When preparing accounts following UK-Irish generally accepted accounting practice (GAAP), a sector or subsector can look for guidance to one of the statements of recommended practice (SORPs) that has been developed in accordance with the code of practice issued by the Financial Reporting Council (FRC). The FRC approves SORP-making bodies and clears each SORP prior to its publication.
The Charities SORP is one of three public benefit entity (PBE) SORPs; the others are for further and higher education (FEHE) and registered social landlords (RSLs). Whenever GAAP changes, a new SORP is required. Since new UK GAAP becomes mandatory for reporting periods beginning on or after 1 January 2015, the Charity Commission and Office of the Scottish Charity Regulator (OSCR), the joint SORP-making body for the charity sector, have issued proposals for a new Charities SORP. The SORP and the accompanying invitation to comment document can be accessed via the dedicated microsite listed at the end of this article. The consultation closes on 4 November 2013.
New UK GAAP is made up of four financial reporting standards (FRS):
- FRS 100, Application of Financial Reporting Requirements;
- FRS 101, Reduced Disclosure Framework - for eligible subsidiaries and the entity accounts of an eligible parent entity reporting under International Financial Reporting Standards (IFRS);
- FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland;
- FRS for Smaller Entities (FRSSE).
According to FRS 100, when a SORP applies, the entity should state in its financial statements the title of the SORP and whether its financial statements have been prepared in accordance with the SORPs provisions that are currently in effect.
It follows from this that any charity preparing its accounts to give a true and fair view under GAAP must follow the SORP unless a more specific SORP applies.
FRS 101 applies to certain entities preparing their accounts in accordance with EU-adopted IFRS. Charities cannot report under IFRS and so FRS 101 does not apply - section 395 (2) of the UK Companies Act 2006 and regulations made under charity law in the jurisdictions of Scotland, England and Wales prohibit charities from preparing their statutory accounts under IFRS.
FRS 102 and FRSSE are the two options that are available to charities preparing their accounts under new GAAP. FRS 102 includes the following PBE-specific accounting treatments:
- accounting for income from non-exchange transactions;
- public benefit entity combinations;
- concessionary loans.
The proposed SORP provides application guidance to charities reporting under FRS 102 or FRSSE.
New SORP structure
The proposed new SORP sets out the form and content of the trustees annual report and the three primary accounting statements:
- a balance sheet (modelled on company reporting);
- a statement of financial activities (SoFA);
- a statement of cashflows;
- the notes to the accounts.
It has been rewritten to take a think small first approach. It has a modular format with the scope and application section followed by 14 core modules that are to be followed by all charities preparing their accounts on an accruals basis.
A further 15 modules are split across four themes:
- special transactions relating to charity operations;
- accounting for special types of assets held;
- accounting for investments;
- accounting for branches, charity groups and combinations.
It is intended that charities select those modules from the theme(s) relevant to their circumstances when preparing their accounts.
Changes from SORP 2005
All charities prepare a trustees annual report and the main changes to that report are:
- charities with no reserves policy must disclose this fact;
- larger charities must explain their approach to risk management;
- where there is doubt as to going concern, a charity must explain these uncertainties;
- the names of all trustees must be disclosed.
A concession under new GAAP allows entities, including charities, preparing their accounts under FRSSE to continue with their existing accounting policies at the time of changeover to new GAAP. In these circumstances the main changes resulting from the new SORP are the new SoFA and, if prepared, a new statement of cashflows and FRSSE-related disclosures.
Charities that report under FRS 102 or prepare their accounts in accordance with FRSSE for the first time must follow the guidance in the SORP and report using the new SoFA. Any charity reporting under FRS 102 must also prepare the new statement of cashflows. There are also a number of changes to accounting policies compared to SORP 2005. Disclosures depend on whether FRS 102 or FRSSE is followed.
In the SoFA, a number of expenditure headings are now combined in a new cost of raising funds heading and governance costs are not shown separately on the face of the SoFA but treated as a separate component of support costs. Investment gains and losses now count as a component of net incoming resources/resources expended. However, the form and content of the balance sheet are unchanged.
The changes to accounting policies and definitions are more fully explained in two helpsheets available via the microsite; in summary these include:
- single-sided transfers are not allowed in the SoFA;
- the basis of going concern must be considered;
- clarification that income is first recognised when its receipt is probable;
- a more extensive requirement for discounting for the time value of money for both income and expenditure where settlement is delayed by more than 12 months and the effect is material;
- where practicable, donated goods for sale or distribution are measured at fair value on receipt;
- properties with a mix of investment and functional use are normally apportioned between tangible fixed assets and investment asset classes on the balance sheet;
- internally generated databases cannot normally be capitalised;
- a new category of mixed motive investments is introduced;
- charities independently governed by a separate body of trustees cannot be treated as branches;
- joint venture entities are normally accounted for on an equity rather than gross equity basis;
- the definition of related parties has been aligned with the definitions set out in FRS 102 and section 118 of the Charities Act 2011.
Once the consultation on the exposure draft SORP closes, the responses will be analysed and the findings discussed by the SORP committee in January 2014. After the FRC has approved it, the new SORP will be published and take effect for financial years beginning on or after 1 January 2015.
In the jurisdictions of Scotland and England and Wales that require accounts prepared on an accruals basis to follow the SORP, the affected charities will not be able to report under SORP 2015 until new regulations have been made.
In those jurisdictions where the regulations do not specify the SORP to be followed (Northern Ireland and the Republic of Ireland), charities will be able to adopt SORP 2015 early.
Nigel Davies is technical secretary to the UK Charities SORP Committee and a member of the Charity Commissions accountancy policy team