Accounting for charity mergers

A charity merger is accounted for in one of three ways under FRS 102 and module 27 of the Charities SORP: merger accounting, where no party gains control and the combined charity carries on for the same beneficiaries; gift accounting, where one charity is handed to another for nil or nominal consideration; or acquisition accounting for everything else. Merger accounting brings the combining charities in at existing book values for the whole year with combined comparatives, but a charitable company combining with a third party generally cannot use it because company law does not allow it.

Which rules apply to a charity merger?

Charities are public benefit entities, so FRS 102 paragraphs PBE34.75 to PBE34.86 apply. Paragraph PBE34.75 brings two kinds of combination within those paragraphs, whether a whole entity or part of one is combining: combinations at nil or nominal consideration which are in substance a gift, and combinations which meet the definition and criteria of a merger. Any other combination, which paragraph PBE34.76 calls an acquisition, follows Section 19 on business combinations and goodwill.

The Charities SORP applies the same framework in module 27, Charity mergers. The Charity Commission’s guidance on how to merge says the receiving charity must account for the merger, and that charities preparing SORP accounts should use module 27 of the SORP that applies to the period: SORP 2019 for periods starting before 1 January 2026, and SORP 2026 for periods starting on or after that date. Module 23 contains a flowchart for deciding how any charity combination or interest in another entity is accounted for.

What counts as a merger rather than a takeover?

The FRS 102 glossary defines a merger as a combination that creates a new reporting entity formed from the combining parties, in which the controlling parties come together in a partnership for the mutual sharing of risks and benefits, and no party in substance obtains control over any other or is otherwise seen to be dominant. All three of these criteria must be met:

1. no party is portrayed as acquirer or acquiree, by its own board or management or by another party;
2. there is no significant change to the classes of beneficiaries of the combining entities or the purpose of the benefits provided as a result of the combination; and
3. all parties, as represented by their board members, take part in establishing the management structure of the combined entity and selecting its management, with decisions made by consensus rather than purely by voting rights.

The second criterion is the one the FRC added for public benefit entities when it adapted the old FRS 6 tests. The FRC’s basis for conclusions also says it does not expect all combinations of public benefit entities to be mergers, so the tests need real evidence: board minutes, the press release, the composition of the new board and the governing document of the combined charity.

When is merger accounting allowed?

Paragraph PBE34.80 requires merger accounting for a combination that is a merger unless the statutory framework the charity reports under does not permit it, in which case the combination is accounted for as an acquisition under Section 19. Paragraph PBE34.81 confirms that a combination that is neither a gift nor a merger, or where merger accounting is not permitted, is an acquisition.

This is where legal form decides the answer. The FRC explains that company law only permits companies to use merger accounting for group reconstructions, and the 2015 amendment to Section 34 was made so that public benefit entities that are companies do not apply merger accounting where the law does not allow it. ICAEW’s summary of SORP 2026 says module 27 now states this expressly: a charity that is a UK registered company and enters into a business combination with a third party cannot apply merger accounting to it. In exceptional circumstances where acquisition accounting would not give a true and fair view, the charitable company may consider the true and fair override described in Appendix III to FRS 102, with full disclosure. Group reconstructions are covered separately in merger accounting for group reconstructions.

Non company charities, such as charitable trusts, unincorporated associations and CIOs, are not subject to that company law restriction.

How does merger accounting work?

• Book values. Under paragraph PBE34.82 the carrying values of assets and liabilities are not adjusted to fair value, although adjustments are made to align accounting policies.
• Whole year. Paragraph PBE34.83 brings the results and cash flows of all combining entities into the new entity’s accounts from the beginning of the financial period in which the merger occurs.
• Combined comparatives. Paragraph PBE34.84 restates the comparatives to include all the combining entities and requires them to be marked as combined figures.
• Costs. Paragraph PBE34.85 charges all merger costs as an expense when incurred.

No goodwill arises. Restricted and endowment funds keep their character in the combined charity, so they continue in the right columns of the statement of financial activities.

