OG15 D1 - ACCOUNTING AND REPORTING

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OPERATIONAL GUIDANCE

CHARITY ACCOUNTS AND REPORTS

THE STATEMENT OF RECOMMENDED PRACTICE: ACCOUNTING AND REPORTING BY CHARITIES (THE SORP), UK ACCOUNTING STANDARDS AND CHARITIES

OG 15 D1 – 14 April 2008

Purpose

This section explains why we have the charities SORP and gives the background to its development, its relationship with company law and charity law, and explains its legal authority, content and application to company charity and non-company charity accounts.

Functional responsibility

For information

All operational staff

Contents

1. Why have a SORP? The purpose of accounting standards and the origins of SORP
2. Accounting Standards and Charities
3. SORP and the Accounting Standards Board
4. A brief history of the SORP to date
5. Current developments in the SORP
6. The legal framework for charity reporting and accounting
7. SORP and small non-company charities with a gross income of £100,000 or less
8. SORP and charitable companies and non-company charities with a gross income exceeding £100,000
9. SORP and audit standards (known as International Standards of Auditing (ISAs))
10. SORP and other sector SORPs
11. Using the SORP effectively
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. Why have a SORP? The purpose of accounting standards and the origins of SORP
	A set of accounts is simply an explanation, in financial terms, of what has happened in the year and the financial position at the year end. In the absence of any standards applying to the preparation accounts the same transaction could be reflected differently by different preparers and even the presentation and format of the accounts could vary according to what information the preparer wished to present.
	The purpose of accounting standards is to establish a framework where particular transactions or occurrences are treated in a common way, thereby ensuring that the reader of the accounts can interpret those accounts with ease, and so can compare one set of accounts with those of another or for the same body compare one year with another.
	Accounting standards vary in form and are: prescriptive rules, or set out a number of acceptable alternative options, or establish the basis for making a judgement as to how to show a transaction or an occurrence in the accounts.
	Prior to the SORP and the Charities Act 1993, there was no coherent reporting and accounting framework for UK charities. Charities had near total freedom in law as to how they reported to the public. The requirements imposed by law on charities were rudimentary and not always even consistent with accounting practice. The Charities ( Statement of Account) Regulation 1960 which provide the accounting framework prior to the 1993 Act only required:
	particulars of assets and the persons in whom they are vested;
	approximate amounts of liabilities;
	amounts of receipts and payments classified according to nature; and
	particulars of assets, receipts and payments should distinguish between endowment and non-endowed.
	The result was a standard of reporting which was condemned by commentators for its poor quality and an inconsistent mix of styles of accounts (ranging from cash accounting through to an ad hoc range of balance sheets and financial statements).
	The 1980 ICAEW research report: Financial Reporting by Charities (authors Peter Bird and Peter Morgan-Jones) studied a sample of 100 of the largest charities of which only 85 could be obtained by the researchers. The study and its related questionnaire of corporate donors and grant making trusts found a number of problems with sector practice:
	a lack of compliance with the disclosure requirements of the law or UK Statements of Standard Accounting Practice;
	a perception that some charities only showed what they wished and concealed their true financial state;
	some evidence of the exclusion of restricted funds from the revenue account and balance sheet;
	evidence of the deliberate understatement of the financial position; and
	that the absence of approved accounting guidelines obstructed auditors in challenging poor practice and in judging whether the accounts were "true and fair".
	They made a number of recommendations:
	that charity accounts comply with the prevailing accounting standards, modified only where appropriate;
	the desirability of more standardised accounts;
	columnar presentation of income and expenditure between unrestricted and restricted funds;
	receipts and payments accounting for smaller charities;
	full accruals based accounts for all other charities;
	consolidated accounts where appropriate; and
	the law should require the audit of charity accounts.
	The "Woodfield Report": Scrutiny of the Supervision of Charities (1987) also found fault with the accounting and reporting by charities. Of the charities required to submit annual accounts under the Charities Act 1960 the report found "that in practice less than 10% comply" (paragraph 52) and it went on to note that "This situation is unacceptable. It is important that information relating to charities is available both to the Commission and the public" (paragraph 53). It also noted and welcomed the fact that "The Accounting Standards Board has been working on best practice for charity accounting and intends to publish a Statement of Recommended Practice" (paragraph 56).
	The Government’s response entitled Charities: A Framework for the Future (1989) paragraph 4.16 laid the foundations for the SORP as the framework for charity accounting and reporting. "Like Woodfield, the government welcomes the SORP. Given charities’ great diversity we do not think it would be practicable to require all charities to follow the SORP in all respects. The precise requirements in each of these areas will be prescribed in regulations."
	Accounting standards are overseen in the UK by an approved standards setting body called the Accounting Standards Board (ASB). The ASB sets standards for both profit and not-for-profit entities through the publication of Financial Reporting Standards and together with Urgent Issues Task Force abstracts provide the accounting profession with the framework within which it operates. This framework is referred to as UK Generally Accepted Accounting Practice (UK GAAP). Any charity preparing accruals accounts to present a "true and fair view" needs to comply with UK GAAP including the applicable SORP.
	The first SORP was developed under the auspices of the Accounting Standards Committee (the predecessor body of the ASB) in 1988 and was arguably a response to poor sector practice. Without an accounting framework, the sector had fallen short of the expectations placed on it by the government in the public interest. However, this SORP (known as SORP 2) had no underpinning in law and its impact on sector accounting and reporting was marginal.
	Subsequently the Charities Act 1993 together with accounting and reporting regulation made under the act established a common reporting requirement (section 45) and accounting framework (section 42) with the SORP underpinning good practice reporting and accounting. At about the same time the Charity Commission was approved as the SORP making body by the ASB and took over the SORP making process, under the oversight of the ASB.
	The SORP process itself is a collaborative one and offers a mechanism for the sector to be directly involved in developing the framework and to decide the direction accountability should take. Through SORP the sector was able and is able to set the framework that would subsequent be adopted by Regulations made under the 1993 Act. Also the SORP provides a unifying framework between charities fully regulated by Part 6 of the Charities Act 1993 and charities incorporated under the Companies Acts. The accounting framework for company charities is set out in company law with the recommendations of SORP enabling such charity to reflect sector needs within the framework of company law. Moreover, the SORP applied across the UK providing a consistent approach to charity accounting across the differing legal jurisdictions of the UK.

