Two new Statements of Recommended Practice (SORPs) for charity accounts were published on 16th July 2014, applicable to charity accounting years beginning on or after 1st January 2015. The SORPs are published by a joint committee of the Office of the Scottish Charity Regulator (OSCR) and the Charity Commission for England and Wales.
The last SORP was published in 2005 and, while it is normally revised every five years, there has been a 10 year gap before the publication of SORP 2015. There are also two SORPs this time around instead of one, divided according to size of charity. One SORP follows the principles of Financial Reporting Standard 102 (FRS 102) which now applies across the UK and Ireland, and the other SORP follows the principles of the Financial Reporting Standard for Small and Medium Sized Entities (FRSSE). The FRSSE applies to charities that meet the thresholds for small company treatment, which means any two of the following:-
- Income of not more than £6.5m
- Balance sheet total of not more than £3.26m
- Not more than 50 employees
The FRSSE SORP will have a short existence, as the FRSSE itself is subject to review under European Parliament proposals.
The way the SORPs' requirements are framed have been simplified in order to make clear those elements which are compulsory and those which are optional.
- MUST is used to indicate parts of the SORP which are mandatory. A failure to abide by these principles will render accounts liable to a qualification in the audit opinion;
- SHOULD is used to indicate those areas which are considered best practice, but failure to abide by them will not be treated as departing from SORP principles; and
- MAY is used to indicate principles which are entirely optional, or where there is a choice about how particular figures or notes may be presented.
The headings used in the Statement of Financial Activities (SoFA) have been simplified so that on the income side the headings are now: donations and legacies; charitable activities; other trading activities; investments; other. On the expenditure side, the headings are now: raising funds; charitable activities; other.
The separate line under expenditure for governance costs has now been removed, but governance costs must still be disclosed in the notes to the accounts. Gains and losses on investments must now be shown"above the line" in charity accounts, which is not likely to be popular with most charities, as it can distort the income and expenditure figures.
Recognition of income, legacies and donated goods
The provisions in SORP 2005 in relation to recognition of income provided that income had to be recognised in charity accounts when it was"certain" that the charity would receive the income. SORP 2015 changes this to"probable": in other words, when it is more likely than not that the income will be received then the income has to be recognised in the accounts. However, income need not be recognised if the charity is not satisfied that there is a proper entitlement to the income or if the income cannot be measured monetarily, and the impact of this change may therefore be minimal when taking all of these criteria together.
The new SORPs contain additional information on when legacy income has to be accrued in charity accounts, but the overall principles are little changed and most charities will only need to accrue when the executors on the testator's estate have obtained Confirmation (or Probate for English estates).
The value of donated goods ought to be recognised at the time of the receipt of the donated goods, at their fair value, but the SORPs explain that donated goods which are intended for re-sale or distribution can instead be recognised at the time that they are sold or distributed where it is impractical to assess their fair value.
Charity trustee reports
A number of changes are made in the SORPs to the amount of information which has to be included in narrative sections of the charity trustees' report, particularly in relation to achievements and performance, reserves policy and risk management. The section on risk management also requires charities to disclose the principal risks and uncertainties facing the charity, and a summary of plans and strategies which are in place for managing those risks. If there are uncertainties about a charity's ability to continue as a going concern, then this must also be explained in the trustees' report.
The new SORPs are intended to help to make charity accounts as transparent as possible and the responsibility properly to account for and report on a charity's activities rests ultimately with the charity trustees. It is important that charity trustees understand what the requirements of the SORPs are and begin to prepare now for changes which lie ahead in relation to their own charities' accounts.