Communicating SORP 2005 to small charities preparing accruals accounts.

Transcription

1 1. Introduction 1.1. At the November meeting, the SORP Committee considered a paper: Steering the way forward: challenges and options. It was agreed that when drafting a future SORP, that the smaller charities, those below the statutory audit threshold, which represent the majority of charities, would benefit from a SORP approach that addressed their needs first, and then elaborated on the requirements and accounting treatments affecting the minority of larger charities However in the interim before 2009/10, the likely timing for the next SORP, it was agreed that some additional advice or guidance could be provided to assist small charities to prepare accruals accounts, and to use and navigate the SORP There are currently 121 copies of the existing SORP in stock at the printers which are likely to be have been used by the end of Quarter 1 of 2007 and consequently any reprint will have to be undertaken in the first half of The SORP remains accessible via the Charity Commission web site Sections 2 and 3 of this paper provide an income profile of the sector and highlight the number of small charities under the audit threshold in England and Wales, and Scotland Section 4 of this paper looks at how a preamble to the SORP might provide a context for smaller charities and facilitate a better understanding of the exemptions available for smaller charities. A draft preamble is attached as appendix 1 for consideration Section 5 of this paper looks at options for developing SORP guidance targeted at small charities. The supporting analysis for each option is attached as appendix 2.

2 2. The current structure of the registered charity sector in England and Wales Income band Number of noncompany charities Number of company charities Total (all charities) Under ,000 10,001 to , ,001 to , ,001 to , ,001 to m Over 1m Total * 2.1. There are 131,700 non-company charities with an income below 100,000 (78% of the sector by number) that may opt to prepare receipts and payments accounts, taking them outside the scope of the SORP All company charities and those non-company charities with a gross income exceeding 100,000 must prepare This category totals 36,500 charities (22% of the sector) Of those charities required to prepare accruals accounts, 23,000 are not currently subject to audit. Once the Charities Act 2006 provisions are effected, this number rises to 28,100, which will fall into the SORP s definition of small Following the implementation of new audit thresholds, 8,400 charities (5% of the sector by number) will be subject to audit and the full reporting and disclosure requirements of the SORP. It should be noted that this category of charity represents some 95% of the income of registered charities in England and Wales. *Although 190,000 charities individual are listed on the register, this includes listed charity subsidiaries, and the analysis considers only those charities which are responsible for filing trustees reports and accounts as at quarter

3 3. The current structure of the registered charity sector in Scotland Income Band Number of noncompany charities Number of company charities Total (all charities) 0 to 100,000 16,400 2,100 18, ,001 to 250, , ,001 to 500, ,001 to 1m > 1m Total 18,050 4,050 22, There are 16,400 non-company charities with an income below 100,000 (74% of the sector by number) that may opt to prepare receipts and payments accounts, taking them outside the scope of the SORP All company charities and those non-company charities with a gross income exceeding 100,000 must prepare This category totals 5,700 charities (26% of the sector) Of those charities required to prepare accruals accounts, 3,850 are not currently subject to audit. Once the Companies Act 2006 provisions are effected, this number rises to 4,500, which will fall into the SORP s definition of small Following the implementation of new audit thresholds, 1,200 charities (5% of the sector by number) will be subject to audit and the full reporting and disclosure requirements of the SORP. It should be noted that this category of charity represents some 95% of the income of registered charities in Scotland. 4. Proposed preamble to the SORP 4.1. At the November meeting, it was agreed that a future SORP might better address the needs of smaller charities, not subject to statutory audit, and be developed in a more user friendly format with a minimum of technical terms. As an interim measure, it was proposed that the opportunity be taken to better explain the application of the SORP to smaller charities The purpose of the draft preamble, appendix 1, is to ensure that those advising small charities or preparing accruals accounts for small charities are familiar with the lighter reporting burden and can make the best use of the existing SORP.

