be classified as investment properties and therefore
shall be accounted for as property, plant and equipment
Feb 2014

39. Entity Combinations
If transfer is at nil or nominal consideration then it is a gift and not a fair value exchange
If FV assets > liabilities recognise a gain shown as income.
If FV assets < liabilities the deficit is accounted for as a loss.
For mergers : In the receiving entity show:
(a) the names and descriptions of the entities;
(b) the date of the transaction;
(c) an analysis of the principal components
(i) after the date of the transaction which includes the gifted entity; and
(ii) up to the date of the transaction.
(d) The aggregate carrying value of the net assets of each
entity at the date of the transaction.
Feb 2014

40. Impairment of assets: public benefit considerations
that if, and only if, the recoverable amount < carrying value of an asset
then reduce the carrying amount to recoverable amount, and recognise the reduction as an impairment loss immediately in profit or loss.
What if use of asset is restricted?
What if asset held for service potential not for future cash flows? Not just PBE’s!
Use of service potential may be appropriate, no details about precise methods.
Feb 2014

41. Funding commitments
An entity shall recognise a liability, where it has made a commitment that it will provide resources to another party, if, and only if:
(a) the obligation is such that the entity cannot realistically withdraw from it; and
(b) the commitment does not depend on the performance of the recipient.
Feb 2014

42. Funding commitments (cont.)
Disclose:
(a) the commitment made;
(b) the time-frame of that commitment;
(c) any performance-related conditions attached to that
commitment; and
(d) details of how that commitment will be funded.
Can disclose in aggregate if not misleading.
However, separate disclosure shall be made for recognised and unrecognised commitments
Feb 2014

43. Incoming resources from non-exchange transactions
A non-exchange transaction is a transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange.
Feb 2014

44. Non-exchange transactions
If non-performance then recognise a liability
when that repayment becomes probable.
Donations of services recognised as
of income and expense if measurable.
If services are used to produce an asset,
then capitalise as part of the cost of that asset.
Non-exchange transactions should be measured
at the fair value of the resources received or receivable.
Feb 2014

45. Non-Exchange Transactions per FRS 102 PBE34:67
An entity shall recognise receipts of resources from non-exchange transactions as follows:
(a) Transactions that do not impose specified future performance-related conditions on the recipient are recognised in income when the resources are received or receivable.
(b) Transactions that do impose specified future performance-related conditions on the recipient are recognised in income only when the performance- related conditions are met.
(c) Where resources are received before the revenue recognition criteria are satisfied, a liability is recognised.

46. The Charities SoRP
At Last the SoRP itself!

47. The Fund Framework
Feb 2014

48. Proposed Accounts requirements England and Wales (excludes CIOs)
Income
≤ £10k
£10k-£25k
£25k-£250k
£250k-£500k
£500k
Accounts
Cash basis (non-company)
Accruals basis (company)
Accruals basis
Simpler?
Full
Trustees’ annual report
Simple
Scrutiny
None
Independent Examination*
Independent Audit
Independent Person
Qualified Accountant
Report to regulator
Update form
Simple return,
report and accounts
Return, report & accounts
If Income >£250k and assets >£3.26m audit required. Company charities may have IE.
Feb 2014

49. SoRP Consistent Terminology
MUST
Compliance necessary in order to show “a true and fair view”
Non-adherence is a departure from the SoRP
SHOULD
Good practice
Not a departure from the SoRP
MAY
Optional
Indicates that there are alternative approaches available

50. SoRP Consultation - Modules
Modular approach
“Pick and mix” online
29 Modules
14 Core
3 Special transactions (including grant making)
2 Types of assets (Heritage and Acting as Custodian)
3 Investments
(Total Return, Pooling, Social investment)
7 Group Accounts
Feb 2014

