A consultation on proposed changes to FRS 102 is an opportunity for charity sector members to draw attention to financial reporting rules that don’t work for the third sector and could have important ramifications for members with an interest in the third sector.
ICAEW is urging members dealing with charity accounts to submit feedback on the Financial Reporting Exposure Draft (FRED) 82 to ensure their specific requirements are taken into account.
Adoption of the Statement of Recommended Practice (SORP) is mandatory in the UK for charities preparing accrual accounts. However, charity reporting in the UK is underpinned by FRS 102 and in the hierarchy of UK 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 UK GAAP.
Richard Bray, Regulatory and Taxes Specialist at Cancer Research UK and an Advisory Panel Member of the FRC, said: “The danger is that charities will think this consultation on FRS 102 isn't about them. What we’re trying to say is that the framework will be set by this consultation. And so where there are areas that the SORP can’t change, it’s important that the FRC is made aware of those issues.”
This is particularly relevant in areas such as income recognition, to ensure there is special consideration around grants or donated goods.
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, specifically, requirements relating to the trustees’ annual report, fund accounting, the format of the statement of financial activities and additional disclosures.
The proposals in FRED 82 mostly reflect recent changes in IFRS Accounting Standards, and here are a few key areas most relevant to the charity sector.
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. A proposed IFRS 16 ‘leases’-based model would require lessees to recognise all leases on the balance sheet, subject to limited exemptions. This change could be very onerous, particularly for small charitable companies that must apply FRS 102, whereas small corporates not subject to the charity SORP can opt to apply the less arduous FRS 105 instead.
The FRED 82 consultation is also an opportunity to highlight a common concern among charity finance experts that the current FRS 102 requirement for comparatives of all disclosure notes results in cluttered charity accounts.
Although the FRC takes charity accounting and public benefit entity accounting very seriously, making the system work for charities depends on feedback from the coalface about what really matters to them, Bray added: “A key example of that is comparative figures, which in a charity aren’t always that helpful. I would encourage charities to give examples of why it causes clutter. What is important is to get practical change.
“Charities represent a small proportion of the FRC’s remit but if we don’t make noise, nothing will happen. If we have a passion for how we present our financial information, then we need to make a noise about those things that will help.
“Because charities are all about public benefit, how we communicate what we do is vital. It’s about trying to make sure that if anybody picks up a set of charity accounts, they will get the information they need and they won’t be too bamboozled by the technical detail. It needs to be there but it isn’t always presented as helpfully as it could be. It’s about creating an environment where those accounts can be as meaningful as possible.”
Kristina Kopic, Head of Charity and Voluntary Sector, ICAEW urged charity finance professionals to take advantage of the FRED 82 consultation to share feedback: “If you work with the charity sector or volunteer as a charity treasurer, this is your opportunity to share examples of where FRS 102 doesn’t serve your charity and the readers of your accounts.”
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.
- Respond to the consultation on the Financial Reporting Exposure Draft (FRED) 82 by 30 April 2023.
- Find out more about the proposed changes to FRS 102.
If you are a finance professional with involvement in the charity and voluntary sector, why not join ICAEW's Charity Community to stay up to date with the latest developments in charity finance, taxation and governance.
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