The Regulator for Charities in England and Wales
(Version April 2005)
1. The Statement of Recommended Practice, Accounting and Reporting by Charities, (the Charities SORP) has been reviewed and a revised edition – SORP 2005 - published in March 2005. The Charity Commission’s website carries copies of the new edition of the SORP. This document provides a broad overview of the changes made to the previous edition of the Charities SORP (SORP 2000). Any reader who would like to review these changes in detail should refer to the copy of SORP 2005 on our website that shows the changes to SORP 2000 as tracked changes.
2. The environment in which charities operate is continually changing. The Accounting Standards Board’s (ASB's) Policy and Code of Practice requires the Charity Commission, as the SORP-making body, to undertake an annual review of the Charities SORP. This review is carried out in conjunction with an advisory group, the Charities SORP Committee.
3. SORP 2000 was published in October 2000. In 2002, an information sheet was published providing informal guidance on a number of accounting issues. In January 2003 ‘Update Bulletin 1’ was issued to update SORP 2000 for new Financial Reporting Standards issued since October 2000, in particular, FRS 17 - Retirement Benefits. SORP 2005 incorporates the amendments introduced by the Update Bulletin and Financial Reporting Standards and Urgent Issue Task Force Abstracts issued, withdrawn or amended up to 31 December 2004.
4. Recent years have seen a number of key reports, publications and research that have influenced the development of charity sector accounting and reporting. These have included:
4.1. Research projects such as the Charity Finance Directors' Group's "Inputs Matters Project" which identified practical issues arising from SORP 2000 and offered possible solutions.
4.2. Research work sponsored by the Institute of Fundraising relating to the identification and classification of fundraising costs.
4.3. The work of the Association of Chief Executives of Voluntary Organisations in relation to cost allocation in “Funding Our Future II: Understand and Allocate Costs” that has informed thinking on cost categorisation and cost allocation.
4.4. The Cabinet Office’s Strategy Unit report “Private Action, Public Benefit” and the government's response in “Charities and Not-for-Profits: A Modern Legal Framework” published in July 2003 addressed primarily at charities in England and Wales (see www.homeoffice.gov.uk/docs3/charitiesnotforprofit.eng.pdf).
The SORP Committee has taken account of these developments and the detailed sector feedback received through consultation.
5. In addition, the Accounting Standards Board published in 2003 a discussion paper “Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities”. Insights from this work have enabled the SORP Committee to make a number of clarifications and improvements to explanations of the recognition of incoming resources and resources expended and the circumstances where consolidated accounts are required.
6. Following consultation in 2004, the Government has decided that the option of adopting International Financial Reporting Standards (IFRSs) should not be available to charitable companies. Both company and non-company charities applying the SORP therefore continue to apply UK accounting standards with a phased approach to full convergence with IFRSs. New standards issued by the ASB in 2005 and planned for 2006 will provide a series of “step changes” replacing one or more existing UK standards with standards based on IFRSs as their development is completed. The Charities SORP will continue to be reviewed in line with the ASB's Policy and Code of Practice to reflect changes in UK standards, including those arising from the convergence process.
7. SORP 2005 remains a comprehensive summary of how accounting standards, charity law, relevant company law and best practice impacts on the preparation of charity accounts and reports. Whilst SORP 2005 is longer than SORP 2000, this is due to expanded explanations, largely in response to requests for further guidance and examples from users of the SORP, as well as the need to address the increasing number of accounting standards in issue. SORP 2005, for example, includes in appendix 2 a summary of some 37 accounting standards and 26 UITF Abstracts as a reference source to users.
8. The underlying principles of the Charities SORP (eg following UK accounting standards, fund accounting and compliance with charity law) are unchanged in the new edition. The main changes to the SORP are:
In general:
8.1. Clarification of the purpose and scope of the SORP, in particular, explaining how the SORP applies in different parts of the British Isles.
8.2. Incorporating recommendations for the interpretation of new financial reporting standards issued since the previous SORP.
