Read questions and answers about the role of the SORP, its development and our role as a SORP-making body.
Q1. What is a SORP?
A SORP is a Statement of Recommended Practice. SORPs provide recommendations for accounting and reporting, in particular, how accounting standards should be applied in the context of particular sectors and how to account for sector specific transactions. SORPs aim to provide consistency of accounting treatment within a particular sector. The Charities SORP applies to charities generally in the UK unless a more specific SORP applies such as for the Further and Higher Education sector or Registered Social Landlords.
Q2. What is the role of the Charities SORP?
The SORP provides a comprehensive framework of recommended practice for charity accounting and reporting. It provides a mechanism enabling charities to meet the legal requirement for their accounts to give a true and fair view and provides consistency in the sector’s interpretation of accounting standards. The SORP also provides recommendations for annual reporting that are relevant to sector and stakeholders needs and are in line with wider developments in reporting.
The requirements of the law and accounting standards exist irrespective of the SORP. The SORP’s contribution is to provide a consistent interpretation of these standards and, moreover, one that has been specifically developed for the sector and with sector involvement at each stage of its development.
Q3. What authority has a SORP?
SORPs are developed under an Accounting Standards Board (ASB) code of practice and provide authoritative recommendations that enable charities to meet the legal requirement to present a true and fair view in their accounts. Accounting standards require any non-compliance with a relevant SORP to be disclosed in the accounts and this may lead to a qualified audit opinion. In the case of the Charities SORP, for non-company charities, its methods and principles and key disclosures are also underpinned, in England and Wales, by regulations made under the Charities Act 1993.
Q4. Who are the ASB and why are they involved?
The ASB is the Accounting Standards Board. This organisation has legal authority in the UK for setting accounting standards. SORPs, which interpret accounting standards, are made under the authority of the ASB whose role also helps provide assurance that SORPs are consistent with existing or planned accounting standards.
Q5. What is the Commission’s role in developing the SORP?
The Commission is authorised by the ASB as the SORP-making body and as such takes the responsibility for organising the SORP review, drafting any revision and undertaking the consultation process. In making recommendations, the Commission is expected to act on the recommendations of an expert committee - The SORP committee. The recommendations of the SORP committee are then tested through extensive consultation before recommendations are finalised and published.
Q6. How independent of Government was this process?
The SORP-making process is independent of government and is developed under a code of practice published by the ASB. The SORP committee’s role is to develop the recommendations contained within the SORP. The SORP committee was of course mindful of recommendations contained in influential reports such the Strategy Unit’s report “Private Action, Public Benefit” as indeed it was of other research and developments taking place within the sector.
The Charity Commission (as the SORP making body) has the right to object to recommendations made by the SORP committee provided any objection is notified and agreed by ASB. The Commission has raised no objections to the recommendations made by the SORP committee in the current review.
Following technical clearance of the Exposure Draft by ASB, a full public consultation was launched at the end of June 2004. Responses to this consultation were carefully considered by the SORP committee and a summary of the responses has been published by the Commission on its website. The consultation was a vital stage in the SORP’s development and allowed recommendations to be tested and further developed before the SORP’s release. ASB clearance also provided a further necessary check in helping to ensure consistency with current or proposed accounting standards.
Q7. Can you give some examples of where consultation helped in developing the SORP’s recommendation?
A number of sections of the SORP were redrafted following consultation and additional clarification and examples added in a number of areas. In particular, the introduction to the SORP was completely rewritten to ensure a better understanding of the role and context of the Trustees’ Annual Report. A new Appendix was also added summarising the very significant relief available under the SORP to smaller charities and a more straight forward basis for grant disclosures was developed based on materiality.
Q8. Who are the members of the SORP Committee and who appoints them?
The SORP committee's membership was ratified by the ASB based on recommendations made by the Charity Commission. Its membership was made up of charity finance directors, charity auditors, academics, and charity advisers and regulators. The committee was chaired by David Taylor, a Non-Executive Charity Commissioner. Members of the committee external to the Commission were Denis Cathcart (Department for Social Development Northern Ireland); Andrew Dobson (Practising Accountant - Scotland); Pesh Framjee (Charities Partner - Deliottes); Keith Hickey (FD - Help the Aged); Richard Hellewell (OSCR); Ian Smith (Scottish Executive); Gareth Jones (Partner PWC - Cardiff Office); Roger Morris (Association of Charitable Foundations); Professor Paul Palmer (City University); Professor Adrian Randall ( charity consultant) and Kate Sayer (Partner - Sayer Vincent). James Dutton (senior legal policy adviser at the Charity Commission) provided legal advice and Ray Jones (Accountancy Policy Adviser at the Charity Commission) undertook the technical drafting.
