An Invitation to Comment
STATEMENT OF RECOMMENDED PRACTICE
Accounting and reporting by Charities (SORP 2000)
EXPOSURE DRAFT OF UPDATE BULLETIN 1:
14 June 2002
Background
As a result of its annual review process, the Charity Commission’s SORP Committee agreed that an update to SORP 2000 was required, primarily to address issues arising from the implementation of Financial Reporting Standard 17 - Retirement Benefits (FRS 17). The Charity Commission announced in March 2000 its intention to update SORP 2000 for this standard through the issuing of an Update Bulletin.
In addition to FRS 17 the Update Bulletin includes amendments to Appendix 2 of the SORP Application of Accounting Standards to refer to the other new FRSs and UITF Abstracts issued since the SORP was published in October 2000. In compiling these amendments, the SORP Committee has applied a cut-off date of 1 January 2002.
Consultation Process
The attached Exposure Draft of the Update Bulletin has been prepared in accordance with both the Accounting Standards Board’s (ASB) Policy and Code of Practice for SORP-making bodies and the Cabinet Office’s Code of Practice on Written Consultation. The Exposure Draft was considered by the ASB on 6 June 2002. The ASB does not undertake a comprehensive review of the proposed changes to the SORP but a review of limited scope is performed.
The Charity Commission, as the SORP making body, now invites public comment on the Exposure Draft. The Exposure Draft has been made available on this website. The Charity Commission is now actively seeking comments on the Exposure Draft from charities, umbrella groups, charity auditors and advisers, relevant government departments and professional bodies throughout the British Isles.
Comments received will be analysed and reviewed by the SORP Committee and any revisions to the Exposure Draft will then be submitted to the ASB for their consideration.
Issues for consideration
The Charity Commission welcomes comment on all aspects of the Exposure Draft, but are particularly interested in the views of the charity sector as to the adequacy and practicality of the guidance provided on the application of FRS 17 – Retirement Benefits. If you do not concur with the approach taken on any particular issue, it would be helpful if your response explained your reasons and your preferred alternative approach to the issue. Views are specifically sought on the following matters:
- FRS 17 sets out how the pension costs relating to a defined benefit scheme should be analysed within the performance statements of commercial entities. The format of the SOFA provides a charity specific format for the analysis of expenditure and gains and losses. Do you agree with the guidance provided in the section of the Exposure Draft dealing with the allocation of defined benefit costs.
- Do you agree with the introduction of "Pension finance costs (or income)" as a new category within the SOFA (see paragraph 27 of the Exposure Draft).
- Paragraphs 14 –19 of the Exposure Draft deals with multi-employer schemes and in particular those where the employer is unable to identify its share of the scheme’s underlying assets and liabilities on a consistent and reasonable basis. Do you concur with the proposed treatment? Certain schemes may be run on a basis that does not enable the parent charity and its subsidiaries within the group to identify their respective share of underlying assets and liabilities. Do you concur with the treatment proposed in paragraph 17, whereby in the consolidated accounts the group scheme is treated as any other defined benefit scheme, whilst the charity itself treats the scheme within its own entity accounts as though it were a defined contribution scheme?
- Paragraphs 29 and 30 of the Exposure Draft explain how the components of the pension cost may be allocated to the restricted funds’ SOFA. The accounting treatment within the SOFA reflects the balance sheet recognition of any pension asset or liability. Thus, when a pension asset or liability is recognised within restricted funds on the balance sheet, the components of the pension cost are similarly charged through the restricted funds’ SOFA. Where the criteria for allocating a pension asset or liability to restricted funds are not met, the proposal is that relevant current services costs may be recharged or allocated to the SOFA of the restricted funds whilst the overall pension asset or liability continues to be recognised within the balance sheet of the unrestricted funds. Do you concur with this approach?
- Although the recharge of certain pension costs to restricted funds with staff costs will be the normal practice, consideration is also given in the guidance to the circumstances where it will be appropriate to allocate a pension asset/liability to restricted funds in the balance sheet. The Exposure Draft proposal is that the pension asset/liability should normally be recognised within unrestricted funds and explains the circumstances where it will be appropriate to carry the asset or liability within restricted funds on the balance sheet. Do you agreed with the guidance provided on this issue in paragraphs 38-42 of the Exposure Draft?
- There will be a complex relationship between the disclosure of a pension asset/liability, a charity’s reserves policy and the cash flow impact on a charity’s resources that arises from the funding position of the scheme. There is a need for this relationship to be explained in trustees’ annual reports or notes to the accounts so that the pension asset/liability disclosures will be properly understood by users of the accounts (see paragraph 46-49 of the Exposure Draft). Do you agree that these issues need to be explained in the report and accounts? Do you agree that further guidance on the impact of pension funding on reserves policy should be addressed through separate Charity Commission guidance?
- Overall, do you consider that the Exposure Draft provides pragmatic and workable guidance on the application of FRS 17 in the context of charity accounting? If not, what further issues should be addressed in the guidance?
- The issue of the additional cost arising from compliance with FRS 17 in terms of actuarial fees and additional accountancy and audit costs has been raised with the SORP Committee. In order for us to assess the cost to the charity sector of complying with this standard, it would be helpful, if your charity participates in a defined benefit scheme, to provide with your response an estimate of the anticipated additional annual compliance costs. It would also be helpful if you could indicate the number of employees in your charity’s scheme.
- Appendix 2 of SORP 2000 Application of Accounting Standards needs to be updated for other new FRSs and UITF Abstracts issued or withdrawn since the publication of SORP 2000. The necessary amendments are set out in paragraph 59 of the Exposure Draft. Are there any additional charity sector specific issues that you feel should be highlighted in this section of the Exposure Draft?
Responses to this consultation should be sent to:
Ray Jones
Policy Accountant
Charity Commission
Woodfield House
Tangier
Taunton
Somerset,
TA1 4BL
Comments on the Exposure Draft should be received by Monday 16 September 2002.