8.3. More explanation, including the use of tables indicating how information may be presented in both the primary statements and related notes, and an expanded glossary of important terms used.
And more specifically:
8.4. More focused recommendations for the content of Trustees’ Annual Reports emphasising the reporting of activities and achievements against organisational objectives.
8.5. More specific guidance on recognising when incoming resources and resources expended should be brought into the Statement of Financial Activities (SoFA).
8.6. Reporting resources expended and incoming resources by activity in the SoFA.
8.7. A new category of ‘heritage assets’ is introduced replacing the “historic and inalienable” category of the previous SORP with expanded guidance being provided.
8.8. A number of changes to disclosure notes and explanations of how the formats of the SoFA and balance sheet can be adapted to fit particular presentational needs.
8.9. A separate appendix summarising the significant exemptions available to smaller charities
8.10. Providing advice on accounting for a number of new situations.
9. The explanation of Charity SORP’s role in providing a definitive guide to how accounting standards and principles apply to charities has been revised in the light of FRS 18 (Accounting Policies). The objective of the SORP has been clarified and the role of the Trustees’ Annual Report in charity reporting more fully explained.
10. The section covering the SORP and the law has been updated. Specific Scottish requirements have been more clearly stated, especially in relation to income and expenditure accounts and cash flow statements.
11. SORP 2005 now limits its recommendations to accruals accounts. The Commission will continue to provide and develop separate guidance, including pro - forma accounts and report packs, for charities that prepare cash based receipts and payments accounts. Where receipts and payments accounts are prepared, trustees in England and Wales will be able to rely on these packs as providing comprehensive guidance and will no longer need to refer to the SORP in preparing their accounts and reports.
12. A new section has been added to the SORP on Accounting for Retirement Benefits, based on FRS 17. The recommendations impact primarily on charities that operate defined benefit pension schemes and incorporate the guidance previously provided in Update Bulletin 1 issued in 2003. Relevant analysis categories have also been added to both the SoFA and Balance Sheet pro-formas to allow for FRS 17 reporting. A number of definitions specific to this particular issue are included in the Glossary.
13. A short new section has been added on Financial Derivatives and their disclosure. This guidance is based on FRS13 which was covered in appendix 2 in SORP 2000. Any charities which make significant use of financial derivative products will need to consider further disclosures that may be required by the new convergence standards (especially FRS 25 and FRS 26).
14. The SORP also clarifies how gift aid payments from a trading subsidiary should be recognised and measured. The introduction of FRS 21 (Post Balance Sheet Events) has more closely defined adjusting events and the SORP interprets how this standard is applied where the amount of a gift aid payment is recalculated with greater accuracy after the year end. FRS 21 also implies that though designated funds should be established before the end of a financial year, the amount in the fund may be amended to take account of post balance sheet information that enables the designation to be calculated more accurately.
15. Small changes that have been made to FRS 2 in relation to the meaning of dominant influence in group accounting have also been incorporated into the consolidated accounts section of the SORP.
16. The SORP provides, in table format, illustrative disclosures and pro-forma layouts for the primary statements. These are intended to assist those preparing accounts by offering examples of how particular disclosures may be set out. In the case of the SoFA and the balance sheet, the tables replace a narrative section in SORP 2000. A full list of tables is given in the SORP contents page.
17. In accruals accounting only material items need to be reported. The definition of materiality has been expanded to clarify that certain items are always likely to be material. Previous SORPs gave indicative materiality levels for a number of disclosures, such as when grants to institutions should be disclosed. This approach has been replaced with materiality instead being judged in the context of a particular disclosure rather than by using an arbitrary threshold. The previous SORP also set out which disclosures were likely to apply to all charities using marking within the text. This approach caused some confusion with users and has therefore been removed and replaced with appendix 5 that sets out more comprehensively the significant exemptions given to smaller charities.
18. Fund accounting remains a key feature of charity accounting and a number of clarifications have been introduced, primarily in appendix 3. Specific guidance explains the use of unrestricted funds for restricted purposes, when performance related grants can be included in restricted funds and the treatment of expenses related to permanent endowment. A pro- forma table (table 2) shows how details of fund movements may be provided.
