Cloud Accounting For Charities. Coping with the challenges of SORP

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1 Cloud Accounting For Charities Coping with the challenges of SORP

2 Introduction Cloud accounting has progressed from basic SME solutions to more advanced software for larger and more complex multi-entity or multi-location organisations. Needless to say, not all accounting software solutions are the same. If you are a small charity you are no doubt applying SORP FRSSE accounting conventions to your accounting and reporting. As a large charity you have the challenge of SORP FRS102 as well as the job of accounting for multiple entities and possibly outlets or locations. The following paper is designed to help you to understand the challenges that SORP creates and the questions you need to ask when evaluating a cloud accounting solution for your organisation.

3 SORP and the Statement of Financial Activity (SoFA) The form of accounting stipulated by SORP (either SORP FRSSE or SORP FRS102) is very different to that used in normal accounting conventions. The key purpose of the SORP accounting format is to give a complete view of the total incoming resources for the year and how they have been expended and show the overall financial position at the year end. The traditional Profit and Loss Account is replaced by Statement of Financial Activity (SoFA) which is very different to a standard profit and Loss Account. The SOFA is designed to show income from various sources: Unrestricted Funds o Unrestricted General o Unrestricted Designated Restricted Funds o Restricted Income o Restricted Capital Expendable o Restricted Capital Permanent Unrestricted General: funds donated to the charity that can be spent or applied at the discretion of the trustees to further the charities purposes. Unrestricted Designated: funds that have been gifted to the charity and classified Unrestricted General but have now have been set aside (at the discretion of the trustees) for a specific project or commitment (thereby making the funds designated but not restricted). Restricted Income: funds that have been allocated to a specific project and have been declared as such by the donor when making the gift (or as a result of the terms and conditions of an appeal) and which must be spent in a reasonable time period. Restricted Capital (Expendable): a gift of a tangible fixed asset where there is power to convert all or part of the capital into income, but the timing of conversion (and spending) of the funds is at the discretion of the trustees. Restricted Capital (Permanent): a gift of a tangible fixed asset where there is no power to convert the capital into income and must be held indefinitely. All expenditure during the year should be applied against either restricted funds, unrestricted funds or designated funds according to the purpose for which the funds are applied and at the same time be accounted for under three main headings of expenditure; Cost of generating funds Charitable Activities Governance Costs

4 Most costs can be easily allocated into the three headings of expenditure noted above, other costs will have to be allocated on a reasonable, justified and consistent basis. Under certain circumstances it is permissible to transfer funds from one category to another, e.g. from unrestricted funds to cover a deficit on restricted funds. All such transfers must be shown separately on the SoFA. In this way the reader of the accounts can measure how the various funds have been applied and in what proportion, thus seeing the financial statements in a more transparent and accountable format. The restricted, unrestricted and designated funds are kept separate at all times and reconciled between funds at the start of the year, income received, expenditure, transfers between funds and funds at the end of the year. SORP and the Balance Sheet The structure of the Balance Sheet specified by SORP is similar to a balance sheet structure of a general business except that the funds of the charity which finance the net assets of the charity will be split between restricted, unrestricted and designated funds. There are other smaller differences which will apply is special cases, e.g. disclosure of heritage assets separately from general fixed assets.

5 If you are considering a cloud accounting solution for your charity then the following is a list of the main challenges that you need to think about: 1. Handling the Separation of Funds Handling the separation of funds and income transfer between funds can lead to some challenges in how the accounts system should be structured to handle this. Charities can and do have countless number of funds of varying Fund Type classifications. In addition they will have extensive numbers of revenue streams and locations. In order to manage the separation of funds you need to check availability of options. There are possibly two main options available. Coding Structure: The first is possible use of the coding structure in the cloud accounting solution provided, it can meet the diverse requirements of your particular charity. You need to ensure that the coding structure provides enough parameters to handle the fund name, fund type, and sources of income. An example is shown in the diagram below:

6 Multiple-Entity Accounting Structure: A common scenario in mid to large charities is the requirement for each fund to have its own complete set of reporting books and records. However, management and the regulator may need to report a combination of these funds under one or multiple charity numbers. Hence the need for consolidated reporting. In this instance each fund is set up as a separate company with its own individual database and set of transactions, currencies, general ledgers, stock systems etcetera. It may also have its own individual Extended Business Analysis functionality. See diagram below for illustration.

7 2. Income Recognition The second challenge relates to income recognition. The variety of income sources over the course of a year together with the SORP demands of using funds classification means it s not always easy to allocate income correctly. You need to check if the cloud accounting solution you are considering includes some of the functions that can help with the task of income recognition: Does it facilitate prepayments? These will allow you to enter revenues that have been invoiced and paid in advance of the commitment. Does it provide a Document Management System? Allows you to scan and store important documentation relating to contracted services, performance commitments and more. Does it include partial Invoicing and Receipts? This allows invoices to be partially paid off to recognise work in progress. What kind of Audit Trail functionality does it provide? There is a full audit trail for every transaction within the system allowing you to view changes to transactions by user. Job and Project Analysis? Does it allow you to monitor jobs or projects on a revenue, expense and P&L basis and to monitor work in progress? Can it Automate Bank Reconciliation? Bank accounts can easily and quickly be reconciled.