51. Charities SoRP 14 Core Modules
Statements
Underlying concepts
Accounting Treatments for Charities
Trustees’
Annual Report
3. Accounting
Standards, policies,
concepts and
principles…
8. Allocating costs
by activity
within SoFA
4. SoFA
5. Recognition
of Income
6. Donated goods
and services
10. Balance Sheet
7. Recognition of
expenditure
9. Disclosure of
trustee and staff
remuneration
14. Statement of
Cash Flows
11. Accounting for
financial assets
and liabilities
13. Events since
the year end
2. Fund Accounting
12. Impairment of assets

52. Charities SoRP -15 “Special” Modules
Charity Operations
Types of Asset and investments
Branches, groups and Combinations
15. Charities and
company law
18 Heritage Assets
23 Combinations overview
16. Presentation
of Grant making
19 Custodian
Trustee
24 Accounting for Groups
17. Retirement and
post-
employment
benefits
20 Total Return on
Investments
25 Branches and
Joint arrangements
21 Social Investments
26 Subsidiaries
22. Pooling
Investment
Funds
27 Mergers
28 Associates
29 Joint ventures

53. SoRP 2005 vs Consultation 1) Trustees’ annual report
charities that have no reserves policy must disclose this fact;
larger charities must explain their approach to risk management;
charities where there is doubt as to their being a going concern must explain these uncertainties; and
the names of all trustees must be disclosed.
Feb 2014

54. None of which is normally revealed
Accountability
On what?
By whom?
To achieve what?
Why?
How well?
To what effect?
None of which is normally revealed
in a set of accounts
Feb 2014

55. Accountability Trustee issues
TAR – tell a story (Collective responsibility)
Seeking transparency – an open attitude
Consider Public benefit
Explain, explain, explain!
Avoid “Elephant in the sitting room!”
Change in the batting order
Feb 2014

56. Trustees’ annual report A document to suit the charity
Who are we?
Reference and Administration
How do we work?
Structure, Governance and Management
What are we doing?
Objectives and Activities – Public benefit
What did we do and how well did we do it?
Achievements and Performance
How did we afford it?
Financial Review
What are we planning?
Plans for Future Periods
What else do we look after
Custodianship T2
Feb 2014

57. Statement of Financial Activities per SoRP 2005
Feb 2014

58. SoRP 2005 vs Consultation 2) Statement of financial activities (SOFA)
The income and expenditure headings in the SOFA have been changed and simplified.
New heading “cost of raising funds” and
governance costs are not shown separately on the face of the SOFA but are treated as a component of support costs.
Investment gains and losses now counted as a component of net incoming resources / resources expended.
Feb 2014

59. Structure of the SoFA Donations and legacies Charitable activities
Unrestricted funds
Restricted funds
Endowment funds
Total funds
Prior period total funds
Income and endowments from:
Donations and legacies
Charitable activities
Other trading activities
Investments
Other
Total Income
Expenditure on:
Raising funds
Total Expenditure
Net gains/(losses)
on investments
Net income (expenditure)

60. Module 1 TAR Reserves Paragraphs 1:22 and 1:48
MUST
Explain any policy for holding reserves
State the amount of reserves and why they are held
If decided not to hold reserves, disclose fact and explain
SHOULD
State total funds at the end of the period
Identify restricted or fixed assets or programme related investments
Identify and explain designated funds and timing of spend
Calculate the amount of reserves at the end of the period
Compare this with the reserves policy and provide explanations of how it will be brought into line in future

61. Real examples from audited charities
Stating the obvious
The charity’s intention is that there is sufficient free reserves to ensure that it can continue its investment in its activities, meet its short and long term liabilities and to repay…or refinance its borrowings. The key to this is the group’s cash flow……
Feb 2014

62. Real examples from audited charities
The coy reserves policy!
A level of charitable funds equivalent to two months Group expenditure is appropriate. It has been decided to exclude the pension fund deficit…At the end of 2009, the level of charitable funds fell short of its target by 20%.
£38.567M x2/12 x 80% = £5.142million!!!
I think?!
Feb 2014

63. Real examples from audited charities
The opaque (but revealing) policy
The Foundation sets a charitable expenditure budget each year, after taking account of its aim to generate a sustainable level of income equivalent to 4% of the 3-year rolling average market value of investments
Feb 2014

