Until recently the Charity SORP has been refreshed every five years but this time there has been a gap of 10 years due to the delay in publishing the new financial reporting standard FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, which is set to replace UK GAAP say Harris & Co accountants Northampton #accountantsnorthampton
Unusually there are now two SORPs as charities that meet the size criteria will be entitled to follow the FRSSE, the Financial Reporting Standard for Small and Medium Sized Entities.
Why two SORPs?
In 2013, the European parliament voted to introduce a new Accounting Directive which radically reduces the disclosures, applying to small companies, to eight mandatory notes. These changes to company law will necessitate a revision of the FRSSE. The Financial Reporting Council (FRC) has already started scoping this work and a new FRSSE would have necessitated a further revision to the SORP soon after its issue. This meant that the Exposure Draft SORP, as published, would only have had a ‘shelf-life’ of a single accounting period before it had to be withdrawn and revised.
The separation of the SORP into two versions – an FRS 102 version and a FRSSE version – means that users of FRS 102 would not be disrupted by the withdrawal and revision of the FRSSE.
The FRSSE SORP can be used by any charity that meets the small company thresholds. That means it has to meet two of the following three criteria – income of not more than £6.5m, a balance sheet total of not more than £3.26m and not more than 50 employees. There are reduced disclosures and the cashflow statement is optional.
However, the FRSSE has many gaps in terms of the accounting issues it addresses and has its limitations as it does not address the public benefit issues that are now addressed in FRS 102. Therefore, the FRSSE SORP includes charity-specific requirements that are additional to those of the FRSSE. In particular, this includes requirements relating to the trustees’ annual report, fund accounting, the format of the statement of financial activities and additional disclosures aimed at providing a high level of accountability and transparency required of charities.
The phrase ‘this SORP requires’ is used in the SORPs to distinguish the additional disclosures required by the SORP, which are not specifically required by the FRSSE or FRS 102. For transactions that are not specifically dealt with in the FRSSE, charities may follow their existing accounting policies provided that the policy and related disclosures made are consistent with accepted accounting practice.
Where a charity undertakes a new transaction for which it has no policy and where it is not dealt with in the FRSSE or the SORP, the FRSSE requires a charity to take into account FRS 102 in establishing current practice.
In summary, the FRSSE SORP will have a very short shelf life; going forward there may not be much difference between the two SORPs – this may influence the choice of which SORP to adopt. Many charities that are eligible to follow FRSSE are therefore opting to follow the FRS 102 SORP.
This SORP uses different terms to distinguish those requirements that must be followed in order to comply with the SORP from other recommendations which charities can opt to follow when preparing the trustees’ annual report and accounts.
‘Must’ indicates those elements where non-adherence is a departure from the SORP. This would require explanation and disclosure, and would impact on the audit opinion. ‘Should’ is used for an item aimed at advancing standards as a matter of good practice.
While charities are encouraged to follow all the SORP’s recommendations, a failure to follow a ‘should’ recommendation is not regarded as a departure from this SORP.
‘May’ is used for an item that a charity may choose to adopt or identifies that an alternative accounting treatment or disclosure of a transaction or event is allowed by the SORP.
The new SORP has made a simplification to the analysis provided within the Statement of Financial Activities (SoFA). There are now five incoming resources headings (donations and legacies, charitable activities, other trading activities, investments and other). There are now only three expenditure headings (raising funds, charitable activities and other).
Governance costs are no longer disclosed on the face of the SoFA but are instead disclosed within the notes to the accounts as a separate component of support costs. Additional lines or columns can be added where necessary.
If a material component of income or expenditure is not presented on the face of the SoFA, the nature and amount of the item must be disclosed in the notes to the accounts.
The current SORP 2005 requires changes in fair value (other than permanent diminutions in value) to be shown in the ‘gains and losses on investments’ line in the bottom part of the SoFA in the section of other recognised gains and losses. Due to requirements in FRS 102, the FRS 102 SORP now requires these changes to be shown before the ‘net income/expenditure’ heading.
This is not popular as most charities do not like showing such investment value movements above the line. Charities can of course insert another subheading ‘net income/expenditure before gains and losses’. This will arrive at the same result as before.
The standards require that comparative information must be provided for all amounts presented in the accounts. This means a change for SoFA information and the SORPs require that the comparative information provided for the total funds of a charity must be presented on the face of the SoFA.
Comparative information provided for the separate classes of funds, if any, held by a charity may be presented either on the face of the SoFA or prominently in the notes to the accounts.
As a result of new requirements in FRS102 the format of the statement of cash flows has changed. The SORP continues to allow the choice of either the ‘direct’ or ‘indirect’ method and provides illustrative formats for charities using the indirect method. The Balance Sheet format is relatively unchanged.
Income recognition change
SORP 2005 required that income should be recognised when the charity has proper entitlement to the income, when there is reasonable certainty of receipt and when the item can be measured monetarily with reasonable certainty.
The key change is that under the new rules the term ‘certainty’ has been replaced by ‘probable’. This is defined as meaning that it is more likely than not that the income will be received. The other two criteria are broadly unchanged.
