The Financial Reporting Council (FRC) has published draft amendments to UK GAAP standards for comment. Here’s why it’s important for all charity finance professionals to make their voice heard.
Relationship between the Charities SORP and FRS 102
Adoption of the SORP is mandatory in the charity law jurisdictions in the UK for charities preparing accrual accounts, and many charity finance professionals will be aware that the next Charities SORP is under development. However, charity professionals mustn’t neglect engaging with FRED 82 as it will directly impact the Charities SORP. How so?
Underlying the Charities SORP is the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102). The SORP provides guidance for charities on how to apply FRS 102 to ‘true and fair’ charity accounts and includes charity-specific requirements that are additional to those of FRS 102. In particular, requirements relating to the trustees’ annual report, fund accounting, the format of the statement of financial activities and additional disclosures.
Importantly, however, in the hierarchy established in accounting standards, FRS 102 requirements take precedence over the SORP. Therefore, it is crucial that user voices from the charity sector are reflected in the updates to FRS102 to ensure that those making changes will consider the special circumstances of charities. This is relevant in areas such as income recognition to ensure that there is special consideration around income recognition for grants or donated goods, for example. A strong charity sector voice on changes to FRS 102 will therefore also provide a better foundation for the next Charities SORP.
FRED 82 highlights for charities
The proposals in FRED 82 mostly reflect recent changes in IFRS Accounting Standards, and here are a few key areas for you to consider in your consultation response:
- Revenue recognition: FRED 82 proposes the introduction of a five-step model for revenue recognition in FRS 102. The model will be based on the requirements of IFRS 15 'Revenue from Contracts with Customers', but with simplifications aimed at ensuring the requirements remain cost-effective to apply. Charities often have diverse sources of funding, including income from charitable grants, donations and legacies, where funds are given freely. However, charities also receive income from contracts which could be impacted by the FRED 82 updates. It is advised that the updated FRS 102 contains sector specific guidance on revenue recognition.
- Lease accounting: Leasing requirements in FRS 102 are set to change significantly. An IFRS 16 'leases'-based model has been proposed, requiring lessees to recognise all leases on the balance sheet, subject to limited exemptions. This change could be very onerous, particularly for many small charitable companies that must apply FRS 102, whereas small corporates can opt to apply the less onerous FRS 105 instead.
- Other feedback: The FRED 82 consultation is also an opportunity to share feedback on other areas where FRS 102 impacts charities. For example, many charity finance professionals find that FRS 102’s requirement for comparatives of all disclosure notes results in cluttered charity accounts. This is your opportunity to share feedback and affect change.
- Effective date: The intended effective date for the amendments is accounting periods beginning on or after 1 January 2025. Early adoption would be permitted provided all amendments are applied at the same time. The development of the next Charities SORP aims to keep in step with FRS 102 and the effective date is expected to be the same.
ICAEW response to FRED 82 consultation
“ICAEW is a long-standing supporter of global alignment in accounting standards, but in a proportionate manner which reflects cost-benefit considerations for preparers and users. We will be examining and debating the proposals in depth in the coming weeks and months, with these principles in mind” says Sally Baker, the Financial Reporting Faculty’s Head of Corporate Reporting Policy.
Our Charity Committee will provide sector-specific considerations and feedback for ICAEW’s consultation response. We also welcome your engagement – please share your charity-specific feedback on FRED 82 with me.
Daniel Chan, Chair of the ICAEW Charity Committee, comments,
“Charity reporting in the UK is underpinned by FRS 102. The FRED 82 consultation is therefore an important opportunity for charities and the charity sector to share our views with the FRC, particularly as this will form the foundation for the next Charities SORP. We would encourage proactive engagement with this, alongside the SORP development process, so that your voice is heard.”
