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ACCA’s response to the exposure draft issued by the Charity Commission is set out below.

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above exposure draft of a Statement of Recommended Practice (SORP). The draft SORP was considered by ACCA's Charities Panel the following are their views.

General comments

1. We are in general supportive of the draft SORP, and our comments below are in the main suggestions for improvement which we put forward for consideration.
   
   
2. In terms of structure and layout the following seemed particular improvements

• The highlighting of generally applicable disclosure requirements
• The improved cross-referencing within the document
• The appendix dealing with the application of accounting standards.

Branch consolidation

1. We note and support the continuation of a clear requirement that branches should be consolidated in most cases.
   
   
2. There might be cases where the number of subsidiary charities may be very long, for example where branches are themselves charities. This could make the disclosure under paragraph 319 of the draft SORP lengthy, and the detail provided not necessarily very helpful to the user. A comparable option to Section 231(5) of the Companies Act to make full details available in some other way, might be allowed under the SORP.

   Structure of the SOFA

3. The proposed structure and income and expenditure headings of the Statement of Financial Activities (SOFA) seem helpful improvements. Our other comments are noted below.
   
   
4. The separation of the results of fundraising from other sorts of income in particular seems a useful development. We support in principle the gross presentation of fundraising income and of fundraising expenses, rather than simply of the net proceeds. The comparable separation of the costs of generating those funds, with the option in paragraph 70 to show a subtotal of incoming resources after fundraising costs, seems a good compromise between the merits of gross and net approaches.
   
   
5. While it is an improvement not to have fundraising and publicity as a heading for expenditure in the SOFA, there will remain practical problems in some cases of segregating publicity expenditure on education from that on profile raising (paragraph 134).
   
   
6. Some guidance on the treatment of exceptional items in the SOFA would be helpful.

   Income recognition

7. The draft SORP deals with this more clearly than its predecessor.
   
   
8. The criteria for recognising intangible income seem reasonable - where the donor incurs cost itself - however it will mean that charities may be dependent on information from third parties in order to prepare its accounts.
   
   
9. Legacy income recognition seemed an area where the existing SORP's guidance is not always being followed. The three criteria of entitlement, certainty and reliable measurement in paragraph 75 (together with their further elaboration in paragraphs 90 to 94) will be helpful. Nevertheless a number of charities have still to make a switch from fundamentally cash-based to accruals-based accounting in this area.
   
   
10. There is also an apparent inconsistency in the SORP between the above paragraphs on the one hand and the test for recognition of contingent assets as incoming resources in the SOFA and debtors in the balance sheet (paragraph 266). Legacies would seem to be prime examples of contingent assets. The test for recognition of contingent assets is "virtually certain", compared to the "reasonable certainty of receipt" test for legacies in paragraph 75.

    Provisions, commitments and contingencies

11. There appears to be scope for misunderstandings to arise from the SORP in this area.
    
    
12. In discussing constructive liabilities in paragraph 124 it might be helpful if it was made clear that for there to be an obligation the charity must have no realistic alternative to settling it. It seems unhelpful to begin the paragraph with the words "It is often found that … ". On the contrary it seems to us the cases of constructive obligations meeting the no realistic alternative test may not be that common.
    
    
13. In addition to "provision" and "contingent liability", paragraphs 125 and 258 the SORP introduce the terms "commitment" and "intention". This seems to make the position overcomplicated and potentially confusing. Moreover these latter two terms do not appear in FRS12. Surely it would be better if grants payable for instance were analysed simply as either obligations or not, and then as liabilities or contingent liabilities depending on the probability of transfer of funds. A contingent grant payable for example could be either a commitment or a contingent liability and so come under either or both of the two sets of disclosure requirements (paragraphs 259 to 261 and 269 to 273).
     
    
14. The way to account for and disclose intentions is surely as designated funds, as set out in paragraph 262.

    Fixed assets and impairment

15. We accept paragraph 213 and the measurement problems of historic and inalienable assets.
    
    
16. In principle, however, it is the inability to dispose of the asset which appears the key characteristic and not the historic or cultural quality of the item. It is possible that there could be a further group of items which while not legally inalienable, are so close to so being as to make no difference. The inability to dispose of the asset when combined with the measurement problems, mean the usefulness of capitalisation to users of the accounts is likely to be much diminished. Inalienable assets, and their de facto equivalents, should not therefore be capitalised.
    
    
17. The treatment of comparable assets under the Government's Resource Accounting Manual might be an appropriate model to follow.
    
    
18. On impairments (paragraphs 226 to 231) we are broadly happy with the approach put forward except that

• Too little significance and guidance has been attached to the problems of looking at groups of assets rather than individual ones
  
• There seems no reason for the SORP to prejudge the incidence of impairments by starting paragraph 226 with "On rare occasions …"
  
• Should not "below the recoverable amount…" in the second line of paragraph 228 actually be "above the recoverable amount …"

Restricted funds

1. We are satisfied with the definitions and treatment of restricted funds in the SORP. In our letter of December 1998 at the beginning of the review process we highlighted an increasing tendency for the proliferation of restricted funds. There is a case for a Charity Commission booklet outside the SORP on how the creation of restricted funds might be limited.

   Trustees report

2. Under paragraph 29(d) we support the disclosures concerning the policy on reserves.
   
   
3. The requirement in 29(d)(iv) to make a statement regarding the adequacy of internal controls is in our view very important for larger charities. The guidance that exists for public companies is probably appropriate for them. Thought should, however, be given as to whether this is an appropriate requirement for the many relatively small charities, and if so to providing some guidance for them in fulfilling this requirement.
   
   
4. We note the reference to future plans in paragraph 29(e). We feel however that there should be more encouragement for a more comprehensive set of forward looking information to be included in Trustees' reports.
   
   
5. The disclosures in paragraph 30 should be extended. The value of the assets involved should be disclosed and also information so that the connection between the activities of the two charities can be understood.

   Other points

6. Paragraph 142 distinguishes institutional and individual grants. The choice of headings should be reconsidered as they could lead to misunderstandings, given that institutional grants could include some made to individuals.
   
   
7. In paragraph 173 should not "pension contributions" actually be "pension costs"?
   
   
8. Paragraph 199 could use the simpler boundary definitions of investment property from SSAP19.

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