The Charity Commission for England and Wales and the Office of the Scottish Charity Regulator (OSCR) have today launched a consultation on a new draft Statement of Recommended Practice (Sorp).

The Sorp is the framework for charity accounting and reporting which must be followed by all charities that annually publish their accounts. This new edition, the first since 2005, comes following the Financial Reporting Council’s (FRC) issuing of the new Financial Reporting Standard (FRS 102), which will form the basis of financial reporting for accounting periods starting on or after 1 January 2015 – the same date as when the new Sorp becomes mandatory.

The regulators have published the consultation on a Sorp microsite, and it will run for four months, closing on 4 November. Today a PDF of the Sorp exposure draft has been published and includes the facility to select and download individual modules of the Sorp, along with an invitation to comment including a list of consultation questions.

Sorp committee encourging feedback

Laura Anderson, joint chair of the Sorp Committee and head of enforcement at OSCR, said: “We want as many charity trustees, accountancy professionals, funders and other interested stakeholders as possible to take part in the consultation and give us their feedback – this is a key opportunity to shape the way accounts are prepared in the future.”

Rui Domingues, director of finance & ICT at Friends of the Elderly and chair of CFG's Technical Accounting Forum, emphasised how much the environment charities operate in has changed since the last Sorp was published.

“The public benefit entity environment is different now,” he said. “Not only in terms of the accounting framework but also the level and type of information expected from charities by beneficiaries, the public and funders. This is a real opportunity to address charity accountability head-on.

“It’s also important that charities are aware of the changes in the new Sorp and start planning for them. For example, this consultation proposes a new look Statement of Financial Activities (Sofa), with some of the key headings changing.”

New Sorp takes modular approach

One notable change in the Sorp draft is that it is written in a modular style, which the Sorp-making body hopes will make the document “easier for charities to navigate and identify the parts of the new Sorp that apply to them”.

There are 15 modules that apply to all charities, and a further 15 that deal with particular transactions and structures, such as social investments and mergers, which only apply to some organisations.

Other proposed changes include a new module on social investments; a reduced number of headings required in the statement of financial activities; and ‘material grants made to institutes’ to be listed in notes, rather than made available in a separate publication.

Being comprehensive but accessible

Ray Jones and Nigel Davies from the accountancy policy team at the Charity Commission told civilsociety.co.uk in July that as well as reflecting FRS 102, the sector-based Sorp committee has also been writing the new draft Sorp specifically to accommodate the needs of smaller charities that choose to continue reporting under the existing Financial Reporting Standard for Smaller Entities (FRSSE).

Jones and Davies said they adopted a ‘think-small-first’ approach in drafting the new Sorp, in order to help charities navigate the document (which at current draft is 200 pages long) and understand which sections apply to them.

“There is an obvious tension between producing a Sorp that is comprehensive and lists all note disclosure requirements, and the risk of simply repeating lists that are available in the accompanying standards,” Jones and Davies said. “We have had to think carefully about how the Sorp might best deal with these sometimes very detailed requirements.”

Speaking to civilsociety.co.uk today, Rohan Hewavisenti, director of finance and business development at British Red Cross, praised the document on the whole, but offered a note of caution about finding the right balance:

“In the interests of transparency, if we’re asked to disclose too much as compulsory, then it ends up reducing transparency as you end up with a very long document,” he said. “So if it’s too long then people won’t read it unless they have a professional reason to do so.

“It can lead to obfuscation – too much information and no one can pick out the key points. And also I think that for something like risk management, if you disclose everything then it’s not clear what’s important.”

Shadow Sorp Committee

Don Bawtree, head of BDO’s not for profit sector group, said that the draft Sorp is “good in parts, but there's a lot of work to do with some fundamental issues still to be resolved”.

Bawtree also heads the ‘shadow Sorp committee’, but was speaking independently to civilsociety.co.uk when he said that a huge question mark hangs over the Sorp’s identity.

“Is this Sorp supposed to be Noddy’s Guide to Accounting, for the treasurer of the Netherwhollop branch, all the way up to the chief executive of a Wellcome Trust or Oxfam, or is it actually a technical document that explains how to apply FRS 102 in the charity context?” he pondered.

“It’s got a bit of an identity problem. And to some extent that’s always been there, but the rules have changed and the FRC is being stricter.

"I think it’s pretty clear from the invitation to comment that it’s the Council saying ‘we would prefer this to be a very limited interpretation where there are issues very specific to charities, and actually all this other stuff sits within the regulator’s purview. So if you want to issue guidance [elsewhere] about what annual reports are all about, that’s fine’.”

Bawtree speculated that this could result in two very difficult documents emerging: a much shorter technical document and more general guidance from the Commission – the latter including a focus on items such as ARs, about which Bawtree speculated that the FRC’s stance is likely to be “that’s not the sort of thing we would normally be issuing as a technical document”.

Bawtree said that his shadow committee will be releasing a list of questions in reacting to the draft “in ten days to two weeks' time”, and anyone interested in commenting can do so to him direct at [email protected].