8 SORP Expenditure Requirements A legal obligation arises when a charity enters into a binding contract and expenditure is recognised when the goods or services are received / completed. A constructive obligation arises when the charity indicates it accepts responsibilities and thereby creates a valid expectation it will meet them. 3. Expenditure Recognition Liabilities can result from exchange transactions that are contractual (e.g. purchase of goods and services or employment of staff) or non-exchange transactions (e.g. making grants). A legal obligation arises when a charity enters into a binding contract and expenditure is recognised when the goods or services are received / completed. A constructive obligation arises when the charity indicates it accepts responsibilities and thereby creates a valid expectation it will meet them. A liability must be measured at the best estimate of the amount required to settle the obligation at the balance sheet date. A provision (a liability of uncertain timing or amount) must be made for future payments to be made (whether over several reporting periods or not) and this must be discounted to the present value (if payments made beyond the current reporting periods). For grants that have conditions attached then provisions may not be required. Unrestricted funds held at reporting date can be designated on the SoFA to meet future funding commitments. Activities that are to be wholly financed from future income must not form part of such a designation. In order to manage expenditure recognition, it is important to review the features that support this requirement: Does it provide facility to record Accruals? These will allow you to enter commitments that require a provision but have not yet been invoiced. Does it provide a Document Management System? This allows you to store important documentation relating to contracted services, performance commitments and more. What kind of Workflow Approval is provided? This increases security allowing purchase orders or payments to be approved by a designated person within the organisation before proceeding. Does it include a Recurring Invoicing function? This allows invoices to be set up as recurring which will help with regular payments such as monthly donations. Is the Job and Project Analysis functions? This allows you to monitor jobs or projects on a revenue, expense and P&L basis and to monitor work in progress. Does it include Batch Payments? Payments can be made through electronic payment files.

9 4. Cost Allocation SORP requires larger charities to report on an activity basis which must be done on a full cost basis. Significant activities are those which due to their size or importance are critical to the charity in meeting its aims and objectives. Charitable activities may be analysed according to services provided or programmes. Additionally, the SoFA must distinguish between expenditure incurred on charitable activities which contribute to furthering the charity s aims and purposes and those undertaken to raise funds. To ensure that the accounts present the costs of activities fairly the following must be applied: Direct costs to a single activity must be attributed to that activity. Shared costs which contribute directly to more than one activity must be apportioned between those activities. Support costs which are not attributable to a single activity must also be apportioned between activities being supported.

10 Under the UK retail gift aid scheme, your charity must have its income estimated based on historical data or some other estimation. 5. Handling Donated Goods and Services Some charities are required to keep stock of Goods donated for re-sale. Goods donated for resale under the UK retail gift aid scheme must have the income estimated based on historical data or some other estimation. Donated goods for re-sale can be recognised as income when they are sold, although where practical the Charity should try to measure the value on receipt, which is the expected re-sale value less the expected cost of sale. The main challenge therefore for charities selling goods is the management of stock and the evaluation of any cloud accounting system should include an examination of: The Stock Management System to handle flows of stock: The system operates fully in conjunction with the Sales Order Processing system and the Purchase Order Processing system. Does it facilitate handling of both Products and Services? So you can operate the Inventory Management System for both Products (physical items) and Non-Products such as Services. Or can you operate stock management simply as a Product Price Catalogue without reference to the Inventory Management facilities? Does it facilitate multiple-warehouses, stock-locations or stock-bins? And can you also operate the system with or without the warehouse location facilities.

11 6. Handling multiple-entities or outlet locations. For many charities, and particularly larger organisations, there will be a requirement to manage the accounts of numerous subsidiaries, offices or retail outlets. In this case therefore the management need to ensure that an evaluation of any cloud accounting system includes an understanding of multi-entity, multi-location accounting and consolidation. How many different entities need to be managed by the system? How many users/concurrent users are required per entity? What level of collaboration is required with your accountant or adviser? Do you require inter-company (not just inter-fund) transaction management? Do you require different levels of user authorisation and permissions? Do you require consolidation of different entities based on different percentage ownerships? Do you require multiple sub-group structures within a group? Do you need automatic elimination of inter-company balances? Do you require multi-currency consolidation with central maintenance of all group master currency tables? About AccountsIQ This article is brought to you by AccountsIQ, cloud accounting and consolidation software for midsize companies, particularly those with multi-entity or multi-location needs. Built for the cloud, AccountsIQ is in use in 23 countries and is now the solution-of-choice for many the worlds leading accounting practices. For further information on how AccountsIQ might work for your growing business please feel free to contact us and we would be happy to discuss your needs. sales@accountsiq.com Web: UK: +44 (0)203 (0) Europe: +353 (0)