At a crossroads
February 2010
Angela Haynes reviews the SORP’s history and hopes that any convergence in accounting standards retains its learning and achievements
Although it feels as if the charity statement of recommended practice (SORP) has been around for a long time, in fact it came into being only in 1996 as a result of regulations made under the Charities Act 1993. It was intended to provide a framework for charity accounting and reporting to overlay the UK generally accepted accounting principles (UK GAAP). The evolution of its unique role in providing guidance in the application of accounting standards to UK charities with incomes of £250,000 and above is reflected in the SORPs of 2000 and 2005 and SORP compliance is now expected of charity accounts.
Recent research
Last December saw the publication of Charity Reporting and Accounting: Taking Stock and Future Reform, a research report analysing the role of the SORP and suggesting changes, which was commissioned by the Charity Commission and the Office of the Scottish Charity Regulator (OSCR), the joint SORP regulator1. The major finding was that the SORP is widely recognised and valued – at least among those engaged in financial reporting in the sector – and, as intended, has improved and shaped charity accounting practices and focused trustees’ attention on the key issues.
The research, undertaken by a team at Queen’s University Belfast during 2008/09, also found that the use of narrative information to complement financial statements was seen as particularly valuable. Changes suggested by the findings focused on improving the existing SORP and included the adoption of a ‘bottom up’ approach. This would focus on the needs of small charities( as these constitute the majority of organisations in the sector) and meet those of medium and larger charities through specific additional sections. Other suggested adjustments included the need for a greater balance within reports of both successes and failures, improved performance reporting, greater accessibility and a need for improved trustees annual reports.
The convergence agenda
However, while this SORP progress report has proved positive overall, suggesting a need only for minor modifications, its conclusions underplay the importance of 2010 as a pivotal year for UK accounting across all sectors. The Accounting Standards Board (ASB), has been interested in the migration of UK accounting standards to international financial reporting standards (IFRS) for a while. In July 2009, the ASB issued a consultation paper, Policy Proposal: The Future of UK GAAP, which addresses the question of the implications of
such a convergence2. Consideration of the implications for public benefit entities is included in the paper.
such a convergence2. Consideration of the implications for public benefit entities is included in the paper.
The convergence agenda assumes that UK accounts need to move to an internationally recognised standard. As currently all the world’s major economies require, permit or are seeking convergence with IFRS, this is the direction in which UK general accounting is gravitating. The ASB proposal consisted of a three-tier reporting regime: tier one would require full IFRS accounts; tier two would allow for the use of the more concise IFRS for small and medium-sized entities (IFRS for SMEs) and public benefit entities of any size; tier three, for the smallest organisations, would provide for reporting under the Financial Reporting Standard for Small Entities (FRSSE) for those organisations small enough to be entitled to use the small companies regime under companies legislation.
Adjustments for non-profits
However, as neither full IFRS nor IFRS for SMEs were designed to apply to organisations with public benefit objectives, they do not provide all the information and transactions that are relevant to not-for-profit audiences. Charity accounting has distinctive features, for example issues of restricted assets, classification of expenditure, the presentation of residual interest, restricted and unrestricted funds, non-reciprocal transfers, commitments to provide public benefits, obligations arising from multi-year grant awards and narrative reporting on the achievement of strategic objectives are not relevant in the world of commercial accounting and therefore would need to be accommodated within an appropriate framework.
The ASB outlines four ways of dealing with the specific requirements of public benefit entity accounts, of which the proposed solution of a not-for-profit standard setting out where different accounting is required for such entities is their preferred approach. Whichever is chosen, there will need to be an adjustment, just as UK GAAP needed to be adjusted to the needs of the sector. There are several possible approaches – the one with most support within the sector is that of a one stop shop – where the issues facing the sector are identified and clear guidance is outlined. This would provide the most obvious role for the experience and learning from the SORP.
Convergence, although resulting in greater accounting complexity, provides an opportunity for greater consistency between charity and commercial accounts, and therefore greater comprehension by general users. If a new public benefit entity standard is developed, it may also enable greater consistency between organisations currently served by different public benefits SORPs.
Timescales
The ASB is due to publish an exposure draft in the summer resulting from the consultation. According to its ambitious timeline 31 December 2010 is the IFRS transition date. While shaping the changes that will result, we must incorporate the learning and achievements of the SORP while addressing issues of accessibility not only to other sectors but also the charity sector’s key audiences in order to ensure that the final framework best meets the sector’s needs.
Author: Angela Haynes
Angela Haynes joined CFDG as policy manager in August 2009 after living and working in Brussels for four years. Her career in the voluntary sector has spanned 20 years incorporating roles with BOND, HelpAge International, Minority Rights Group International, a local women’s NGO in the Dominican Republic for CIIR (now Progressio), and the World University Service (now Education Action).
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