CHARITY SORP 2015 INTRODUCTION FOR LARGER CHARITIES AUGUST 2014
CHARITY SORP 2015 (FRS 102) 1 CHARITIES SORP 2015 (FRS 102) This briefing paper covers the main issues and changes relating to the new Statement of Recommended Practice applicable to charities preparing their accounts under FRS 102 ('the Sorp'). Charities that are permitted to apply the FRSSE (and opt to do so) will use a separate Sorp. This briefing paper focuses on the FRS 102 based Sorp. The Sorp uses the terms 'must', 'should' and 'may' to clearly identify what are requirements compared to what are considered to be good practice but not mandatory. The Sorp requires that charities subject to audit adopt additional reporting requirements. This briefing note assumes that the charity is subject to audit. This briefing note does not cover the nuances of Scottish accounting requirements.
2 CHARITY SORP 2015 (FRS 102) CHARITIES SORP 2015 (FRS 102) SCOPE AND IMPLEMENTATION DATE The Sorp applies to all charities unless they are subject to another reporting regime, or can (and opt to) apply the FRSSE. Accounting periods starting to report 1 January 2015 are likely to be the first for which it will be permissible under the new Sorp. Early implementation will only be possible if new charities accounts regulations are brought into force which will permit earlier adoption. The first set of financial statements prepared in accordance with the new Sorp will need to include comparatives that are restated. Applying the new framework will also involve establishing an opening comparative balance sheet for the purposes of certain disclosures. THE FINANCIAL STATEMENTS OF A CHARITY UNDER THE NEW SORP Broadly speaking, charity accounts and reports are not expected to look significantly different under the new Sorp and there are no new requirements that result in a fundamental shift in how charity accounts will be presented. However, the Sorp remains a fairly long and complicated document which a significant amount of changes to the finer details. This briefing note aims to consider, and bring to your attention, some of these changes. TRUSTEES' ANNUAL REPORT The Sorp emphasises the need for good and balanced annual reporting that describes impact, not just outputs. There is increased emphasis on describing social investment activities in the new Sorp. There is still an option to provide information relating to the contribution of volunteers in terms of volunteer hours or staff equivalents in the trustees annual report. In addition: Major fundraising expenditure in advance must be explained in the trustees annual report and the effect on fundraising ratios quantified Charities must describe the main risks and uncertainties facing them and a summary of their plans to manage those risks The reserves reporting requirements are more prescriptive and detailed, following good practice already established by many charities Governance disclosures are increased by the requirement to set out key management remuneration policies and practices. Senior management must be named. Perhaps the only requirement to go completely is the need for reports on summary accounts and information.
CHARITY SORP 2015 (FRS 102) 3 THE PRIMARY STATEMENTS THE STATEMENT OF FINANCIAL ACTIVITIES (THE SOFA) The requirement to present a SOFA is retained, with a new option to present the statement as a single column if materially appropriate to do so. Comparatives for all material information presented by fund will need to be shown either on the primary statements or in the notes. This will add volume to most accounts. Under the new Sorp: Narrative descriptions on the SOFA are simplified eg 'Net incoming resources' becomes 'Net income' Governance costs are now considered to be akin to support costs and are allocated and apportioned across other categories of expenditure Net gains/losses on investments are now to form part of the net income calculation. Preparers concerned about the volatility this may cause to net income could insert additional sub-totals. Other matters that may affect the presentation of the SOFA: Conversion of endowment funds to income may be treated as income, or a transfer Contracts that restrict the use of any surplus may be treated as restricted funds (Note 'may') Legacy income recognition will be affected by the change in criteria for recognition of income from 'virtually certain' to 'probable' in relation to likelihood of receipt. Useful additional guidance emphasises probate as a point of reference The Sorp also allows charities to adopt a portfolio approach to large legacy volumes Donated goods for resale must be measured at fair value on receipt, unless impractical and the Sorp provides details as to how donated goods will be accounted for where measured on this basis. The Sorp suggests that it will however 'often' be impractical Retail gift aid stock should be treated as a donation Volunteer time is precluded from the accounts if it constitutes 'general volunteer' time. There is a definition of 'general volunteer' in the glossary to the Sorp which focusses on the nature of the assistance provided and whether the assistance is related to the volunteers' trade or profession. The Sorp also includes some expanded guidance on areas such as onerous contracts and fundraising. Most charities will however already be applying the guidance.