19. A number of changes have been made to clarify the distinction between Summary Financial Information and Summary Financial Statements and the nature of the statements provided to ensure the nature of the summaries are understood by users of this information.
20. The section dealing with consolidated accounts has been rewritten to clarify the meaning of control (direction and benefit) and to take account of the change in FRS 2 relating to dominant influence. The SORP clarifies when consolidation is not required and how to consolidate charitable subsidiaries. The Charity Commission’s requirement for the submission of accounts when group accounts are prepared is also clarified.
21. Funders, on occasions, may nominate trustee(s) to the Board of the recipient charity. Guidance is provided explaining the circumstances where is likely to amount to control and thus whether group accounts are required.
22. A number of new definitions have been added to the glossary in Appendix 1 and several of the existing definitions have been refined. These include:
| Activity Classification of Costs | Functional Fixed Assets | Pooling Scheme |
| Audit Threshold | Donated Services and Facilities | Public Benefit Entity |
| Common Investment Funds | Governance Costs | Reserves |
| Costs of Generating Voluntary Income | Gross Income | Support Costs |
| Deferred Income | Heritage Assets | Total Expenditure |
| Depreciated Replacement Cost | Income | Total Return Approach to Investment |
| Ex-Gratia Payments | Investment Management Costs | Trustee for a Charity |
| Fair Value | Investment Property | Voluntary Income |
| Financial Derivative | Parent and Subsidiary Undertakings | 13 terms related to Retirement Benefit accounting |
23. Several of the terms introduced effectively replace certain terms used in SORP 2000. These include Governance costs (Management and Administration costs removed) Heritage Assets (Historic and Inalienable assets removed) and Donated Services and Facilities (Intangible Income removed).
24. The Trustees’ Annual Report has played a major role in charity accountability since the issue of SORP 1995. In SORP 2005 the reasons why the Trustees’ Annual Report is such a key document are clarified. Whilst most of the detailed content of the report was requested in previous SORPs, SORP 2005 builds on these past recommendations by adding a number of additional disclosures to the report including:
25. SORP 2005 also presents the recommendations for the report in a more structured way using the following seven sections:
26. Disclosure recommendations are expanded to include the name of any Chief Executive Officer or other senior staff members to whom day-to-day management of the charity is delegated.
27. SORP 2005 pulls together existing recommendations concerning governance and structure into one section of the report and includes the statement about risks that was first introduced by SORP 2000. An additional disclosure is added to this section that sets out the policies and procedures adopted by the charity for the induction and training of its trustees.
28. This new section creates a stronger and more focused structure than past SORP recommendations. It is designed to help the reader understand the aims and objectives set by the charity, and the short and long term strategies and activities undertaken to achieve them.
29. SORP 2005 confirms that the valuation and inclusion of volunteers’ contribution to charity activities is not required within the SoFA; however the SORP encourages trustees to provide readers with sufficient information to understand the role and contribution of volunteers. SORP 2005 also recognises that charities may provide funding through the use of social or programme related investment and in such cases the charity’s policy for making such investments should now also be explained.
30. Again, this new section provides greater clarity as to disclosure expected about the achievements and performance of the charity and its subsidiary undertakings in the year. A summary of any measures or indicators used by the charity to assess its achievements should be included in the report.
31. The recommendations of SORP 2000 to report on the effectiveness of fundraising activities have been expanded. In addition to providing details of fundraising performance any material expenditure for future income generation should be explained together with the effect on both current and future income generation.
32. SORP 2005 also recognises that factors outside the control of the charity may impact on its ability to achieve the objectives set and where relevant, details of such factors should be included within the report.
33. SORP 2005 states “The report should contain a review of the financial position of the charity and its subsidiaries and a statement of the principal financial management policies adopted in the year”.
34. Reserves are also now reported as part of the financial review section. The reserves definition in the glossary has been changed so that designated funds are not automatically excluded from reserves and flexibility has been introduced for charities to calculate reserves based on their specific circumstances.
