The Regulator for Charities in England and Wales
Updating the Charities SORP for:
FRS 17- Retirement Benefits
FRS 18- Accounting Policies
FRS 19- Deferred Tax
UITF Abstracts issued or withdrawn since October 2000
The consultation period for this Exposure Draft ends on 16 September
2002. The Exposure Draft should be read in conjunction with the An
Invitation to Comment document which highlights particular issues
on which views are sought.
The Accounting Standards Board (ASB) published in July an Exposure Draft of an amendment to FRS 17 'Retirement Benefits'. The proposed amendment would extend the transitional arrangements in the standard and therefore defer the mandatory requirement for the full adoption of FRS 17. Our current consultation on the Charities SORP Update Bulletin 1 will continue although we recognise that those responding will need to be aware of the extended transitional arrangements that may result from the recent ASB proposals.
1. All Statements of Recommended Practice (SORPs) are developed in the context of current accounting practice and cannot override the provisions of the law, financial reporting standards (FRSs) or UITF abstracts. In particular, any failure or delay in updating a particular SORP does not exempt reporting entities from following relevant standards from their effective date. Charities that are required to prepare accounts to give a true and fair view are therefore required to follow all relevant accounting standards in the preparation of their financial statements.
2. The Charities SORP - Accounting and Reporting by Charities is now reviewed annually in accordance with the Accounting Standards Board’s (ASB) code of practice applicable to all SORP making bodies. The first annual review of the Charities SORP since its issue in October 2000 was completed in February 2002. This review considered the impact of new accounting standards and UITFs introduced subsequent to its publication.
3. The information sheet published following this first annual review confirmed that the SORP Committee considered that charity specific guidance was required on the application of FRS 17-Retirement Benefits. FRS 17 is a technically complex standard and guidance is considered necessary to explain how the operating costs, financing costs or income and recognised gains and losses resulting from retirement obligations entered into by employer charities should be recognised within the resources expended categories of the statement of financial activities (SOFA). The application of FRS 17 also gives rise to a number of charity specific accounting issues. Particular issues arise in relation to how the elements of the pension cost should be allocated within the SOFA to restricted funds and the circumstances in which a pension asset or liability arising from a defined benefit scheme should be apportioned in the balance sheet to any restricted funds.
4. In addition to FRS 17 there have been two other accounting standards issued since the publication of the SORP. FRS 18 – Accounting Policies supersedes SSAP 2 – Disclosure of Accounting Policies, and FRS 19 – Deferred Tax supersedes SSAP 15 – Accounting for Deferred Tax. The SORP had largely anticipated the requirements of FRS 18, and FRS 19 does not have a significant impact on charities, due to the tax exemptions available. A summary of these new standards is, however, to be inserted into Appendix 2 - Application of Accounting Standards - of the SORP, that is also updated for all UITFs issued or withdrawn by the ASB between October 2000 and 1 January 2002.
5. The [Draft] Bulletin contains the changes necessitated by the introduction of FRS 17 -Retirement Benefits - and provides a commentary as to the basis of the recommended practice. The revisions to the SORP narrative introduced by this [Draft] Bulletin are shown in bold type, with commentary in normal type.
8. Charities that operate only defined contribution pension schemes will not be significantly affected by the new standard. The cost of a defined contribution scheme is equal to the contributions payable to the scheme for the accounting period, with costs allocated within the resources expended categories of the SOFA. A disclosure note is simply required to confirm the nature of the scheme, the cost for the period and any outstanding or prepaid contributions at the balance sheet date.
9. The following paragraph shall be included in the section of the SORP dealing with "Expenditure and Costs" under a new sub-heading "Pension and Retirement Benefits" immediately after Paragraph 153.
153.1 – The cost of a defined contribution scheme is equal to the contributions payable to the scheme in the accounting period. The pension costs are allocated across the relevant resources expended categories of the SOFA set out in paragraph 136.
10. An additional paragraph is also included in the section of the SORP dealing with "Notes to the Accounts" under a new sub-heading "Pension and Retirement Benefits" following paragraph 175:175.1 – Where a defined contribution scheme is operated by a charity the notes to the accounts should disclose the nature of the scheme, the costs for the accounting period and the amount of any outstanding or prepaid contributions at the year-end.
11. Defined benefit schemes are defined within FRS 17 as being "a pension or other retirement benefit scheme other than a defined contribution scheme. Usually, the scheme rules define the benefits independently of the contributions payable, and the benefits are not directly related to the investments of the scheme. The scheme may be funded or unfunded."
12. The major accounting change in relation to defined benefit schemes is the phased recognition of the recoverable asset or likely liability arising from the pension scheme’s actuarial surplus or deficit.
