In July, two new SORPs were introducted for charities. So what were the key changes and how
will charities be impacted?
Two new SORPs were recently published (the FRS102 SORP and the FRSSE SORP respectively) and are applicable for accounting periods commencing 1 January 2015. The FRS102 SORP is based on “New GAAP” and the FRSSE SORP adopts existing GAAP.
The key changes introduced by the new SORPs are as follows:
The SORPs identify “musts”, “shoulds” and “mays” so it is clear those requirements that need to be adopted in order for the accounts to be compliant and those which are best practice.
The Statement of Financial Activities (SOFA) has a simplified format and uses plainer English, making it easier for the lay reader to understand.
However, a key difference is that the FRS102 SORP requires net investment gains or losses to be disclosed “above the line” before arriving at net income, whereas the FRSSE SORP allows gains and losses to be disclosed after net income.
In addition, the FRS102 SORP requires comparative figures for each separate class of funds by way of a note to the accounts. However the FRSSE SORP only requires comparative figures for total funds.
This is potentially the most significant change to accounting treatment within the SORP. Income is now recognised when receipt is probable, rather than virtually certain. As a result the recognition point for some forms of donated in come in particular legacy income will accelerate. The FRS102 SORP offers specific guidance in relation to legacies.
Donated goods and services
The FRS102 SORP requires donated goods received for either sale or distribution to be valued and recognised on receipt (rather than on sale or distribution). However, this is not required if it is impractical to assess the value at that point; a concession to those charities running charity shops reliant upon donated goods.
Cash flow statements
There is no exemption for small charities not to prepare cash flow statements under the FRS102 SORP although that exemption is still available to those using the FRSSE SORP.
Defined Benefit Pension Schemes
Charities will be required to recognise the liability to make payments to fund any past service deficit where it has entered into an agreement to make those payments.
Key management personnel
All charities will now be required to disclose the numbers of staff whose remuneration is over £60,000 in bands of £10,000, as the exemption for smaller charities in the 2005 SORP has been removed.
In addition, the FRS102 SORP requires disclosure of the total remuneration for key management personnel. Larger charities are also required to explain the arrangements for setting the remuneration of the charity’s key management personnel including any bench marks or parameters or criteria used.
The FRS 102 SORP will now require complex financial instruments such as derivatives which may have historically have been off balance sheet to be recognised and measured at fair value through the SOFA.
Goodwill and intangibles
Where the useful economic life for goodwill and intangibles cannot be reliably estimated, amortisation will be over five years rather than twenty as previously.
The FR S102 SORP requires unlisted investments to be carried at fair value and introduces a new form of investments called Mixed Motive Investments.
The Trustees Report
The SORPs require a fair and balanced report to be given in line with that required under corporate repor ting, including more detailed disclosu re of the principle risks and mitigating factors, and more focus on public benefit. The reserves policy should be fully explained o r an explanation of why there is none.
Charities must plan for the introduction of both FRS102 and the new SORP which take effect from 1 January 2015.
It is important to consider which SORP to adopt. While it may be convenient to adopt the FRSSE SORP for the year ending 31 December 2015, it is likely that the proposed revision to the FRSSE will result in the recognition criteria of assets and liabilities to be aligned with FRS102 so any benefit may be limited.
If you wish to discuss this further, please contact Mark Hart.