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Changes to the SORP

The Charity SORP (Statement of Recommended Practice) FRS 102 has now been in place for a number of years and since its implementation there have been two ‘update bulletins’. This means that in order to comply with charity law when preparing your charity’s year end accounts, you will need to refer to three separate guides: the Charity SORP FRS 102, Update Bulletin 1 and Update Bulletin 2. 

The most recent of these is Update Bulletin 2 and this is effective for periods commencing on or after 1 January 2019.

So what do you need to know about this Update Bulletin?

1.Comparative Information Requirements 

The FRC has clarified that comparative information must be provided for all amounts  presented in the current period’s financial statements, which includes the notes to the accounts. This means that comparative information must be provided in the net asset note and movement of funds note. This adds yet more information to the year end accounts and it is therefore becoming increasingly important, despite more information and requirements being added, that the accounts prepared are easily understandable and useful for the users of the accounts.

There are a number of other changes listed in the update bulletin, including the addition of a net debt note where a statement of cash flows is prepared and changes to the way investment property is measured, so we would recommend that charities familiarise themselves with the contents.

2. Accounting for subsidiary donations to parent charities 

This is the most significant change that has been introduced by Update Bulletin 2 and  will affect charitable groups where the trading subsidiary makes charitable donations to its parent charity. These charitable donations are now considered to be a distribution by nature and therefore they will be accounted for in the same way as dividends, rather than as an expense as has been done historically.

It then follows that, like a dividend, these distributions will be recorded in the year they are paid and not accrued in the year to which they relate, meaning that the donations will be accounted for a year later than they have been in the past. However, the donation can be included in the year it falls due if a ‘legal obligation’ exists.

It is possible that a trading subsidiary’s articles of association could create this legal obligation depending on the wording. Alternatively, a legal obligation can be created by a deed of covenant. This deed sets out the relationship between the trading subsidiary and parent and details the legal commitment for the company to pay all future profits to the parent charity by way of a      donation. The deed of covenant needs to be signed and in place prior to the first period end in which the new interpretation comes into effect.

If a legal obligation exists then the donation can be accrued as a liability in the subsidiary and as an asset in the parent, and many charities prefer this treatment as it presents the transactions in the financial year they relate to.

It should be noted that these accounting changes will not alter the tax effect of the donation, as the subsidiary will still account for only the tax it expects to pay. So if the donation is paid within 9 months of the year end, even if it is not recognised in the accounts, the tax relief will still be obtained.

Planning in advance for these changes is the key to successfully implementing Update Bulletin 2, particularly regarding the changes to accounting for gift aid, so please do get in touch if you require any advice or assistance.

We’d be happy to help!

Contact Martin Borradaile on 01228 530913 or email him at MartinB@doddaccountants.co.uk

Please click here to go back to our other charity newsletter articles.

<May 2020>
MTWTFSS
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May 31

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