4 4.3. The opportunity is also taken to sign-post the reader to additional sources of advice from the regulators and to remind small charities of the receipts and payments option. Questions: Does the Committee agree that a preamble to the current SORP would assist smaller charities navigate the SORP and understand the exemptions available to them? Does the Committee agree that the preamble creates no new recommendations and so would not require formal consultation prior to its inclusion in the next reprint of the SORP? Are there any further signposting or textual changes to the preamble that would assist users or enhance clarity? 5. Options for the charity regulators to further assist small charities comply with the SORP 5.1. An initial interim measure to better explain the sources of existing information to help small charities has been accepted by the Commission. The Commission will redesign its web information on accounts and SORP entitled Help with preparing Charity Accounts and Reports, with the emphasis on accounting by the size of charity rather than on the SORP In addition to redesigning the Commission web information, additional options to better explain the application of the SORP to smaller charities, for the Commission and OSCR as regulators, were considered, with the aim of providing additional assistance to small charities preparing None of these options would amend the SORP, nor would they be issued by the SORP Committee and therefore would not require a formal consultation process or ASB sign-off. The options considered were: A separate guide seeking to interpret or comment upon each section of the SORP in turn from the perspective of the small charity. Additional model trustees annual report and accounts examples. A collaborative project to develop a bespoke guide identifying particular aspects of SORP where a commentary is required, with or without additional examples. A series of leaflets on particular accounting related issues that may be of interest to small charities. Changes to the accruals pack.

5 5.2 Appendix 2 reviews the pros and cons for each option. Of the options, modifications to the accruals pack offers the most economic and effective interim solution. By simplifying the standard proformas and accompanying notes, the pack could be further developed as a stand alone product consistent with the SORP and thereby provide guidance as to the form and content of accounts and accounting policies as initial entry level guidance. Question: Does the Committee have any comment on this planned approach to assisting smaller charities, or other recommendations as to how the Charity Commission and OSCR might best meet the needs of smaller charities in the interim between the current SORP and the next SORP? 6. Conclusion 6.1. The SORP Committee is asked to approve the proposed preamble to the SORP and is invited to make recommendations to the Charity Commission and OSCR as to how the needs of small charities may best be met, in the interim between the current SORP and the next SORP The SORP Committee is also invited to note that sector initiatives provide an invaluable resource CFDG has indicated a strong interest in developing an aid to small charities which is both a guide to the SORP itself and a worked example, by taking a model ledger. Transactions would be taken through trial balance with the conversion into the finished SORP compliant financial statements. The guide, by being produced by a firm of accountants with support from CFDG membership, would be visibly distinct from the SORP. This planned initiative is subject to a firm of accountants being willing to devote the considerable time required and sponsorship funding being found.

6 Appendix 1: Draft Preamble to the SORP: Small charities and SORP 2005 The recommendations contained in this Statement of Recommended Practice, the SORP, apply to charities in the UK that prepare their accounts on the accruals basis to give a true and fair view of their financial activities and financial position. The SORP is not a one-size fits all framework. The SORP recognises that users of accounts prepared by smaller charities may have different information needs. This is reflected in the greater flexibility in presentation and disclosure offered to small charities without a statutory audit requirement and in particular those below the statutory audit threshold (Appendix 4). The simplified framework applying to small charities is set out in appendix 5. By far the majority of charities in the UK are small. Non-company charities with an annual income which does not exceed 100,000 may opt to prepare receipts and payments accounts on a cash basis, taking them outside the scope of this SORP. Receipts and payments accounts For charities registered in England Wales preparers of receipts and payments accounts may disregard the SORP entirely and have considerable discretion in how they structure their receipts and payments accounts. No balance sheet is required, rather a simple listing of assets and liabilities called a Statement of Assets and Liabilities is provided. Similarly, a simplified Trustees Annual Report, may be presented. Similarly in Scotland receipts and payments accounts are not prepared in accordance with SORP and the form and content of the Receipts and Payments Accounts and Trustees Annual Report is specified in the Charities Accounts (Scotland) Regulations Accruals accounts and small charities Charities preparing accruals accounts, whatever their size or form (trust, association or company etc), are all required to prepare primary financial statements, namely a Statement of Financial Activities (SORP table 3 page 15), a balance sheet (SORP table 7 page 37), and notes to the accounts. A minority of very large charities also have to prepare a cash flow statement. For small charities preparing accruals accounts, the SORP provides simplified annual reporting framework through a simplified Trustees Annual Report, flexibility in the formatting of the Statement of Financial Activities and reduced requirements for notes to the accounts. Small charities and the Statement of Financial Activities and notes to the accounts Small charities do not have to adopt the standard headings for either incoming resources or resources expended in the Statement of Financial Activities and can develop their own to suit their particular circumstances. Consequently a

