UK: RP Issues - Winter 2013/14

Last Updated: 27 January 2014
Article by Smith & Williamson


By Jonathan Pryor

This issue is packed full of a range of items of considerable importance to the RP sector.

We open with an article on sustainability issues and their relevance to the RP sector. We continue with a commentary on the Homes and Communities Agency's latest sector risk profile, providing some useful insights into the regulator's areas of concern and how these have evolved from its previous equivalent publication.

We then set out the first of several reports on financial reporting matters, starting with financial instruments, surely the most arcane of technical issues for the preparer of financial statements. This article emphasises how much is still in the process of being changed, which clearly makes planning much more challenging. We then discuss some key aspects of successful pay and reward strategies, referring to the importance of it being aligned to your culture, values and objectives.

Our next article provides some overarching comments about preparation for FRS102, referring in particular to the experiences with a number of RPs where direct one to one sessions have helped enormously with their preparation processes. I am very grateful for the kind permission from two of our clients to reproduce their observations in this briefing.

We then move onto the highly complex area of pensions, continuing the series of articles on this topic that we have published for many years. Unfortunately, the challenges show no sign of going away and this article points out several further useful planning points.

Our third financial reporting article discusses arguably the most heated issue of the moment in financial reporting, namely impairment. The article acknowledges that this is indeed a challenging issue for the RP sector but suggests that some of the concern might be overstated. Clearly there is further work to be done on this area and readers can expect us to comment in more detail in later issues.

Finally, almost as light relief, we make some observations on the charity SORP which is also under consultation at the moment. Most readers will be forgiven for thinking that the scale of issues with that SORP are relatively minor compared to ours!


By Andrew Bond

The Green Deal and the related Energy Company Obligation (outlined in our spring 2013 issue) have not yet delivered anywhere near the activity which the Government envisaged. Originally this was a policy area that was expected to see a major take up by housing associations and others to help the UK meet its carbon budgets and address fuel cost and poverty issues by reducing energy used. However, in practice, to date, both the Green Deal and ECO have disappointed. Press reports indicate the Government is considering extending the intended £1.3bn per annum ECO scheme so that it can work better alongside the Green Deal. It has also been reported that an extension may be made to the timetable. Under ECO, energy companies could be fined up to 1% of their global turnover by Ofgem if they do not meet their targets and so it may be that RPs might find some increasingly good deals about, but the uncertainty over the future of the schemes may undermine opportunities.

Zero carbon homes

The Government is struggling to promote the energy efficiency of existing stock. However, it reiterated in August that it is committed to implementing zero carbon homes from 2016. Exactly what constitutes 'zero carbon' has been consulted upon, with the deadline for feedback ending on 15 October 2013. Amongst the matters covered are 'allowable solutions'. These solutions would potentially enable 'off site' measures including, possibly, retrofitting other existing stock or making a payment which is directed to a fund that then invests in projects which will deliver carbon abatement on the developer's behalf. 2016 is not far off in development terms and so longer term business plans will need to make some assumptions about the likely impact of the final regulations.

Sustainability reporting requirements

While elements of government policy are clearly not working as intended, the wider sustainability agenda rolls on and regulatory impact continues to bite. Greenhouse gas reporting has seen developments in recent months and although at present there is no general mandatory obligation for RPs, large or small, to report on this area at present, it is likely there will be increasing pressure and in the medium term a mandatory reporting requirement for large associations is likely.

Here are a couple of areas of particular general interest..

Companies Act 2006 (strategic report and directors report regulations 2013)

From 1 October 2013, regulations will require all UK quoted companies to report on their greenhouse gas emissions as part of their annual directors' report. This requirement affects all UK incorporated companies listed on the main market on the London Stock Exchange, a European Economic Area Market or shares listed on the New York stock exchange or NASDAQ. The Government states on its web page detailing the legislation that it encourages all other companies to report similarly, although this remains voluntary.