64. Reserves Policy
The directors are currently formulating a policy whereby the free reserves held by the organisation should be approx 3 months of non-discretionary resources expended, which equates to £205,000.
This would enable current activities to continue in the short term should funding drop significantly.
At present the free reserves, at £57,575 do not reach this target level and the directors are considering ways in which additional funds should be raised.
Both the policy and its implementation are under regular scrutiny.
Feb 2014

65. Trustees’ Annual Report
Reserves are charity’s freely available income funds
Definition normally excludes
Permanent endowment funds
Expendable endowment funds
Restricted funds
And unrestricted funds not readily available for spending
Funds only available by disposing of:
Fixed assets for charity use
Programme related investments
But charities may have more or less reserves available e.g..
Expendable endowments
Unrestricted funds earmarked or designated for essential spending T8
Feb 2014

66. Identifying the Free Reserves?
Unrestricted
Designated
Restricted
Endowed
Total
Fixed assets
175
150
325
Investments
250
500
900
NCAs 40
160
200
LT Loans
(100)
365
310
1,325
Designated funds comprise:
Continuity reserve Leasehold sinking fund 100
Feb 2014

67. Identifying the Free Reserves?
Unrestricted
Designated
Restricted
Endowed
Total
Fixed assets
175
150
Investments
250
500
NCAs 40
160
LT Loans
(100) 0?
365
310
1,325
Designated funds :
Contingency reserve 50
Leasehold sinking fund
100
Feb 2014

68. SoRP 2005 vs Consultation 3) The statement of cash flows
The statement of cash flows must be provided by any charity preparing its accounts under FRS 102.
Feb 2014

69. Possible adjustments on transition
Recognising assets/liabilities not previously recognised
Not recognising assets/liabilities previously recognised
Restating certain assets and liabilities at a different value
Reclassifying items
Recognising adjustments on transition in retained profits

70. Cash flows from operating activities:
 Table 8 Statement of Cash Flows
Total funds
Prior Year funds
Note
Cash flows from operating activities:
Net cash provided by (used in) operating activities X
(X)
(Table 9)
Cash flows from investing activities:
Dividends, interest and rents from investments
Proceeds from the sale of property, plant and equipment
Purchase of property, plant and equipment
Proceeds from sale of investments -
Purchase of investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Repayments of borrowing
Cash inflows from new borrowing
Receipt of endowment
Net cash provided by (used in) financing activities
Change in cash and cash equivalents in the
reporting period
(Table 10)
Cash and cash equivalents at the beginning of the reporting period
Change in cash and cash equivalents due to
exchange rate movements
Cash and cash equivalents at the end of the

71. Table 9:Reconciliation of net income (expenditure)to net cash flow from operating activities
Current year
Prior Year
Net income/(expenditure) for the reporting period (as
per the statement of financial activities) X
Adjustments for:
Depreciation charges
(Gains)/losses on investments
Dividends, interest and rents from investments
(X)
Loss/(profit) on the sale of fixed assets
(Increase)/decrease in stocks
(Increase)/decrease in debtors
Increase/(decrease) in creditors
Net cash provided by (used in) operating activities

72. SoRP 2005 vs Consultation
4) Changes to definitions and accounting policies
Single-sided transfers are not permitted in the SOFA.
The basis of going concern must be considered.
Income is first recognised when its receipt is “probable” (this point has been clarified).
Feb 2014

73. SoRP 2005 vs Consultation(cont.)
4) Changes to definitions and accounting policies
Where practicable, donated goods for sale are measured at fair value on receipt.
Where practicable, donated goods for distribution are recognised at the time of receipt at fair value.
There is a more extensive requirement for discounting for the time value of money with respect to both income and expenditure where settlement is delayed by more than 12 months and the effect is material.
Feb 2014

74. Income Recognition
Income is recognised in the Statement of Financial Activities (SoFA) when a transaction or other event results in an increase in the charity’s assets or a reduction in its liabilities.
Feb 2014

