The Financial Reporting Council (FRC) has issued FRS 102 amendments which will be mandatory for all accounting periods commencing on or after 1 January 2019 therefore affecting charities with year-end of 31 December 2019 onwards. As this is a change in accounting standard, this is also likely to require a prior year adjustment in the financial statements.
Charity trading subsidiaries are permitted to pay their profits in full to their charitable parent and thereby ensure that no corporation tax is payable. Many charities accrue their gift aid payments made by their trading subsidiaries in the year that the profits are realised, even though the gift aid payments may have been made up to nine months after the year end. Therefore this is shown as liabilities in accounts of trading subsidiaries (and accrued as income in the charity).
For accounting periods commencing on or after 1 January 2019, charities cannot report Gift Aid from their trading arms in their accounts until they actually receive it, unless they have a legal agreement in place such as a Deed of Covenant. 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. A board decision to pay profits is not considered to create a legal obligation.
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. This will result in profits being reported within the financial statements of subsidiaries, however, no tax charge need be included as there is a full expectation that no tax will be payable.
The parent charity may, however, be able to accrue the gift aid income at its year-end from their subsidiary as there is a full expectation that there will be such a receipt. Clearly, where this is the case, a consolidation adjustment will need to be made where the charity prepares group financial statements as a result of this accounting mismatch.
It is important that this change is considered well in advance of your year-end to ensure that you are clear about the accounting implications and ensure that any stakeholders understand these changes. If the charity want to match their ‘gift aid payment’s with the associated profits realised in that year they will 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.
If you would like to discuss this, or any aspect of your charity’s finances, please contact Lesley Malkin