2. Accounting Standards and Charities
	UK charities which prepare accruals accounts do so on a "true and fair" basis and so must comply with UK GAAP. Indeed, trustees have a legal duty to prepare accounts that give a "true and fair" view. One of the complaints frequently levelled at the SORP is its complexity and growing length, however the main reason for this is the development of UK GAAP which now encompasses 37 Financial Reporting Standards (FRS) and 22 Urgent Issue Task Force (UITF) abstracts and runs to some 3085 pages (including Exposure Drafts). The SORP offers a single reference source summarising all the standards as they affect charities and runs to 121 pages (including appendices). Moreover, the SORP needs to reflect the requirements of charity law, for example fund accounting, address the reporting needs of charities however constituted and be compatible with the law of the separate jurisdictions of the UK.
	Non-company charities and those company charities not incorporated under the Companies Acts where they prepare accruals accounts, must prepare them on a true and fair basis in accordance with Regulation 8 (4) of The Charities (Accounts and Reports Regulations) 2008 and follow the methods and principles of the SORP, Regulation 8(5). Charitable companies incorporated under the Companies Acts must prepare accounts on a true and fair basis in accordance with sections 393, 396 and 474 of the Companies Act 2006.
	Non-company charities with a gross income of £100,000 or less may opt to prepare receipts and payments accounts. Receipts and payments accounts are not required to give a "true and fair" view and are therefore not subject to UK GAAP and the SORP. However whenever a small charity, which is eligible to adopt receipts and payments accounts, opts to prepare accruals accounts instead, it is choosing to comply with UK GAAP and the trustees must ensure that they, or their advisers, are familiar with and follow the SORP. The SORP does however make significant concessions for the smaller non-auditable charity which are summarised in appendix 5 of the SORP

