UK: FRS102 Has Arrived - What's Your Move?

Last Updated: 30 July 2013
Article by Fiona Reid

The wait is over – mandatory from 1 January 2015.

The long-awaited new accounting standard for the UK and Ireland was finally published by the Financial Reporting Council in March 2013 and for charities which are within its scope, will be mandatory for accounting periods starting on or after 1 January 2015 (the standard can be used now provided that using it does not cause a conflict with the SORP). FRS 102, 'The Financial Reporting Standard applicable in the UK and Republic of Ireland,' will apply to all companies and public benefit entities other than those which either have to or choose to apply EU-adopted IFRS, those entities which choose to apply the reduced disclosure framework for IFRS preparers under FRS 101 and those which qualify as small and choose to apply the Financial Reporting Standard for Smaller Entities (FRSSE). As we have reported in the newsletter several times over the past couple of years, this new standard is based on IFRS and there are some significant changes between the requirements of FRS 102 and current UK GAAP.

For charities, the full impact of the change is not yet known because the new charities SORP has only just been issued for consultation and we have not had time to fully analyse its impact. The purpose of the SORP is to provide charities with additional guidance on the application of UK GAAP. The new SORP will provide guidance to those charities which choose to apply the FRSSE, and also to those which will apply the new FRS 102.

Income recognition is a particularly complex area for charities and this continues under FRS 102 and the proposed new SORP.

As of now, a charity must analyse its income between:

  • income from exchange transactions
  • income from non-exchange transactions, ie donations and grants.

Exchange transactions are those transactions where the charity receives income from a purchaser in respect of goods and/or services provided to that purchaser. For charities, this would include, for example, school fees, entrance fees, etc. Income from such transactions is recognised as goods or services being provided.

However, exchange transactions do not cover grants where a service is provided to a third party. For example, local Government grants to charity to fund a meals-on-wheels service is not an exchange transaction as the recipient of the service is not the funder.

It is important that charities clearly understand their contractual arrangements and not just for accounting purposes. Breach of a performance-related contract could result in damages being awarded against a charity; breach of grant conditions would normally just result in a clawback of the grant.

The existing SORP states that donations and grants are recognised when the charity is entitled to the income, when there is sufficient certainty that it will be receivable and when it can be measured. The proposed new SORP maintains this broad outline, but 'certainty' is replaced by 'probability'. However in practice this should make little difference.

For most charities the key issue regarding income is when to recognise income from donations and grants. Existing practice is that income is recognised in full when the three conditions above are met. In assessing entitlement, the existing SORP requires consideration be taken of any conditions which have to be met, before entitlement passes. Generally any conditions which are within the charity's own control are to be disregarded in making this assessment. Here, FRS 102 differs as it simply refers to performance conditions – there is no distinction as to conditions which are within the charity's own control and those which are externally imposed. However, the proposed new SORP requires that performance conditions within the charity's own control should be disregarded when there is evidence that they have been or will be met. Essentially, the SORP is saying that administrative requirements should be disregarded.

Clearly this continues to be a complex area. For those charities receiving grants and donations, the proposed SORP should be reviewed and the requirements matched to each type of income.

Another area of significant difference is employee benefits. FRS 102 requires entities to recognise holiday pay accruals to the extent that employees have rendered services to the charity which increases their entitlement to future paid holiday. This is something that is not specifically required under current UK GAAP and while not difficult to calculate, it is an additional administrative requirement for accounts preparers. Although the inclusion of holiday pay accruals might change the period in which salary cost is recognised it will not change the cost in total, however, the FRS 102 requirements in respect of accounting for interest cost on defined benefit pension schemes will change the profit and loss charge for most entities with defined benefit schemes. FRS 102 does not allow a higher interest rate to be used to calculate the expected return on scheme assets but instead requires that entities use a discount rate equivalent to the return on high quality corporate bonds to calculate interest on the net pension liability. This could result in the cost of activities increasing under FRS 102.

So, what should charity finance staff do now as a result of the issue of FRS 102? Obviously the SORP is going to be an important document for accounting and reporting under FRS 102, but there are some steps that can be taken now.

  • Consider whether your charity will apply FRS 102 or the FRSSE.
  • If you choose to apply FRS 102, finance staff and probably also the chief executive and trustees should attend training on this new standard. Your charity's accounts will look very different under FRS 102 and it is important that everyone understands the changes.
  • Prepare a timeline and understand when your transitional date is. Your transitional date is the first day of the comparative accounting period in the first set of accounts. For example if your first set of accounts under FRS 102 is to 31 December 2015 then the transitional date is 1 January 2014, i.e. not very far away.
  • Set up a working party to deal with the transitional arrangements and consider the implications of the change in accounting framework. For example will loan covenants be affected?
  • Review the standard and consider the changes that will apply equally to all entities and therefore are unlikely to be covered by the charities SORP. These are the areas that you can start to work on straight away without waiting for the SORP to be issued.
  • Keep abreast of developments and best practice. Review the draft SORP when it is issued and use the consultation period if you have a comment to make.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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