Accounting and reporting by charities

Comments from ACCA to the Charity Commission and the Office of the Scottish Charity Regulator, November 2013.


We are pleased to see that the approach has been maintained of having a SORP which aims to be reasonably comprehensive and be the main point of reference and guidance for the preparation of charity accounts. This is very important as many of the preparers of charity accounts or the trustees approving them are not experts and the charities are small with few resources.

The draft SORP incorporates many improvements in clarity with these users in mind and we very much support those.

However it is made more complex by having to cover both FRS102 and the FRSSE. In our view the FRC should withdraw the FRSSE once FRS102 is established and include appropriate disclosure reductions for smaller entities. This would then allow for the SORP in turn to become more straightforward.

We support the main proposals of the SORP. We have noted some further simplifications that are possible to the Statement of Financial Activities and some duplication of guidance. We have also noted some disclosure requirements that are not required or could be moderated – for example on grants made to institutions, executive salaries and fraud disclosures.


QUESTION 1: Modular format

We support the format. The SORP has become a longer document as a whole and the modular format helps with this issue to an extent.

QUESTION 2: Better meets the needs of smaller charities

We think the language used in the SORP is more direct and better communicates with the range of people involved in the preparation of the accounts of smaller charities. The modular approach will help here as well by setting to one side many of the more complex issues which are less likely to occur with smaller charities.

QUESTION 3: The use of the terms ‘must’, ‘should’ and ‘may’

It is helpful to have clarity on these issues, especially of course on those items that must be complied with in order to claim compliance with the SORP. The terms are explained properly in paragraphs 3.30 to 3.33, though that explanation might be set out more up-front in the SORP.

However the distinction between ‘may’ and ‘should’ is arguably not as important and the must/should/may system looks more complex than necessary. We would propose a ‘must ‘and ‘may’ regime.

The text should be gone through carefully to ensure that there is consistent application of whatever system is chosen. For instance 3.25 uses the phrase ‘it is important to’ – was this meant to be a ‘must’?

QUESTION 4: Improving the SORP microsite

The microsite works well and will be a practical help for the non-expert users.

The microsite, not being part of the SORP itself, may be an appropriate place to set out illustrative examples that many users find a very helpful way to translate SORP requirements into practical implementation (see Q25).

QUESTION 5: Structure and content of the trustees’ annual report

We would propose no changes to the main requirements other than we think that the SORP should make reference to the requirements for strategic and directors’ reports.

We find the risk considerations and reporting are better expressed and have the potential to encourage more than boiler-plate disclosures.

QUESTION 6: Reporting achievements and performance

We agree with the way the requirements in this most significant area are stated.

QUESTION 7: Additional or unnecessary requirements

We have no items to propose here.

QUESTION 8: Simplified headings and format for the statement of financial activity (SoFA)

The new wording and simplification of the SoFA in general are welcome in making the statement more understandable.

Our suggestions for further improvement and simplification are:

  • Lines A2 and A3 should be reversed and they should be renamed ‘from fundraising and other sources’ and then ‘from charitable activities’. This would put the income from donations and fundraising next to each other together. These sorts of income tend to be more similar than the income from charitable activities.
  • The subtotal of net incoming resources before investment gains/losses is not needed and is not a very helpful one. For most charities investment gains and losses represent incoming resources and they will be looked at together with the investment income. The distinction between realised and unrealised gains/losses is not very significant when it concerns listed investments where gains/losses tend to be realised or readily realisable.
  • The line C ‘Transfers between funds’ would be better coming below other recognised gains and losses just above ‘Net movement in funds’
  • Designated funds should be reflected both in the SoFA and in the balance sheet.

QUESTION 9: Columnar structure for SoFA

On balance we support retaining the current structure where the restricted, unrestricted and endowment funds are shown in separate columns on the face of the SoFA and not just as note disclosures. We recognise that the columnar structure adds significant complexity to the financial statements and non-expert users may find the distinctions and the implications of surpluses and deficits not readily understandable. However the distinction can be very significant in some cases and the SoFA structure gives the issue prominence for the charity and the users of its accounts. In some cases the balance between restricted and unrestricted may be of significance to what activities can be undertaken. It may also be very helpful in explaining when income may have been recognised significantly in advance of its expenditure.

QUESTION 10: Charity-specific accounting and reporting

We are not aware of significant omissions.

QUESTION 11: Specific disclosure of recipients of grant funding

While we are very much in favour of transparency in relation to grants to institutions and others, we do not support the way this issue is currently addressed in the draft SORP.

Disclosure of the names of material recipient institutions is important, but this sort of information is not fundamentally financial and so would be better done in the trustees’ report and not in the financial statements.

To frame the requirement as material grants is not sufficiently clear – material to the donor or to the recipient? How is material to be judged? To give threshold such as at least the 25 largest recipients might be more practicable.

The SORP could refer to other disclosures about grants made – such as an indication of the range of grants by size in bandings. These could be for both grants to institutions and to individuals.

QUESTION 12: Staff salaries disclosures

No change is needed to the requirements here. The bandings are sufficient to give users an overall picture of the resources expended on senior staff which we agree is an issue which concerns the public and other users of the financial statements. Identifying the highest paid individual and their remuneration may unnecessarily focus on that individual perhaps rather than on the bigger picture of the rewards to senior staff as a whole.

