23rd October 2017

No sooner has everyone moved to the FRS102 SORP that there is more technical change afoot. Financial Reporting Exposure Draft (FRED) 68, issued by the Financial Reporting Council in September, looks at the accounting for Gift Aid payments between subsidiaries and their charitable parent. Consultation on the ED will close on 20 October 2017.

This most recent Exposure Draft, issued by the Financial Reporting Council in September, looks at the accounting for gift aid payments between subsidiaries and their charitable parent. Consultation on the ED will close on 20 October 2017.

The FRC has been made aware of significant differences in accounting treatment arising in practice, in relation to the accounting for gift aid payments made by a subsidiary to its charitable parent. Such payments are made during the nine months following the relevant reporting date, and are a distribution to owners but a donation for tax purposes. Although the gift aid payment is made after the reporting date, the tax effects automatically relate to the earlier period.

For a subsidiary of a charitable parent, these draft amendments to FRS 102 propose to require the tax effects of a gift aid payment that it is probable will be made in the nine months following the reporting date to be taken into account at the reporting date. This will reflect the fact that in most cases such entities will minimise their liability for corporation tax as a result of making gift aid payments.

In addition, it has been clarified that:

(a) the gift aid payment, as a distribution to owners, shall not be accrued at the reporting date (unless a deed of covenant is in place) and shall be recognised in equity; and

(b) the tax effects of the gift aid payment shall be recognised in profit or loss.

If the ED is adopted as drafted, this will mean that in many cases the subsidiary will show a substantial accounting profit in the year, but no tax charge to profit, and the following year the distribution of profit will be shown in the Statement in Changes in Equity. However, in the year of adoption it also means that the parent charity will be unable to recognise the income from the gift aid payment, as it will have no entitlement to the “dividend” payment due at the year end date (unless, as above there is a deed of covenant in place), which will distort some Charity accounts for one year.

These draft amendments will improve the consistency of reporting between entities and the relevance of information provided to users, and are expected to come into force, along with FRED67, on the triennial review of FRS102 in 2018/19, although early adoption is permitted.

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