Tag Archives: charity accounts

New Charities SORP

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Following the release of FRS 102 in March, the new charities SORP (Statement of Recommended Practice) has been released in draft form. A four month consultation will now take place before any amendments are incorporated and the new SORP is formally implemented.
For accounting periods commencing on or after 1 January 2015, charities will need to prepare their accounts either under the FRSSE (the Financial Reporting Standard for Smaller Entities) or FRS 102. The SORP provides guidance for charities on applying these standards. Therefore, it remains a technical document, although effort has been made to make this more accessible and practical.

Like its predecessor, the new SORP must be followed by charities when preparing their accounts and the Trustees’ Annual Report, unless a charity also falls under the requirements of other SORP, such as for Higher Education Institutions, in which case these other SORPs take priority.

The SORP applies to those charities preparing accounts on an accruals basis – it does not apply to those charities who prepare their annual accounts on a receipts and payments basis.

So what are the changes?

‘Think Small First’
The first thing to note is that the SORP has been prepared taking a ‘think small first’ approach. Given the fact that 82% of registered charities have incomes below £100,000, this is an appropriate and reasonable approach, and will hopefully provide clear guidance to smaller charities. However, it is worth pointing out at this stage that the SORP applies to those charities preparing accounts on an accruals basis – it does not apply to those charities who prepare their annual accounts on a receipts and payments basis.

Modular Approach
The structure of the SORP has been changed, with it now been presented in modular format. The SORP consists of different modules – fourteen are core modules that are applicable for all charities (such as the Trustees’ Report, fund accounting, allocating costs by activity, and the statement of cash flows), with the remaining fifteen modules providing guidance on particular matters, transactions, structures etc (for example heritage assets, disclosure of grant-making activities, and charity mergers).

This modular approach builds on the ‘think small first’ approach. It’s usually much easier to ‘add on than take away’. Therefore, the modular approach allows charities to pick and choose only those additional modules that are applicable to them, rather than as previously having to work through all the detailed guidance to determine what is applicable.

Another benefit of the modular approach is that the introduction to each section provides guidance on which sections of that module are applicable to those preparing accounts under FRSSE and those under FRS 102. Again, this is aimed at making the guidance within SORP more accessible.

Layout and SOFA Headings
The layout of the accounts and Trustees’ Annual Report, are largely unchanged. However, there have been changes to the categories on the Statement of Financial Activity (SOFA). These headings have been updated and appear more ‘user-friendly’, perhaps this has been influenced by research carried by Ipsos Mori for the Charity Commission whereby 96% of respondents said charities should provide the public with clear information on ‘how they spend their money’. It is hoped that these revised headings will help to improve the quality of financial reporting by charities.

A summary of the changes to the headings are as follows:

Existing SORP

New SORP

Income

Income

Income from generated funds

Donations

Income from charitable activities

Earned from charitable activities

Earned from other activities

Other incoming resources

Investment and other income

Expenditure

Expenditure

Cost of generating funds

Cost of raising funds

Costs of charitable activities

Expenditure on charitable activities

Governance costs

Other resources expended

Other expenditure

The main point from the above is that governance costs are no longer split out on the face of the SOFA; instead these are to be included within ‘Expenditure on charitable activities’.

There are some interesting technical points that also require discussion, such as income recognition in light of FRS 102, and these will be the subject of future blogs.

The above points hopefully provide some guidance on the changes to the approach of the SORP and layout of charity accounts. If anyone has any queries regarding the new SORP and how it may affect them, please don’t hesitate to get in touch.

FRS 102 – Impact on Charities and the New Charities SORP

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Earlier this year, the Financial Reporting Council (the FRC) published Financial Reporting Standard 102 (FRS 102), the culmination of years of debate, consultation, draft versions, and delays. It replaces all previous FRSs, SSAPs, and UITFs (and at around 300 pages is considerably shorter than what it is replacing), and is based on the IFRS for SMEs. It also includes guidance specifically for public benefit entities.

So what is the impact for charities?
Currently, charities prepare their accounts under UK FRSs or, if they are smaller charities, the FRSSE, as well as following the requirements of the charities SORP (both the FRSSE and the SORP are currently being revised to reflect changes in FRS 102, with consultation on the new charities SORP expected to commence in summer 2013).

Larger charities, those exceeding the small companies’ thresholds, will prepare their accounts in accordance with FRS 102 and the new SORP. For smaller charities, they will have a choice of following FRS 102 or the FRSSE. The likelihood is that the new SORP will be tailored to smaller charities adopting the FRSSE (a reasonable approach given that only 1.2% of the 163,000 registered charities have incomes in excess of £5,000,000).

When do the changes came into force?
The new standard comes into effect for accounting periods commencing on or after 1 January 2015. This may seem a long way off. However, it’s not as easy as saying “let’s worry about this in 2015”.

For example, a charity preparing its accounts to 31 December will need to adopt the new standards for the year end 31 December 2015. This means that the comparative figures, for the year ended 31 December 2014, will need to be restated to reflect the new reporting requirements. And the opening balances for the 2014 accounts are the accounts for the year ended 31 December 2013 – which will also need to be restated.