13. FRS 17 has a long implementation period and does not require any surplus or deficit on defined benefit pension schemes to be recognised in the charity’s balance sheet or for movements to be reflected through its SOFA until accounting periods ending on or after 22 June 2003. However, detailed financial disclosure notes are introduced in two stages:
A summary of the standard and details of its phased implementation are included in the Update to Appendix 2 section of this [Draft] Bulletin.
14. Employers participating in defined benefit multi-employer schemes are subject to reduced disclosure requirements where contributions are set in relation to the current service period only or the where the employer is unable to identify its share of the underlying assets and liabilities on a consistent and reasonable basis. Charities need to liaise with the scheme administrator or their actuary in advance of the reporting date to determine whether this split can be obtained.
15. Where contributions are set in relation to the current service period only (i.e. are not affected by any surplus or deficit in the scheme relating to past service of its own employees or other members of the scheme), the participating charity accounts for its contributions to the scheme as if it were a defined contribution scheme.
16. In certain other schemes a charity's contributions will be affected by any surplus or deficit in the scheme but the charity may be unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis. In such circumstances the charity will again account for its contribution as if it were a defined contribution scheme and disclose the nature of the scheme and any information available as to any surplus or deficit in the scheme and the implications this may have on the charity.
17. On occasions a defined benefit scheme includes both the employees of the parent charity and its subsidiary companies. Such group schemes may be run on a basis that does not enable the parent charity and subsidiaries within the group to identify their respective share of the underlying assets and liabilities. In such circumstances the separate entities each account for the scheme as a defined contribution scheme. From the viewpoint of the reporting group however the group defined benefit scheme is treated as any other defined benefit scheme.
18. The following paragraphs shall be included in the section of the SORP dealing with "Expenditure and Costs" immediately after paragraph 153.1:
153.2 - A charity participating in a multi-employer defined benefit scheme, where the contributions are set in relation to the current service period only, accounts for its contributions to the scheme as if it were a defined contribution scheme.
153.3 – Where a charity’s contributions are affected by a surplus or deficit in the scheme, but the charity is unable to identify its share of the underlying assets and liabilities on a consistent or reasonable basis, then the charity also accounts for its contributions to the scheme as if it were a defined contribution scheme. If a charity contributing to a defined benefit scheme relies on this exemption, written confirmation should be obtained from the scheme administrator or actuaries clearly stating that the charity’s share of the underlying assets and liabilities cannot be identified on a reasonable and consistent basis and the general circumstances giving rise to this position.
153.4 - If a charity and its subsidiary companies participate in a group scheme, but it is unable to identify each separate entities' share of the underlying scheme assets and liabilities, then each accounting entity treats its own contributions as if it were a defined contribution scheme. The consolidated accounts however treat the group scheme as any other defined benefit scheme.
The following paragraph shall be included in the section of the SORP dealing with "Notes to the Accounts" immediately after Paragraph 175.1.
175.2 - Where confirmation has been obtained from the scheme administrators or actuaries that the employer’s share of underlying assets and liabilities cannot be identified on a consistent and reasonable basis this fact should be disclosed as well as noting that the scheme is a defined benefit scheme. Such confirmations would normally be obtained when full actuarial valuations are required. Any available information about the existence of a surplus or deficit and the implications for the employing charity should also be disclosed.
19. It is desirable that a consistent approach is adopted by entities that participate in the same multi-employer scheme. It is proposed that the Charity Commission will contact the major providers of multi-employer schemes in which charities frequently participate, seeking their confirmation as to whether relevant FRS 17 information can be provided on a reasonable and consistent basis. The SORP Committee takes the view that such useful information is best presented in a separate information sheet rather than as part of the SORP’s recommendations.20. FRS 17 sets out how the change in the defined benefit asset or liability should be analysed into the required cost components and how these components of the pension cost are recognised in performance statements, either as part of operating activities or finance costs (or income) or within the statement of total recognised gains or losses. The structure of the SOFA combines an income and expenditure account and statement of total recognised gains into one statement, with resources expended being classified on a functional basis. The SORP Committee has considered how best to recognise the various component of the defined benefit costs within the structure of the SOFA.
21. The SORP Committee considered that charities will need to adopt pragmatic solutions when allocating the pension cost within the resources expended and gains and losses categories of the SOFA. The methods adopted for allocating costs across the resources expended categories will need to be reasonable, justifiable and consistent. Each charity will need to adopt methods appropriate to its own circumstances in order to produce an equitable allocation. Allocation of costs based on staff costs or pension contributions payable are two approaches commonly adopted. The method adopted should be explained as an estimation technique in accounting policy disclosures.
22. The current service cost should be allocated across the resources expended categories of the SOFA on a reasonable, justifiable and consistent basis.
