Future changes to financial reporting
The Financial Reporting Council (FRC) has published proposed changes to FRS102, the accounting standard upon which the charity reporting requirements set out in the Statement of Recommended Practice (SORP) is based. These proposals are set out in an exposure draft known as FRED82 and are currently being consulted upon. If approved the changes will also result in the need for the SORP to be updated so that it remains consistent with FRS102, and it is expected that the changes will come into force for accounting periods commencing on or after 1 January 2025.
The key proposals set out in FRED82 are designed to keep reporting in the UK consistent with developments in International Financial Reporting Standards that have already been enacted in the areas of income recognition and leasing.
It is the proposed changes to lease accounting that will have the biggest impact for charities. At present leases are classified as being either ‘finance leases’ or ‘operating leases’ with a different approach followed for each. In short finance leases are those where the lessee is deemed to have the benefits of ownership of the related asset despite not being the legal owner, with the lease recognised ‘on balance sheet’ as a result, with the accounts showing both the asset and a creditor for the lease obligation. All other leases are accounted for ‘off balance sheet’ as operating leases with no asset or liability recognised, with lease payments generally recognised as an expense when paid.
The proposals will remove this distinction between finance and operating leases, and will see all leases recognised on balance sheet except for those of low value or with a lease term of less than a year. As a result for the first time many leases will need to be recognised on balance sheet, including leases for property, vehicles etc. Doing so will inevitably require additional work to be performed when preparing accounts, and some charities could find that they reflect debt obligations in their balance sheet for the first time due to the recognition of lease balances.
The other main proposal outlined in FRED82 is a change to the way income is recognised. Whilst the changes are unlikely to have any significant impact for the majority of charities, those with more complex arrangements where they provide a combination of goods and service in a single package could be affected.
Few of the other proposals in FRED82 are likely to impact on charities themselves, but for those that utilise subsidiary undertakings to conduct any trading activity the accounts of those companies could be affected, with additional disclosure requirements being introduced for small entities.
Future editions of Charity News will keep you apprised of development in FRS102 and the Charity SORP as we approach the 2025 implementation date for the revised versions of these standards.