35. This section now also includes details of the charity’s principal funding sources and how expenditure has supported the key objectives of the charity. Also where material investments are held, the report should include details of the extent to which social, environmental or ethical considerations are taken into account in setting investment policy.
36. Although SORP 2000 recommended that plans for the future be disclosed in the report, SORP 2005 gives greater emphasis to this disclosure and recommends that future plans should include the aims and key objectives set for future periods and details of any activities planned to achieve them.
37. The ASB’s “Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities” has been most useful in helping identify when assets and liabilities should be recognised in charities. Whilst this has not changed the underlying accounting standard (FRS12), it has helped with interpreting it in charities.
38. In relation to the recognition of incoming resources the principles set out in SORP 2000 of entitlement, certainty of receipt and reliability of measurement have all been retained with additional guidance identifying the point at which entitlement to the income is likely to arise and hence be recognised for:
Specific examples are given of where the different approaches will be appropriate.
39. The recognition of resources expended mirrors incoming resources in relation to the same three types of transaction as given above. The explanation has been improved and contains more examples than were provided in SORP 2000, especially in relation to multi-year grants.
40. The distinction between conditional grants and restricted funds has also been more clearly explained. Restricted grants and performance related grants are also more clearly differentiated with entitlement only arising on performance related grants as the specific performance conditions are met.
41. Guidance has also been reviewed in relation to the valuation of donated services and facilities (which were called Intangible Income in earlier SORPs) and it is clarified that the services of unpaid volunteers are not to be included in the SoFA.
42. Since SORP 1995 the SoFA has provided for the analysis of resources expended based on a ‘functional’ split. This concept was not universally understood and was criticised by a number of commentators as being inconsistently applied. SORP 2005 provides for the analysis of resources expended based on activity. There are three main activity groups:
Each of these groups could contain a variety of individual activities, more details of which may be given in the notes. Support costs and grants made are not activities and so will in future not be a focus for reporting. However, charities will be able to report on the extent to which these costs are a part of activities in the notes to the accounts.
43. The SoFA also provides for the analysis of incoming resources by activity, in particular breaking down incoming resources from generating funds into the following categories which are matched by a similar breakdown of resources expended on generating funds:
44. The narrative accompanying the SoFA defines each of the categories to be used for resources expended and incoming resources and explains and gives examples of what each category should contain. Specific areas that have been clarified include explaining that ancillary trading is income from charitable activities and giving guidance on fundraising start-up costs and data capture costs of new databases. The text explains what should be placed on each line of the SoFA (excluding sub-totals) and includes sections on transfers and actuarial gains or losses on defined benefit pension schemes.
45. A corollary of focussing the SoFA on activities is that support costs will not be shown in the SoFA as they do not represent a distinct activity of the charity. The revised section on support costs explains what support costs are, explains how they relate to activities and outlines what should be reported about them in notes to the accounts.
46. Similarly ‘grants made’ is not a separate activity, but part of grantmaking, which is one way of delivering a charitable activity. Therefore ‘grants made’ will normally be shown in the notes rather than the SoFA.
47. Though the main structure of the SoFA is fixed, charities may, within limits, adjust the statement to reflect their particular charity needs. SORP 2005 gives indications of when this may be done, for example by adding a second unrestricted fund column or by changing the order of incoming resources categories within incoming resources.
48. The section on allocation and apportionment (particularly relating to costs) has been expanded with further explanation and examples. This section also incorporates the guidance issued on the allocation of joint fundraising costs issued in the 2002 information sheet.
49. The term ‘Heritage Assets’ is now used in place of ‘inalienable and historic assets’ and is more narrowly defined as tangible fixed assets that are of historical, artistic or scientific importance and are held to advance the preservation and conservation objectives of a charity. Where similar assets are held for other purposes they should not be considered as heritage assets e.g. works of art or antique furnishings held as a store of wealth and unrelated to any preservation or educational objects of the charity, then such assets do not fall within the category of heritage assets.