Q9. When will the membership of the SORP committee next be reviewed?
The membership of the SORP committee is reviewed by the Commission following each major revision to the SORP. The SORP making process requires a huge ongoing commitment from the members of the working party and for this reason some members may wish to stand down. In addition, we need to ensure the committee reflects the diverse nature, activities and geography of the sector as well ensuring the necessary knowledge and skills to enable the committee to continue its work. In the forthcoming months the Commission will be considering the membership of the next SORP committee before making its recommendations to the ASB for its ratification. The Commission will actively engage with the sector during this process.
Q10. Is the process too accountancy based?
Obviously, the development of accounting recommendation requires technical accounting knowledge. Many, if not most, of the SORP committee members are also Charity Trustees and people such a Professor Paul Palmer also brought a wider perspective to the process. The Commission was however aware that issues such a Trustees' Annual Reporting needed input from a wider constituency than the accountancy based SORP committee. For this reason, we formed a sub-committee, chaired by Geraldine Peacock, that brought together an advisory group with a wider constituency that the accountancy representatives of the SORP committee. This Annual Reporting Advisory Group was instrumental in helping to develop recommendations for the Trustees' Annual Report that were subsequently adopted by the SORP committee and are included in the revised SORP.
Q11. What were the key drivers behind the proposed changes?
The SORP is subject to annual review. The Charity Commission published an "Update Bulletin" in January 2003 and the year before an "Information Sheet" clarifying certain interpretational issues that had arisen in relation to the SORP. Also a number of accounting standards have been issued, withdrawn or modified since the SORP was last published and there was a need to codify these changes into a revised SORP.
In addition, issues have been raised in a number of influencial reports including the Cabinet Office’s Strategy Unit Report "Private Action, Public Benefit" and the Charity Finance Directors' Group's "Inputs Matters" project. These two reports together with the Association of Chief Executives of Voluntary Organisation's work in relation to core costs have been influential in developing the SORP’s recommendations.
Q12. What are the key changes?
The review was directed at creating a greater impetus for charity reporting to focus more clearly on the reporting of achievements against organisational objectives. This can best be achieved by creating a greater focus in charity accounts on the reporting of the costs of activities and the objectives, programmes or services that these costs support. In reporting achievements within the Trustees' Annual Report, a link can be created with financial reporting within the SoFA, enabling the reader to correlate this information with the income streams supporting a particular activity and the resources expended in its delivery.
Q13. What consultation took place before the issuing of SORP 2005?
Following the publication of an Exposure draft, three months (July – September 2004) were allowed for interested parties to study the exposure draft and make comments to the Commission. During this period there were over 100,000 “hits” on our website as people looked at the exposure draft. We also undertook a series of road show events in partnership with CFDG and WCVA that provided an opportunity not only to present the proposed changes but also to hear feedback on the proposals.
Following the consultation period the 158 written comments received were analysed in detail and reported to the SORP committee. A report on the responses has been published on our website. The SORP committee considered the comments in detail and as a result a number of changes were made to the draft. SORP 2005 was approved for release by the ASB on 28 February 2005 and issued by the Charity Commission on 4 March 2005.
Q14. When does SORP 2005 apply?
SORP 2005 will apply to the accounts of UK charities for accounting years commencing on or after 1st April 2005. The SORP encourages charities to adopt the new recommendations early.
In England and Wales, Regulations made under the Charities Act 1993 adopt the methods and principles of the SORP.
Q15. Isn't this just change for change's sake, charities just getting used to one SORP and then you introduce changes?
No, the revision of the SORP is certainly not change for change sake. The SORP committee has rather responded to developments in the sector (e.g. Programme Related Investments, Total Return) and calls from the sector to address cost analysis and to create a clearer linkage between costs of activities and related income streams.