Some take the view that this will mean that much more income will need to be recognised and income that was previously not accrued or was deferred will now have to be included in the SoFA. However, most charities that deferred income recognition did not recognise income because they thought that they were not entitled to the income at the accounting reference date.
This test has not changed and if the reason why a charity did not recognise income was based on not having proper entitlement at the balance sheet date or not being able to monetarily measure the income, then the modification of reasonable certainty of receipt to more likely than not will not impact on income recognition.
One important question is whether charities will have to accrue more legacy income than before? The simple answer is no. There has always been a degree of flexibility on when charities recognise legacy income.
SORP 2015 continues to allow the flexibility that exists in the current SORP but provides more guidance on entitlement and explains that for accounting purposes, evidence of entitlement to a legacy exists when the charity has sufficient evidence that a gift has been left to them and the executor is satisfied that the property in question will not be required to satisfy claims in the estate. The SORP goes on to explain that of itself establishing entitlement is insufficient to recognise legacy income. The recognition of the gift is also affected by the probability of receipt and the ability to estimate with sufficient accuracy the amount receivable.
The SORP now clarifies that receipt is normally probable when there has been grant of probate and the executors have established that there are sufficient assets in the estate, after settling any liabilities, to pay the legacy and any conditions attached to the legacy are either within the control of the charity or have been met. This is the same as the treatment currently used by most charities of recognising legacies at the earlier of when estate accounts are settled or income is received.
Some charities have sufficient information on their legacies’ trends to take an alternate view accruing for legacies when probate is filed. This treatment can be acceptable if there is evidence to show that it does not provide a result that is shown to be materially incorrect. SORP 2015 now specifically explains the use of trends and historical information.
Another significant change affects whether donated goods now have to be included in stock. Due to changes arising from FRS 102, income from the receipt of donated goods for sale or distribution should be recognised at the time of receipt at its fair value.
However, the SORPs explain that If it is impractical to assess the value of donated stock held for resale or distribution at the time of receipt, or if the costs involved in undertaking the valuation of donated stock outweigh the benefit, then charities can continue with their existing practice of recognising the income from donated goods when they are sold or distributed.
The Exposure Draft of the SORP wrongly excluded from the scope of branch accounting charities that are independently governed by a separate body of trustees. This has been changed in the final version of SORP 2015 and there is now no change from the requirements of SORP 2005.
Special trusts and any other non-corporate entities which are administered by, or on behalf of, the reporting charity and whose funds are held for specific purposes which are within the general purposes of the reporting charity will continue to be accounted for as branches.
The SORP will be effective for accounting periods beginning on or after 1 January 2015. Accounting standards require the comparative and opening balance sheets at the ‘date of transition’ to be restated if there are any changes. ‘The date of transition’ is the beginning of the earliest period for which a charity presents full comparative information. However, the opening balance sheet itself does not need to be presented.
This requires the presentation of reconciliations of funds determined in accordance with its previous financial reporting framework and its funds determined in accordance with new requirements at two dates:
- the date of transition to the new SORP; and
- the end of the latest period presented in the entity’s most recent annual financial statements determined in accordance with its previous financial reporting framework.
There is also a requirement to present a reconciliation of ‘surplus or deficit’ as previously stated with the surplus of deficit as it is restated in accordance with the new requirements for the same period.
For example, for an entity with a 31 December year end, the first year of mandatory application will be the year ending 31 December 2015. The charity will need to restate its opening balance sheet at the date of transition (ie, at 1 January 2014) and comparative balance sheet (ie, at 31 December 2014), although the opening balance sheet need not be presented.
The charity will need to prepare reconciliations of funds at 1 January 2014 and 31 December 2014 and of surplus or deficit for the year ending 31 December 2014.
This is not an exhaustive list of changes and a help sheet of what has changed will soon be published on the SORP website. There is more information required in the narrative section on areas such as achievements and performance, reserves policy and risk management. Charities that are companies can find useful guidance on the SORP website on how to incorporate the new Strategic Report into the trustees’ report.
Preparing for implementation
- Decide which SORP is to be followed. FRSSE or FRS102
- Identify the transition date (this is not the date of mandatory application)
- Consider areas where changes may be needed on implementing FRS102 and/or the new SORP
- Consider if any information needs to be obtained for the transition date. For some areas it may be difficult to obtain the information at a later date. For example, holiday pay accruals.
- Consider one off opportunities. For example to revalue tangible fixed assets and treat this as deemed cost
- Consider impact of major changes to the number if any. For example, the need to include the discounted value of agreed funding plans where a multi-employer defined benefit scheme is being accounted for as a defined contribution scheme
- Consider the enhanced information required for the Trustees Report and understand how this will be collated and presented
- Plan early!
FRSSE SORP: This can be used by any charity that meets the small company thresholds. It has to meet two of the following three criteria – income of not more than £6.5m, a balance sheet total of not more than £3.26m and no more than 50 employees
FRS 102 SORP: Charities that do not qualify to be able to follow the FRSSE SORP will have to follow the FRS 102 SORP. Any charity can opt to follow the FRS 102 SORP regardless of size and many have done so
To download the new Charity SORP 2015 versions for FRS 102 and FRSSE, click here