23. Past service costs arise from a decision to improve benefits or to award new benefits in relation to past service and therefore increase scheme liabilities immediately. Under SSAP 24 past service costs for current employees were spread forward in the resources expended categories of the SOFA and past service costs of former employees was recognised in the SOFA immediately unless covered by a surplus in the scheme. Under FRS 17 the award of benefit improvements is regarded as an employment cost and it is recognised that such awards may form part of remuneration packages offered. Such benefits increase scheme liabilities immediately and are therefore recognised through the SOFA as the increase in benefits vest (i.e. as entitlement to benefit arises). The standard does however allow past service costs to be offset against any unrecognised surplus on the scheme that the employer could not otherwise utilise through reduced contributions or refunds. In such cases the unrecognised amount used to fund past service costs may be offset against the past service cost within the SOFA. The SORP Committee believes that decisions to award improved benefits will often be made in the context of an unrecognised surplus on the scheme and, in such circumstances, may not significantly impact on net costs recognised in the SOFA.
24. Where such past service costs do arise they will need to be allocated on a reasonable and justifiable basis across the resources expended categories of the SOFA. Some commentators have suggested that such costs, when allocated on a functional basis, may distort a particular expenditure category and therefore recommend that such costs be allocated to the management and administrative category of the SOFA.
25. The SORP Committee believes such an approach is flawed, as such costs do not relate to the management and administration of the charity but arise from a decision made in an accounting period as to additional levels of benefits that should arise under the scheme. Indeed, such decisions may be seen as part of a remuneration package. It is, however, recognised that in certain situations such costs may distort expenditure comparisons and that separate disclosure on the face of the SOFA in accordance with FRS 3 - Reporting Financial Performance may be necessary where such costs are exceptional.
26. Gains and losses on settlements and curtailments arising, for example, from early termination of employment, amendment to scheme terms, or the purchase or transfer of employees’ rights under the scheme may give rise to particular cost allocation issues. Again, such costs should be allocated across the resources expended categories of the SOFA and, where appropriate separately disclosed as exceptional costs on the face of the SOFA in accordance with FRS 3 – Reporting Financial Performance.
27. The interest cost and the expected return on assets are required by the standard to be included as other finance costs, rather than as part of operating activities. The SOFA format does not currently provide an interest cost category, as such costs tend to be allocated on a functional basis, although some preparers do use a separate expenditure category to identify interest cost, particularly charitable companies who wish to ensure interest costs are disclosed on the face of the SOFA. In developing FRS 17 the ASB took the view that the inclusion of pension interest cost and the expected return on assets as part of operating activities would risk distorting operating costs disclosed and would create cost distortions between funded and unfunded schemes with the same pension obligations because the interest cost and expected return are matters relating to the financing of the pension promise. The SORP Committee believes this same logic must apply within the context of the resources expended categories of the SOFA. It is therefore proposed that a new cost category – "Pension finance costs (or income)" be introduced into the SOFA to recognise the interest cost and the expected return on assets.
28. Actuarial gains and losses are required by the standard to be recognised within the statement of total recognised gains and losses. The ASB regards such actuarial gains and losses as similar in nature to revaluation gains on fixed assets and as incidental to the main purpose of the pension scheme. Similarly, fluctuations in scheme liabilities reflecting market conditions are also incidental to the main purpose of the charity. In order to recognise such actuarial gains and losses an additional category, pension finance costs (or income), needs to be inserted into the SOFA.
29.The Allocation of pension scheme assets/liabilities between funds section of this [Draft] Bulletin explains the circumstances in which a surplus or deficit in a defined benefit scheme may give rise to the recognition of a pension asset or liability within restricted funds. When a pension asset or liability is recognised within restricted funds then the components of the pension cost will similarly be recognised within the restricted funds column of the SOFA. The criteria set out in the preceding paragraphs apply equally to the allocation of the components of the pension cost within the SOFA categories of the restricted funds.
30. Where the criteria for an apportionment of part of the pension asset or liability to restricted funds are not met, this will not preclude charging a portion of the pension costs to the SOFA categories of the restricted funds in appropriate circumstances. Where staff costs are incurred in relation to a restricted fund, current sector practice would result in an appropriate allocation of costs being made to restricted funds in respect of pension contributions payable. Similar criteria would apply in the context of costs recognised in accordance with FRS 17 with restricted funds being charged with a portion of the current service cost. The methods adopted for allocating pension costs to restricted funds will need to be reasonable, justifiable and consistent. Each charity will need to adopt methods appropriate to its own circumstances in order to produce an equitable charge to restricted funds. As previously explained an allocation based on staff costs or pension contributions payable are two common approaches. Again, the method adopted should be explained as an estimation technique in accounting policy disclosures.