QUESTION 13: Identifying source of disclosure requirements

SORP users should be able to trace back the source of the disclosure requirement, if they need to. In general this seems unlikely to be needed that often and so we would not favour burdening the main text with too many cross references. In the electronic version of the SORP this reference could be added without ‘clutter’. In a printed version this could be way of an appendix setting out the origin of the different requirements.

It would not be appropriate for the SORP to imply a different weighting to requirements based on their origin. The ‘must’ and ‘may’ system already addresses that.

As noted above one of the strengths of the current SORP (particularly for the less expert preparers) is that it is the main reference point for their work and that they do not in general have to consider multiple regimes. Keeping the disclosure requirements, whatever their source, together is important in that regard.

Of the various options suggested we would think that (c) is closest to what we would prefer.

QUESTION 14: Reduced disclosure framework in FRS102

Retaining the transparency in regard to trustees and directors is important for charities. In general therefore we would agree with not allowing charities to use the reduced disclosure framework. On the other hand cash flow statements are in some subsidiaries not a meaningful disclosure and so a partial allowance of the framework would be better in our view.

QUESTIONS 15 and 16: Supporting both FRS102 and the FRSSE

While both sets of accounting standards FRS102 and the FRSSE are available to charities the SORP must support both. We consider that it does achieve this. It should not be the SORP’s role to prevent smaller charities using a ‘lighter touch’ regime they may currently use and which is available to other similar sized entities.

However we note that the differences between the two regimes are not very substantial (excluding perhaps the issues of consolidation and cash flow statements). The existence of the two regimes does however add significant complexity and length to the SORP.

What is required is for the FRSSE to be withdrawn by FRC once the application of FRS102 has been established and the SORP could then be simplified accordingly. Indeed our favoured approach all along to the new UK GAAP was to have a UK version of the IFRS for SMEs (i.e. what is essentially FRS102) with suitable disclosure reductions for small entities, and to withdraw all the existing UK standards including the FRSSE.  The new SORP will be an illustration why that approach made sense.

QUESTIONS 17 and 18: Mixed motive investments (MMI)

The draft SORP essentially proposes that MMI are treated as if they were purely investments held for their financial return. Given their nature that is not right. MMI represent a range from those that are very comparable to programme related investments to those more akin to ethical financial investments. However to try to divide costs or returns as to how much should be shown as charitable activity and how much as investment, seems impractical. Where there are MMI a judgement should be made as to which objective is the predominant one. The accounting treatment would then follow this with some appropriate disclosures.

QUESTION 19: Branches and subsidiaries

It will be clearer if bodies that are incorporated with separate governance are consolidated as subsidiaries and others without truly separate governance are treated as branches.

QUESTION 20: Equity method of accounting

We agree with the accounting treatment proposed. We consider the disclosures required especially the sixth and seventh bullet points of 29.22 will be sufficient to give the reader an appreciation of the scale of the activities in the joint venture.

QUESTION 21: Government grants

Grants whether from government bodies or from others should be accounted for in a consistent way.

QUESTION 22: Any other comments on accounting principles

Paragraph 4.15 includes a requirement for all charities that all material losses through fraud be set out on the face of the SoFA or in the notes. There could be potential complications in some cases which should be alluded to. For example, when there is an on-going police investigation following a fraud, trustees have sometimes received legal advice that they should not make public statements in their accounts at that time due to an upcoming court case of a former employee for example. Indeed the current Charity Commission guidance on their website (chapter 3 “Protecting Charities From Harm” publication) states to take legal advice first when making any public statements in relation to fraud (for example in the accounts).

In paragraph 9.31 the ‘must’ and the ‘may’ should be the other way around in our view. The key disclosure is of the full time equivalent employees. This provides comparability between charities and permits users to make sense of the salary disclosures for example. The disclosure of the total headcount may also be interesting information.

There is scope to simplify some of the SORP’s sections by addressing duplication, even within the SORPs core modules. For example material on the measurement and disclosure of provisions appears in paragraphs 10.84 and 10.89, but also in 7.32 and 7.47. Likewise with financial instruments where there is material in Chapter 10 section A4, B2,B3, B4 and C1-3 which deals with financial instruments which are also covered in Chapter 11.

We question whether the wording of the principle in 7.10 is right. Why is the historical cost of a liability referred to? It is not a very helpful concept generally. Why not just say liabilities must be measured at the best estimate of the amount to settle at the reporting date (as it says in 10.82)? Also we are not sure an exception from the principle is needed for financial instruments especially liabilities due in more than 12 months. Would not the best estimate to settle at the reporting date be calculated as its present value? If one settles long before the due date one would expect to get a discount.

Paragraph 7.45 might helpfully refer to the accrual for unused holiday entitlements which seems to be one of the most common adjustment between current UK standards and FRS102.

The heading above paragraph 5.23 appears to contain too many ‘negatives’ and as a result is not very clear. It might better read “deferring income where there are conditions that limit recognition”.

QUESTION 23: Simplifications made to the SORP

We agree with these.

QUESTION 24: Any further simplifications

We have noted some of these under Q22 above.

QUESTION 25: Example accounts and reports

Examples of reports and accounts are useful to charities in reporting under the SORP. This is particularly the case where preparers are not expert as is often the case with smaller charities. We recommend option c) but that the SORP microsite might be a good place to provide them rather ‘cluttering’ the main body of the SORP.

Last updated: 12 Nov 2013