Kate Sayer outlines the accounting changes that charities can expect from a new Sorp based on Financial Reporting Standard 102.

For some time now we have had a stable reporting and accounting regime, with the Statement of Recommended Practice (Sorp) for charities last issued in 2005. The Sorp is actually an interpretation for charities of generally accepted accounting practice. Now we have a major change in general accounting standards and so the Sorp will be reissued.

The timescale for the change is that charities will have to use the new Sorp for accounting periods beginning on or after 1 January 2015. This will mean that charities with a December year end will have to use the new Sorp for their accounts for the year ended 31 December 2015.

Comparative figures for the year ended 31 December 2014 will have to be in the same format. Some preparation at an early stage would therefore be wise. Charities need to take care where they change their year end or if they are just starting a new entity, as the changes may then affect them earlier.

New charity Sorp

The new charity Sorp will be issued for consultation in July 2013.

In a major departure from the old Sorp, the new version will not be "one size fits all". The new Sorp has a modular format. Core modules relevant to all charities cover areas such as the trustees’ annual report, fund accounting (restricted and unrestricted funds), primary financial statements, general income and expenditure and the balance sheet.

There are then specialist modules for certain types of charities, such as companies, or charities undertaking particular activities, such as joint ventures, grant making, or holding heritage assets. Specialist guidance also covers investments, social investments, branches, groups and mergers.

New Financial Reporting Standard

The basis for the new Sorp is Financial Reporting Standard 102. This was issued in March 2013 by the Financial Reporting Council and will be effective for financial years commencing on or after 1 January 2015.

It replaces all financial reporting standards and statements of standard accounting practice and is designed to apply to all entities including not-for-profits, other than those reporting under the FRSSE (see below) or international financial reporting standards (mostly global companies listed on a stock exchange).

FRS 102 can be adopted early, but not if a specialist Sorp applies, so charities must wait for the charity Sorp.

FRS 102 introduces some changes, but fewer than anticipated. For example, the FRS 102 introduces new terminology such that the balance sheet is now called ‘a statement of financial position’ and the profit and loss account is replaced with the ‘statement of comprehensive income’. However, the charity Sorp will retain the terms balance sheet and statement of financial activities. One change that is likely to be retained is that stock will be called inventory.

Other changes

• All entities reporting under FRS 102 will have to produce a statement of cash flows – a simplified cash flow statement.
• The criteria for recognising assets and income, liabilities and expenses have been aligned so that these are now based on probability and reliability of measurement. For example, you will include income (and a debtor as an asset) when it is probable that you will receive the income. This may affect the timing of the recognition of some donations and legacies.
• Accrued holiday leave or other entitlements will have to be included as a liability.
• Longer-term liabilities (more than one year) have to be discounted to their net present value.
• Donations of goods and services have to be brought in at their fair value, which is usually their market value. Public benefit entities (including charities) have a concession whereby the donated stock in charity shops (and similar donations) can be recognised as income when sold, because it would be difficult to measure the value reliably at an earlier stage.

Smaller charities

Smaller charities will be able to choose whether to use the Financial Reporting Standard for Small Entities (FRSSE) or the FRS 102. The new charity Sorp is drafted to be applicable to both sets of charities, but you do have to choose one or the other and then follow it consistently. Your charity is small if you meet two out of three conditions:

• Annual income not exceeding £6.5m.
• Balance sheet total not exceeding £3.26m (this refers to the total funds or total net assets).
• Average number of employees not exceeding 50.

If your charity qualifies as small, then you may adopt the FRSSE version of Sorp now or when you implement the new Sorp. If your charity is not small, then you must adopt FRS 102 and the correct version of Sorp matched to that standard.

Broadly speaking, the FRSSE version of the new Sorp would mean little change for a charity following the current Sorp.

Kate Sayer is a partner at Sayer Vincent.