The Regulator for Charities in England and Wales
The Charity Commission is a SORP making body and as such is required by the Accounting Standards Board’s code of practice to undertake an annual review of the SORP. This review has been undertaken in conjunction with the SORP Committee, and in particular considered:
The current SORP was issued in October 2000, and although its early implementation was encouraged its effective date of implementation is for accounting periods beginning on or after 1 January 2001. An unusual situation therefore arises in that the first annual review under the ASB’s code of practice was undertaken before most charities had produced or filed their first accounts under current SORP.
The general level of compliance amongst charities encouraged the SORP Committee. The SORP was widely accepted by the sector and the non-compliance issues that arose were not indicative of any widespread failure to follow any part of the guidance.
The annual review has not amended or revised the current SORP. The overall aim of this information sheet is to provide informal guidance on certain issues that arose in the context of the review on the application of the SORP (issued in October 2000). The purpose of the information sheet is to assist practitioners in the preparation of financial statements. It does not form part of the SORP, nor has it been reviewed by the ASB. It attempts to explain and illustrate what is already required by the SORP, but does not carry the authority of the SORP. In addition the information sheet has been used to confirm the applicability of FRS 17 –Retirement Benefits to charities and explain how SORP guidance will be developed to address this new standard.
The issuing of FRS 17 by the ASB radically changes the way in which charities, that are members of defined benefit schemes, must account for their pension costs. The SORP to an extent anticipated these changes and states in guidance under "SSAP 24 Accounting for Pension costs" that the effect of proposals at that time would be for any pension scheme surplus/deficit to be shown on the balance sheet, with actuarial gains and losses recognised in the bottom half of the SOFA as part of recognised gains and losses.
The SORP Committee recognises that FRS 17, as are financial reporting standards generally, is applicable to charities and that whilst a steer is provided by the SORP, additional guidance will be required as a result of this standard. In particular, guidance is needed to explain how changes in the defined benefit asset or liability may need to be analysed in the SOFA expenditure or gains categories. Whilst views as to appropriate accounting treatment are being developed within the sector, it was recognised that, under the code of practice for SORP making bodies, consultation would be necessary before recommendations can be made as to recommended accounting treatment. The Charity Commission has agreed to undertake a consultation exercise commencing in June 2002 with a view to a bulletin update to the Charities SORP being issued later in 2002. The consultation will seek the views of charities, their auditors, and relevant professional bodies and government departments. The consultation will in particular seek to test the current views developing within the charity sector as to the SOFA analysis of the components of the pension cost.
Whilst there is a clear consensus developing that current service costs should be analysed across the relevant functional expenditure headings of the SOFA, and that actuarial gains and losses should be analysed in the statement of total recognised gains and losses at the foot of the SOFA, further consideration is being given to the analysis of the remaining components of the pension cost.
In particular, consideration is being given to the appropriate analysis within the SOFA expenditure headings of the interest cost and the expected rate of return. Also consideration is being given to the appropriate analysis and disclosure of past service costs and gains and losses on settlements and curtailments particularly where the amounts involved could be construed as exceptional in terms of the impact on particular expenditure headings.
The SORP Committee has indicated that it believes these issues will need further consideration and will use the forthcoming consultation to explore and test its views on these issues.
The consultation will also be used to explore the methods by which the various elements of the SOFA credits/debits should be allocated to restricted funds that include employment costs and the allocation of scheme assets/liabilities between such funds.
The SORP Committee recommends that any charity with a defined benefit scheme should discuss the issues with their auditors and contact their actuaries to ensure that the information required for accounting purposes will be available in time for the staged introduction of the standard and that appropriate methods to carry out valuations have been established.
A significant number of charities are also members of multi-employer defined benefit schemes such as The Teachers’ Pension Scheme, the Local Government Superannuation Schemes and a number of schemes operated by the Pensions Trust.
To determine whether a particular scheme falls within the FRS 17 definition of a multi-employer scheme required to be treated as defined benefit scheme, charities should contact their scheme provider to get confirmation in writing as to whether the assets and liabilities can be separately identified. As part of the proposed consultation exercise the Charity Commission will be seeking comments from major multi-employer schemes, of which charities are members, to ascertain which schemes can provide necessary FRS 17 information.
In certain multi-employer schemes the surplus or deficit in the scheme affects contributions, but the charity will be unable to identify its share of the underlying assets and liabilities on a consistent and reasonable basis. In such circumstances the contributions to the scheme are accounted for as a defined contribution scheme. The situation should be disclosed, as should any available information about the existence of a surplus or deficit. Similarly, in certain defined benefit schemes the contributions may be set in relation to the current service period only. In such cases the contributions to the scheme are accounted for as if it were a defined contribution scheme.
