The Charity Commission and Office of the Scottish Charity Regulator (“OSCR”) have just announced that the final version of the new Charities Statement of Recommended Practice (“SORP”) has been passed to the Financial Reporting Council (“the FRC”) for their review and approval. The FRC are expected to approve the new SORP for issue by the end of June 2014, with it coming into effect for accounting periods commencing on or after 1 January 2015.

The release of the new SORP comes after many months of public consultation, followed by review and revision (as required or deemed appropriate) by the SORP Committee.

Well I say SORP, because in fact it has been announced that there will be two new SORPs: one for those charities who are required or who chose to prepare the accounts under full UK accounting standards (the new FRS 102), and one for those entities who are eligible to report under the Financial Reporting Standard For Small Entities (“FRSSE”).

So why have two SORPs been prepared?

Well, one of the questions posed as part of the consultation process sought views as to whether the new SORP should support the FRSSE. This issue seemed to raise more debate than perhaps was expected and in fact many respondents took this question one step further and commented on whether the SORP should require charities to follow full UK accounting standards (FRS 102) only.

The arguments in favour of taking this approach and disapplying the FRSSE centre around the fact that this would provide more consistent reporting in the sector, since everyone would be signing from the same hymn sheet, as it were. In addition, a charity must follow FRS 102 on matters where the FRSSE is silent (which could lead to charities reporting under two different accounting frameworks). Furthermore, the SORP would only need to consider and reflect requirements and terminology of FRS 102, thereby making the SORP shorter and easier to follow.

However, the consultation responses also revealed strong support for retention of the FRSSE. Supporting the FRSSE is consistent with the overall “think small” approach of the new SORP, and many respondents commented on the exposure draft of the new SORP placing undue emphasis on FRS 102.

Another key issue is the long-term future of the FRSSE – a new EU Accounting Directive is expected in the near future. This is likely to require further changes to the FRSSE, which would require further amendments to the SORP.

Therefore, the decision has been taken to publish two SORPs. This approach answers those consultation responses that the SORP was too focused on FRS 102, as well as providing the following benefits:

• • Avoids disruption to FRS 102 users as they will not be affected by further revisions to the SORP;

• • Simplification of each SORP as each will use the terminology relevant to the accounting framework being reflected; and

• • Allows each SORP to focus on the specific accounting treatments set out by each accounting framework.

As noted above, there is the issue regarding what happens where a charity undertakes transactions that are not addressed by the FRSSE. In such instances, charities can retain existing accounting policies, provided they meet accepted practice, but are encourage to adopt current practice as reflected by the SORP. For sector specific transactions, the new FRSSE SORP will require charities to adopt current practice (i.e. to follow the SORP), in order to promote best practice throughout the sector.

The introduction of a FRSSE SORP also reflects the fact that around 98% of charities by income are eligible to adopt the FRSSE (although it should be noted that the Charity Commission and SORP Committee, in their report to the FRC recommending the SORP for approval, comment that the majority of charities preparing accruals accounts do not actually adopt the FRSSE – indeed, Goodman Jones have run recent seminars on the new SORP and found that none of the charities in attendance are currently adopting the FRSSE). The reasons why so few charities chose to adopt the FRSSE are unknown, but it will be interesting to see whether this changes following the changes being introduced by FRS 102.

It could be argued that having two SORPs is not consistent with the FRC’s policy of cutting clutter. However, I believe that this approach should aid users of the SORPs as it will remove the need to review and filter out those sections that do not apply to the accounting framework they are adopting – making the SORPs easier to follow, which hopefully will lead to improved reporting.

As ever, the devil will be in detail…