Article 8 of the energy efficiency directive of the EU

This article came into force on 4 December 2012 and requires that all member states implement a system of energy audits for large enterprises. The requirement is that such enterprises are required to have been audited by 5 December 2015. The Government proposes to introduce legislation by way of regulations under the Energy Savings Opportunities Scheme (ESOS), which is expected to be implemented next year. The likelihood is therefore that within the foreseeable future (and actually before that other major reporting change FRS102 is mandatory) all large entities (which includes a number of RPs) will have to report their greenhouse gas emissions. Some thought on the planning for the logistics of this reporting should probably commence now!

With the economy (possibly) on the mend, although sections of the Government are certainly keen that climate change concerns do not impede economic progress, various reporting requirements continue to build and associations should at least keep a weather eye on developments in this area as part of their strategic planning and risk and reporting considerations.


By Julie Mutton

The Homes and Communities Agency (HCA) has again published its analysis of risks facing the RP sector, in particular risks which would cause an RP to fail the viability element of the Governance and Financial Viability Standard.

Prior to the credit crunch, social housing had enjoyed a long period of relative stability but the outlook is now much more uncertain and a range of new risks have presented themselves to the sector.

The risks identified are broadly the same as those appearing in the 2012 analysis with welfare reform and diversification evolving particularly rapidly.

The risks

The HCA highlights risks under four broad headings.


  • Debt requirements and timing of sales receipts need careful monitoring to ensure poorly managed cash flow does not disrupt the development programme.
  • The HCA is keen to ensure that diversification does not put social housing assets at risk.
  • With more providers cross-subsidising social housing programmes through outright sales, there is greater exposure to the vagaries of the housing market.
  • Existing stock needs to continue to meet the decent homes standard and, with other distractions, there is a risk that the quality of ongoing maintenance is not sustained.


  • Existing debt needs monitoring in order not to jeopardise the attractive terms that many RPs enjoy.
  • New financing arrangements including engaging with capital markets or sale and leaseback schemes bring particular risks.
  • Exposure to Mark-to-Market needs monitoring.
  • Forthcoming changes to accounting standards (FRS102) bring risks in terms of the complexities of accounting for financial instruments and managing stakeholder perception where financial statements could potentially look very different.


  • The affordable rent regime brings greater exposure to the housing market with rent levels being linked to local market rents.
  • Affordable rent and welfare reform bring potential cash flow volatility.
  • Pressure on local authorities means that certain providers are exposed should significant Supporting People contracts be lost.


  • Scheme deficits and the untested impact of auto-enrolment create uncertainty around future pension costs.
  • Differential inflation rates need to be managed (CPI for rents and RPI for costs).

Key themes

Planning vs implementation

In a number of areas, the HCA's regulatory approach was previously to gain assurance that RPs are formulating plans for dealing with issues such as welfare reform and affordable rent. The approach has moved towards gaining assurance on the quality and effectiveness of the strategies that are being implemented and how they feed into business plans and forecasts.


A recurring theme in the risk analysis is the volatility of cash flows, making financial forecasting particularly difficult, for example in the following cases.

  • Housing development – uncertain timing and quantum of sizeable payments and sales receipts.
  • Diversification - no past experience of cash flows.
  • Affordable rent – rents fluctuate with the market.
  • Welfare reform – greater risk of arrears.
  • Supported housing – reliance on retaining contracts.
  • Pension costs – changes at each triennial valuation and the unknown impact of auto-enrolment.

'The board must understand'

In over 20 places throughout the document, the HCA stresses that providers/the board must 'understand'. In the new world of social housing a lack of understanding within an organisation and particularly at board level presents significant risk. The HCA wants assurance that:

  • organisations understand the risks associated with individual development schemes
  • boards understand the risks of each market they enter on diversification
  • providers understand in detail all contracts they enter into, for example sale and leaseback
  • providers understand their regional housing market
  • boards understand the risks when making investment decisions and relationships with institutional investors
  • boards understand the implications and obligations associated with new debt arrangements
  • providers understand the implications of FRS102
  • providers understand the impact of differential inflation rates on costs in relation to income.

The implication is that there needs to be a focus on the quality of boards, with a wide range of skills required amongst members. The HCA also notes that there should not be reliance on just one or two members who have understanding of, for example, derivatives.