Following this consultation the Charity Commission intend to publish a bulletin that will update the SORP for FRS 17 requirements.
The current guidance provided in paragraphs 277 to 282 of SORP is considered to be consistent with the requirements of FRS 18. The SORP does however make reference to SSAP2/FRED 21 (paragraphs 33 and 119) and users of the SORP should now refer to FRS 18 for further reference.
Guidance is provided in paragraphs 345 to 347 of SORP on the application of the FRSSE to charities. Charities that are under the threshold for small companies are recommended, by the SORP, to prepare group accounts where total group income exceeds £250,000. Paragraph 345 of the SORP indicates that where consolidated accounts are prepared by such smaller entities then the FRSSE cannot be adopted. For clarification it should be noted that whilst the FRSSE cannot be applied in isolation, it can be applied in conjunction with the additional standards set out in section 16 of the FRSSE (June 2002).
Information about the aims, objectives and projects of a charity are frequently provided in the context of fundraising activities such a mailshots, collections and telephone fundraising. Some uncertainty appears to exists as to whether the provision of such information creates a joint cost that may be allocated to other activities in accordance with the guidance provided in paragraph 153 of SORP 2000.
The SORP Committee considers that this situation is explained in paragraph 133 of the SORP in that a distinction is draw between publicity costs or costs involved in raising the profile of a charity which is associated with fundraising (costs of generating funds) and publicity or information that is provided in an educational manner in furtherance of the charity’s objectives (charitable expenditure). Publicity and information supplied in an educational manner is likely to be identifiable as being:
Information targeted at potential donors (rather than potential beneficiaries) providing general information about a charity’s activities would not normally create a joint cost. Such information is not targeted at potential beneficiaries, it does not provide specific guidance on actions that can be taken to further its objectives and may not be part of wider educational activities or objectives of the charity. Such information costs incurred in conjunction with a fundraising activity would normally relate to the fundraising activity. This could be contrasted with, for example, a health education charity that targeted high-risk group or the medical profession supplying information as to health risks or symptom recognition and advising on steps that should be taken. Such information would fall within charitable expenditure in that it was targeted, advises on steps that can be taken and is likely to link to the charity’s activities or objectives in health education.
The SORP Committee proposes to keep this issue under review and if interpretational issues continue it will consider consultation and bulletin guidance in the future.
Paragraph 42 of the SORP explains that portfolio management fees in relation to a permanently endowed fund should be charged against that fund (i.e. charged to capital). This approach follows case law in relation to trust property. Certain interpretational difficulties have arisen in relation to other costs incurred in relation to functional (i.e. held for charity use) or investment properties held as permanent endowment. For clarification rent collection, property repairs and maintenance charges would normally be charged against the relevant income fund as would the cost of rent reviews. Property valuation fees incurred in connection with the sale of endowed property would normally be charged against the gain or loss realised by the endowed fund on the disposal, valuation fees incurred for accounting purposes would normally be charged to the management and administration category of the relevant funds that hold the properties being valued.
Paragraph 79 of the SORP explains that grants and donations are normally recognised when receivable even if the resources are received in advance of the performance of the activity. They should not be deferred unless restrictions are imposed which amount to pre-conditions.
There has been some uncertainly as to the criteria for the recognition of grant income where payment has been promised but not been received, particularly where the promise contains payment terms that may be perceived to amount to a condition. For example, a donor may specify a gift and indicate that payments will be made on particular staged dates, or that payment will be made on the presentation of a report or certification of expenditure or on presentation of an architects certificate when the gift is for the construction of a building. In such circumstances the three tests of paragraph 75 should still be applied.
A prerequisite of recognition of a promised gift is evidence of entitlement. Evidence will normally exist when promised gifts are formally expressed in writing. Where entitlement is demonstrable, and unless conditions are attached, such promises should be recognised once the criteria of reasonable certainty and measurability are met. Similar principles are explained in the context of legacies in paragraphs 89 to 91 of the SORP.
Promises with conditions attaching are however unlikely to give rise to entitlement until the conditions are met. It would therefore normally be inappropriate to recognise such promised gifts as income until the conditions attaching to the promised gift are met.
A term attaching to a promised gift that is simply an administrative requirement such as the submission of accounts or certification of expenditure (as opposed to a condition that needs to be met) would not normally prevent the recognition of a promised gift. Similarly, a payment schedule would not prevent recognition unless it inferred expenditure was limited to a future accounting period. A term requiring the submission of an activity report may create a condition preventing the full recognition of a promised grant where it can be inferred that future receipt of funding is conditional on a favourable outcome or progress being identified by the report. Similarly, a gift containing a term that restricted payment, for example, to the submission of architects’ certificates is unlikely to be recognised until at least all necessary building consents, designs and tenders were in place to give the necessary certainty the construction would proceed.