Working in the charitable sector? Then you’ll want to know about a development that impacts on your gift aid payments from trading subsidiaries to parent companies.
It’s all to do with the FRS 102, which is the financial reporting standard for the UK, setting out how a company should prepare its accounts and show financial information.
On 15 Dec 2017, the Financial Reporting Council (FRC) issued the Amendments to FRS 102 – Triennial Review 2017.
Purpose of the Amendments
The amendments have been designed to:
1. Simplify the original FRS 102, making it easier to use
2. Reduce the cost and effort involved in preparing accounts
3. Help to clarify the reporting requirements.
These amendments are effective for accounting periods beginning on or after 1 January 2019, although early adoption is permitted.
Most of the amendments focus on tidying up issues and are unlikely to have a significant impact on the preparation of your accounts.
However, the clarification around gift aid payments may require the statutory accounts to be restated now, so it’s important that as a charity, you’re aware of the changes affecting you.
There’s also an option to adopt the tax provisions early of which you may wish to take advantage.
“Remember, gift aid payments can be made to charities by their trading subsidiaries up to nine months after the year-end.” Michael Ware, Horus Consulting
However, they’re often accrued by the charities in the year that the profits were realised.
The payments are considered to be constructive obligations by the charity, so are shown as liabilities in accounts of trading subsidiaries, and accrued as income for the charity.
Following the amendments to FRS 102, gift aid payments are viewed as a distribution, so are treated as a dividend.
The payments can only be accounted for when they paid or when there is a legal obligation.
3 Legal Obligation Must-Knows
A legal obligation is NOT created by:
- A director’s meeting during which it is confirmed that the profits will be paid to the charity
- The custom and practice of making such payments every year
- A specific clause in their Memorandum and Articles of Association stating that profits need to be paid to the parent charity.
The only method of creating a legal obligation is to have a legally binding agreement, such as a deed of covenant, in place.
This will document that the taxable profits of the trading subsidiary will be covenanted to the parent charity.
4 Facts about Deeds of Covenants
- A deed of covenant is a legally binding agreement between two parties stating that one party agrees to pay the other an agreed amount of money without receiving any benefit in return.
- It’s important to remember that the deed must be properly drawn up, signed, witnessed, sealed and delivered to the party receiving the payments.
- The deed will also be for a fixed period, usually four years, and will need to be renewed.
- If you choose to forego the deed of covenant, then the gift aid payment can only be recognised when it’s actually paid.
If the trading subsidiary needs the nine months after the year-end to have the working capital to make the payments, the gift aid will be recognised in the following year’s accounts.
“There are advantages to the changes to the FRS 102 that charities may wish to take advantage of.” Michael Ware, Horus Consulting
For example, entities wholly-owned by a charity are permitted to account for the tax consequences of those payments earlier than the period in which the gift aid payments are made, where it’s probable the payments will be made within nine months of the reporting date.
The next step is for charities with trading subsidiaries to decide whether it’s better for them to match gift aid payments with the associated profits realised.
If so, they’ll need to pay the gift aid payments in the year or enter into deeds of covenant to change the gift into a legal obligation.
Summary of This Article and Your Next Steps
This article relates to amendments to the FRS 102.
The main change affecting the charity sector addresses accounting for gift aid payments from trading subsidiaries to parent companies.
A deed of covenant is recommended to be in place before 2019.
As a finance professional with a wealth of experience working with charitable organisations, I can provide clarity on the amendments to FRS 102 and advise on the best way for your charity to implement them.
To book an initial consultation appointment, at no charge, click here.
“Michael did a great job leading our statutory accounts and audit process in the absence of the permanent finance lead. He rebuilt our accounts model, worked collaboratively with the permanent finance team, and managed the process with the audit team, while providing assurance to me so I could report to the board. His work and recommendations have provided us with a robust platform for future development.” Claire Montague, Chief Operating Officer at Royal Trinity Hospice