by David Finnerty
The Charities Commission, in new guidance published on 16 July 2014, announced a number of changes to the accounting process for charities. Contained in two new Statements of Recommended Practice (“SORPs”), this change in procedure is going to require all charities to examine their own accounting processes and likely need to adjust them to comply with the new guidance which becomes effective for financial years beginning on or after 1 January 2015.
The changes are intended to reflect a change in focus on a European level when it comes to charities. Greater emphasis is now placed on the size of charities. It is this emphasis which helps to explain the need for two new SORPs (which inevitably will cause confusion). The “Financial Reporting Standard 102” SORP (“FRS102”) is distinctive from the “Financial Reporting Standard for Smaller Entities” SORP (“FRSSE”), the latter of which can only be adopted by charities with a total income of under £6.5m, a gross balance sheet of no more than £3.26m and 50 or less employees.
Whilst it is anticipated that ongoing changes will ultimately render the FRSSE redundant, until that time those charities who do qualify to adopt its terms will enjoy reduced disclosure requirements and the choice of whether to prepare a cash flow statement.
The current desire for charities to give a ‘true and fair’ view as to the information given to their stakeholders is retained, with all charities required to give a standard baseline of information. For larger charities more information will need to be disclosed, including explanations of social investment policies, enhanced disclosures covering the principle risks and uncertainties facing a particular charity (as well as a summary of strategies in place to manage these) and guidance as to pay arrangements for key charity personnel.
In terms of actual accounting requirements, efforts have been made to simplify the process of preparing the Statement of Financial Activities. Whilst the basic structure has been retained, the categories of income and outcome have been simplified. With regard to gains and losses on investment, it will be necessary to present these in the accounts in a slightly different format which will present a combined value of net income and expenditure on investments together with net gains and losses incurred on them.
This is obviously by no means an exhaustive explanation of the changes which will be made in this area. The Charity Commission has produced a number of helpful factsheets on their website www.charitysorp.org, which help to outline both the differences between the new and old regimes and the FRSSE and FRS102.
Although the formal requirements only apply to financial years post 1 January 2015, charities would be best served giving consideration to these now. It may be that different accounting processes need to be adopted today so that the required figures for the new regime are to hand in 2015. For some charities the impact of the new SORPs will be minimal. For other larger organisations they will potentially require some time and effort to properly implement. The sooner this process is considered, the better.