4 CHARITY SORP 2015 (FRS 102) CHARITIES SORP 2015 (FRS 102) BALANCE SHEET The format of the balance sheet under the new Sorp is unchanged, as are most of the underlying requirements. However, the following matters are worthy of note: There is a definitive requirement for all charities to present a revaluation reserve on the balance sheet where such a reserve exists Heritage assets have been redefined to remove the reference to a charity s objects Mixed use properties (ie those which are both for the charity s own use and held to earn rentals/capital appreciation) are specifically addressed by the new Sorp: they should be split between fixed assets and investment property if a reliable estimate can be made, but in the event that this is not possible, they should be treated as fixed assets Basic and complex financial instruments are considered at length. The main areas charities will need to consider are concessionary loans, complex interest rate swaps, options and forward contracts, some foreign exchange arrangements and more complex advanced fee schemes. These will require detailed disclosures and in some cases more complex accounting Within funds, charities are explicitly permitted to report a reserve fund (sometimes known as a continuity fund) as a separate reserve.
CHARITY SORP 2015 (FRS 102) 5 CASH FLOW STATEMENTS The Sorp is consistent with FRS 102 in requiring the presentation of cash flow statements even for subsidiary entities. The cash flow statement will also be re-summarised under three main categories of cash flow. Other sections/modules within the new Sorp Other matters worthy of note Company law Grant making Pension schemes Investments - social investment Group accounts control in group scenarios Group accounts parent entity SOFA Group accounts merger accounting Group accounts associates Group accounts Joint ventures The new Sorp includes a specific requirement to show separately any tax due. Grant details may be disclosed in the notes, the annual report or website. Deficit recovery plans on multi-employer schemes are to result in the recognition of a liability. Programme-related investments and mixed motive/ purpose investments are the subject of specific requirements and guidance in the Sorp. The Sorp explores the question of what constitutes control for charitable organisations and group, and how preparers should consider whether there is benefit to a holding entity. The Sorp does not include the allowance included within the previous Sorp for a parent entity to omit the parent entity SOFA from the financial statements of a group. Charity mergers merger accounting is preserved for charities where the transaction meets certain criteria. This section also confirms that it is appropriate to use merger accounting on reconstructions, such as when a trust converts to a CIO. Associates can be measured at cost or fair value, unless group accounts are prepared where the equity method must be applied (28.10). Joint ventures this topic is much expanded and addresses joint ventures which may or may not be charities. The requirements follow FRS 102 and deals with joint venture activities that are carried out by a jointly controlled entity. The guidance sets out tests to identify the respective interests of each party. Charitable joint ventures are treated as programme related investments and/or restricted funds. Non charitable ventures may be treated at cost or fair value, and equity accounted in group accounts. There are numerous disclosures, but none of them difficult or controversial. Prior year adjustments Major judgements Government grants Prior year adjustments now arise on material errors, not just fundamental ones. Major judgements that affect the accounts need setting out in the notes. Charities in receipt of government grants must make further disclosures about these. Trustee benefits More disclosure is required on trustee benefits (9.7) (including why some are necessary), and related party transactions, including a statement that there are none. Staff costs Ex-gratia payments Conclusion Staff cost disclosures must also set out much more detail about redundancy or termination payments (9.27), as well as aggregate pay of key management personnel. FRS 102 requires holiday pay to be accrued as well. Small ex gratia payments, such as flowers and chocolates, are not to be regarded as ex gratia. We hope that the above provides sufficient steer for charities to understand the implications of the new Sorp for larger charities. The Sorp itself is nearly 200 pages long, and in many places requires the reader to cross refer to FRS 102 itself. Whilst there is no substitute for reading the Sorp itself, the BDO charities team are experts in this area and are happy to assist.
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