31. Additional guidance is required within the SORP on the analysis of the defined benefit cost within the SOFA. The following guidance paragraphs are therefore included in SORP immediately following paragraph 153.4:
153.5 - Where a charity participates in a defined benefit scheme, the change in the defined benefit asset or liability (other than that arising from contributions payable to the scheme which affect the surplus or deficit in the scheme) is analysed into its components which are recognised through the SOFA on full implementation of FRS 17. (See Appendix 2 for FRS 17 implementation date and transitional arrangements). The changes relating to current or past service costs and gains and losses on settlements and curtailments are allocated, on a reasonable and consistent basis, to the appropriate resources expended categories set out in paragraph 136.
153.6 – Where past service costs or gains or losses on settlements or curtailments are material in the context of the particular expenditure (or income) category in which they are recognised, the amounts should be disclosed as exceptional in accordance with FRS 3 – Reporting Financial Performance (see Appendix 2).
153.7 – The net of the interest costs and expected return on assets should be disclosed on the face of the SOFA as "pension finance costs (or income)".
153.8 - Actuarial gains and losses arising are recognised within the "gains and losses" categories of the SOFA under the heading "actuarial gains and losses on defined benefit pension scheme".
153.9 - Where the criteria for the recognition of a pension asset or liability within restricted funds are met (see paragraph 259.4), the related pension costs will be recognised within the restricted funds column of the SOFA. The components of the pension cost are recognised within the same SOFA categories and on the same basis as set out in the preceding paragraphs.
153.10 - A restricted fund may, however, incur staff costs without
the criteria for the recognition of a pension asset or liability within
the restricted fund's balance sheet being met. For example, a restricted
fund may be of a short-term nature or staff may be frequently transferred
between activities creating uncertainty as to the fund which will ultimately
recover any surplus or meet future contributions resulting from any
deficit. In such circumstances the restricted funds column of the SOFA
may still be charged with an appropriate portion of the current service
cost component of the pension cost relating to the staff engaged in
activities within restricted funds although the balance sheet of the
unrestricted funds would continue to recognise the overall pension asset
or liability.
Disclosure – Specific notes to the accounts relating to the disclosure of defined benefit and defined contribution schemes are set out in paragraphs 175.1 to 175.4.
32. Actuarial valuation fees should be treated in the same way as internal and external audit fees and charged to the management and administration category of the SOFA. Paragraph 151 of the SORP, dealing with management and administration costs, is therefore amended by the following insertion:
151 – Insert an addition phrase " actuarial valuation fees relating to any defined benefit pension scheme," immediately following the phrase "Direct costs will include such items as internal and external audit…"
33. In order to update the section of the SORP dealing with gains and losses the following additional paragraph is added to this section of the SORP:
156.1 - Actuarial gains and losses on defined benefit pension assets/liabilities arising from any new valuation and from updating the latest actuarial valuation or to reflect conditions at the charity’s balance sheet date should be included under the "actuarial gains and losses on defined benefit pension scheme" heading within the SOFA. (See Appendix 2 for implementation date and transitional arrangements under FRS 17).
The resulting amendments to SORP formats are set out in the Consequential Amendments to SORP formats and narrative section of this bulletin
34. FRS 17 substantially affects the accounting treatment adopted by charities that contribute to defined benefit schemes. Pension scheme assets are measured at fair value (e.g. market value of quoted securities) at the charity’s balance sheet date. The scheme’s liabilities are measured using the projected unit method and discounted at the charity’s balance sheet date using the current rate of return on high quality corporate bonds. Full actuarial valuations should be obtained at intervals not exceeding three years and performed by an independent, qualified actuary and reviewed annually at the charity’s balance sheet date and updated to reflect current conditions.
35. The standard states "the surplus/deficit in a defined benefit scheme is the excess/shortfall of the value of the assets in the scheme over/below the present value of the scheme liabilities. The employer should recognise an asset to the extent that it is able to recover a surplus either through reduced contributions in the future or through refunds from the scheme. The employer should recognise a liability to the extent that it reflects its legal or constructive obligations."
36. The standard requires the defined benefit asset or liability to be presented separately on the face of the balance sheet. Paragraph 184 of the SORP specifies the format of the balance sheet. Under this format the asset or liability is presented as a separate line after (vii) -Provisions for liabilities or charges - and before (viii) - Net assets. The resulting amendments to SORP formats are set out in the Consequential amendments to SORP formats and narrative section of this bulletin.
37. The following paragraphs shall be included in SORP following paragraph 259 under a new heading "Defined benefit pension scheme asset/liability":
259.1 – FRS 17: Retirement Benefits substantially affects charities that operate defined benefit schemes. Pension scheme assets are measured at fair value at the charity’s balance sheet date. Liabilities are measured using the projected unit method and discounted at the balance sheet date using the current rate of return on a high quality corporate bond. Full actuarial valuations should be obtained at intervals not exceeding three years which are undertaken by an independent, qualified actuary and reviewed annually at the charity’s balance sheet date and updated to reflect current conditions.