75. Income Recognition
Income must only be recognised in the accounts of a charity when all of the following criteria are met:
Entitlement – control over the rights or other access to the economic benefit has passed to the charity.
Probable – it is more likely than not that the economic benefits will flow to the charity.
Measurement – the monetary value or amount of the income or costs can be measured reliably
Feb 2014

76. Grants or Contracts The central question is
WHEN do we recognise the Incoming Resource?
The answer is
WHEN the ASSET is created.
But how does it work in practice? ……….
Feb 2014

77. Grants or Contracts There are two types of incoming resource
CONTRACTS and GRANTS
CONTRACTS exist where there is an Agreement that the charity will provide specific services (or goods) in exchange for a payment.
Payment is due when PERFORMANCE is completed.
Feb 2014

78. Grants or Contracts CONTRACTS
When performance is complete the asset has been created and the resource is available for the charity’s future use.
Recognise income only when the performance is completed.
On a long-term contract recognise income when there is certified part-performance
Payment received in advance is deferred until performance is satisfactorily completed
Sometimes contracts are called
“Grants with performance conditions”
Feb 2014

79. Grants or Contracts GRANTS
Grants are received when a charity is given resource to spend on the charity’s objects (UF/RF) but nothing is given back in exchange. No goods or services are provided in return.
The accounting treatment depends on whether or not there are any CONDITIONS preventing the charity from spending the resource.
Feb 2014

80. Grants or Contracts GRANT with NO CONDITIONS GRANT with CONDITIONS
Record the whole incoming resource in the SoFA when it is receivable. Recognise income immediately. The asset is created.
GRANT with CONDITIONS
If the condition is within the charity’s control.
(E.g. display accounts ) then recognise immediately.
Otherwise treat as a Contract…….
Feb 2014

81. SoRP Consultation – “Grant” conditions
Performance
Non-performance
Service Level required
Units of output supplied
Obtain matched funding
Obtain planning permission etc.
Time conditions specified by donor
Feb 2014

82. Grants or Contracts ACCOUNTING TREATMENT OF CONTRACTS
Measure over time of the contract
Keep track of costs and liabilities
Match costs to funds
Recognise income when performance is complete
Defer receipt from SoFA initially – reduces net Assets
Review ongoing performance at the year-end
Feb 2014

83. Grants or Contracts Purpose/ Transaction Unrestricted Restricted Grant
Yes
Contract
No?
Feb 2014

84. Charities SoRP
What does the SoRP Consultation say…about grants and Contracts
MODULE 5
Recognition of income, including legacies, grants and contract income
Feb 2014

85. Charities SoRP – Module 5
understanding the nature of income;
general rules for income recognition;
general principles for recognising income from donations and grants;
identification of terms and conditions;
performance-related conditions;
other terms and conditions that limit the recognition of income;
deferring income where conditions that limit recognition are not met;
terms and conditions that do not prevent recognition;
recognising income from legacies;
income from donated goods, facilities and services;
income from contracts for the supply of goods and services;
income from membership subscriptions;
income from interest, royalties or dividends;
settlement of insurance claims; and
disclosures and notes to the accounts.
Feb 2014

86. Charities SoRP - “5.19”
Is the funding agreement is a performance-related grant or a contract.
Important distinction because the consequence of non-compliance with performance conditions and the liability for non-performance differ.
Contract Law - buyer to seek costs, damages and recompense
for any failure or breach of contract by the seller,
Grant failure may lead to a partial or full repayment
of the grant if there are repayment conditions.
Feb 2014

87. Charities SoRP - Terminology
There are two broad categories of income:
income from exchange transactions (contract income)
income from non-exchange transactions (gifts).
Something for nothing!....TERMINOLOGY
A non-exchange transaction is a transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange.
Feb 2014

88. Charities SoRP – Restricted Funds
A donation or grant that can be used for any purpose of the charity is unrestricted income.
However, a donation or grant may be restricted to a specific purpose of a charity.
A restriction may result from a specific appeal by the charity, or
from the decision of the grant maker or donor to support a specific purpose of the charity rather than making funds available for the charity’s general use.
5.6
Feb 2014

