Earlier this year, the Financial Reporting Council (the FRC) published Financial Reporting Standard 102 (FRS 102), the culmination of years of debate, consultation, draft versions, and delays. It replaces all previous FRSs, SSAPs, and UITFs (and at around 300 pages is considerably shorter than what it is replacing), and is based on the IFRS for SMEs. It also includes guidance specifically for public benefit entities.

So what is the impact for charities?
Currently, charities prepare their accounts under UK FRSs or, if they are smaller charities, the FRSSE, as well as following the requirements of the charities SORP (both the FRSSE and the SORP are currently being revised to reflect changes in FRS 102, with consultation on the new charities SORP expected to commence in summer 2013).

Larger charities, those exceeding the small companies’ thresholds, will prepare their accounts in accordance with FRS 102 and the new SORP. For smaller charities, they will have a choice of following FRS 102 or the FRSSE. The likelihood is that the new SORP will be tailored to smaller charities adopting the FRSSE (a reasonable approach given that only 1.2% of the 163,000 registered charities have incomes in excess of £5,000,000).

When do the changes came into force?
The new standard comes into effect for accounting periods commencing on or after 1 January 2015. This may seem a long way off. However, it’s not as easy as saying “let’s worry about this in 2015”.

For example, a charity preparing its accounts to 31 December will need to adopt the new standards for the year end 31 December 2015. This means that the comparative figures, for the year ended 31 December 2014, will need to be restated to reflect the new reporting requirements. And the opening balances for the 2014 accounts are the accounts for the year ended 31 December 2013 – which will also need to be restated.

In fact, FRS 102 allows early adoption for accounting periods ending on or after 31 December 2012, so long as it does not conflict with the requirements of the existing SORP. Recent guidance issued by the Charity Commission states that early adoption of FRS 102 would be in conflict with the current SORP and legal requirements – meaning that charities should continue to follow current reporting requirements, until the new SORP is released.

But not adopting early does not negate the fact that charities need to start planning for these changes now.

Key Changes
So if charities need to start thinking about the changes now, what needs to be considered? Below are some key highlights:

Cashflow statements – FRS 102 does not include an exemption for small charities to dispense with the need to prepare a cashflow statement, meaning charities will need to prepare a cashflow statement unless they follow FRSSE

Holiday pay accrual – under FRS 102, it is compulsory for charities to accrue for holiday pay earned but not yet taken, especially where carried over from one accounting period to the next; given such calculations are rare it is advisable for charities with December year-ends to undertake this calculation for 2013 as this form part of the restatement of opening reserves

Revaluation gains – this is a disclosure change rather than a new requirement, since revaluation gains, on equity investments and investment properties, will be recognised in income rather than in the other gains and losses section of the SoFA

Income recognition – FRS 102 focuses on recognition when income is probable as opposed to virtually certain; the most likely impact of this is in respect of legacies for those charities that adopt a prudent recognition approach

Intangible assets and amortisation – where the useful lives of intangible assets cannot be reliably calculated, the amortisation period is 5 years, compared to the current 20 years

Multi-employer defined benefit pension schemes – where there is an agreed scheme deficit reduction arrangement in place, a provision should be recognised in respect of contributions due

Prior year adjustments – FRS 102 requires for these material errors in the prior period, and not just fundamental errors as currently

The introduction of FRS 102 and the above issues may not seem, on the face of it, significant or applicable to your charity. But they will have an impact upon the development of the new SORP and may change under what standards a charity reports – changes are afoot. For any guidance on the new changes, please get in touch.