The Charity Commission’s Nigel Davies introduces the new framework for charity accounting and reporting
UK GAAP is changing with effect for accounting periods beginning on or after 1 January 2015.
This new framework brings change to charity accounting in the UK and Ireland.
The existing Statement of Recommended Accounting Practice: Accounting and reporting by charities (popularly known as SORP 2005) will be superseded by a new framework of two SORPs.
As far as charities are concerned, new GAAP is comprised of three standards:
The role of SORPs is to provide application guidance to help practitioners prepare accounts under GAAP, so when GAAP changes, a new SORP is required.
A draft version of a new charities’ SORP was issued for consultation from July to November 2013. The consultation process culminated in 179 written responses and more than 1,600 people participated in 26 consultation events held across the UK and Ireland.
A significant minority of charities already use the FRSSE and 88% of respondents supported a solution that supported both FRSSE and FRS 102. However, due to a new accounting directive from the European Union, the longer-term future of the FRSSE is very uncertain. A number of respondents also advocated separating out the two standards with separate SORPs, citing dissimilarities in terminology, definitions and accounting treatments. Therefore, to address these concerns, there are two new SORPs. While any charity can follow the FRS 102 SORP, only those charities that fulfil two of three eligibility criteria may adopt the FRSSE SORP. In order to use the FRSSE, charities must meet two out of three of the following criteria: an annual gross income of less than £6.5m; total assets of less than £3.26m; or fewer than 50 employees. Charities now face a very clear choice for accounting periods beginning on or after 1 January 2015.
In writing the new SORPs, care has been taken to respond to feedback from the charity sector, particularly:
The table below compares line headings from SORP 2005 with their respective location in the SoFA under the new SORPs. For clarity only an extract of each SoFA is shown. An important change required by accounting standards that applies in future is a requirement to give comparatives for each column in the SoFA either on the face of the SoFA or in the notes to the accounts.
There are key differences in the areas of accounting policies and disclosure. Reference must be made to the SORP as the following highlights are not exhaustive.
With respect to accounting policies the main changes are:
The main additional disclosure requirements are:
The FRSSE sits within a framework of existing GAAP which is being withdrawn. To allow for this, FRSSE 2015 provides that where an entity is facing an item or transaction of a kind for which it has no existing accounting policy (termed ‘accepted practice’) it should refer to FRS 102 to identify the ‘current practice’ to follow.
The FRSSE SORP requires if the FRSSE specifies a solution for specific items or transactions that the FRSSE must be followed, otherwise for charity (public benefit entity) specific items or transactions ‘current practice’ (new GAAP) must be adopted. The FRSSE SORP also identifies when charities can retain their existing accounting policy for non-charity specific items or transactions, provided this is consistent with ‘accepted practice’ (existing GAAP).
The main differences between the FRSSE and FRS 102 SORPs are:
The form and content of the trustees’ annual report is common to both SORPs. The two changes that affect all charities are:
Changes that affect only larger charities are:
In preparing the accounts under a new SORP, the comparatives for the previous period need to be restated on a like-for-like basis which requires a revised comparator opening balance sheet and closing balance sheet for the previous period together with a SoFA for the previous period. Also if FRS 102 is followed, a comparative for the Statement of Cash Flows is needed.
The items most likely to require adjustment are:
|Existing requirements||Equivalent new requirements|
|2005 SORP |
|FRSSE SORP |
|FRS 102 SORP
|Voluntary income||Donations and legacies|
|Activities for generating funds||Other trading activities|
|Investment income||Income from investments|
|Incoming resources from charitable activities||Income from charitable activities|
|Other incoming resources||Other income|
|Total incoming resources||Total income and endowments|
|Costs of generating voluntary income and Fundraising trading: cost of goods sold and other costs and Investment management costs||Expenditure on raising funds|
|Resources expended on charitable activities and|
|Expenditure on charitable activities|
|Other resources expended||Other expenditure|
|(see Gains / (losses) on investment assets below)||Net gains / (losses) on investments|
|Net incoming / (outgoing) resources before transfers||Net income / (expenditure)|
|Gross transfers between funds||Transfers between funds|
|Gains on revaluation of fixed assets for charity’s own use||Gains / (losses) on revaluation of fixed assets|
|Gains / (losses) on investment assets||Gains / (losses) on investment assets||(see above)|
|Actuarial gains / (losses) on defined benefit pension schemes||Actuarial gains / (losses) on defined benefit pension schemes|
|Other gains / (losses)|
|Net movement in funds||Net movement in funds|