The Charities SORP is a Statement of Recommended Practice which sets out how charities should prepare their annual accounts and report on their finances. The SORP is an interpretation of the underlying financial reporting standards and generally accepted accounting practice. The SORP is overseen by a committee of 17 expert members drawn from the 4 charity law jurisdictions covered by UK-Irish GAAP.
What is the charities SORP (FRS102)?
The introduction of Financial Reporting Standard 102 (FRS 102) was a radical change as it brought together a whole series of piecemeal standards and guidelines on general accounting into a single standard. When FRS102 was introduced, the Charities SORP was revised to interpret FRS102 for charities. A charity will now need to comply with FRS102 and the SORP (FRS102) for their financial statements to show a true and fair view.
How are charity SORP (FRS102) accounts different from standard FRS102 accounts?
The Charities SORP requires a far greater level of information and disclosures in order to provide transparency and accountability. There are more requirements for the directors’ report, more analysis of income and expenditure and a focus on the funds position.
What is different about the directors’ report?
The directors’ or trustees’ report has to provide information on why the charity exists, so its objectives and aims, plus describe the types of activities it undertakes and how it delivers public benefit. The trustees’ report will incorporate the requirements of a business review or strategic report but offer more in terms of explaining the charity’s performance in the financial period and the impact its achievements have had on its beneficiaries.
Then there are the 3Rs: risk, reserves and remuneration. A charity has to describe the principal risks it faces and how it manages them, explain its policy for holding reserves and explain how it remunerates its executive staff.
What’s different about the statement of comprehensive income?
A charity will call this the SOFA, being the Statement of Financial Activities. A SOFA has far more detail than a typical income statement, with analysis of the key income streams between donations and legacies, income from charitable activities, income from trading activities and investment income. The expenditure will be analysed in a similar way, showing the costs of raising funds, investing and trading and the costs of delivering the charitable activities.
The charitable activities should be analysed into the key activities described in the trustees’ report, so providing the reader with an understanding of the income and expenditure for each activity.
The most striking difference on a SOFA is the analysis of funds. There will be multiple columns on the SOFA to report the income and expenditure for endowment funds, restricted funds and unrestricted funds and the total. The nature of the fund determines what it was given for and how it can be used. Charities must use funds received in accordance with the conditions the funds were given under, so this analysis is key to providing accountability in the financial statements.
The SOFA does not report a profit or loss, but rather the net income/expenditure for the year and the net movement in funds. This is because a charity is not focussed on generating a profit/surplus or loss/deficit. The key things to report are the funds in, the funds out and the funds carried forward to spend in future periods. There is additional analysis in the notes of the movements of individual funds, whether they are endowments to be held as capital, restricted funds to be spent on particular purposes, designated funds which the trustees have earmarked for specific purposes or the general or “free” reserves.
What’s different about the statement of financial position?
A charity’s balance sheet will be very similar in presentation to a commercial entity’s, with the exception of the funds. The bottom half of the balance sheet will be analysed to show the amounts held in each of the endowment, restricted, designated and general funds.
What’s different about the statement of cash flows?
The statement itself is not different, but there are different requirements for which charities must prepare one. The Charities SORP requires all “larger” charities with income over €500,000 to prepare a statement of cash flows, regardless of whether they could take the exemption under section 1A of FRS102.
What else is different?
The notes will provide an analysis of the income and expenditure by activity. As well as the key activities on the face of the SOFA, the notes will report expenditure incurred by way of overheads to support the key activities and the governance of the organisation. These are reported in the notes and then allocated to the key activities on the SOFA.
The notes also need to disclose any transactions with related parties. The related parties of a charity include all the trustees and their close family members, plus the key management personnel and their spouses. If the charity transacts with any of these individuals, it will need to consider if the transaction needs to be disclosed in the financial statements. The SORP provides information on the types of transactions that must be reported and those that do not.
The most important disclosure is where a trustee has been paid, either for performing their trustee role or in their professional capacity.
The most common disclosure is in relation to trustees’ expenses, which must be disclosed whether they are reimbursed costs that the trustee has paid for themselves or whether the charity paid for the expenditure directly on the trustees’ behalf.
The SORP also requires the disclosure of any donations from related parties, with detailed disclosure for any donations made with conditions. The charity must also disclose the aggregate total of donations received from related parties without conditions.
Joanna Pittman, Sayer Vincent UK