The future of charity financial reporting
Financial reporting in the charity landscape had a long period of stability, with SORP 2005 having a shelf life of some 10 years. The new Statement of Recommended Practice: Accounting Reporting by Charities (the Charities SORP (FRS102)) saw significant change beyond that required by FRS 102.
FRS 102 and associated fair value requirements significantly impacted both disclosure and the recognition and valuation criteria in the financial statements of charities. Transitional adjustments around multi-employer defined benefit pension scheme liabilities, accelerated revenue recognition and the recognition of donated goods are among the most commonly reported and are often material in size.
More friendly and transparent
The Charities SORP (FRS102) went further than this and took the opportunity to make the SORP more relevant, user friendly and more transparent. Its online modular structure, the use of “must, should and may”, specific guidance on topical matters such as social investments and the availability of model accounts and help sheets all made the Charities SORP (FRS102) more accessible than its previous paper based counterpart.
With specific Charities SORP (FRS102) reporting changes around the presentation of the financial statements, a move to plain English in the financial statements and changes in the requirements of the Trustees’ Report encouraged transparency and brought in comparability between charities, like the calculation of free reserves.
It is likely that the future of charity reporting will move forward in much the same vein in future SORPs, with the Financial Reporting Council’s triennial review of FRS 102 expected to be completed in 2018 and an Exposure Draft of the next Charities SORP (FRS102)) expected shortly afterwards. While, of course, any underlying changes in FRS 102 force a change in the Charities SORP (FRS 102) the expectation is for the opportunity to be taken to further change the reporting requirements for charities. In readiness for the next SORP the SORP Committee invited the sector to respond to a consultation, which closed on 11 December 2016.
More accessibility for smaller charities
Moves are likely to be made to make the Charities SORP even more accessible for smaller charities through the issue of more guidance and help. The sector has also commented that following the definition of charities with income over £500,000 being defined as “large”, reporting for charities with income around this level is particularly onerous. For example, it is seemingly heavy-handed for a charity with £500,000 income reporting to be treated at the same level as a charity with £10 million income.
The consultation noted the option to add a third tier of reporting, distinguishing the very largest charities, which would bring charity reporting in line with the three tier approach taken by companies in the UK – although this does not sit well with the concept of making the Charities SORP accessible to all users.
More wholesale change may be seen in the Trustees’ Report, as the current SORP retained the “story telling” approach from the previous SORP. It remains likely that this will be retained but with more emphasis on linking the narrative to material elements of the financial statements and providing sufficient detail to enable the users to better understand the achievements of the charity.
With financial statements seemingly ever growing in size, it has also been suggested that a “key facts summary” could be provided to encourage all users of the financial statements to become more engaged with them.
Expansion of reserves explanation
Owing to sensitivity around charities holding either excess or too little in reserves Charity SORP (FRS 102) required larger charities to describe their reserves policy and approach to reserves so that readers understood performance against target. It is likely that this disclosure will be expanded to include commentary around why reserves are held, reasons for using reserves and the basis of calculation.
Previous consultation has heavily supported the retention of the single Statement of Financial Activity (SoFA), however there remains ambiguity for readers where capital funds are recognised as income on receipt. The operational result of the activities of a charity may be heavily obscured by such receipts and ongoing depreciation costs throwing up very “lumpy” results year on year. The new SORP may therefore include some guidance on how this could be shown on the face of the SoFA, or alternatively this may be picked up in changes in the requirements around reserves disclosure.
Further changes to the Charities SORP are also likely to be driven by the public interest aspect with a focus on public benefit, risk management, meaningful consideration of going concern, guidance on the definition of and enhanced analysis of fundraising and administration costs.
While FRS 102 will continue to guide certain fundamental principles it remains clear from public opinion and the SORP consultation that more than ever the Charities SORP will continue to evolve meaningfully in its own right. Key issues are expected to be around impact, sustainability and transparency. The Charities SORP clearly faces some conflict and potential compromise around this and the desire to make the Charities SORP accessible to all.
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