The proposed changes, to be consulted over a short four-week period, are set out in FRED 68 Draft amendments to FRS 102 Payments by subsidiaries to their charitable parents that qualify for Gift Aid.

The changes are required as there are significant differences in the accounting treatment used in practice relating to the accounting for Gift Aid payments made by a subsidiary to its charitable parent.

They will ensure that charitable entitities, including registered providers of social housing and higher educational institutions, can benefit from corporation tax relief provisions. As these distributions are considered as a form of distribution to owners, the subsidiary will have taxable profits and needs to recognise this as a tax expense.

In this context charitable refers to an entity that has been recognised by HMRC as being eligible for certain tax reliefs because of its charitable purposes.

The key changes include:

-          introduce new requirements in FRS 102 Section 29 Income Tax for subsidiaries of charitable parents, to clarify that the tax effects of distributions to owners shall be presented in profit or loss, rather than the same component as the underlying transaction;

-          tax effect of Gift Aid payments to charitable parent (ie, effectively tax relief) can be recognised at year-end if certain conditions met:

o   subsidiary is wholly owned;

o   Gift Aid payment is likely within nine months; and

o   payment will qualify to be set against tax.

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.

These draft amendments propose that the tax effects of such a gift aid payment, when it is probable that it will be made in the nine months following the reporting date, shall be taken into account at the reporting date. 

This will improve the consistency of reporting between entities and the relevance of the information provided to users.

FRED 68 also discusses other aspects of the accounting for the expected gift aid payment.

The FRC expects to finalise these proposals with those in FRED 67 Draft amendments to FRS 102 – Triennial review 2017 – Incremental improvements and clarifications, and their proposed effective date is accounting periods beginning on or after 1 January 2019, with early application permitted provided all of the amendments are applied at the same time (ie, including the measures outlined in FRED 67).

The closing date for comment is 20 October and responses should be sent to [email protected]

FRED 68 Draft amendments to FRS 102 Payments by subsidiaries to their charitable parents that qualify for gift aid