Far reaching changes to accounting standard for charities with subsidiary trading companies

On 15 December the Financial Reporting Council (FRC) issued FRS 102 amendments which will be mandatory for all accounting periods commencing on or after 1 January 2019 – i.e. to highlight 31 December 2019 or 31 March 2020 year ends.

This may seem some time off, however the consequences of the clarification around gift aid payments could require statutory accounts to be restated now, so charities and their trading subsidiaries need to be aware of the changes affecting them. There is also the option to adopt the tax provisions early, which many charities may wish to do for reasons outlined below. The key changes affecting charities are:

Gift aid payments from trading subsidiaries

Many charities will have accrued their gift aid payments made by their trading subsidiaries in the year that the profits were realised, even though the gift aid payments may have been made up to nine months after the year end. Such payments have been routinely accrued and considered to be constructive obligations by a lot charities and auditors alike, and so are shown as liabilities in accounts of trading subsidiaries (and accrued as income in the charity).

However there was a divergence of opinion by some charities and auditors following the ICAEW technical paper which concluded (after seeking legal counsel) that these payments were distributions. On this basis the ICAEW technical paper determined that such payments could not exceed distributable reserves – caused by trading subsidiaries distributing their taxable profit when this is more than their accounting profit due to tax timing differences and disallowables.

The consequences of this technical release also resulted in a divergence of accounting treatments, depending on your auditors, as to whether the gift aid payments were accrued or not in the trading subsidiary and charitable parent’s accounts. FRED 68 consultation towards the end of last year sought opinion on its proposed treatment which reflected the conclusions in the ICAEW technical paper; that gift aid treatments are treated as distributions. Although the majority of responses received, including ours, did not agree with the proposals, the FRC rejected the arguments put forward and FRS 102 remains unchanged.

So what is the problem? As gift aid payments are a distribution (which means they are akin to a dividend) they can only be accounted for when paid or when there is a legal obligation. The directors of the trading subsidiary having a meeting before the year end to confirm that the profits will be paid to the charity is specifically quoted in the standard as NOT creating a legal obligation, nor is the custom and practice of making such payments every year.

The only way to accrue a distribution is to have a legal obligation such as a deed of covenant – a legally binding agreement documenting that the taxable profits of the trading subsidiary will be covenanted to the parent charity. Deeds of covenant used to be commonplace many years ago but disappeared when ATCs (advance corporation tax) ceased. In my opinion they can be quite onerous. They’re usually in effect for a fixed period of time, typically 4 years, and so need to be renewed which is easily overlooked. In addition, once in place they offer no flexibility, so the zero rate tax banding of £5,000, which was used by many subsidiaries to build up some reserves, could not have been taken advantage of. So in my view, we are taking a step backwards, not forward and increasing costs for charities as a result of needing a legal document.

Some trading subsidiaries have a specific clause in their Memorandum and Articles of Association which states that profits need to be paid to the parent charity, however there is a question as to whether this is a sufficient legal obligation under FRS 102. One point to note, is that if a gift aid payment was accrued in previous years, and the clarified requirements of FRS 102 say that it should not be as no legal obligation existed, then a prior year adjustment would be required unless it is not deemed material.

Not having such a legal obligation in place means that the ‘gift aid payment’ would be recognised when paid. If the trading subsidiary needs to take advantage of up to nine months after the year end in order to have the working capital to be able to make the payments, then the gift aid will be recognised in the following year’s accounts. For example, charities which have trading subsidiaries that hold biannual conferences would have accounts which show a substantial profit in one year and an equivalent loss in the following year when the profit is paid up. In order to be absolutely certain that you can match the profit with the gift aid payments, there needs to be a deed of covenant in place or actual cash distributed. Charities with 31 March year ends have time to put their deeds of covenant in place before their year end so as to ensure they will be able to accrue their 2017/18 year end ‘distribution’ in their March accounts.

This is a clarification to FRS 102 rather than a change in the standard, so it applies immediately, not just for years commencing on or after 1 January 2019.

Tax treatment of gift aid payments

One piece of good news is that the FRC has recognised that even if they are not accrued in the accounts, such payments would mean no tax was payable by the trading company and so FRS 102 has been amended so that the tax does not need to be accounted for; and neither is there any need to show the deferred tax position. The tax treatment in the accounts is as if the payment had been made! In order to apply this tax treatment, there will be a need to adopt this element of the new FRS 102 early and disclose that this has been done in the accounting policies.

Investment properties and those occupied by other group entities

The undue costs or effort exception to valuing investment properties has been removed as their fair value is readily available, even for part occupied premises, so investment properties do need to be shown at fair value.

However, one welcome change in FRS 102 as a result of the above is that properties occupied by another group entity can be treated as functional fixed assets in those accounts (as they are in the consolidated accounts), at cost less depreciation, rather than be recognised as an investment property at fair value in the subsidiary, as is the case now. Again this element of FRS 102 can be adopted early.

Statement of cash flows

A net debt reconciliation is a requirement of the new FRS 102 when it comes into force.


The narrative accompanying the FRS 102 amendments confirms definitely that any disclosures made under SORP form part of the comparative information requirements, and all comparatives must be disclosed in full – including for example support costs, expenditure analysis, net assets and reserve fund movements.

Other changes following the amendments to FRS 102 are unlikely on the whole to impact many charities.

Future actions

For charities with trading subsidiaries, urgent action is required in deciding whether they want to match their ‘gift aid payment’s with the associated profits realised – in which case they need to actually pay the gift aid payments in the year or enter into deeds of covenant urgently to change the gift into a legal obligation.

This post was written by Price Bailey Charities Partner, Helena Wilkinson. If you need further information on any of the above please feel free to get in touch with Helena using the contact form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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