259.2 – The surplus/deficit in a defined benefit scheme is the excess/shortfall of the value of the assets in the scheme over/below the present value of the scheme liabilities. In accordance with FRS 17 principles an asset is recognised to the extent that the employer charity is able to recover a surplus either through reduced contributions in the future or through refunds from the scheme. A liability is recognised to the extent that it reflects its legal or constructive obligation of the employer charity. (See Appendix 2 - FRS 17 - for implementation date and transitional arrangements).
38. The accounts structure provided by the SORP differentiates (usually in columnar form) between the unrestricted income funds, restricted income funds and endowment funds of the charity. The unrestricted funds of a charity can be expended for any of the charity’s purposes, whilst restricted funds can only be applied for particular purposes within the objects of the charity. The restricted funds, including endowments, usually represent special trusts administered by the reporting charity. Charities therefore need to determine to which particular fund of the charity the defined benefit asset or liability accrues.
39. In general, the reporting charity, as employer, will have the legal obligation under the terms of the pension scheme trust deed or the constructive obligation created by its past actions and statements. It will be rare for particular funds of the charity to be the employer or to enter into specific arrangements for retirement benefits separately from the reporting charity.
40. The SORP Committee’s view is that a surplus or deficit in a scheme normally gives rise to an asset or liability within unrestricted funds of the reporting charity. The reporting charity will normally be the employer and have control as to the future use of a recoverable surplus obtained in the form of reduced contributions or a refund from the scheme. In addition, the award of benefit improvements is also usually in the hands of the employer. Similarly, where a liability arises through a legal or constructive obligation to make good a deficit this liability will normally rest with the reporting charity. Consequently a defined benefit asset or liability will normally accrue to the unrestricted income fund.
41. This view is also supported by practical considerations. In most charities there will be fluidity in terms of the allocation of staff cost across the various funds. Often, staff costs will be allocated on a percentage basis representing the time spent on particular activities of restricted funds, and staff functions will regularly change, impacting on which fund is charged with their costs in a particular period. In such circumstances the allocation of an asset or liability between funds would create no more than a notional asset or liability that may not give rise to an economic benefit or cost to a particular fund.
42. However, where a particular restricted fund is likely to have a long-term existence and the charity employs staff specifically to undertake the work of that particular fund, it may be appropriate to allocate a reasonable portion of any pension asset or liability to the restricted fund provided the allocation reflects the economic reality of the situation. In such circumstances it would be necessary to demonstrate that any constructive liability arising from a disclosed liability will in practice accrue to the restricted fund or that any asset disclosed will give rise to a refund or reduced contributions benefiting the restricted fund. Where such an apportionment is made, the charity will review the asset/liability attributable to restricted funds on an annual basis to ensure that the disclosed position continues to reflect the economic consequences to that fund. Liaison with larger funders may be necessary to agree the basis on which pension costs may be charged against restricted funding. In particular it would be inappropriate to allocate a pension liability to restricted funds in the absence of agreement with major funders that any obligation to fund the deficit can be met from restricted funds.
43. The following paragraph shall be included in SORP following 259.2:
259.3 - A surplus or deficit in a scheme normally gives rise to an asset or liability within unrestricted funds of the reporting charity. The reporting charity will normally be the employer and have control as to the future use of a surplus recovered either in the form of reduced contributions or a refund from the scheme. Similarly, where a liability arises through a legal or constructive obligation to make good a deficit this liability will normally rest with the main charity. Consequently a defined benefit asset or liability will normally accrue to the unrestricted income fund.
259.4 – A pension asset may be recognised as accruing to a restricted fund where it can be demonstrated that the economic benefit of the asset will accrue to a particular fund through reduced contributions or refunds. Similarly, a pension liability may be allocated to a particular fund where it is demonstrable that a constructive liability arises to fund the deficit and could properly be met from the particular fund. Such a situation may arise where staff are specifically engaged on a long-term project funded from restricted income.
259.5 – Any allocation of a pension asset or liability to a restricted fund should be reviewed on an annual basis. Where staff changes or cessation of a particular project indicate that the economic benefits or obligations will no longer accrue to that particular fund then the asset or liability should be allocated to the unrestricted funds by means of a transfer of funds through the statement of financial activities.
Disclosure – Specific notes to the accounts relating to the disclosure of defined benefit schemes are set out in paragraphs 175.1 to 175.4.
44. FRS 17 requires reporting entities that participate in defined benefit schemes to make a considerable number of detailed disclosures in the notes to their accounts. The SORP Committee has given careful consideration as to whether these notes should be fully reproduced within the SORP. To fully reproduce the detailed narrative of the standard within the SORP would involve the insertion of several pages into the SORP and would provide no information that was not already available in the standard. In general the note disclosures required by the standard do not create any charity specific issues and their inclusion in the body of the SORP may detract from the charity specific issues that the SORP is designed to address. The charity specific impact of the standard has, in the view of the SORP Committee, been addressed in the additional paragraphs inserted by the previous sections of this [Draft] Bulletin. A summary of the note disclosures required by the standard is however likely to be helpful to users of the SORP.