89. Restriction vs. performance condition
A restriction on the use of a grant or donation to a particular purpose or activity of a charity does not create a performance condition.
A restriction creates a requirement that limits or directs the purpose for which a resource may be used but it does not require a specific level of performance or output from the recipient charity.
5.18
Feb 2014

90. SUBSTANCE/LEGAL FORM
Transactions must be accounted for and presented in accordance with their SUBSTANCE and not simply their LEGAL FORM.
Charities must therefore consider the substance of any conditions attaching to donations or grants and to the substance of any contractual terms when determining their entitlement to income.
Similarly, the substance of any restriction placed on the use of income must be considered when determining whether or not income is presented as restricted funds in a charity’s accounts.
5.7
Feb 2014

91. Restricted Contract Income!
In particular, a charity, should consider:
Whether entitlement to income is subject to fulfilling performance-related conditions. Performance-related conditions distinguish a contract or performance-related grant from an outright gift such as an unconditional grant.
The terms of a donation or grant that impose a restriction on use which is narrower than the general purposes of the charity. Terms placed on gifts that limit a charity’s discretion over how income must be used are presented as restricted income in the accounts.
5.7 (Cont.)
Feb 2014

92. Restricted Contract Income!
The terms of a CONTRACT that limit payments to amounts expended by the charity on purposes specified in the contract and restrict the charity’s use of any surplus. INCOME that is RESTRICTED by contractual terms may be presented as restricted in the accounts if the restrictions are in SUBSTANCE THE SAME AS would apply to a RESTRICTED donation or GRANT.
5.7 (Cont.)
Feb 2014

93. SoRP 2005 vs Consultation
5) Changes to definitions and policies (cont.)
Properties with a mix of investment and functional use are normally apportioned between tangible fixed assets and investment properties on the balance sheet.
A new category of “mixed motive” investments is introduced.
The definition of related parties has been aligned with the definition set out in FRS 102 and section 118 of the Charities Act 2011.
Internally generated databases cannot normally be capitalised.
A provision must be recognised for those defined benefit pension schemes accounted for as a defined contribution scheme where there is an agreement in place to make additional contributions to reduce a fund deficit.
Feb 2014

94. Income Recognition Legacies
ENTITLEMENT
Know of the existence of a valid Will AND
Know about the death of the benefactor
TO RECOGNISE INCOME
MUST show ENTITLEMENT PLUS
“PROBABILITY of receipt” PLUS
Ability to ESTIMATE with sufficient ACCURACY the amount receivable
RECEIPT PROBABLE when
There has been Grant of Probate AND
Executors have established that there are sufficient assets in the Estate AND
Any conditions attached are within the control of the charity or have been met

95. Income Recognition : Legacies (cont).
Payment is received or notified after the reporting date and before accounts are authorised BUT payment was agreed by the executors prior to the end of the reporting period., THEN treat as ADJUSTING EVENT and accrue it as income. Always use FAIR VALUE.
If charity has entitlement but the AMOUNT is uncertain then disclose as a CONTINGENT ASSET
LARGE charities may use a PORTFOLIO approach
If to be received > 12 months from the reporting date then DISCOUNTING can be used but unwind against legacy income.
If there is IMPAIRMENT then make the adjustment between income (not expenditure) and debtors.

96. Additional definitions and disclosures
Charities SoRP
Additional definitions and disclosures

97. New definition – “De facto” trustee
De facto trustee is a person who has not been validly appointed as a trustee but
is acting as the trustee of the charity and is exercising the functions that could only be properly discharged by a trustee. This may have come about due to an error, omission or oversight in the appointment process of that trustee.
May also be known as a de facto director.
Key point is that they are included in disclosure requirements for Trustee and Staff remuneration

98. Common basic financial instruments
Cash
Debtors including trade debtors and loans receivable
Creditors including trade creditors and loans payable
Overdraft (loan repayable on demand)
Qualifying long term loans*
Bank deposit
Investment in non-puttable ordinary or preference shares
Loans advanced by the charity on market terms*
* Must meet the FRS 102 debt instrument criteria