How is a merger that is really a gift accounted for?

Many charity combinations involve one charity transferring everything to another for nothing. Paragraph PBE34.77 applies Section 19 to such a combination, with two changes. Under paragraph PBE34.78, any excess of the fair value of the assets received over the fair value of the liabilities assumed is recognised as income, representing the gift of one entity to another. Under paragraph PBE34.79, any excess of liabilities over assets is recognised as an expense, representing the net obligations taken on without reward. There is no goodwill in either case.

What does each treatment look like?

Illustration only. Charity A, with net assets of £400,000, and Charity B, with net assets of £100,000, both unincorporated, transfer everything to a new CIO on 1 July 2027. The CIO’s first accounts run to 31 March 2028.

Facts	Treatment	Effect in the CIO’s accounts
Joint board, same beneficiaries, no party presented as acquirer	Merger accounting	Both charities’ results for the full year to 31 March 2028, combined comparatives, net assets brought in at £500,000 book value, merger costs expensed
Charity A’s trustees take control of the CIO’s board and B is described as joining A	Acquisition, or a gift if no consideration is given	As a gift, B’s assets and liabilities at fair value with the net figure as income, and B’s results only from 1 July 2027

The same facts in a charitable company combining with a third party would usually lead to acquisition or gift accounting, because merger accounting is not available without the override.

What must be disclosed?

For each merger accounted for as a merger in the period, paragraph PBE34.86 requires the newly formed entity to disclose the names and descriptions of the combining entities or businesses; the date of the merger; an analysis of the principal components of the current year’s results between the period after the merger and each party up to the merger date; an analysis of the previous year’s results between each party; the aggregate carrying value of each party’s net assets at the merger date; and the nature and amount of significant adjustments to align accounting policies, with an explanation of any further adjustments to net assets. ICAEW notes that SORP 2026 gives additional clarity on the merger disclosures.

What about a change of legal form?

Converting an unincorporated charity into a CIO or charitable company is a common restructuring. ICAEW explains that module 27 of the SORP treats such a change as a merger where the charity’s work, purposes and beneficiary class are unchanged: results of both entities are included for the whole period, comparatives are combined, book values are kept, and any restricted funds of the old charity remain restricted. The trustees’ annual report should explain the restructure, its date and reasons, and both old and new registration numbers. See charitable company or CIO.

Which legal steps affect the accounts?

• Vesting declarations. Section 310 of the Charities Act 2011 lets the transferring charity’s trustees make a pre merger vesting declaration by deed, vesting legal title to its property in the receiving charity on a specified date, with exceptions such as certain leases and shares.
• Register of mergers. Section 305 requires the Commission to keep a register of charity mergers. Registration is a legal requirement where a pre merger vesting declaration is used and otherwise voluntary, and the receiving charity registers.
• Legacies. Under section 311, once a relevant merger is registered, a gift that would have taken effect for the transferring charity on or after registration takes effect as a gift to the receiving charity, except a gift meant to be held as permanent endowment of a transferor that kept its endowment. That affects how the receiving charity recognises legacy income after the merger.
• Records. The Commission says a dissolving charity must keep its accounts and records for six years from the end of the financial year in which they were made, and can ask the receiving charity to keep them.

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Related Accountapedia entries

• Public benefit entities and concessionary loans
• FRS 102 Section 19: business combinations and goodwill
• Consolidating a charity’s trading subsidiary
• The Charities SORP explained
• Recognising donations and grants in charity accounts

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• ICAEW: Summary of changes
• GOV.UK: How to merge charities
• ICAEW: Accounting for a change in legal form
• GOV.UK: Guidance about the register of merged charities
• legislation.gov.uk: Act 2011 c. 25, section 305
• legislation.gov.uk: Act 2011 c. 25, section 306
• legislation.gov.uk: Act 2011 c. 25, section 310
• legislation.gov.uk: Act 2011 c. 25, section 311

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.