45. The following paragraph shall be included in SORP under the heading "Pension and Retirement Benefits" following paragraph 175.2:
175.3 - FRS 17 - introduces detailed disclosure requirements for charities that participate in defined benefit pension schemes. The notes to the accounts should include the following information:
(See Appendix 2 - FRS 17 - for implementation date and transitional arrangements).
46. The SORP recommends that an explanation be provided in the notes to the accounts as to any restrictions placed on the use of particular funds and that an indication be given as to whether resources are held in an appropriate form to enable each fund to be applied for its purposes. It will be important for users of accounts to understand how a disclosed pension liability may impact on resources available and to understand the restrictions that may be placed on restricted funds to contribute to any disclosed pension liability. Similarly, it will be important for users of financial statements, particularly funders, to understand how the charity may benefit from any surplus and that a pension asset may not be immediately realisable as cash. The following paragraph shall be included in the SORP to emphasise the relevance of such disclosures:
175.4 When a material pension liability is disclosed in the balance sheet, the notes to the accounts (or trustees’ annual report) should explain the impact, if any, on resources available for general application. If a pension liability exceeds the balance on unrestricted funds, the note should also explain any limitations placed on any restricted fund of the charity to contribute to any resource requirements arising from the disclosed liability. If a material pension asset is disclosed, the notes to the accounts (or trustees’ annual report) should explain the nature of the economic benefit derived from the asset and give an indication of the period over which any benefit in terms of reduced contributions will accrue to the charity.
47. The SORP Committee also recognises that an example set of accounts showing how the full disclosure requirements of the standard might be met would be of assistance to preparers of accounts. This approach is best achieved by updating relevant example reports and accounts provided in CC66 - SORP 2000: Example Reports and Accounts. A worked example of both full compliance with the standard and of disclosures relevant where a charity chooses to take advantage of transitional arrangements under the standard will be provided.
48. Paragraph 31(e) of the SORP already requires trustees to provide a statement of their reserves policy in their trustees’ annual report. Trustees will need to explain the effect of any defined benefit surplus or deficit on their reserves policy and also any cash flow implication for planned activities in their review of activities. Trustees need to pay particular attention to explaining clearly and simply how the accounting disclosures should be interpreted in the context of the charity’s finances. The accounting disclosures separating the pension asset and liability and corresponding pension reserve from the other funds of the charity will need to be explained and reflected in the analysis of assets and liabilities by fund as required by paragraph 49(a) of the SORP. In addition trustees will need to consider explaining to the charity’s stakeholders the effects of the inclusion of any pension asset or liability on the charity, particularly any impact on its reserves policy. Trustees will also need to consider direct communication with major funders, explaining the impact on cash flows.
49. The SORP Committee believes that this complex interface with reserves policy and cash flows goes beyond the scope of the SORP and has agreed that these issues are best addressed through separate Charity Commission guidance updating the current Charity Commission leaflet CC19 Charities’ Reserves or through separate advice on the impact of FRS 17 on reserves policy.
50. The implementation of FRS 17 requires a number of small amendments to SORP formats to allow for the specific disclosures required by the standard. Similarly, certain terms currently used describing pension scheme arrangements need to be updated to ensure the terminology used is consistent with the new standard. A small number of other consequential changes to terminology are also set out in this section.
51. Paragraph 60 and 64 of the SORP is amended to allow for the SOFA recognition of pension finance costs and actuarial gains and losses.
The existing sub-paragraph 60(iii) – the total by column of the resources expended in the year - is renumbered 60(iv)
An amended sub-paragraph 60(iii) – pension finance costs – is inserted.
An additional sub-paragraph 64(iii) - actuarial gains and losses on defined benefit pension scheme – is inserted.
52. In addition the table presentation setting out the construction of the SOFA is amended as follows:
Paragraph 69 - Table 1 - of the SORP is amended by the insertion of an additional item - H - "Actuarial gains and losses on defined benefit pension scheme" immediately following item G "gains and losses on revaluations and disposals of investment assets". "Net movements in funds" is redesignated item I, with "total funds brought forward" redesignated item J, and "total funds carried forward" redesignated item K.