50. Heritage Assets will continue to be capitalised unless no reliable cost information is available, or valuation approaches lack sufficient reliability, or there are significant costs in producing valuations that outweigh the benefits of valuation. This position is largely dictated by the underlying accounting standard FRS 15 although it is recognised that a high proportion of those responding to the consultation expressed concern as to the current approach to the capitalisation of such assets. The issues raised by the consultation relating to the capitalisation of Heritage Assets are currently receiving consideration by the Accounting Standards Board who plan to publish a discussion paper later in 2005 that will give further consideration to the issues surrounding the accounting treatment of such assets.
51. The section on the disclosure of grants to institutions has been reorganised to clarify when detailed disclosure is necessary and what should be disclosed. Suggestions as to what is material have been removed. An explanation is also provided of what support costs would be associated with grantmaking.
52. There is an extension to legacy disclosure to cover life tenancies and accounting policy treatments for different types of legacy.
53. The requirement to disclose costs of trustee indemnity insurance has been removed.
54. There has been clarification on what should be disclosed in relation to staff costs and emoluments, especially in relation to part-time staff. The threshold for ‘band’ disclosure has been raised to £60,000 and smaller charities are excused disclosing this ‘band’ information.
55. The requirement to disclose non-statutory costs of external scrutiny has been removed.
56. The ‘Note on Changes in Resources Applied for Fixed Assets for Charity Use’ has been amended. This is a note that can be of value to charities that do not produce a cash flow statement as it explains how the net increase or decrease in resources affects the amount of resources actually available for the charity to use. It takes account of the purchase and sale of fixed assets and movement in endowment funds and programme related investments.
57. The overall structure of the balance sheet is unchanged though the explanation of the statement’s contents has been changed from a narrative approach to a pro-forma table setting out details of the content of this primary statement. More details are also given as to how the format can be adapted to report restricted funds. Heritage assets replace inalienable and historic assets (see section above on this) and rows have been added for programme related investments and defined benefit pension scheme assets, liabilities and funds.
58. The balance sheet also shows where revaluation reserves should be shown (a Companies Act requirement) and where share capital should appear (for those few charities that have share capital).
59. The explanation of the items in the balance sheet has been reorganised. Tables have been introduced to show how fixed asset and investment movements can be displayed and there have been slight changes in the rules on analysing mixed use fixed assets.
60. Significant exemptions are given to charities below the audit threshold allowing them flexibility in the analysis provided in their SoFA and considerably reducing the level of disclosures in both their annual report and notes to the accounts. The Charities Bill currently before Parliament proposes that, in relation to English and Welsh and Company charities, an audit requirement should only apply to charities with income over £500,000 or total assets of more than £2.8 million. Concessions available to smaller charities are now summarised in a new Appendix 5. Appendix 5 also contains the guidance on the use of the FRSSE and details of which charities may use cash based receipts and payments accounts.
61. Charities in England and Wales are able to make use of administrative provisions to allow them to adopt a total return approach to managing investments held as permanent endowment. An explanation of the total return approach and how this should be accounted for in charity accounts is provided, chiefly in Appendix 3
62. A short section has been added dealing with Common Investment Funds and Investment Pooling Schemes. The Trustee Act 2000 has made it easier for charities in England and Wales to use pooling schemes and it is important that charities are aware of the accounting implications.
63. A new section has been added explaining how to account for Programme Related Investments and related sections explain how these should be accounted for in the SoFA and Balance Sheet.
64. We are committed under the ASB’s code of practice to review the SORP annually, maintaining the SORP’s relevance to sector needs and ensuring its ongoing consistency with accounting standards as they develop. We face a particularly challenging time as UK standards continue to converge with International Accounting Standards. Where possible, we will address new standards and development within the sector through the use of SORP update bulletins and ensuring our website guidance is updated as needed.
65. SORP 2005 has a key role to play in assisting charities provide financial information about their activities and resources which is of interest to many people and to meet legal requirements that such accounts give a “true and fair” view. Retaining and enhancing the high reputation of the sector is a responsibility that we share with the sector.