Your financial statements for this year will be the last to be prepared in the current format. The accounting regime in this country is changing for all entities including charities.
The charity SORP (Statement of Recommended Practice on accounting) which all charitable schools have adopted in the past is being replaced with two new SORPs. As schools approach their 2015 financial year end, now is the time to think about the impact of SORP 2015 on comparative figures. We recap on our recent SORP briefings with a summary of those key areas to think about now.
Which SORP – Charities SORP FRS 102 or Charities SORP FRSSE?
Any charitable school can follow Charities SORP FRS 102 but only those charities that fulfil two out of three eligibility criteria may adopt the lighter touch Charities SORP FRSSE. The criteria are for charities - including non-company charities - that qualify as a small company or small group, had they been incorporated by company law. Under the existing company law (Companies Act 2006 Regulations), a charity would qualify as small where any two of the following three criteria are met in both the current and preceding financial years:
- Gross income of not more than £6.5m (£7.8m gross before consolidation adjustments for a charitable group);
- Balance sheet total (gross assets) of not more than £3.26m (£3.9m gross before consolidation adjustments for a charitable group); and
- Average number of employees of not more than 50 (aggregate number of employees for a charitable group).
Some smaller schools may be eligible to adopt the FRSSE SORP; however a word of caution; the FRSSE is due to be replaced in the near future. Schools adopting Charities SORP FRSSE will potentially therefore face further changes at a later date (currently anticipated as being 2016), if the FRSSE is withdrawn.
Holiday pay accruals
Under SORP 2005, staff costs were included in the accounts based on what was paid to staff during the financial year.
It is now a requirement that untaken annual leave and sick leave are accrued as a liability if material.
If your staff holiday year is not coterminous with the financial year (or staff can carry over unused holiday), you will need to calculate the value of untaken holiday at the balance sheet date.
Schools with a June or July year end are likely to have an accrual for holiday pay due to teaching staff for time taken in the summer holidays. Many other schools may have support staff with annual leave accrued on a calendar rather than academic year.
What you need to do:
Calculate the value of untaken holiday at the opening and closing balance sheet date. Your payroll system may be able to provide much of the data for the calculation. The accrual should be the difference between the holiday pay accrued evenly over the financial year less the annual leave actually taken.
If the balance is material your comparative balance sheet will be restated for the accrual on adoption in 2016.
Key management personnel
Schools will now be required to disclose the total remuneration paid to 'key management personnel' for their services. Disclosure can be made on an individual basis if desired. The SORP defines the term key management personnel as 'those persons having authority or responsibility for planning, directing and controlling the activities of the charity and to whom the Trustees have delegated significant authority in the day-to-day running of the charity'.
What you need to do:
Governors should make a decision now as to which staff meet this definition so that comparative data can be collated this year end for inclusion in the 2016 financial statements. Many schools will opt for the SMT but in some cases this may be broader (or narrower) than the SORP definition.
Valuation of fixed assets
As with the current SORP, non-investment fixed assets continue to be measured at historic cost or fair value. When adopting the new SORP for the first time, you may choose to adopt the historical cost model but use fair value at transition date as your ‘deemed’ cost. This gives schools the opportunity to revalue buildings to current value at 1 September 2014 without the on-going cost and administrative burden of regular revaluations. However don’t forget that your annual depreciation charge will be based on the new ‘deemed cost’ and could have a significant impact on the SOFA.
What you need to do:
There may be reasons that revaluation of land and buildings is attractive to the Governors (perhaps to aid borrowing or bring previously unrecognised buildings onto the balance sheet). If they wish to adopt the transitional provisions available, a formal valuation of the land and buildings should be obtained with and effective date of 1 September 2014*
Do you have a trading subsidiary? Think before paying up gift aid this year
On 31 October 2014 the ICAEW issued its technical release ‘Guidance on donations by a company to its parent charity’ which considers the accounting implications of legal advice that donations of taxable profits by a subsidiary company to its charitable parent constitute distributions rather than donations.
- donations should be treated as a distribution of reserves in the accounts of the subsidiary rather than as an expense; and more importantly
- where these distributions exceed available distributable reserves (typically because profits have been gift aided based on taxable profits rather than accounting profits), they are unlawful and the charitable parent is liable to repay the excess to the subsidiary company.
With donations now being recognised as a distribution for accounting purposes but allowed as a donation for tax purposes, there will be a disparity between the tax charge in the accounts and the accounting profit which needs to be reconciled via a note in the trading company financial statements.