53. The standard requires the defined benefit asset or liability to be presented separately on the face of the balance sheet. Paragraph 184 of the SORP specifies the format of the balance sheet. Under this format the asset or liability is presented as a separate line after (vii) -Provisions for liabilities or charges - and before (viii) - net assets. The following amendments to the structure of the balance sheet are therefore required:
Paragraph 184 of the SORP is amended by deletion of sub-section headings (viii), and (ix) and replacement by:
Paragraph 184 of the SORP is amended by the insertion of a revised sub-section heading (x):
(x) The funds of the charity are divided between:
54.The Allocation of pension scheme assets/liabilities between funds section of this [Draft] Bulletin explains the circumstance where it is appropriate to allocate a pension scheme asset or liability between the funds of a charity. Where a pension asset or liability is allocated to a restricted fund the resulting pension reserve should be separately disclosed within the restricted income funds or endowment funds on the face of the balance sheet. An additional paragraph is therefore added immediately following paragraph 184 of the SORP:
184.1 - Where a pension asset or liability arising under a defined benefit scheme is allocated to restricted income funds or endowment funds, the pension reserve reflecting the asset or liability should be separately disclosed within the relevant fund balance on the face of the balance sheet.
55. Paragraphs 172 to 175 of the SORP addresses the SOFA disclosure notes relating to staff costs and emoluments. These note disclosures need to be updated for FRS 17 terminology:
172 - Delete reference to "pension contributions" and replace with "pension costs (those pension costs included within resources expended excluding pension finance costs)".
173 - Delete "contributions" and replace with "costs"
174(a) - Delete "money purchase benefits" and replace with "defined contribution scheme".
174(b) - Delete "money purchase" and replace with "defined contribution schemes".
56. Paragraph 291 of the SORP addresses the disclosure of accounting policies in relation to the recognition of pension contributions. This paragraph requires updating to include the recognition of any pension asset or liability:
291 (a) - Delete "contributions" and replace with "costs and any pension asset or liability".
57. The SORP, in its narrative, had largely anticipated the introduction of FRS 18. References to SSAP2/FRED 21 have now however been superseded by the issuing of FRS 18 and therefore the following amendments are necessary:
Paragraph 33 – Delete "SSAP 2 / FRED 21" and replace with "FRS 18".
Paragraph 119 – Delete "SSAP 2" and replace with "FRS 18".
Paragraph 277 - Delete "FRED 21" and replace with "FRS 18".
58. The update of the SORP for FRS 17 necessitates the addition of certain terms and definitions to the SORP glossary. Paragraph 23 of the Appendix 1 - Glossary to the SORP dealing with pension schemes is deleted and replaced with the following definitions:
Actuarial gains and losses: Changes in the actuarial deficits or surpluses that arise because the actuarial assumptions have changed or events have not coincided with the actuarial assumptions made for the previous valuation.
Current service costs: Increase in the present value of scheme liabilities resulting from employees’ service in the current period.
Curtailment: An event reducing the expected years of future service from current employees or reducing for a number of employees the accrual of benefits for future years service. E.g. early termination of employees’ services or termination or amendment of scheme terms affecting benefits accrued by future service.
Defined benefit scheme: A pension or other retirement benefit scheme other than a defined contribution scheme. Usually, the scheme rules define the benefits independently of the contributions payable, and the benefits are not directly related to the investments of the scheme.
Defined contribution scheme: A pension or other retirement benefit scheme into which an employer pays regular contributions fixed as an amount or as a percentage of pay and will have no legal or constructive obligations to pay further contributions if the scheme does not have sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Individual member’s benefits are determined by reference to contributions paid into the scheme in respect of that member, usually increased by an amount based on the investment return on those contributions.
Expected rate of return on pension assets: Average rate of return (including income and changes in fair value but net of expenses) expected over the remaining life of the related obligations on the assets held by the scheme.
Interest cost (pensions): The expected increase during the period in the present value of the scheme liabilities because the benefits are one period closer to settlement.
Multi-employer scheme: A defined contribution scheme or a defined benefit scheme where more than one employer participates.
Past service cost: Increase in the present value of scheme liabilities relating to employee service in prior periods that arise in the current period as a result of the introduction of, or improvements to, benefits.
Retirement benefit: All forms of consideration given by an employer in exchange for services rendered by employees that are payable after the completion of employment.
Settlement: An action which relieves the employer (or the scheme) of the primary responsibility for a pension obligation. For example the payment of a lump sum in exchange for surrender of rights, the purchase of an annuity to cover benefits, or the transfer of scheme assets and liabilities relating to employees leaving the scheme.
59. The following amendments are necessary to update Appendix 2 of the SORP for the financial reporting standards and UITFs issued or withdrawn by the ASB since October 2000.