99. Common other financial instruments
Advance fee scheme in a School
- Account according to the substance of the transaction
Foreign Exchange contracts etc.
Loans with “Put and Call” options
- Need to consider “hedging” aspects per S12 of FRS102

100. UK Retail Gift Aid System
Charity selling goods for third parties are
Legally acting as agent…entitled to commission only
Until donor waives repayment…then a donation (GA!)
All handled under “Income from other trading”
Large charities may use estimation techniques
Income from FAIR VALUE of donated goods recognised when sold….
Or in two stages received (if FAIR VALUE ESTIMATION is possible) and then when sold

101. New definition of Related Parties
A. any trustee and custodian trustee
B. the donor of any land to the charity (on or after establishment; and
C. any person who is:
1. a child, parent, grandchild, grandparent, brother or sister of trustee (A) or land donor (B)
2. an officer, agent or a member of the key management personnel of the charity;
3. the spouse or civil partner of any of the above persons (A, B, C1 and C2);
4. carrying on business in partnership with any of the above persons (A, B, C1, C2 and C3);
5. a person, or a close member of that person’s family, with control or joint control over the charity
6. a person, or a close member of that person’s family, with significant influence over the charity
‘Close member of a person’s family’ refers to:
a. that person’s children or spouse;
b. the children, stepchildren or illegitimate children of that person’s spouse or domestic partner;
c. dependents of that person; and
d. that person’s domestic partner who lives with them as husband or wife or in an equivalent
same-sex relationship.

102. Not Related Parties?
A charity is not necessarily related to another charity simply because a particular person happens to be a trustee of both.
It will only be ‘related’ if the relationship means that one charity, in furthering its charitable aims, is under the direction or control of the trustees of another charity.
“In considering a possible related party relationship, a charity must assess the substance of the relationship and not merely its legal form.”

103. (Corporate) Related Parties if…….
the entity and the reporting charity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
one entity is an associate or joint venture of the other entity (or a member of the group in which the other entity is the parent or a member);
both entities are joint ventures of the same third entity;
one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
the entity is a post-employment benefit plan for the benefit of employees of either
the reporting entity or an entity related to the reporting entity;
an entity that is controlled or jointly controlled by a person, or two or more persons, identified in A, B or C;

104. Related Parties disclosures…..
the DESCRIPTION of a RELATIONSHIP between the parties
(including the interest of the related party or parties in the transaction);
a description of the transaction(s);
the AMOUNTS involved;
outstanding BALANCES with related parties and provisions for doubtful debts;
any amounts written off from such balances during the reporting period;
the terms and conditions, including any security and the nature of the consideration to be provided in settlement;
details of any guarantees given or received; and
ANY OTHER elements of the transactions which are necessary for the understanding of the accounts; and
this SORP REQUIRES the disclosure of the NAME(S) of the transacting related party or parties.

105. Related Parties (cont.)
The reporting charity must not state that related party transactions were made at open market value or on terms equivalent to those that prevail in arm’s length transactions unless such terms can be substantiated.
If there have been no related party transactions in the reporting period that require disclosure, this SORP requires that this fact must be stated.

106. Related Parties Exemptions
If there is no evidence of influence…
Donations without conditions that change the charity’s activities such as:
requiring the charity to purchase goods or services from a specified supplier;
making an interest bearing loan to the charity;
or requiring that payments be made to a specified third party.
However charities must show the total amount of unconditional donations
Services provided by trustee on a voluntary basis,
Contracts of employment (except trustee)
Other items
Purchase of minor articles (charity shop),
receipt of services (per beneficiaries),
out of pocket expenses (but note disclosure of trustees expenses),
amounts waived unless material.

107. Employee and Trustee Remuneration
Important to show that the charity is operating for the public benefit and trustees are acting in the interests of their charity and not for private benefit.
For this reason, this SORP requires that disclosure must be made of transactions involving trustees, related parties, staff remuneration and ex-gratia payments.
The payments made to the auditor or independent examiner must also be disclosed.