In fact, FRS 102 allows early adoption for accounting periods ending on or after 31 December 2012, so long as it does not conflict with the requirements of the existing SORP. Recent guidance issued by the Charity Commission states that early adoption of FRS 102 would be in conflict with the current SORP and legal requirements – meaning that charities should continue to follow current reporting requirements, until the new SORP is released.

But not adopting early does not negate the fact that charities need to start planning for these changes now.

Key Changes
So if charities need to start thinking about the changes now, what needs to be considered? Below are some key highlights:

Cashflow statements – FRS 102 does not include an exemption for small charities to dispense with the need to prepare a cashflow statement, meaning charities will need to prepare a cashflow statement unless they follow FRSSE

Holiday pay accrual – under FRS 102, it is compulsory for charities to accrue for holiday pay earned but not yet taken, especially where carried over from one accounting period to the next; given such calculations are rare it is advisable for charities with December year-ends to undertake this calculation for 2013 as this form part of the restatement of opening reserves

Revaluation gains – this is a disclosure change rather than a new requirement, since revaluation gains, on equity investments and investment properties, will be recognised in income rather than in the other gains and losses section of the SoFA

Income recognition – FRS 102 focuses on recognition when income is probable as opposed to virtually certain; the most likely impact of this is in respect of legacies for those charities that adopt a prudent recognition approach

Intangible assets and amortisation – where the useful lives of intangible assets cannot be reliably calculated, the amortisation period is 5 years, compared to the current 20 years

Multi-employer defined benefit pension schemes – where there is an agreed scheme deficit reduction arrangement in place, a provision should be recognised in respect of contributions due

Prior year adjustments – FRS 102 requires for these material errors in the prior period, and not just fundamental errors as currently

The introduction of FRS 102 and the above issues may not seem, on the face of it, significant or applicable to your charity. But they will have an impact upon the development of the new SORP and may change under what standards a charity reports – changes are afoot. For any guidance on the new changes, please get in touch.

Charity Funding Shortages – The Survey Says……No?

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Over the last week or so, I have come across various instances of people commenting on how hard it is for charities in the current economic climate.

The first was a news article about how charities are turning to investment markets for new sources of funding during hard times, commenting that “with public donations…falling, one in six British charities have said they are concerned they might have to close this year.”

The second instance was a conversation between two men talking about how hard it is for charities to find finding, with them commenting that “it’s really hard for charities, there’s no money out there at present – people can’t afford to donate, government funding and grant funding is being cut to next to nothing, investment returns are low…”

The final instance was during a charity audit course where the presenter, herself a trustee of a charity, was commenting that going concern is a key area at present given how much charities are struggling to find the resources to carry out their activities, at the very time when their services are required more than ever.

I do not know these specific circumstances of the organisations referred to above; the comments may reflect these. However, the comments seem very broad and generalised.

Now we all know that the British love to moan (queues and the weather spring to mind as two frequent complaints). But as the above are the common comments of charity funding, and two of the three specific examples above come from people involved in charities, surely this isn’t just a moan. Charities are finding it tough; there’s very little funding around.

But is that true? Evidence suggests otherwise. Looking at the data published by the Charity Commission for gross income levels recorded by charities for each year since 1999, income has increased every year. In the same period, the number of registered charities has fallen. Therefore, across the same period, average income per charity has actually increased year-on-year.

Income reported by large charities (in excess of £10million per annum) accounts for around half of the total income received by charities (ranging from 43% in 1999 to 57% in 2012). Therefore, one might argue that income for smaller charities is being squeezed – events such as Comic Relief, Sports Relief and Children In Need are massive events that energise the general public at large, and so people carry out events for these charities, perhaps to the detriment of smaller charities.

But again, this argument is not supported by the numbers. In the period 1999 – 2012, the number of large charities has increased year-on-year, as has the average income of these large charities. For ‘smaller’ charities, the number of charities has fluctuated from year to year over this period, whilst average income for such charities has increased every year.

Looking at the split of income, voluntary income has continued to increase. Investment income has continued to increase. Trading income has increased. Income from charitable activities, has fluctuated slightly, but is relatively constant.

So, the numbers do not appear to support the view that there is very little funding around.

Income may be increasing, but I know from my own work with charity clients there are certain types of funding that are being cut or are harder to obtain. Therefore, charities are having to review income streams, be innovative, be efficient. And the statistics above indicate that charities are doing this and doing this well.

Are times hard? Yes they are. But you know what? Perhaps it’s good that they are hard. If it was easy to attract income, there is a risk complacency sets in, income is taken for granted, and services/performance suffers.

Therefore, the age old adage that for every problem there’s an opportunity seems more appropriate than ever. The current climate is allowing charities to strive constantly to review their aims, provide efficient services and ensure the money received is meeting their public benefit objectives. So let’s take the opportunity to build upon the fine work charities are doing, continue to be innovative and forward thinking, and support the sector.