3. SORP and the Accounting Standards Board
	SORP making bodies are expected to meet criteria laid down by the Accounting Standards Board (ASB) and to develop their SORP in line with their published code of practice – SORPs: Policy and Practice issued in July 2000. Under the code of practice the Commission and the Office of the Scottish Charity Regulator (OSCR), as the joint SORP making body for charities in the UK, need to demonstrate that:
	the sector represented has special accounting or financial reporting problems that require the clarification of accounting standards or interpretation;
	the SORP making body represents the whole or major part of the sector for the purposes of financial reporting within the relevant jurisdiction;
	the SORP making body shares the ASB’s aim of advancing and maintaining standards of financial reporting in the public interest; and
	it agrees to abide by the ASB’s code of practice.
	The code of practice also requires:
	a review of the SORP at least annually. The outcome of a review is not necessarily a new SORP, the conclusion can be that no change is required, or, that an information sheet is required to clarify particular issues, or, that an Update Bulletin should be published to deal with a limited amendment of the SORP;
	participation of representatives of the sector, independent outsiders on behalf of wider public interest and, where possible, users of financial statements, and have sufficient technical accounting support. In the case of the Charities SORP, this requirement is met through the appointment of a SORP Committee; and
	wide consultation on proposals, including a public consultation on any proposed changes through the publication of an exposure draft.
	The SORP’s role, as set out in the ASB’s code of practice, is to supplement accounting standards and other legal and regulatory requirements in the light of special factors prevailing or transactions undertaken in the charity sector. The SORP has to be developed in the context of current accounting practice, in a manner compatible with the provisions of the law, accounting standards and Urgent Issues Taskforce (UITF) Abstracts. The SORP Committee must identify, consider, and address issues relating both to the application of the current SORP and develop recommendations that will assist the sector implement any new accounting standards that have been introduced since the last review.
	The SORP is not a regulatory tool for the Commission and OSCR. The SORP is produced under the oversight of the ASB with its recommendations developed by a sector based SORP Committee in accordance with the ASB code of practice and to assist charities in the UK meet their accounting and reporting responsibilities. SORPs are initially released as an exposure draft subject to public consultation, and following a post consultation review are approved by the ASB Committee for Public Benefit Entities to confirm that the SORP does not conflict with UK GAAP and then signed off for release by the full ASB Board.

4. A brief history of the SORP to date
	1988. SORP2 was issued by the Accounting Standards Committee in May 1988, together with a guide for the smaller charity. The recommendations went beyond the very basic legal requirements of the Charities Act 1960. The Charities Act 1960 was silent as to the format of the accounts, bar a requirement for details of the receipts and payment in the year. Rather than a balance sheet all that was required were particulars of assets distinguishing endowments and approximate amount of the liabilities.
	Although the Commission welcomed SORP2 and would accept filings made using SORP2, SORP2 was wholly voluntary and not underpinned by regulation and was not adopted as standard practice by the sector. Arguably the continuing poor response by the sector meant that a regulatory framework was required if the sector was to achieve adequate levels of accountability and transparency in the public interest.
	1995. Accounting by Charities: Statement of Recommended Practice (October 1995) was the fruit of a collaboration with the ASB where the Commission was granted the status of SORP making body. The SORP was underpinned by The Charities (Accounts and Reports) Regulations 1995 which came into force on 1 March 1995. The 1995 SORP introduced the Statement of Financial Activities in place of an Income and Expenditure Account, alongside a balance sheet and notes to the accounts.
	2000. Accounting and Reporting by Charities: Statement of Recommended Practice (October 2000) was the second by the Commission as a SORP making body. Effective from 1 January 2001, the SORP was underpinned by The Charities (Accounts and Reports) Regulations 2000 which came into force on 15 November 2000. The Regulations adopted the "methods and principles" of SORP thereby avoiding the need to schedule the format and other requirements in such detail. The SORP was supplemented by an Information Sheet which provided additional informal guidance on particular points and Update Bulletin 1 which amended the SORP for pension accounting and other new standards was published in January 2003.
	2005. This is most recent SORP from the Commission as the sole SORP making body. Accounting and Reporting by Charities: Statement of Recommended Practice (March 2005) was effective for accounting periods starting on or after 1 April 2005. The SORP was again underpinned by The Charities (Accounts and Reports) Regulations 2005 which again adopted the "methods and principles" of the SORP and came into force on 31 March 2005.
	A reprint is planned in early summer 2008 to update legal references for the Charities Act 2006, the Companies Act 2006 Charities Act 2006, and the Charities and Trustee Investment (Scotland) Act 2005. This reprint will also flag more clearly the current exemptions available to smaller charities below the audit threshold.
	In 2006 OSCR joined the Commission to form a new joint SORP making body and a new SORP Committee was recruited by open advertisement to undertake annual review the existing SORP in accordance with the ASB Code of Practice and to prepare for the next SORP.
	An Information Sheet providing additional informal guidance on particular application points has been issued and further application guidance (which does not amend the SORP) will be issued as necessary. Update Bulletins amending the SORP will be issued as necessary but only to reflect significant developments in UK GAAP that may arise prior to the publication of a new SORP.

