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Yesterday (20/09/2017) the FRC published a proposed amendment to FRS102 that solely relates to charities, which aims to achieve a consistent approach to the accounting for trading subsidiaries. There has been some confusion in this area in recent years following the ruling that the donation of a trading subsidiary’s profit to its parent charity is in fact a company distribution.

A summary of the proposed treatment is as follows:

  • 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). To mirror this the parent charity will not accrue for its receipt.
  • The gift aid payment, when it is recognised, shall be recognised as a distribution within equity, not as an expense recognised in the profit and loss account.
  • The tax effects of a gift aid payment that is probable will be made in the nine months following the reporting date shall be taken into account at the reporting date, reflecting the fact that in most cases trading subsidiaries will minimise/eliminate their tax liability as a result of making gift aid payments. This tax effect will be recognised in the profit and loss account.

The proposals are now being consulted upon, but it is expected that FRS102 will be updated for these at the same time as the earlier proposed changes set out in FRED67, possibly by the end of the year. They will not come into force until 2019, but early adoption will be possible. It is likely that at present many charities do not follow this approach, and therefore a change in accounting treatment may be required.

You will find the details of these proposals in FRED68, should you wish to read them, which is available on the FRC website.

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