Sector groups such has CFDG in their ‘Inputs Project’ have recognised structural difficulties with the current SoFA (Statement of Financial Activities) to which the SORP committee has responded. Similarly issues have been raised by the Institute of Fundraising in relation to the SORP creating a clearer presentation of fundraising costs. The sector debate on reporting activities, achievement and impact (reflected in the SU Report’s findings and recommendations) simply could not be ignored and the SORP committee has responded by creating a reporting focus on these matters within both the Trustees' Annual Report and through the emphasis given to reporting activity costs in the accounts.
There is also a changing framework set by accounting standards which must be reflected in the SORPs recommendations if its relevance is to be maintained. Charities rely on the SORP being technically correct and up to date. The review has taken on board these issues, identified synergies (e.g. ACEVO's core cost work) and taken them forward by developing the current SORP framework not by creating a completely new approach.
Q16. Isn’t the new SORP getting too long and complex?
It is true that both SORP 2000 and SORP 2005 are longer than their predecessors. In each case the reason for the increase in length has been caused by three factors: the need to incorporate advice on additional accounting standards, the need for advice on accounting for new situations and the request from readers and users of the SORP for further explanations and examples.
The SORP committee have done everything possible to keep increases to a minimum. Some advice that appeared in earlier SORPs has been removed and SORP 2005 now deals exclusively with accruals accounts (receipts and payments accounts being addressed though accounts pack). The SORP committee resisted where possible requests made through consultation what would have expanded the SORP still further by addressing specific issues affecting a particular charity. Interestingly, even those commenting that the SORP was becoming overlong usually identified particular issues affecting their own charity where they felt further advice or examples desirable.
Whilst general accounting training provides a sound basis for charity accountants, those producing charity accounts need also to have an understand of charity law and trust accounting and how commercial accounting can be adapted to meet charity circumstances. The SORP also has to address the legal frameworks applicable to the differing legal jurisdictions of the UK in which charities operate and the specific requirements of Company Law.
Q17. How does the revision help the smaller charity?
Smaller charities still need a reference source that explains how accounting standards apply to charities and a reporting framework that provides the format and layout for fund accounting and give the essential disclosures for “true and fair” accounting.
What this revision has done is to create an Appendix that pulls together and summarises the significant relief available to small charities both in terms of disclosure, the format of the SoFA and in Trustees Annual Reporting. In addition, we have revised the accounts packs for smaller charities (CC16/CC17) and these are also available on the Commission’s website.
Q18. Are example accounts provided?
Yes, example accounts and reports under the SORP 2005 have been prepared and are available on our website. We will be adding further to this bank of examples during the period leading up to 31 March 2006. However, whilst examples provide ideas for the layout of charity accounts, they should not be regarded as a substitute for the SORP’s recommendations.
The 'Charities' Online Accounts Awards' recognise excellence in financial reporting and these good practise examples are recommended viewing for preparers of charity reports and accounts.
Q19. Why does the SORP still require the capitalisation of Heritage Assets given the responses received at consultation?
We recognise that many in the museum and gallery sector feel that the approach to capitalisation required by FRS 15 creates anomalies and indeed can result in confusing reporting when applied to heritage assets.
The SORP however cannot re-write or overrule accounting standards. As explained at the consultation stage, the SORP Committee wanted to use the consultation process to explore this long standing issue in more detail so that respondents’ views on this issue could be used to inform subsequent reviews of the SORP. The Commission has shared these responses with the ASB’s Public Sector and Not-for-Profit Committee who have now published a discussion paper that gives consideration to the accounting issues involved.
Q20. How does SORP 2005 fit with the SIR?
The Summary Information Return forms part of the Annual Return for 2005. The SIR does not form part of a charity’s Trustees Annual Report and accounts, however, the information provided by the report and accounts does provides much of the information that will be needed to complete the SIR. Where accounts are prepared under SORP 2005 then the financial summaries included in the SIR can be completed directly from the accounts.
Q21. Will the Charities Bill have any impact on the SORP?
The published Bill currently affect SORP 2005 in one key respect: increasing the threshold for audit from £250,000 income or expenditure to £500,000 income (or total assets of over £2.8m). The audit threshold is relevant under the SORP as charities that are not subject to an audit requirement may adopt the exemptions applicable to smaller charities. The Bill also proposed giving legal basis to the SORP’s recommendations in relation to consolidated group accounts.