Contingencies and exit strategies

The HCA is keen to gain assurance that providers have contingency plans or exit strategies in place should risks materialise to ensure ongoing viability and to protect social housing assets.

Other risks

While the profile gives a fair summary of the risks facing the sector, it is arguable that it omits two key risks for the sector.

  • The escalating cost of senior staff remuneration is hard to forecast with certainty. Whilst costs need managing it is nevertheless important to provide competitive packages to senior staff in order to attract and retain the best people. Costs associated with dismissal can also be high and need to be factored in when reviewing staff structures.
  • The perception that the sector delivers poor value for money presents a risk as government and public support is key to the ongoing success of the RP sector. The typically weak value for money statements within financial statements (on introduction of the direction 2013) risks reinforcing this view.


RPs should ensure that they are addressing the risks highlighted in the 'Sector risk profile 2013':

and check that they can give assurance to the regulator that the risks are actively managed and understood.


By Jonathan Pryor

As many of our readers will be painfully aware, FRS102 has particularly significant repercussions for financial instruments. We all face numerous challenges including the potential for some or all of the following: fair value reporting, some of the movements in fair value going through the income and expenditure account (I&E), consequent increased volatility, hedge accounting and detailed disclosure requirements.

As a result, some RPs have invested time in exploring what the impact might be, including undertaking analysis of their loan instruments to see whether they are classified as basic under the complex rules set out in paragraph 11.9 of the FRS102 standard, and in some cases exploring hedge accounting under section 12.

Sadly, much of this may have been a waste of time.

Bad (or actually good) news

As we have flagged previously, sections 11 and 12 have been on the point of being changed quite significantly to reflect the different hedge accounting principles that will be included in IFRS9 Financial Instruments. We now know that proposals to amend the standard are being set out in an exposure draft (FRED51). Since these changes are likely to go through relatively quickly, it will mean that the current version of hedge accounting set out in section 12 is unlikely to ever be applied unless RPs choose to adopt FRS102 early. The good news is that the new rules are much more permissive and should allow hedge accounting to be applied to a wider range of circumstances. Equally, the important option of deeming certain instruments that are basic to be reflected at fair value through profit or loss (and therefore in effect achieve hedge accounting without documentation) is going to be widened. Even worse (or actually even better) news

However, there are discussions currently underway which may result in the Financial Reporting Council (FRC) making changes to section 11. In particular greater clarity is expected to be provided as to whether debt instruments are classified as basic or other. While the outcome cannot be anticipated with certainty at this stage it is probable that many instruments where it previously appeared likely they would be classified by RPs as 'other' could now fall into the basic category.

Next steps?

If you have not done anything in respect of financial instruments yet, it could be argued you may have demonstrated admirable forward thinking! However, it is worth investing time now in understanding the broad principles of financial instruments accounting. In practice, if you do not have a complex hedging strategy it is likely that the outcome may be predicted with some confidence; your loan agreements are very likely to be classified as basic in nearly all cases, although there will be some exceptions. The uncertainty over hedge accounting and classification may well therefore not be significant for you.

On the other hand, if you have done quite a bit already, you may well need to start again. Some of the previous work may of course be useful but it is quite likely that parts of the more complex items of work will now be redundant.

Whatever position you are in, this area is a minefield. It remains of huge significance to RP financial statements. Equally, it is hard to navigate to the final resting place when the standard itself is shifting. Consequently all RPs will need to consider how best to respond; all should be investing time now in understanding the overview but will also need to fine- tune the detail once the position becomes clearer.

Fortunately, we are in an excellent position to advise on the changes and the expected final outcome which should help RPs to decide on that balance. Please do ask us to help you understand the requirements before spending lots of time on it at this stage.


By Rachel Stone

In the middle of change it can be easy to overlook the impact that restructuring, growth and mergers have on reward strategy. We all know that having up-to-date and flexible people practices is vital to support corporate objectives, but many associations forget to review their reward approach as their organisation grows and changes. Here's our six stage model for checking that your reward systems are still up to the job.