Reference and narrative relating to the following FRSs and UITFs in Appendix 2 of the SORP are deleted:
SSAP 2 – Disclosure of Accounting Policies
SSAP 15 – Accounting for Deferred Tax
SSAP 24 – Accounting for Pension Costs (superseded and deleted only on full implementation of FRS 17)
UITF Abstract 6 – Accounting for Post-retirement benefits other than Pensions
UITF Abstract 7 – True and Fair View Override Disclosures
UITF Abstract 12 – Lessee Accounting for Reverse Premiums and Similar Incentives
UITF Abstract 14 – Disclosure of Changes in Accounting Policies
UITF Abstract 16 – Income and Expenditure Subject to Non-standard Rates of Tax
UITF Abstract 20 – Year 2000 Issues: Accounting and Disclosures
The following text is inserted into Appendix 2:
FRS 17 – Retirement Benefits
FRS 17 sets out the accounting treatment for retirement benefits such as pensions and medical care during retirement. The main requirements are:
FRS 17 allows for the following transitional arrangement:
Equally applicable to charities, specific guidance on the allocation of the pension costs within the SOFA is provided in paragraphs 153.1 to 153.10. Guidance on the recognition of any pension asset or liability and its allocation across a charity’s funds is provided in paragraphs 259.1 to 259.5. Notes to the accounts are set out in paragraphs 175.1 to 175.4.
FRS 18- Accounting Policies
FRS 18 deals primarily with the selection and disclosure of accounting policies and, in some circumstances, requires disclosures about the estimation techniques used in applying those policies adopted. It requires disclosure of the extent to which financial statements comply with any relevant SORP. The appropriateness of accounting policies adopted are judged against the objectives of:
Equally applicable to charities as other entities. The disclosure of compliance with any relevant SORP has particular relevance in the context of the charity sector where adherence to this SORP is expected.
FRS 19 - Deferred Tax
FRS 19 requires full provision to be made for deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation.
Not generally applicable to charities due to tax exemptions available. However the abstract will be of relevance in consolidated accounts that include non-charitable subsidiaries particularly those that adopt a policy of profits retention rather than full distribution of taxable profits through Gift Aid provisions.
UITF Abstract 24 – Accounting for Start-up Costs
Addresses whether start-up costs that cannot be included within the cost of a fixed asset may nevertheless be carried forward. Start-up costs that do not meet the recognition criteria under relevant accounting standards should not be carried forward, but recognised as an expense when incurred.
Equally applicable to charities as to other entities.
UITF Abstract 25 – National Insurance Contributions on Share Option Gains
Not applicable to charities
UITF Abstract 26 – Barter Transaction for Advertising
An entity involved in publishing or broadcasting may agree to provide advertising in exchange for advertising services provided by its customers, rather than for cash consideration. Income from advertising undertaken on such a barter basis is only recognised where persuasive evidence exists that the advertising opportunity could have been sold for an equivalent sum of cash.
Equally applicable to charities as to other entities.
UITF Abstract 27 – Revisions to Estimates of Useful Economic Lives of Goodwill and Intangible Assets
This abstract states that a change from non-amortisation of goodwill or intangible assets, on the grounds that the life of the asset is indefinite, to amortisation over a period of 20 years or less should not be reported as a change in accounting policy. In such a circumstance, the carrying amount of the goodwill or intangible asset should be amortised over the revised remaining useful life.
Goodwill rarely arises in the context of charity accounts; the treatment of intangible assets applies equally to charities as to other entities.
UITF Abstract 28 – Operating Lease Incentives
A lessor may provide an incentive for the lessee to enter into a new or renewed operating lease. It requires that the relevant income or expense be recognised over the life of the asset, or until a market rent will be payable, on a straight-line basis unless another systematic basis is more representative of benefit flows.
Equally applicable to charities as other entities.
UITF Abstract 29 – Website Development Costs
Websites are used for a variety of activities, including promotion of services and goods, taking orders and provision of information. Many entities incur significant costs in developing such websites. Certain website development costs may be capitalised only where they lead to the creation of an enduring asset delivering benefits at least as great as the amount capitalised.
Generally applicable to charities. Charities’ websites may however also provide economic benefit without being related to cash flow, for example, the provision of educational information to beneficiaries of the charity. To the extent that the relationship to such benefits is sufficiently certain such costs may be capitalised.
UITF Abstract 30 – Date of Awards to Employees of Shares or Rights to Shares
Not applicable to charities.
UITF Abstract 31 – Exchanges of Businesses or Other Non-monetary Assets for an Interest in a Subsidiary, Joint Venture or Associate
Entities may transfer businesses or other non-monetary assets in exchange for equity in a subsidiary, joint venture or associate. This abstract deals with accounting for such transactions in consolidated accounts, in particular issues surrounding reporting the transaction at fair values or book values.
Equally applicable to charities as other entities.
UITF Abstract 32 - Employee Benefit Trusts and other Intermediate Payment Arrangements
This abstract applies when an entity sets up and transfers funds to an employee benefit trust (or other intermediary) and the trust’s accumulated assets are used to remunerate the entity’s employees (or other service providers). The abstract clarifies how the principles for FRS 5 – Reporting the Substance of Transactions should be applied.
Not generally applicable to charities.