5. Current developments in the SORP
	OSCR joined with the Charity Commission in 2006 to become the joint SORP making body for charities in the UK. The SORP Committee has always had a majority of its membership drawn from the sector and the new Committee, recruited through open advertisement, has been restructured to deepen sector representation and bring together a broad diversity of experience from across the UK charity sector and accountancy profession.
	The drivers for change that will influence the development of the SORP include:
	changes in charity and company law;
	changes in UK GAAP;
	convergence of UK GAAP with International Financial Reporting Standards (IFRSs);
	requirements for a charity specific interpretation of a particular standard;
	developments in good practice reporting;
	sector and public demands for transparency in reporting and accounts;
	relevant reporting and accounting burdens for small (under the statutory audit threshold) charities;
	stewardship reporting needs for resources held on trust; and
	maintenance public confidence and trust through high quality financial and narrative reporting.
	The agenda, minutes and papers for the SORP Committee are published after each SORP Committee meeting on both OSCR’s and the Commission’s websites.

6. The legal framework for charity reporting and accounting
	6.1 Legal framework for reporting 6.2 Legal framework for company charity accounts 6.3 Legal framework for non company charity accounts

	The legal framework differs between company charities incorporated under the Companies Act and other charities which are subject to the Charities Act 1993.
	The Charities Act 1993 codified for the first time a power to make Regulations as to the form and content of a charity’s report and, for non-company charities, the accounts. This framework, as amended by the Charities Act 2006, remains in place.
	The legal framework is common to all registered charities with respect to the content of the Trustees’ Annual Report. The legal framework for accounts differs between charitable companies established under the Companies Acts (most recently 1985, 1989 and 2006) and all other charities, for convenience termed non-company charities.

	6.1 Legal framework for annual reporting
	The reporting framework is explained more fully in CC15 Charity Reporting and Accounting: the Essentials, but can be summarised as a requirement that all registered charities (company and non-company alike) must produce an annual report (Charities Act 1993 section 45(1)) that accords with the Regulations. These Regulations are currently the Charities (Accounts and Reports) Regulations 2008. The framework provides for a simpler form of reporting for charities not subject to statutory audit.
	Charitable companies, in accordance with company law, must produce a director’s report (Companies Act 2006 section 415) but the two reports can be combined into a single report, provided all the requirements of the Charities (Accounts and Reports) Regulations are met.

	6.2 Legal framework for company charity accounts
	Charitable companies incorporated under the Companies Acts are subject to company law with respect to the content of the directors’ report and the accounts. The Companies Act 2006 requires that the accounts present a "true and fair" view (section 393). To comply with the requirement to prepare accounts to give a "true and fair" view, company charities should follow the SORP.
	The concept of "true and fair" view lies at the heart of financial reporting in the UK (See paragraph 10 - Statement of Principles for Financial Reporting, published by ASB). Company accounts are prepared on the accruals basis and should comply with either UK GAAP (sections 396 and 464) or where appropriate International Financial Reporting Standards (section 397). Charitable companies are prevented by company law (section 395(2)) from adopting International Financial Reporting Standards.
	UK GAAP, FRS18 Accounting Policies, requires that where there is an industry SORP this should normally be followed (FRS18 paragraph 58). The Auditing Practices Board (APB) bulletin 2000/3 (Departure from Statements of Recommended Practice for the preparation of financial statements: Guidance for Auditors) notes that for accounts to give a "true and fair" view, the auditor needs to ensure that SORP is followed; the guidance provides for a qualified or adverse opinion where SORP is either wholly disregarded or the alternative treatment adopted does not provide a "true and fair" view.
	The Companies Act 2006 requires that a company charity’s accounts (sections 395 and 471) include a balance sheet and notes (sections 396 and 472) and an income and expenditure account (section 474). The UK GAAP requirement to follow the relevant industry SORP in order for the accounts to provide a "true and fair" view means that a company charity’s accounts will also include a Statement of Financial Activities. A charity may only depart from the SORP if the alternative treatment gives a more "true and fair" view of a particular matter.

	6.3 Legal framework for non-company charity accounts
	The situation for non-company charities is more straightforward. Charities eligible to prepare receipts and payments accounts need not follow the SORP since the SORP does not apply to receipts and payments accounts (SORP paragraph 6) as they are not required to give a "true and fair" view. SORP does however apply to all charities preparing accruals accounts on a "true and fair" basis (SORP - paragraph 3).
	The Charities (Accounts and Reports) Regulations 2008, Regulation 8 (5) requires that the accounts are prepared in accordance with the methods and principles of the SORP. Regulation 8 also sets the requirement for a Statement of Financial Activities and Balance Sheet and related notes to the accounts.
	SORP has legal underpinning for the accounts of non-company charities. A charity may only depart from the SORP if the alternative treatment is necessary to give a "true and fair" view of a particular matter.

