We haven’t had a new SORP since 2005, and in that time we have managed to bring in a whole new accounting framework in the UK. Despite this, if you ask the average charity auditor what difference the new SORP is going to make day-to-day, the answer is likely to be, ‘erm, probably not much’.
Many of the major issues that had the potential to de-rail charities were dealt with in earlier consultations on the accounting standards – such as valuing donated stock in charity shops. It’s important to remember that the SORP only interprets and provides guidance on these standards – it can’t overrule them. The Financial Reporting Council (FRC) has issued ‘Public Benefit Entity’ (PBE) clauses in the standards, allowing most of the accounting practice commonplace in the non-profit sectors to continue to a large extent. Some of the provisions are clear cut add-ons. Others are slightly awkward insertions (or exemptions) that clearly contradict the wider standards but are nonetheless useful to the sector; this includes a ‘practicality’ let-off on valuing charity shop stock, allowing us to just carry on valuing at point of sale as before.
Having said this there are some core elements of the new reporting standards, based on International Financial Reporting Standards (IFRS), which invoke subtle, but noteworthy differences in the new SORP, as well as a couple of potentially nasty surprises. So where can these be found?
- Income recognition: The main change here is that underlying principles state that the income is recognised when it is ‘probable’, whereas previously it was when it was ‘virtually certain’. This may affect income coming in through legacies or pledges.
- Fair value: This is generally taken to mean the market value of something, and it appears a great deal in the reporting standards as a proxy for measuring the value of assets. In the charity context this has led to slight change in how we might look at some of the things which are donated to us such as facilities and other services.
- Reduced disclosure framework: The SORP Committee has taken the view that as it stands in the standards this framework is not strong enough on related party disclosures. Therefore, at the moment the reduced disclosure framework does not apply under the new SORP and charities may need to prepare cash-flow statements for trading subsidiaries that are of a significant value.
- Defined benefit pension deficits: The new standards state that payment plans which have been put in place to pay towards a deficit for a multi-employer defined benefit scheme must now be disclosed as a liability. This could have a profound impact on the balance sheet of some charities which have such plans in place, giving some the appearance of being insolvent.
Less technical but just as important are the significant adaptations which have been made to the presentation of the SORP. The new ‘modular’ format makes it much easier to navigate the SORP and use the document to answer questions, because the accounting ‘issues’ are pulled out in individual chapters. Previously there was a rather long-winded explanation of the same issues within one section on the SORP.
While this works well, there are a few things that charities might want to consider when responding to the current consultation:
- Can smaller charities easily identify which sections of the SORP apply to them?
- Is it clear enough which aspects of the SORP are statutory requirements and which are good practice recommendations? At the moment this is done largely through use of words such and ‘must’ and ‘should’.
- Can the requirements of the two different reporting standards to which the SORP refers, FRS 102 and the FRSSE, be easily identified?
Changes to the SOFA
The SoFA itself (Statement of Financial Activities to those not familiar with the acronym), provides stakeholders with the most important first glance information. Changes are proposed here in order to streamline it and simplify terminology. There will be fewer headings on the face of the SoFA, but with increased breakdown of disclosures in the notes to the accounts. This is likely to be of most significance to those with a peripheral interest in the SORP, as it provides the hard figures used by many stakeholders.
This is not an exhaustive list of changes and issues by any means, but it gives an idea of the range of considerations for the sector in bringing this SORP in, and how this might impact on reporting. The next few months will be full of discussion and debate about how we move this forward in the best way for the sector and for sector accountability.
Katherine Smithson, CFG policy and public affairs officer.