For accounting periods commencing on or after 1 January 2015, charities must decide whether to prepare accounts under FRSSE or FRS 102. Due to differences between FRSSE and FRS 102, a statement of recommended practice (SORP) has been developed for both.The two broad categories of income
SORP defines two broad categories of income: exchange transactions and non-exchange transactions.Exchange transactions
arise when income is received by the charity for goods or services, usually supplied under contract and where the income received is approximately equal in value to the goods or services supplied by the charity to the funder.Non-exchange transactions
arise where the charity receives value from the donor without providing equal value in exchange, commonly referred to as gifts.
There is also a hybrid of the two, where funds are received in return for goods or services of approximately equal value provided to a third party, commonly referred to as performance-related grants. Whilst these are legally gifts, they are to be accounted for as if they were exchange transactions.Recognition criteria
The former criteria of entitlement, reasonable certainty and measurement are modified slightly to entitlement, probability and measurement
. In practice, this subtle change is not likely to have a practical effect.
With the new definitions there is, however, a potentially significant change in how performance-related income is recognised. Income from exchange transactions, including performance-related gifts, must be acknowledged in accordance with the stage of performance of the contract and the costs to completion. Where performance-related conditions are specified, the income must only be recognised to the extent that the charity has provided those goods or services. Any income received in advance of the conditions being met should be deferred.
The new SORP also introduces the idea of time-related conditions
and states that these may be implied, for example, when a multi-period grant is approved and is to be paid on the basis of agreed annual budgets, the charity may not be entitled to spend part or all of that income in advance of its budgeted years without the prior approval of the grant provider.
Donations or grants received with no conditions attached should continue to be recognised when the charity is entitled to them. They should not be deferred even if the resources are received in advance of the expenditure on the activity funded by them. The timing of the expenditure is at the charity’s discretion and the income cannot be deferred simply due to the expenditure not yet being incurred.How does this affect you?
The existence of performance-related conditions will determine when and how much income a charity can recognise in each accounting year. This in turn could create possible peaks in income in some years and shortages in others, which will increase the complexity of the charity’s accounts and the management of cash flow.
It is important to be aware of this when preparing bids for funding and to build in specific performance measures which are achievable for the charity, or ensure that multiple year funds include a condition as to which year they are recognised. If these can be built into the application process it might save headaches later.
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