An exposure draft of the new SORP for charities was published in July and the consultation period closed on 4 November. The new SORP will give guidance to charities on the application of FRS102 (which was published in March this year) and the FRSSE. As explained in the previous issue of this newsletter, charities that are over the small companies' threshold will be required to follow FRS102, and smaller charities may choose to do so if they wish, for accounting periods beginning on or after 1 January 2015.
The SORP committee has achieved their previously stated intention to make the SORP easy to read and accessible. The language used is simple and in most parts it is very clear and easy to understand, even for non-accountants. However, there is reference to FRS102 throughout which means, especially for more technical accounting issues, that users will need to become conversant with FRS102 as well as the SORP itself. Here are a few headlines.
Judgement and estimation
Charities must disclose:
- the most significant judgements made in preparing the accounts; and
- key assumptions and estimation uncertainties having a significant risk of leading to material adjustment to assets/ liabilities in the following reporting period. This could be a sensitive issue for example when assessing recoverability of items such as debtors, legacies or provisions in respect of claims against the charity.
SoFA
The Statement of Financial Activities (SoFA) presentation is modified with the main income headings now being:
- donations
- earned from charitable activities
- earned from other activities
- investment and other income.
Within expenses, 'governance costs' are no longer with us and will be classified within support costs.
Present value
For assets and liabilities which will be settled after more than one year, FRS102 requires that they are measured at their present value using an appropriate discount rate, and the SORP gives examples of when this might be necessary for charities. A discounting adjustment should only be made 'if material' so in practice it may be that such an adjustment is rarely seen, although it will need to be considered.
Key management personnel
The draft SORP recognises that trustees exercise control of a charity but that senior management deals with the day- to-day running. Together, these two groups are referred to as 'key management personnel'. FRS102 requires disclosure of the remuneration of key management personnel as well as transactions specifically with trustees. This means that remuneration of the senior management team is required to be disclosed in the notes to the accounts for the first time.
Social investments
The concept of social investment is picked up on by the new SORP. This is a relatively new classification of investments on which the Charity Commission produced guidance in their publication CC14. This recognises that there is a category of mixed motive investment that is neither purely financial nor purely in the furtherance of the charity's activities.
Financial instruments
This is perhaps the biggest area of potential change for many charities. "Financial instruments" covers a multitude of items – including simple items such trade debtors, trade creditors, cash at bank, as well as more exotic items, such as contracts to acquire foreign currency and (for charities with borrowings) interest rate caps, collars and swaps.
The good news is that for many common, simple financial instruments (including cash at bank, trade debtors and trade creditors) there will be no change. However, more complex items are likely to have to be recorded at their fair value, which may result in additional work for charity staff and greater volatility in reported results.
However, even an arrangement which seems simple on first sight can be problematic. The SORP gives an example for a forward fee arrangement where an upfront payment provides protection against future fee increases (schools may use such an arrangement). Under FRS102, receipts from such arrangements have to be discounted to reflect the time value of money. Unfortunately, while the SORP identifies the issue, it doesn't give any guidance as to how this discount rate might be determined. This is indicative of the whole of the SORP's guidance on financial instruments: the guidance is designed to be accessible, but financial instruments under FRS102 is a complex area and therefore incompatible with such a simplistic approach.
It will be interesting to see the results of the consultation process. The draft SORP has not made any significant changes to the well-understood principles of charity accounting and it is clear that the major changes to accounting and reporting by charities are being driven by FRS102. Whatever the final text of the SORP, charities can be sure that the annual report and financial statements will be much longer and potentially harder to understand for many users as a result of the application of FRS102.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2013. code 1369/2013/db 13/1019 expiry 28/02/2014
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