Financial Reporting Update. 19 September 2014

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Melanie Snow
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1 Financial Reporting Update 19 September 2014

2 Welcome Seminar overview The current UK financial reporting regime Changes to UK GAAP Impact on charity financial reporting Introduction of new SORPs Transition tips

3 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)

4 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

5 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

6 Changes to UK GAAP The hierarchy FRS 102 SORP FRSSE SORP FRS 102 FRSSE International Financial Reporting Standards FRS 102 SORP

7 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

8 Impact on charity financial reporting Which SORP should you follow? Legal status/size < 250k income Small charity Large charity Unincorporated Not applicable FRSSE SORP or FRS 102 SORP Incorporated FRSSE SORP or FRS 102 SORP FRSSE SORP or FRS 102 SORP 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.

9 Impact on charity financial reporting 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 FRSSE to be withdrawn in 2016 so further change FRC latest thinking is to amend FRS 102 FRSSE will be a separate section Update FRSSE SORP/FRS102 SORP?

10 Impact on charity financial reporting 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

11 Impact on charity financial reporting Accounting for investments Special transactions relating to charity operations - Incorporated charities - Grant funders - Retirement benefits Core modules applicable to all charities Accounting for branches, charity groups and combinations Accounting for special types of assets - Heritage assets - Funds held as custodian

12 Impact on charity financial reporting 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

13 Impact on charity financial reporting 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

14 Impact on charity financial reporting Example: Reconciliation of restated surplus 000 Surplus for the year as previously stated Adjustment arising from recognition of legacy Adjustment arising from accruing for additional staff costs Adjustment arising from fair value adjustment on fixed assets Surplus for the year as restated X X (X) X X

15 Impact on charity financial reporting 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

16 Julia Croucher Senior Audit Manager

17 Applying FRS 102 SORP Areas to be covered Trustees Annual Report Statement of Financial Activities Statement of Cash Flows Balance Sheet Disclosures Group considerations

18 Applying FRS 102 SORP 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).

19 Applying FRS 102 SORP 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

20 Applying FRS 102 SORP 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

21 Applying FRS 102 SORP 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

22 Applying FRS 102 SORP 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

23 Applying FRS 102 SORP 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

24 Applying FRS 102 SORP 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

25 Applying FRS 102 SORP 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

26 Applying FRS 102 SORP 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

27 Applying FRS 102 SORP 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

28 Applying FRS 102 SORP 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

29 Applying FRS 102 SORP 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)

30 Applying FRS 102 SORP 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

31 Applying FRS 102 SORP 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

32 Applying FRS 102 SORP 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)

33 Applying FRS 102 SORP 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)

34 Applying FRSSE SORP Key influences on decision But... Likely to be minimal changes to your existing accounting policies No Statement of Cash Flows No disclosure of key management total remuneration and benefits The FRSSE will be withdrawn in 2016 which could result in restatement in successive years.

35 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

36 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

37 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

38 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

39 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

40 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!

41 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

42 Help Where to seek guidance SORP micro site: Full SORPs Build your own SORP Helpsheets Financial Reporting Council Changes to FRS 102 Updates on FRSSE

43 Thank you Q&A 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

Preparing for SORP 2015: an essential overview for charities

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