A draft Statement of Recommended Practice update bulletin has been issued, which deals with a number of matters arising from the revision to the underlying accounting standard – FRS 102 – and from developments in practice and law since the Sorp was issued. FRS 102 mainly changes for accounts years ending December 2019, and the consultation on the Sorp update bulletin opened on 20 February and closes on 4 April.
There are 21 proposed amendments, of which the more significant are: a new accounting policy choice for charities renting investment properties to subsidiaries; drawing attention to the role of deeds of covenant to justify booking Gift Aid payments before the year-end; and requiring more comparatives, mainly in relation to funds, and an extra note for cash flow statements.
Other helpful changes include: revised guidance on how and when to recognise intangible assets, including the transfer of activities to a subsidiary undertaking as an example of a charity reconstruction that should be accounted for as a merger; a tighter definition of a mixed-use property; and a definition of the term "service potential".
The service potential definition will probably be the topic of most relevance to most charities, since many organisations hold assets for delivering their charitable objectives, rather than to earn money.
Reporting to the regulator
The Charity Commission has issued a publication covering the extent to which auditors are reporting matters of material significance to them. The commission report says that in the six months to 31 October 2017 only 28 reports were submitted, compared with 114 modified auditor’s reports that should have been reported on. It says only a small proportion of those 28 reports were made on a timely basis. Charity law requires the report to be made immediately the matter comes to the auditor’s attention, which the commission says should be the same day the accounts are signed off.
The Financial Reporting Council has issued a specific response. The FRC reminds auditors of charities that they are required to follow regulatory requirements, which includes understanding the relevant legal and regulatory framework, so that they can spot situations that might be reportable. This means being familiar with the charity regulators' guidance on reporting matters of material significance and other relevant charity regulators' guidance – all set out in the FRC’s practice note 11, covering the audit of charities.
Two charity investigations
Two cases of interest have just been reported by the Charity Commission. The Friends of Blencathra was an appeal to buy a mountain in the Lake District that failed when it was instead purchased in the name of the Eighth Earl of Lonsdale. The case is a reminder that charities need to go through formal processes to return funds, rather than simply use them for another purpose.
The other case is unusual because it involves trustees in making what appears to be serious restitution of funds after they received payments for consultancy work. These payments were unauthorised because they arose under a conflict of interest. The case is a reminder that only in rare situations do trustees benefit from their role and that the Charity Commission’s intervention can come at a cost to trustees.
New VAT regulations have been issued that put in place the requirements of Making Tax Digital for VAT. Meanwhile, in Scotland regulations have now been issued enabling the introduction of two new tax bands for Scottish taxpayers from 2018/19 – the starter rate of 19 per cent and the intermediate rate of 21 per cent.
Finally, all three of the UK’s three independent charity regulators – the Charity Commission, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland – have issued an alert for any charity that receives, holds, moves or uses money, and particularly those moving funds internationally. The alert reminds them of the need to use conventional/regulated banking systems when moving money around.
Don Bawtree is lead partner for charities at accountants BDO LLP