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Explainer: FRS 102 Periodic Review 2024 - Considerations for charities
On 27 March 2024, the FRC issued Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024, concluding its second periodic review of the financial reporting standards.
Charities in the UK must prepare their financial statements in accordance with FRS 102 (unless permitted by law to prepare receipts and payments accounts). This document is intended to assist stakeholders by highlighting certain aspects of the Periodic Review amendments which may be particularly relevant to charities in the UK.
A statement of recommended practice (SORP) provides guidance to preparers of charity accounts and additional requirements that are not in FRS 102. The Charities SORP-making body intends to consult during 2025 on revisions to the Charities SORP1 to reflect the Periodic Review amendments to FRS 102 and make other SORP changes. However, the timing of such revisions does not defer the effective date of the Periodic Review 2024 amendments for charities. Charities will therefore wish to familiarise themselves with the amendments to FRS 102 and prepare for implementation well ahead of the effective date.
The effective date for most of the amendments to FRS 102 is accounting periods beginning on or after 1 January 20262. Transitional arrangements are set out in Section 1 Scope. This document, in combination with an FRC webinar on 15 January 2025, highlights a subset of the key topics that charities are likely to need to consider.
Headline amendments
| FRS 102 Section | What's changed? | Key considerations for charities |
|---|---|---|
| Section 20 Leases | Removal of the distinction between operating and finance leases for lessees; more leases now recognised with an asset and liability on-balance sheet (similar to extant finance lease accounting). | Except where the recognition exemptions apply, operating leases will now move on-balance sheet. A charity will need to identify all arrangements in scope, and whether recognition exemptions are available. |
| Recognition exemptions permit short-term leases and leases of low-value assets to remain off balance sheet. | As part of the on-balance sheet accounting, a charity will need to establish which discount rate to use for each lease. | |
| Measurement of the lease liability requires an appropriate discount rate. A public benefit entity can use the rate of interest otherwise obtainable on its deposits, but only if it cannot readily determine the discount rate otherwise required by the standard. | A charity will need to use the information readily available to it to determine whether it is in receipt of such incoming resources – if, for example, the lease payments are significantly below market rents. Any such incoming resources shall be recognised and measured in accordance with other sections. Whether this has a significant impact on the charity's accounting will depend on how it had previously accounted for these arrangements. When there is no substantive consideration, the arrangement may not meet the definition of a lease, in which case the new Section 20 requirements will not apply. | |
| The new section highlights that: | ||
| - Some arrangements may contain incoming resources from a government grant or non-exchange transaction if, for example, the lease payments are significantly below market rate. | ||
| - If contractual payments are so low that they are not substantive (e.g. peppercorn or nominal consideration), the arrangement may not meet the definition of a lease. | ||
| Section 23 Revenue from Contracts with Customers | A single comprehensive five-step model is introduced for revenue recognition for all contracts with customers, based on identifying the distinct goods or services promised to the customer and the amount of consideration to which the entity will be entitled in exchange. Non-exchange transactions remain outside the scope of Section 23 (and therefore of the new five-step model) and are addressed in: | Charities may generate income from contracts with customers in various ways, and will need to apply the new five-step model to each. For some transaction types, such as simple retail sales of goods, this is unlikely to result in significant change. More complicated contracts, such as paid research and development contracts, may require more detailed analysis, which could in some cases result in more significant change from previous accounting. The accounting for non-exchange transactions has not changed substantively, although certain incremental improvements and clarifications have been made, as set out below. |
| - Section 24 Government Grants; or | ||
| - Section 34 Specialised Activities. |
Other incremental improvements and clarifications
A range of other incremental improvements and clarifications were made to FRS 102. In general, they should make the requirements of the standard easier for preparers to understand and apply consistently, improving the quality and comparability of financial information available to users of financial statements. Those likely to be of more interest to charities include:
| FRS 102 Section | What's changed? | Key considerations for charities |
|---|---|---|
| Section 34 Specialised Activities | There have been incremental improvements and clarifications throughout Section 34, intended to make existing requirements clearer and easier to apply consistently. | Charities may wish to review their existing accounting policies and practices, to confirm that they are consistent with the clarified requirements of the standard. In addition to those subsections of Section 34 set out below, charities may also be interested in clarifications to the requirements for: |
| - Funding Commitments (paragraphs 34.57 to 34.63); | ||
| - Public Benefit Entity Combinations (paragraphs PBE34.75 to BE34.86); and | ||
| - Public Benefit Entity Concessionary Loans (paragraphs PBE34.87 to PBE34.97). | ||
| Heritage assets (paragraphs 34.49 to 34.56) | Existing requirements clarified. Consequential amendments to reflect new terminology e.g. 'right-of-use asset'. | Charities may find it easier to identify: |
| - assets to which the accounting requirements for heritage assets apply; | ||
| - other assets for which heritage asset disclosures are encouraged; and | ||
| - exceptional cases in which a heritage asset is not recognised because its fair value cannot be measured reliably at commensurate cost. | ||
| Heritage assets could be either owned, or held under a lease as a right-of-use asset in accordance with Section 20. | ||
| Incoming resources from non exchange transactions (paragraphs PBE34.64 to PBE34.74) | Appendix B Guidance on incoming resources from non-exchange transactions was incorporated into the body of Section 34. | Combining the appendix into the body of the section should make the standard easier to read and understand. |
| Donated goods, services, or facilities | Amendments include a clear articulation of whether and when donated goods and services shall be recognised and, if so, measured either at the fair value of the resources received or receivable, or the value to the entity. The determination of the value to the entity was also clarified. | There is no change in the underlying principles for recognising income from donated goods, services or facilities: |
| - Charities are required to measure donated goods at their fair value, and donated services or facilities at their value to the charity. | ||
| - Contributions made by volunteers are not generally recognised as they cannot be measured reliably. | ||
| - When it is impracticable to estimate the value of a resource with sufficient reliability when it is received or receivable, the income is recognised when the resource is sold or distributed (e.g. for high volume, low value second-hand goods donated for resale). | ||
| Charities may wish to review their existing policies and practices, to confirm that they are consistent with the clarified requirements of the standard. | ||
| Legacy income | Amendments have been made to clarify existing requirements, focused on the unchanged principle that income from a legacy is recognised when it is probable that the legacy will be received and its value can be measured reliably. | Charities may wish to review their existing accounting policies and practices, to confirm that they are consistent with the clarified requirements of the standard. |
| Section 7 Statement of Cash Flows | New disclosure requirements about supplier finance arrangements (effective1 January 2025). | Charities will need to identify whether they are party to supplier finance arrangements and if so, take note of these new disclosure requirements, and their earlier effective date. |
| Section 2A Fair Value Measurement | A new section replacing the old Appendix to Section 2, updated to align definitions with latest international standards and provide additional guidance. | Charities should be aware of the additional guidance in FRS 102, including the updated definition of the fair value of a liability (now based on transfer rather than settlement, and taking into account non-performance risk). This may change some fair value calculations. |
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