UK Generally Accepted Accounting Practice (GAAP) has changed for accounting periods beginning on or after 1 January 2015. The old Statement of Recommended Accounting Practice: Accounting and reporting by charities (popularly known as SORP 2005) has been superseded by a new framework. John Maddocks provides an overview of the key changes.
What is new GAAP?
From the viewpoint of charities, the new GAAP is comprised of three standards:
- Financial Reporting Standard for Smaller Entities 2015 (FRSSE) - a UK Companies Act based standard retaining the terminology and many of the small company accounting treatments of existing GAAP
- Financial Reporting Standard 100 – Application of Financial Reporting Requirements - sets out the general framework and establishes the status of SORPs.
- Financial Reporting Standard 102 – the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) is an amalgam of accounting treatments available under existing GAAP and the International Financial Reporting Standard for Small and Medium-sized Enterprises developed by the International Accounting Standards Board.
The role of SORPs is to provide application guidance to help practitioners prepare accounts under GAAP. It follows that when GAAP changes, a new SORP is required. Any charity can follow the new FRS 102 SORP, with smaller charities being able to opt to follow a SORP based on the FRSSE for one year only.
It may seem obvious to move straight to the full FRS 102 SORP, however as the FRSSE SORP is based on old GAAP it may provide a half-way house for smaller charities wishing to minimise the impact of the changes for 2015/16 accounts. This article concentrates on FRS 102 SORP, but also provides information on the one year FRSSE option to allow charities to make an informed choice.
What does the FRS 102 SORP (New SORP) say?
The new SORP incorporate a number of important changes including:
- a clear distinction between requirements that apply to all charities from those that apply to larger charities (larger charities are those with a gross income over £500,000 in the reporting period)
- differentiation between what ‘must’ be done to comply with the SORP, what ‘should’ be done as a matter of good practice and what ‘may’ be done by way of extra illustration or an option
- distinguishing between requirements imposed by the SORP from the requirements of accounting standards
- more explanatory text to help smaller charities understand what is required
- retention of the columnar approach to the Statement of Financial Activities (SoFA) but with simpler, clearer headings for income and expenditure.
How has the SoFA changed?
Many of the SoFA headings and have changed. Here are some examples of changes in income headings:
- Voluntary income
- Activities for generating funds
- Investment income
- Incoming resources from charitable activities
- Other incoming resources
- Donations and legacies
- Other trading activities
- Income from investments
- Income from Charitable activities
- Other income
There are similar changes to expenditure headings. One important change is the removal of ‘governance costs’ from the expenditure list. Governance costs are instead allocated across the charity’s activities as a part of support costs.
‘Gains/losses on investment assets’ has moved up the SoFA and now sits above the net income/(expenditure) line and is shown as ‘Net gains/(losses) on investments’.
It is worth noting that the new SORP requires comparative figures for the previous reporting period for all of the SoFA columns, e.g. restricted, unrestricted and endowment columns; not just the total column. This comparative information can be shown either on the face of the SoFA or in the notes.
How will preparing accounts under the FRS 102 SORP differ from SORP 2005?
The Charity Commission has produced two help sheets to assist charities to understand the changes. These are available at Charities SORP.
Help-sheet 1 compares paragraphs in SORP 2005 with the FRS 102 SORP
Help-sheet 2 considers the key differences in the areas of accounting policies.
The main changes include:
- the income recognition criterion of ‘virtually certain’ is replaced by ‘probable’
- new guidance on the recognition of income from legacies using a portfolio approach
- donated goods for resale or distribution are recognised upon receipt unless impractical and/or the costs outweigh the benefits
- new guidance on recognising income under the UK retail gift aid scheme on an estimated basis
- new guidance on the identification of onerous contracts
- a liability for paid annual leave and sick leave due
- differentiation between ‘basic’ and ‘other’ more complex financial instruments
- new guidance on the application of a total return approach to investments (England and Wales only)
- new class of social investments and mixed-motive investments
- incorporated charities are specifically prohibited from being treated as branches
- new guidance on the use of and criteria for merger accounting
- equity method now used for consolidating joint venture entities;
- definition of de-facto trustees added
- a revised definition of related parties.
For a full summary of the differences, please refer to the help sheets on Charities SORP.
Who can opt to use the FRSSE SORP?
Because of previous uncertainties regarding the future of the FRSSSE a decision was taken to develop two charities SORPs: one based on FRSSE and one based on FRS 102. Those charities that fulfil two of three eligibility criteria have the option of adopting the FRSSE SORP:
- an annual gross income of less than £6.5million
- total assets of less than £3.26million
- fewer than 50 employees.
The FRSSE is based on old GAAP whereas FRS 102 is new GAAP and is based on the IFRS for Small and Medium-sized Entities (IFRS for SMEs). Charities now face a very clear choice for accounting periods beginning on or after 1 January 2015. However, the FRSSE is being withdrawn and so this will only be an option for one year, after which all charities following the SORP will adopt the FRS 102 version.
How different is the FRSSE SORP?
The main differences between the FRSSE and FRS 102 SORPs are considered in help sheet 3. The main differences include:
- the opportunity to retain certain accounting policies for non-charity specific items or transactions
- the Statement of Cash-flows is voluntary
- investment gains/ (losses) do not count towards the net income/ (expenditure) figure
- recognition of a liability for annual leave and paid sick leave is not required
- a different approach to calculating the present value of liabilities and written down value using government bonds rather than a credit risk adjusted market rate (this is likely to result in higher present values)
- fewer disclosure requirements for items in the accounts, especially to do with financial instruments, group accounts, and related party transactions.
What are the main changes to the trustees’ annual report?
The two changes that affect all charities are:
- A charity must disclose its reserves policy or it must state it does not have a reserves policy and give reasons.
- All trustees who served in the accounting period and are in position at the time the report is signed must be named.
Changes that affect only larger charities include:
- a description of the principal risks and uncertainties facing the charity and its subsidiary undertakings, as identified by the charity trustees, together with a summary of their plans and strategies for managing those risks.
- the arrangements for setting the pay and remuneration of the charity’s key management personnel and any benchmarks, parameters or criteria used in setting their pay.
- an explanation of social investment policies and how any programme related investments contributed to the achievement of its aim and objectives.
What resources are there to help?
The new SORP together with accompanying help sheets was published in mid July 2014 and is found on the dedicated charities SORP micro-site Charities SORP.
CIPFA has produced disclosure checklists for both SORPs:
FRS102 SORP disclosure checklist
FRSSE SORP disclosure checklist
Hard copies of the SORPs are also available from CIPFA:
FRS 102 SORP
John Maddocks is a Technical Manager at CIPFA
*NHS charities should note that new GAAP is not the same as the applicable Financial Reporting Manual (iFREM) as the iFREM is an interpretation of the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. Therefore, if consolidating a linked charity into the accounts of an NHS body, you may need to make adjustments, where necessary, for group accounting policies based on the iFREM.