108. Paying Trustees?
A transaction involving a trustee or other related party must always be regarded as material regardless of its size.
Must make the same disclosures for de- facto trustees.
Most trustees are volunteers however,
provided the arrangement is legally authorised, a trustee may be remunerated for their role as a trustee.
On occasions, a trustee may also be employed in some other role, by the charity or a related entity.

109. Trustee payments disclosure
MUST
SORP requires Accounting Note that EITHER
None
One or more
of the trustees have been paid any remuneration or received any other benefits from an employment with their charity or a related entity; or

110. Payments to trustees MUST show
for each individual trustee who received remuneration or other benefits show
LEGAL AUTHORITY
TRUSTEE NAME
REASON FOR PAYMENT
AMOUNT
remuneration, pension contribution or any other benefit
MAY show
distinguish between as trustee and other services

111. All charities MUST disclose
the fact that there are no employees who received employee benefits (excluding employer pension costs) of more than £60,000 (€70,000); OR
the number of employees whose total employee benefits (excluding employer pension costs) for the reporting period fell within each band of £10,000 (€10,000) from £60,000 (€70,000) upwards.

112. FRS102 “Key Management Personnel” trustees and senior employees
MUST
disclose the total amount of any employee benefits received by trustees and its other key management personnel
SHOULD
give consideration to the information needs of their funders and other stakeholders in making their accounting disclosures.
E.g. Chief Executive Officer or highest paid staff member,
MAY
Disclose the amount of employee benefits paid to its key management personnel on an individual basis.

113. Accrual for Holiday Pay
A liability for paid annual leave and paid sick leave is recognised, if it is a material component of total expenditure, and not discounted for the time value of money.

114. SOCIAL INVESTMENT
‘Social investments’ are either programme related and mixed motive investments (new category)
Programme related investments are held to further the charitable purposes of the investing charity. There may be a financial return but it is incidental
Mixed motive investments are a form of social investment made in part to further the charitable purposes of the investing charity and in part to generate a financial return.

115. SOCIAL INVESTMENTS (cont.)
A charity making or in receipt of social investments or undertaking complex contractual arrangements needs to consider carefully the nature of the arrangement and account for the substance of it.:
Examples include:
repayable loans,
non-repayable loans (quasi equity),
concessionary loans, equity investments, property letting,
performance related income or profit-sharing arrangements or partnerships

116. ACCOUNTING FOR SOCIAL INVESTMENTS
To account for the investment or contractual arrangement correctly, a charity needs to be able to identify:
the nature of the asset or entitlement to income acquired;
the basis upon which any financial return is calculated;
the method(s) to be used to measure financial return;
the nature of any liabilities or obligations acquired;
the method(s) to be used to measure any liability or obligation; and
their motive(s) for acquiring the investment.

117. SOCIAL INVESTMENT : PROPERTY
Property may be Programme Related Investment only when it is held specifically to enable a third party to undertake particular activities using the property that contribute to the investing charity’s charitable purposes.
Property may also be classified as mixed motive investment when it is held for a combination of the financial return it generates and the contribution its use by another charity or third party makes to the investing charity’s purposes.

118. SOCIAL INVESTMENT: PROPERTY
Property is held either
to further the objects (property, plant and equipment) or
The generate a return (investment property)
If property is held for a mixed purpose then
It must be apportion between the two categories above
If not practicable then Tangible Assets PPE
If property is held for own purposes plus let to third party who furthers our objects
It must be apportion between PPE and Mixed

119. Total Return Approach to investment
ORIGINAL ENDOWMENT PLUS SUBSEQUENT CAPITAL GIFTS
Needs GD authority
Needs CC permission
HC amounts ring-fenced?
UNAPPLIED TOTAL RETURN
Cumulative returns on investments
Less previous transfers to income
Record keeping is a challenge
Evolved by CC since 2002

120. Onerous contracts Situations may arise where
the unavoidable costs of fulfilling a contract exceed
the expected economic benefit derived from it.
In such circumstances, a charity must recognise these irrecoverable costs.
E.g. leaving a property with unexpired lease
(no possible sub-let)

121. Onerous contracts (cont.)
MUST
make provision for a material loss-making contract which cannot be cancelled without the payment of compensation.
IMMEDIATE
provision for the unavoidable loss.
IMPAIRMENT REVIEW
of the fixed assets used in supplying the contracted service(s) before calculating the provision.

