The new further and higher education SORP (SORP 2019), has been issued following the triennial review of FRS 102. For institutions covered by SORP 2019, which include all further and higher education institutions in the UK, it must be adopted for periods beginning on or after 1 January 2019, ie year end 31 July 2020 for most further and higher education institutions. SORP 2019 states that early adoption is permitted if the relevant Accounts Direction permits; the 2019 Accounts Directions from both the ESFA and Office for Students are awaited at the time of writing.
There are relatively few changes in the updated FRS 102 and SORP 2019, and a number of the amendments that are incorporated are unlikely to affect most further and higher education institutions. If early adoption is permitted and chosen by an institution, all of the Triennial Review 2017 amendments to FRS 102 and the SORP 2019 must be adopted in full, subject to two exceptions, the most relevant for further and higher education institutions being in respect of gift aid.
Arguably the most relevant change for further and higher education institutions is in relation to accounting for gift aid payments (from a subsidiary to its charitable parent). This is a change that can be early adopted without implementing SORP 2019 in full.
The amendment provides an exception whereby an entity may recognise the income tax effects of that gift aid payment (ie, the tax deduction) regardless of whether or not the gift aid payment has been accrued at the reporting date:
- if an entity is wholly owned by a charitable parent (as defined);
- it is probable that a gift aid payment will be made within nine months of the reporting date; and
- that payment will qualify to be set against profits for tax purposes.
This exception means that a wholly owned non-charitable subsidiary will not need to recognise a current tax expense when it is probable that its taxable profits will be relieved by an expected gift aid payment.
Although not a change, it is also worth remembering that while gift aid payments are a donation for tax purposes, they are legally a form of distribution to owners and so should be accounted for consistently with dividends – ie as a deduction from equity. Consequently, an expected gift aid payment should not be accrued unless a legal obligation to make the payment exists at the reporting date. A board decision to make a gift aid payment to a parent charity, that has been taken prior to the reporting date, is not sufficient to create a legal obligation.
The SORP now specifically states that a subsidiary may be excluded from consolidation where its inclusion is not material for the purpose of giving a true and fair view (but two or more subsidiaries may be excluded only if they are not material when taken together).
Another area which may affect some institutions is respect of investment property. SORP 2015 required all investment property to be carried at fair value. This treatment continues to be one of the accounting options under SORP 2019. However, alternatively under SORP 2019, property (or part property) rented out to another group entity, which would otherwise meet the definition of investment property, could now be transferred to property, plant and equipment and restated to depreciated historic cost. However, a transitional relief permits the use of fair value as deemed cost at the date of transition to SORP 2019.
The SORP also:
- clarifies that mixed use property must be separately recognised between investment property and property, plant and equipment if it could be sold or leased out separately under a finance lease;
- states that investment property must be included within tangible assets in the SORP unless separate presentation is required due to materiality; and
- removes undue cost or effort exemptions for valuing investment properties (and investments in associates and joint ventures).
SORP 2019 contains some other minor amendments, such as reference to regulators rather than funding bodies.
There are other changes which are unlikely to affect most further and higher education institutions. These include:
- other than the point on gift aid payments, the only matter which can be early adopted in isolation is with regard to directors’ loans. Previously, as financing transactions, these had to be measured at the present value of future payments, discounted at an appropriate market rate of interest. Now, for small companies, loans from a director and/or their close family members can be recognised at cost, where there is a shareholder within a director’s group of close family members; and
- changes to conditions for classification of financial instruments including a principle-based description of basic financial instruments; and
- on future business combinations, only intangible assets that are separable and arise from contractual or other legal rightswill have to be separately identified from goodwill and valued (though the option to still do so if only one criteria is met will be available).
The distinction between finance leases and operating leases remains in SORP 2019 but it is expected that the recent change in International Financial Reporting Standards, to recognise virtually all leases on balance sheet, will be adopted in FRS 102 at some point in the future.
The other potential change of note in future is in respect of accounting for government grants. Unlike the Charities SORP, the further and higher education SORP continues to allow a choice of accounting treatment between the accruals and performance models. Whether this stays an option in the next version of the SORP remains to be seen.
If you would like to discuss the new changes further, please contact Dominic Blythe.