7 number of the SORP disclosures, as set out in Appendix 5, are also not required. For example, this approach removes the need to identify the activity to which expenditure relates, or to separately identify support costs and their apportionment and allocation. The Trustees Annual Report and small charities The Trustees Annual Report has an important role in supplementing information contained in the accounts. However, the SORP recognises that the information needs of users of the Trustees Annual Report are likely to be less detailed for smaller charities. In addition to the mandatory items (refer to SORP paragraphs 41(a) to 41(e), 44(a) and 44(b), 47(a), and 59), small charities need only provide a summary of the main activities undertaken in relation to those objects (SORP paragraph 52) and a summary of the main achievements of the charity during the year (SORP paragraph 54). Complementing this summary of activities and achievements, the financial aspects need simply be a statement of the reserves policy (SORP paragraph 55(a)) and whether any fund is materially in deficit, the circumstances giving rise to the deficit and detail of the steps being taken to eliminate the deficit (SORP paragraph 55(b)). Whilst there is no bar to providing all the additional disclosures required of large charities, this is wholly voluntary, as a matter of good practice. (Please note that directors of company charities need to ensure their director s report also includes all the companies act disclosures required of them.) A checklist for the simplified trustees annual report is also set out in table 11 of appendix 5 to the SORP. Further sources of advice Whether preparing accruals accounts or receipts and payments accounts, the Charity Commission prepare model packs with model accounts formats, trustees annual report templates and additional advice. The Office of the Scottish Charity Regulator will provide a model pack and example accounts for receipts and payments accounts from the end of January Access to resources is via the home pages on the internet for: The Charity Commission The Office of the Scottish Charity Regulator The Charity Commission Direct facility also offers help line support to do with the SORP, accessible via the home page or by telephone or for hearing impaired callers

8 Appendix B Further interim assistance to small charities preparing The table reviews the strengths and opportunities and threats and weaknesses for each of the options to provide additional assistance to small charities preparing The options considered are not intended to change the SORP and are viewed as complementary to the existing SORP. The SORP Committee at its first meeting on November considered the options for the SORP review and the development of the next SORP. It concluded that the next SORP should be developed with more of a small charity focus, subject to developments in UK GAAP and IFRS. An interim solution to assist the small charity, not subject to statutory audit, is therefore required. Option A separate guide seeking to interpret or comment upon each section of the SORP Additional model trustees annual report and examples A bespoke guide including a commentary on the SORP including examples A series of leaflets on particular accounting related issues Changes to the accruals pack Pros (Strengths and opportunities) Highlights smaller charities. An opportunity to explain in greater detail. Highlights smaller charities. Reflect other charitable activities not covered in the existing suite of examples e.g. village halls. A hybrid of the first two options which combines a commentary highlighting small charities with worked examples. Highlights small charities. Enables particular points to be discussed in turn in greater detail and less technical language. Highlights smaller charities. Provides a template generically suitable for small charities with the accompanying commentary providing an opportunity to explain in greater detail. Clearly a different product to the SORP. Editing an existing product rather than developing a new one saves time and avoids expanding the range of publications. Cons (Weaknesses and threats) The experience of issuing a separate guide to the 1995 SORP (booklet CC35 Accruals accounting for the smaller charity), was of confusion of the guide and the SORP. Complexity of cross-referencing to the SORP. Judgemental in terms of those issues may not apply to smaller charities. Danger of repetition of the current SORP. Danger of unintended ambiguity of aspects of SORP rephrased in the guide. Resource intensive to produce. Difficult to address diversity of the sector. Danger that the guide is seen as a substitute for reading or knowing the SORP Examples presume a certain level of knowledge and expertise. Time consuming to draft and review. No example can cover all aspects. Danger that examples are seen as substitutes for reading or knowing the SORP. Shares the same weaknesses and was the approach taken with CC35 in 1995 which caused significant confusion in the sector. Time consuming to draft and review. Danger of confusion with the leaflets being taken as a replacement for SORP. Not all potential issues may be covered due to sector diversity. Complexity of cross-referencing to SORP. Time consuming to draft and review. Templates and accompanying commentary presumes a certain level of knowledge and expertise. Time taken to draft and review