Stage 1: Review changes to the size and structure of your job roles

As organisations are re-built and finances are re-organised, the boundaries of many job roles are likely to be extended. Both the depth and breadth of roles may change, and effective job design and evaluation techniques will help you re-value these roles fairly.

Stage 2: Check the validity of your pay and grading structure

Check whether your grading structure is still suited to the current shape of the association. Is it time to review your grades or levels? Do you need to change your pay model? Can staff still see clear career progression pathways?

Stage 3: Obtain accurate and current market data

As the economy starts to recover, keep your eye on market trends to reduce the risk of losing good people to new or higher profile roles elsewhere. Market data on pay is essential if you want to make good decisions about how to position pay for individuals and teams.

Stage 4: Review the cost effectiveness of your benefits

Are you getting the best rates for benefits? With pension changes still underway and greater private sector competition in some service lines, now is the time to 'spring clean' your benefits offering and make sure you are getting real value for money for your organisation and your staff.

Stage 5: Re-communicate the value of your total reward package

Many staff simply don't know how much their benefits are reward package and get these messages out to your staff in clear and fresh ways. We have seen financial education sessions pay dividends for employees and employers as they build understanding of pensions and other benefits offerings.

Stage 6: Ensure your reward strategy is equal pay compliant

If you do make changes to roles and reward structures you need to check that these will be applied fairly. For larger organisations, equal pay analysis will help you to test the effectiveness of any changes made and provide a benchmark for measuring future progress.

As a leading provider of pay and reward services to associations across the UK, we are seeing far more activity in the marketplace, with associations wanting to improve underlying reward strategy, design pay structures that fit with their corporate ambitions, and get accurate market data on pay and total reward. Your pay and reward model should align directly to your culture, values and objectives – if it doesn't, now could be a good time to take another look at pay.


By Jacqueline Oakes

For some sectors, the impact of the new standard will not be immediate. This is not the case for the RP sector. For all RPs FRS102 will result in substantial changes. A comprehensive and customised assessment of where you are now, and what condition you will need to be in before the transition date will be a pre-requisite of a stand-out performance.

What do you need to do?

You will need to invest time to:

  • determine how big an issue this is for you and your business
  • identify whether there are any crucial areas which will require immediate attention
  • pull together a properly resourced plan and timetable covering the steps you will need to follow
  • consider whether or not you will need some outside help and where best to source this.

The first challenge is when and where to start.

When to start?

2016 may seem a long way off however for the majority of RPs with a 31 March year end, the transition date will be 1 April 2014 (effectively 31 March 2014), just months away!

The transition date is key as for some transactions your ability to influence the outcome may be lost after this date, for example hedge accounting (although note some of the practical issues in this area in Jonathan's article on p6 of this publication). Also some choices available at transition need to have been fully evaluated prior to the transition date or opportunities may be lost. Furthermore some business discussion may look sensible now but could appear calamitous in light of future reporting requirements (most notably any financial restructuring and any property developments such as grant funded schemes). Consequently the timeline is much closer than you think.

Where to start?

We have developed a modular approach to help you assess, design, implement and assure the transition to FRS102. In this article we will consider the planning phases 1 and 2.

Planning is not necessarily looking at the detail; there is a lot of work that can be done upfront to make the transition process easier. These are explored further below.

Reporting standards review

Most RPs are expected to adopt FRS102, however for other entities within the group e.g. development and financing companies you may wish to assess the alternative options.

Impact assessment and stakeholder map

Strategic and operational areas will need to be considered, for example.

  • Have you identified all applicable stakeholders?
  • What is your stakeholders' current understanding of the changes
  • What communication are your stakeholders expecting?
  • Does your risk assessment process and register incorporate the implications of FRS102?
  • How are your systems placed to process the changes?
  • Do you need to implement any further internal controls?
  • What internal/external reports are required and can these be produced with the current software?
  • Are there any implications for taxation?
  • How does the impact of FRS102 fit into the organisation's wider strategy, objectives and KPIs?
  • What level of external support should you seek and for which areas?
  • What are your training needs and where should these be sourced from?

Accounting options

There are a surprising number of choices available both on transition and going forward. Having all the facts to hand will determine the quality of that decision.

