A major change for the charities sector will take effect next year when the Charities Statement of Recommended Practice (SORP) 2005 is replaced with two new SORPs for charity accounting and reporting.
The existing Charities SORP 2005 will be replaced for accounting periods beginning on or after 1 January 2015, with two new versions: the FRSSE (Financial Reporting Standard for Smaller Entities) SORP and the FRS 102 SORP.
The FRSSE SORP can only be used by small entities as defined by the Companies Act 2006, which means they must meet two of the following three criteria:
- income of less than £6.5 million
- assets of less than £3.26 million
- fewer than 50 employees.
Charities using the FRSSE SORP should be aware that the FRSSE is due to be replaced, probably in 2016, with an updated version that reflects changes made to the UK GAAP (Generally Accepted Accounting Practice) in 2013. As a result the FRSSE SORP will also need to change so charities using this version could face changes in accounting policies and disclosures both next year and in 2016.
The FRS 102 SORP, which is named after the accounting standard recently introduced to bring the UK more into line with international accounting standards, is mandatory for any charity breaching the thresholds above and can be voluntarily used by a charity if under these thresholds.
The FRSSE SORP will require less disclosure that the FRS 102 SORP. However, there are parallels between the two, which will run alongside each other and both have been divided into modules, to make them easier to read.
Key messages within both SORPs include an emphasis on transparency and impact reporting. Some other key similarities and differences include:
- the requirements of the trustees’ annual report are the same for both SORPs (including requiring larger charities to provide more information on issues including social investment policies, the financial effect of significant events, a description of principal risks facing the charity and strategies for managing these and pay and remuneration arrangements for key management personnel)
- both SORPs require charities to explain any policy they have for holding reserves, the amount of reserves and why they are held (or explain why trustees have decided it is unnecessary to hold reserves)
- all trustees who acted during the year, or are in position at the time the trustees’ annual report is signed, must be listed
- the requirements in both SORPs are the same for fund accounting and the
- the format for the balance sheet is common to both SORPs but there are some differences in terminology and in detailed accounting treatments
- gains and losses on investment assets count towards net income/expenditure in the FRS 102 SORP but are excluded from these categories in the FRSSE SORP
- the cash flow statement is optional under the FRSSE SORP but mandatory for FRS 102 SORP, in which it has three elements – cash flows from operating activities, investing activities and financing activities
- within module 3 (accounting standards, policies, concepts and principals) the terminology and definitions used differ significantly between the two SOPRS. More disclosure is required in FRS 102 SORP
- FRS 102 SORP changes one of three criteria for income recognition, requiring that income should be recognised when its receipt is “probable” (rather than “virtually certain” in the SORP 2005)
- in regard to trustee and staff remuneration, FRS 102 SORP requires that, among other items, charities must disclose the total paid to key management personnel; contributions paid to a pension fund for the benefit of employees; details of redundancy and termination payments.
Both SORPs are complex documents and it is advised that charities seek expert advice on their contents and implications for them individually, well in advance of when they take effect from January 2015.
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