122. Onerous contracts provision
Provision is the lower of:
Costs involved in completing the contract and
Cost of any compensation payable as result of withdrawing from the contract.
For charities enhanced service levels to beneficiaries beyond contacts do not create an onerous contract even when these costs cannot be recovered because they are part of charitable activities.

123. Charities SoRP – Items most likely to……
Income (Almost) virtually certain
Paid Annual Leave accrual
FRS102 treatment of defined benefit pension scheme
Goods for resale
Concessionary Loans at Fair Value
Other financial instruments
Extended credit on contracts
……..require adjustment if FRS 102 adopted?!

124. Heritage Assets Module 18
A heritage asset is a tangible or intangible asset with historical, artistic, scientific, technological, geophysical or environmental qualities that is held and maintained principally for its contribution to knowledge and culture.

125. Attributes of a Heritage asset
An asset may have the attributes of a heritage asset, e.g. be of historic or artistic importance, but unless
It is ALSO held and maintained for its contribution to knowledge and culture then it will not fall within the definition of a heritage asset.

126. Examples of (Non) Heritage Assets
Assets with heritage attributes
may be used operationally for other purposes unconnected with the promotion of knowledge and culture. In such instances, the asset is accounted for within tangible fixed assets or investments as appropriate.
Examples:
A historic building used by an educational establishment
Attributes not heritage
 Museum or gallery
collections held – Heritage
buildings or display cases – not usually heritage
 Works of art or historic buildings
Investments not usually heritage

127. Heritage Assets
Charities that do not have preservation or conservation purposes should account for an asset as a heritage asset only if that asset: 
has historic, artistic, scientific, technological, geophysical or environmental qualities;
contributes to knowledge and culture through its retention and use; AND
is accessible to the public for viewing and/or research.

128. Heritage Asset - Disclosure
Heritage assets are shown in a separate category
Shown at cost or FAIR VALUE
Charities are not required to recognise heritage assets on the balance sheet if
information on their cost or valuation is not available and such information cannot be obtained at a cost commensurate with the benefit to the users of the accounts and to the charity.

129. Heritage Assets - Disclosure
Where reliable information on cost or value is not available
charities will need to consider if the cost of obtaining a valuation is justified by the usefulness of the information to the users of the accounts and to the charity for its own stewardship purposes.

130. Heritage assets - Valuation
Charities may adopt ANY reliable valuation technique to estimate the fair value of a heritage asset.
E.g. the use of market value may provide a reasonable approach; or
the use of depreciated replacement cost may be appropriate.
However, depreciated replacement cost may not be an appropriate method where a building cannot be replicated using modern building methods or where the value of the original asset lies in its unique historic or heritage qualities.
If a valuation method is adopted, it must be applied to all assets within a particular class or to a group of similar assets.

131. Heritage Assets – Accounting Disclosures
a separate class in the balance sheet
With note for analysis of those classes or groups of heritage assets reported at cost and those reported at valuation;
INCOME
include the value of any heritage asset gifted in the ‘INCOME FROM DONATIONS AND LEGACIES heading (SoFA)
GAIN or LOSS IN CARRYING VALUE
recognise any change in the valuation of a heritage asset as a ‘GAIN or LOSS on REVALUATION OF FIXED ASSETS’ in the SoFA;
GAIN or LOSS ON DISPOSAL
recognise any gain on the disposal of a heritage asset as ‘OTHER INCOME’ AND 
recognise any loss on disposal, depreciation or impairment of a heritage asset as a COST OF CHARITABLE ACTIVITIES in the SoFA.

132. My contact details Useful Websites Kenbrewco@gmail.com 07748 758345
Feb 2014