Tax implications

Organisations that are tax paying will also need to assess the implications for taxation and gift aid – not all changes arising as a result of accounting under FRS102 will be tax neutral e.g. financial instruments, lease incentives. In addition the added volatility likely to arise from fair value movements may also make it harder to estimate gift aid payments.

Gearing and interest cover covenants

There are a combination of effects from FRS102 (the radical changes to grant accounting, impairment and financial instruments) that will have a profound impact on covenant calculations. We are anticipating that between 50 and 100 RPs will breach covenants as a result of the different accounting treatments unless actions are taken.

Project plan and division of responsibility

You will need to pull together a well-articulated project plan for the transition, including quality control and project management. In order to ensure that no key areas are missed a clear understanding of the above factors will be essential.


Although you are likely to have attended a variety of seminars and events already you will undoubtedly require further training between now and 2016. Typically there are three main audiences to be considered: the finance team, the board/audit committee and the senior management team. In addition to the series of RP seminars we ran during 2013 on FRS102, we have the following dedicated RP seminars coming up in the next few months.

Upcoming seminars

  • 30 January 2014 seminar – practical issues relating to FRS102
  • 11 March 2014
  • 9 October 2014

However we have also delivered a series of dedicated one-to-one training sessions for RPs which cover the very specific issues faced by the individual RP. These provide a wonderful opportunity to explore in more detail any gaps in understanding and help articulate the key areas of focus for the RP in responding to the FRS102 challenge. The feedback from these sessions has been overwhelmingly positive. If you would like to find out more please do contact any of the Smith & Williamson team for more information.

Case study

For many of our clients we have started the FRS102 planning process with a bespoke training and brainstorming session, enabling knowledge to be developed within the wider team, as well as establishing a work plan for meeting the challenges ahead and identifying issues previously not considered.

Before the session

  • Performing a review of the financial statements to identify the main areas where FRS102 will have an effect.
  • Reviewing financial instruments in overview. This involves provision of a summary of the existing loans and swaps etc. (if any stand-alone ones) so that we can assess provisionally how they are likely to be treated.
  • Reviewing the main financial covenants in overview.
  • Preparation of a tailored briefing document.

At the session

Presentation of the briefing document. Typically these sessions last around 2 to 3 hours and include a combination of general briefing, specific discussion of your affairs and the more significant of the various policy choices available.

Who attends?

Key finance and treasury team members.

After the session

  • Provision of a summary note of the key points emerging from the session requiring follow-up action.
  • Where required assistance in producing a comprehensive project plan.
  • Presentation to the board/audit committee, emphasising their role in overseeing the transition process. The focus is very much on the key things that they should be aware of and should be monitoring rather than the technical effects of the changes, although the latter are covered briefly.


By Chris Murray

Those RPs who participate in any of the SHPS defined benefit structures or earlier growth plan series will know only too well that the spectre of funding deficits has risen – bigger and more daunting than last time, with increased funding rates and higher deficit recovery contributions from this April.

Auto-enrolment looms

Even if you have consulted your staff and restructured your schemes in order to mitigate future liabilities under these arrangements, what about the looming nightmare that is auto-enrolment or the financial pain of compliance?

There will be hordes of advisers scratching at your windows, trying to tempt you with their services but if they are offering to talk to each one of your auto-enrolled staff individually, beware! Ask yourself why does an employee that has not previously chosen to join a pension scheme suddenly need one to one advice? This situation is totally different to voluntary entry, where many employers like to ensure their staff are being helped with investment choices. With auto-enrolment, there aren't any investment choices – at least not at the point of being enrolled so what are you paying for?

RPs initially think about the cost of auto-enrolment in terms of contributions payable, especially since often, only a small proportion of their workforce currently participates in any kind of employer-sponsored pension arrangement. The additional expense is going to hurt. By October 2018, you will be paying three times what you will have to pay on your staging date.

Will many staff opt-out? The largest employers (big retailers) who 'staged' on 1 October 2012 have a remarkably similar staff profile to the average RP, with a small core of management and many lower paid workers. Yet to their financial directors' horror, less than 10% of employees have opted-out so far.

