One of the common questions we have from smaller charities relates to the choice between the two SORPs and which one they should use: is it worth using the FRSSE SORP for one year? In order to give a response on this question it is best to look at the two aspects of the accounts separately.
In this post:
Different SORPS and the Trustees Report
The Trustees report requirements under both SORPs is identical. The area that is subject to the most change is within the narrative reporting section of the accounts as there is a need for more information if you are a large charity. The definition of large in this respect means subject to audit – which is income over £1million (or £500k in Scotland); or income over £250k and balance sheet greater than £3.26million (or £3.26million with accruals accounts prepared in Scotland). However, the new SORP Update Bulletin issued on 2 February, which applies to accounting periods beginning on or after 1 January 2016, defines large as £500k in the UK – so thresholds are simplified (and reduced!). So many more organisations, who thought that they would be small, will now be caught by the requirements of the increased narrative reporting in the Trustees Report.
What are the new narrative changes in the FRS102 SORP?
There are well publicised changes such as the need to include the charity's principle risks and how they are mitigated and include a remuneration policy. However there are other changes too (like naming the Chief Executive and senior management team) which is quick to do, to more far reaching disclosures. The additional narrative covers objectives and activities; achievements and performance; financial review; plans for future periods; structure, governance and management; and reference and administrative details – so pretty much all areas. Below are a few highlights. The organisation must provide an explanation of its strategy for achieving its aims with details of the significant activities undertaken AND the criteria or measures used to assess success of these activities. The achievements section follows on to require details of significant charitable activities undertaken and their achievement against the objectives set. This is very much more outcomes or impact-focused reporting, and seeking justification for why the organisation exists, its activities, demonstration of delivery and impact. Both the SORP and the new Charities (Protection and Social Investment) Act require more disclosure on fundraising which not only covers its performance, but adherence to codes, protection of vulnerable people, details of complaints and policies. Quite when the new Act will require this additional information is yet to be determined but it has now been passed. You need to start thinking about your Trustees’ report, because regardless of which SORP you choose you will need to include more information than in the past and perhaps from a totally different perspective than previously reported. This will take time.
Changes to financial statements
With regards the accounts, for most organisations, the biggest difference between the two SORPs is the requirement for a statement of cash flows. However, as noted above, the SORP Bulletin now clarifies that only small organisations will be exempt (under £500K of income); and that this Bulletin can be adopted early. Therefore if you are small, you can just adopt the changes in the Bulletin and still not need do a cash flow – this means just one change in your accounts. If you are small now but will become large, you will still need to have a statement of cash flows and delaying by one year to go through the requirements of adopting two different SORPs really does not seem worthwhile. There are other slight differences, such as the position of unrealised gains and losses on investments, however with the ability to include a new heading on the SoFA – something like ‘net income before investment gains’- then this is also not seen as a big issue. Others include discontinued activities, restructuring or fundamental reorganisations which have different treatments; internally generated databases can still be capitalised under FRSSE but not FRS102, inability to revalue intangible fixed assets under FRSSE and generally more additional disclosure requirements under FRS102 SORP. However this benefit would need to be seen to outweigh the costs of having to understand and apply FRSSE SORP to change again one year later. The only really significant difference seems to relate to multi-employer pension schemes where under the FRSSE SORP there is potential to retain the charity’s existing policy which would defer recognition of the pension scheme deficit funding as a liability for one year.
Therefore, for most organisations, the decision has been just to choose FRS102 SORP. Now, with the ability to adopt the SORP Update Bulletin early, there seems to be even less appetite and benefit in using the FRSSE SORP at all – unless you wish to delay a multi-employer pension scheme deficit perhaps.
Helena Wilkinson is Head of Charities and Not for Profit at Price Bailey. This article originally appeared in CFG's Member's Magazine, Finance Focus.
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