7. SORP and small non-company charities with a gross income of £100,000 or less
	The vast majority of charities (circa 78%) are non-company charities with an income below £100,000 and are eligible to use receipts and payments accounting. Such charities can elect to prepare receipts and payments accounts which are not governed in format or content by either the Regulations or the SORP.
	Where charities opt to prepare accruals accounts, the SORP permits considerable flexibility for smaller charities (refer to SORP appendix 5) and gives considerable freedom in the layout of the Statement of Financial Activities. Unless the charity is required by a funder or donor to prepare accruals accounts, or it expects to exceed the income threshold in the next accounting period, the trustees need to consider whether the advantage in terms of the greater accountability and information that accruals accounts provide outweighs the additional costs and complexity of their preparation under UK GAAP. For many small charities simpler receipts and payments accounts may adequately meet their charity’s needs.

8. SORP and charitable companies and non-company charities with a gross income exceeding £100,000

Non-company charities with an income above the receipts and payments threshold but below the statutory audit threshold, and all charitable companies must prepare accruals accounts but the SORP permits considerable flexibility for smaller charities (refer to SORP appendix 5) and gives considerable freedom in the layout of the Statement of Financial Activities. The minority of charities above the statutory audit threshold have more detailed disclosure requirements under the SORP.

9. SORP and audit standards (known as International Standards of Auditing (ISAs))
	Audit standards issued by the APB also underpin the SORP, ISA 250 paragraph 35 notes that where non-compliance with laws and regulations arises and this has a material effect on the financial statements auditors should normally express a qualified or adverse opinion. Practice Note 11: The Audit of Charities in the UK (2002), paragraphs 15 and 57, advises that "it is normally necessary to follow the guidance set out in the Charities SORP in order to give a true and fair view".
	Where the accounts are prepared on an accruals basis and do not comply with the SORP, the auditor should consider APB Bulletin 2000/3 Departure from Statements of Recommended Practice for the preparation of financial statements: Guidance for Auditors, to determine whether the departure from, or non-compliance with SORP is so material or pervasive as to require an adverse or qualified opinion.
	The audit profession therefore has an important role in raising the quality of reporting and accounting by charities as their work will involve the consideration of SORP compliance when forming their audit opinions and where necessary in advising their clients of the steps necessary to avoid an adverse or qualified audit opinion that may result from significant non-compliance.

10. SORP and other sector SORPs
	Where there is a more specific sub-sector SORP then that SORP is used in place of the Charities SORP. This is because the specific sub-sector SORP, for example for Registered Social Landlords or Higher or Further Education Institutions, interprets accounting standards specifically for that particular sub- sector, addressing the particular transactions that are likely to occur and thereby ensuring a "true and fair" view is presented. The role of more specialised SORPs is recognised by the Charities SORP in paragraph 5 and the provisions in Regulations for "special case" charities.
	It is not possible under UK GAAP to "pick and mix" different SORPs. A SORP should be adopted in its entirety. The only exception is where a departure from the SORP is necessary for a particular transaction in order to give a "true and fair" view. Whilst a departure from SORP for a specific matter is possible under both FRS18 and the Regulations, if the alternative treatment can be justified a being more appropriate to the particular circumstances and therefore necessary to give a "true and fair" view, this is not a general permission for a charity to create its own hybrid version of a SORP.

11. Using the SORP effectively
	The SORP is a technical document interpreting UK GAAP for UK charities and both FRS18 and the Regulations require these recommendations to be followed if the accounts are to present a "true and fair" view.
	However non-compliance, by omission or design, with a particular recommendation is of itself not necessarily a cause for regulatory action unless the error or omission has the potential to significantly mislead the user of the accounts about the activities or resources of the charity. Instead SORP compliance should be judged against the accounts of a charity as a whole and issues of non-compliance can then be considered on the basis of context, materiality, and its impact on accountability and transparency. This involves professional judgement.
	Therefore accountancy advice should always be sought when using or interpreting the accounting recommendations of the SORP whether in dialogue with charity trustees, staff or professional advisers or when dealing with telephone or written enquiries.

Glossary of Terms used in this Guidance
	Accounting Standards Board (ASB)
	International Auditing Standards
	International Financial Reporting Standards
	Urgent Issues Task Force (UITF)
	UK GAAP

Index to further related information