Other ghouls to face

Can you afford to enrol everyone into social housing pension scheme defined contribution (SHPS DC), for example? Can you afford not to? If you are fortunate enough to have an option, do you know enough about what else is available to make an informed choice?

And it's not just the additional contributions that will hurt. Have you considered how you are going to run the auto-enrolment process? Without setting up some kind of system to handle all of the communications that RPs must issue to their staff – even those who already participate in a scheme – you will face a challenge. Many payroll systems can help with categorising staff and assessing eligibility for auto-enrolment but we have yet to come across any that will also handle the communications.

Getting the message

What communications? Well, apart from letting your staff know what's coming and possibly needing to consult (depending on the changes being imposed) all staff need to receive very specific information about their status and options both at the point they are assessed as being eligible for auto-enrolment (or being ineligible, as the case might be) on postponement and when opting-out.

Going it alone

Then there is the cost of getting everything to work together; there has long been a feeling in the RP community that SHPS (more specifically, The Pensions Trust) will step in and make everything work. In recent years, many RPs have been faced with difficult decisions over restructuring, failing financial status and now the management of auto-enrolment, none of which The Pensions Trust help with. It's not allowed to give advice and it does not provide software (known as 'middleware' that sits between itself and your payroll) so you are on your own.

Are you aware that you will have to assess your staff every month to see if their status has changed? Do you know what fate awaits RPs who get it wrong? Have you thought about getting together a project team? You will no doubt appreciate that a lot of thought and planning needs to be given to auto enrolment and the cost of professional help will almost certainly be higher than you think.

There is another murky figure on the horizon – the end of contracting-out in 2016 and the ensuing increase in National Insurance Contributions. And what about the impact on your accounts when deficit recovery contributions have to be amortised and accounted for under FRS102?

Don't feel overwhelmed – we can help. Contact myself or one of our team.


By Jonathan Pryor

Arguably the main area of contention relates to the new proposals in the SORP on impairment. The current concept of planned internal subsidy on which many RPs have relied has been replaced by an objective measure, EUV-SH, for estimating the fair value of a scheme.

The FRS requires an entity to record an impairment if the recoverable amount of an asset is less than its carrying value. It defines the recoverable amount as the higher of value in use (which the SORP working party consider will be rarely relevant) and fair value less costs to sell.

Consequently, if the EUV-SH is lower than the carrying amount then an impairment will arise. This will be the case both for historic schemes where this is still true and for new schemes. Indeed, the recognition point is likely to be earlier in most cases than completion and could even arise at scheme approval stage.

Assuming the consultation process does not identify any material flaws, it is clear that the consequences of this change could be far reaching. Not surprisingly, there is very considerable concern that the accounting treatment might limit some RPs' future development plans.

Here are some points that may not have been fully appreciated in the sector.

  1. The carrying value includes a deduction for the related amortised grant, provided this is also carried on the balance sheet. Not that much help for future schemes admittedly, but potentially very helpful for historic ones.
  2. EUV-SH is intended to reflect the amounts other RPs would be prepared to pay for the scheme given the continuing restrictions in operation that may be present. The value should therefore include an element to take into account what the sector as a whole is prepared to pay for the social benefit derived from the asset in excess of the cash flows derived from it. So, if the scheme has planned internal subsidy, and the level of this is judged to be broadly in line with the 'RP market level' for such subsidy, then there would ordinarily be no impairment.
  3. If the valuer judges that a bidding RP would take into account potential alternative uses for the properties in their bid for the scheme, they should reflect this in the EUV-SH. Consequently there may be some schemes in high value areas which attract a higher EUV-SH than might otherwise be justified purely from the existing rentals because of a 'hope' value.
  4. Expressly, the valuation should reflect the optimisation of the sale process. In particular, if a higher value could be obtained from dividing the stock up into smaller parcels or lots, then the valuation should be done on that basis. There is objective evidence that this factor alone can increase valuations markedly.
  5. It is also worth noting that, though not the work of the SORP working party, FRS102 is different from FRS11 in that reversals of impairments just due to time are reflected as a credit in the income statement. Consequently, although an impairment may be recognised on some schemes at day one, it is possible that just through inflation on rents, for example, that the impairment will partially reverse each year to counter to some extent the impact of impairment on future development.

