This guide is not exhaustive and does not constitute advice. Each charity will need to consider its own circumstances. It is recommended that discussions are held with independent examiners and auditors at an early stage so that the key considerations can be addressed at the earliest opportunity.

The Charities Statement of Recommended Practice (SORP) (FRS 102) advises on the accounting implication of a change in legal form in section 27 on Charity Mergers. It explains that, if the charity’s work including its purposes and beneficiary class remain unchanged, these types of reconstruction should be treated as mergers subject to the conditions outlined in paragraph 27.13 of the SORP.

Merger accounting involves presenting the assets, liabilities and funds as though they had always been part of the same (restructured) charity. Even though the change in legal form may take place part way through the reporting period, the accounts must be drawn up to include the results of the combining (unincorporated and incorporated) charities for the whole of the reporting period in which incorporation, or any other type of restructure, occurred. Any restricted funds of the unincorporated charity must remain restricted in the restructured charity. 

The accounts must present comparative amounts on the same basis to show the aggregated results for the combining charities for the previous reporting period. This would probably only include the results from the unincorporated charity as it is likely that the incorporated charity did not exist in the previous reporting period, and the comparative amounts should be identified as being ‘combined’ figures.

The carrying amount of assets and liabilities of the combining charities are not restated to fair value but accounting policies must be uniform.

The accounts must make specific disclosures in the reporting period in which the change of legal form takes place. These are outlined from paragraph 27.14 of the SORP and include:

• A description of the change of legal form
• The date on which the new, e.g. incorporated, charity was created and the merger took place
• The names and description of the former and new legal entities, for example the unincorporated and incorporated charities
• An analysis of the principal components of the Statement of Financial Activities (pre and post-merger) may be required if one charity operates for part of the year, and the newly created charity operates for the remainder and the accounts are drawn up as combined. Table 18 of the SORP illustrates this.

The other disclosures required for charity mergers as per the SORP are less likely to apply to a change in legal structure where the incorporated entity has been newly established, and the two charities were never active concurrently. However, if certain disclosures (per SORP paragraph 27.14) do not apply, charities should explain the nature of the merger and why certain disclosures are not required.

The change in legal structure is a fundamental change and needs to be disclosed in the Trustees’ Annual Report (TAR). The section that explains the charity’s Structure, Governance and Management is the most appropriate section to explain the details of the restructure, including the date and nature of the restructure and what the reasons were for changing the legal form of the charity. The change in legal structure may also result in a new charity registration number, and both the new and the former details should be disclosed.

If you want to find out more about the types of legal structure most commonly used by charities, including trusts, unincorporated associations, companies limited by guarantee (CLGs) and charitable incorporated organisations (CIOs), catch up on our recent webinar: Charity structures and restructuring: choosing the best legal form for your charity

In this recording, Lettie Ransley, Associate at Farrer & Co, outlines the advantages and disadvantages of particular structures, the circumstances in which trustees may wish to consider a change of structure (for example, to incorporate as a CLG or CIO), the process which is typically followed and common issues which can arise along the way.