What is the Charity SORP?
It is a Statement of Recommended Practice which sets out how charities should prepare their annual accounts and report on their finances.
Why has it been changed?
The SORP is an interpretation of the financial reporting standards and generally accepted accounting practice in the UK. Because these have changed, the SORP has to be updated. The introduction of Financial Reporting Standard 102 (FRS 102) has been a radical departure as this brings together a whole series of piecemeal standards and guidelines on general accounting into a single standard. FRS 102 also includes specific sections on public benefit entities.
Why are there now two SORPs?
As well as FRS 102, there is an existing accounting standard for smaller entities called the Financial Reporting Standard for Smaller Entities (FRSSE). As many charities are small, it seemed appropriate to issue a version of the SORP that would apply specifically to small charities.
Which charities can follow the FRSSE SORP?
The small company thresholds are used for determining what is small, even if you are not a company. Currently this means that you have to be below two out of three of the following criteria for the current and preceding year:
- Gross income of £6.5 million
- Balance sheet total of £3.26 million
- An average number of employees of 50
What are the pros and cons to choosing the FRSSE SORP?
The main advantage is that your accounts will change very little as the FRSSE describes current accounting practice. However, the FRSSE does not cover charity items such as voluntary income and heritage assets, so you have to look to FRS 102 for the appropriate accounting treatment in those cases. In addition, the future of the FRSSE is uncertain and it is currently being updated. It is likely that a new version will adopt some of the principles of FRS 102 but it is also possible that it will be scrapped in the medium term.
How do I know which SORP to choose?
You have to choose the FRS 102 SORP if your income is greater than £6.5m or you think you will exceed the small company threshold in the near future. The Charity Commission have prepared a useful helpsheet which sets out the differences between the FRS 102 version and the FRSSE version of the SORP.
What’s different in the FRS 102 SORP?
The main change in FRS 102 is a move to ‘fair value’ as the basis for including transactions and balances. We have not moved away from historic cost completely, but it will be necessary to consider fair value more frequently. Other matters in the FRS 102 SORP:
- all entities have to prepare a statement of cash flows
- income including legacies should be recognised when their receipt is ‘probable’ rather than certain
- all charities must disclose the total amount of all employee benefits received by ‘key management personnel’ for their services to the charity – this is the senior managers
- all charities must disclose the fact that there were no employees who received pay over £60,000 or disclose the number of employees remunerated above £60,000 in bands of £10,000
- charities are encouraged to disclose their remuneration policy in the trustees’ annual report
- governance costs are no longer shown as a separate row in the Statement of Financial Activities (SoFA) but must be disclosed in the notes
- comparatives are required for each column of the SoFA, but may be provided in the notes to the accounts
- gains and losses on investment assets are part of the income or expenditure of the charity and therefore go ‘above the line’
- material items should be disclosed separately in the accounts, as should extraordinary items
- all charities have to make a statement about going concern, either explaining any material uncertainties or risks to cast doubt on it or the factors that support it
When do the changes take effect?
You need to apply a new SORP for your accounting period beginning on or after 1 January 2015. So the first year ends affected are 31 December 2015, but you need to consider whether you will be making changes such as revaluations, which would have to be reflected in the comparative balances. In that case you need to think about getting a revaluation as at the transition date, which will be from 31 December 2013, as this will form the opening position for the comparative in the first accounts prepared under FRS102. You may also need to consider if you have to change your accounting treatment of transactions in 2014.
Where can I find out more?
Look out for the second article by Kate Sayer on tomorrow’s edition of ehospice UK, which will focus on the importance of good financial leadership in hospices.