So where does this leave us?

It is clear, as indeed it always was, that as many RPs as possible should respond to the exposure draft of the SORP with their thoughts on this issue. Although we recognise that many of these responses are likely to refer to the impact on the particular RP or the sector as a whole, it would be helpful if possible if there were also some comments on the technical aspects of the argument, particularly where people disagree. However, on the basis that the exposure draft is not changed as a result, it is also clear that valuers will be very busy as this process will require more examination of individual schemes and greater levels of analysis by valuers. It will also require higher levels of investigation by auditors.

In the meantime it will be important for many RPs to assess whether the above changes might have a material impact on either the existing financial position or future plans for development. The impact on covenants and business plans is potentially profound.


By Adrian Wild

An exposure draft of the charities SORP was issued in July 2013. This exposure draft incorporates the necessary changes arising from the publication of FRS102.

While many RPs have charitable status (even if not registered with the Charity Commission) they do not have to follow the charities SORP, as the RP SORP is more specific. However, it will be applicable to RP groups which incorporate non-RP charitable subsidiaries. These subsidiaries will need to follow the charities SORP.

Although the SORP is only an exposure draft and therefore it may change, I do not expect that there will be fundamental changes following the completion of the current consultation exercise. While in many areas the charities SORP simply regurgitates requirements of charity law and FRS102, in certain areas it imposes more specific requirements.

Income recognition

Under the existing SORP, income is recognised when it is measurable, when the charity is entitled to receive it and when it is virtually certain to be received. The new SORP replaces 'virtually certain' with 'probable'.

This is most likely to make a difference for income derived from legacies and pledges – under the new SORP income recognition may be advanced.

Statement of financial activity

The Statement of Financial Activity (SoFA) presentation is specified and is simplified from the previous SORP with the main income headings now being:

  • donations
  • earned from charitable activities
  • earned from other activities
  • investment and other.

Within expenses, 'governance costs' are no longer with us and will be classified within support costs.

For larger charities, the SORP requires the SoFA to be analysed by activity.

Social investments

The concept of social investment is picked up on by the new SORP. This is a relatively new classification of investments on which the Charity Commission produced guidance in their publication CC14. This recognises that there is a category of mixed motive investment that is neither purely financial nor purely in the furtherance of the charity's activities. Here the SORP builds on the public benefit exemptions available under FRS102.

Recognition of Government grants

This is perhaps the most significant area for RPs.

Under FRS102, there are two methods for recognising Government grants.

  1. The total grant is recognised as part of income once the recognition criteria have been met; or
  2. The grant is taken to the balance sheet (as a creditor) and released to income as the related costs are incurred or over the life of the associated asset.

I understand that the RP SORP (which has yet to be issued as an exposure draft) will require that RPs adopt option 2 – effectively continuing with the current position, albeit that the grant received and not used will be treated as a creditor and will be released to the income statement over a different period.

The RP SORP (assuming the exposure draft is unchanged when finalised) will require that RPs adopt option 2 if properties are carried at cost – effectively therefore, where a charitable subsidiary receives Government grants, it will need to either follow the RP SORP rather than the charities SORP or have an accounting policy divergent from the group policies. In the latter case, there would need to be a consolidation adjustment to align the policies.

It should be noted that this applies only to Government grants and not grants from – for example – other charities. Under both the RP SORP and the charities SORP option 1 will need to be followed for non-Government grants.

Financial instruments

Throughout, the charities SORP is designed to be easy to read and accessible and largely it is successful in these aims. However, financial instruments is potentially the most complex area of FRS102 and therefore incompatible with such an approach. In this area I consider that the SORP offers little guidance of substance.

Much of the new charities SORP is similar to the existing SORP, but as with FRS102, there is a significant learning curve and forward planning is vital to successfully implement the necessary changes.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code 13/051 exp: 31/07/14

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Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions