Are you An essential charity update ready for the Big Change? Alliotts guide to how the new 2015 SORPs will affect your charity www.alliotts.com
Contents Page 3: What changes have been made? Page 3: What exactly do you need to consider? Page 4-6: What do you need to know about the new SORPs? 1. Changes to your Trustees report 2. Changes to your Statement of Financial Activities (SOFA) 3. Changes to your Balance Sheet 4. Changes to your Cash flow Statement 5. Changes to your accounting policies and disclosures 6. Transitional arrangements Page 7: What do you need to do now? 2
What changes have been made? Two new charity SORPs (Statement of Recommended Practice) have been published to replace SORP 2005: The first, FRS102 SORP, can effectively be used by any charity but is compulsory for larger charities that will have to apply FRS 102 (Financial Reporting Standard 102), the new form of UK standard financial reporting The second, FRSSE SORP, is for smaller charities and follows FRSSE 2015 (Financial Reporting Standard for Smaller Entities 2015) Both SORPS come into effect for the accounting periods commencing on or after 1 January 2015 and will replace the existing SORP 2005. As your charity s comparative figures will need to be prepared to include 2015 - the year the new SORP was first applied - you really need to consider the impact the new SORPs will have on your charity now. However you also need to recognise that it is likely that FRSSE SORP will be withdrawn within a couple of years. This will mean that smaller charities will probably have to adopt the FRS102 SORP, although there may be some relaxation in certain reporting requirements for small charities by this time. For you this means that the format of your accounts could be forced to change twice within two years so, after consideration, you may feel it may be easier to adopt the full FRS 102 SORP now. What exactly do you need to consider? You need to make a choice, FRS102 SORP or FRSSE SORP. For most charities, the FRSSE SORP may appear to be the simplest route; but you have to be small enough to meet the size criteria. If you meet two of three conditions below in relation to the current and preceding years you will probably be able to use the FRSSE SORP: If your charity has an income of less than 6.5m If your charity s balance sheet contains total assets of not more than 3.26m If your charity has fewer than 50 employees 3
What do you need to know about the new SORPs? What are the formats associated with the new SORPs? The new SORPS are modular in format so that charities can choose the most relevant areas to them. Will the new SORPs bring about any changes to the way you report? Whilst the FRSSE SORP, has much reduced disclosure, the FRS102 SORP heralds a number of changes, some of which must be complied with and are not just recommendations. If you have to adopt the FRS102 SORP, these changes include: 1. Changes to your Trustees report The changes are minimal and should not require much additional effort for most charities. Charities must disclose their reserves policy, or disclose the fact that they have decided not to hold reserves There must be explanations given for arrangements and policies for setting the pay and remuneration of the charity s key management personnel. Key management personnel is a term used by FRS 102 for: those persons having authority and responsibility for planning, directing and controlling the activities of a reporting entity - directly or indirectly - including any director (whether executive or otherwise) This definition includes trustees and those members of staff who are the senior management personnel to whom the trustees have delegated significant authority or responsibility in the day-to-day running of the charity. Your trustees report should also include an explanation of social investment policies and how any programme-related investments have contributed to the charity s aims and objectives. A description of the principal risks and uncertainties facing the charity should be given, together with plans and strategies to manage those risks. 2. Changes to your Statement of Financial Activities (SOFA) The activity basis of accounting, under which charities should classify their income and expenditure by activity, has been retained. However, the income categories of income from generated funds, income from charitable activities and other incoming resources (which were introduced for the first time in the current SORP 2005) have been replaced by five broad headings: Income from donations and legacies Income from Charitable activities Other trading activities Investment income Other income These are changes in titles rather than changes to the basis for classification. Comparative figures will now be required for all columns in your SOFA, either by way of adding further columns or by providing this information in the notes. The current SORP 2005 only requires a total column to be provided for the comparative period s funds so the new requirements will make the SOFA (and/or notes) look increasingly complex and will potentially make it more difficult for many charities to interpret. contd 4
Changes to your Statement of Financial Activities..contd SORP 2015 introduces new terminology when describing income and refers to two broad categories of income: I. Income from exchange transactions (contract income, for example, from parents for school fees for a school charity, or local authorities contract income for providing care services) II. Income from non-exchange transactions (gifts including donations and grants) For charities with investments, any gains and losses will now be reported in the SOFA as part of net income/expenditure rather than being reported lower down the SOFA as other recognised gains and losses. This could have quite a dramatic result on how the results look for charities as it will be more difficult to see the result of normal activities when the impact of stock market movements are reflected in the income figures. Governance costs will no longer be separately disclosed on the face of the SOFA but will instead be included within charitable activities as support costs. 3. Changes to your Balance sheet Investment properties can now have a new class of mixed use where a charity uses a building itself but rents out part of it as an investment property. Long term debts and liabilities must be discounted for the time value of money to present value, if the effect is material. Software licences that extend beyond one year and have been capitalised as fixed assets are now classified as intangible rather than tangible. Total return investment information is included in more detail where this is adopted by charities with endowed funds. 4. Changes to your Cash flow Statement The FRS102 SORP format requires that this statement now reconciles down to cash and cash equivalents rather than just cash. This means that deposit accounts that were not repayable on demand without loss of interest (for example fixed three-month term deposits or any other liquid resources) will now be included in the bottom total rather than reflected as a movement in the cash flow statement. The balance sheet format will remain mostly unchanged. However, under FR102 SORP 2015, there is a newly-defined type of fixed asset social investments. This will apply where the purpose in making an investment is wholly or partly to further a charity s aims. This includes mixed motive investments (where social investments have been made both to further the charitable purposes of the investing charity and to generate a financial return). If they are material social investments, including mixed motive investments, they will need to be disclosed separately on the face of the balance sheet. 5
5. Changes to your accounting policies and disclosures FRS 102 SORP makes some specific changes to accounting policies and disclosures and the changes most likely to affect charities are: Income should now be recognised in your accounts when it becomes probable (i.e. more likely than not) whereas under SORP 2005 it was recognised when income became virtually certain. This may mean income being recognised earlier than at present and an area that will require a great deal of additional thought and discussion will be exactly when you should recognise legacies The total pay and benefits for key management personnel must be disclosed You are now required to recognise a liability in your balance sheet for any outstanding paid annual leave and sick leave, if material. Such a circumstance may arise when the holiday year does not run alongside your financial year The FRS 102 SORP states that financial statements must include disclosure of any material uncertainties of which the trustees are aware in making their going concern assessment. Where there are no material uncertainties about a charity s ability to continue as a going concern, this should be clearly stated A definition of de-facto trustees has been added. This is a person who has not been validly appointed as a trustee but is acting as a trustee of the charity and is exercising the functions that could only be properly discharged by a trustee Any transactions involving a trustee or other related party must now always be regarded as material transactions, which could mean the capture and disclosure of more transactions in the financial statements, including the aggregate of unconditional donations made by trustees Additionally, the new SORP requires disclosure of the terms and conditions of any related party transactions and states that a related party transaction should not be described as being at arm s length unless this can be substantiated Material items should now be disclosed separately in your accounts, not just exceptional items The detailed list of institutional grants can now be provided separately from the accounts in another document or even on your website if it is clearly explained in your accounts 6. Transitional arrangements The FRS 102 SORP allows for a number of simplifications to the preparation of your opening balance sheet and comparative figures when you report under the new SORP for the first time. In particular, a charity may elect to measure a fixed asset (including buildings) on the date of transition at its fair value and use that fair value as its deemed cost at that date. This deemed cost would then be used as a basis for future depreciation. Alternatively, where a market value for buildings is used on the date of transition, you have the option to go back to it as a historic cost. What are the key differences from the FRS102 changes listed above if you adopt the FRSSE SORP? Where a charity can adopt the FRSSE SORP, the accounts are likely to be shorter. Whist they formats are basically the same, under the FRSSE SORP: The Cash flow statement is optional; Accounting treatments vary slightly for things such as income recognition; There is reduced disclosure for intangible fixed assets, investments, stock and liabilities; There is no specific requirement to accrue holiday pay. 6
What do you need to do now? As a charity the minimum you need to consider now is: When your charity needs to adopt SORP 2015 and whether you consider early adoption (which is an option for some larger charities) Whether your charity, if it is small, will adopt FRSSE SORP, or stick with the FRS102 SORP When and how you will revisit your accounting policies to ensure you are compliant To discuss any of these points or to find out more about the new SORPs that will affect your charity, please email Steve Meredith, Head of the Alliotts Charities Team, stephen.meredith@alliotts.com or call Steve on 01483 508513 Whether or not your accounting systems will be able to accommodate the changes Whether you need specialist support to identify transitional issues Whether your staff need to be trained on the changes to the SORP and on how it will affect your charity How to value any fixed assets you want to be measured at fair value at the transition date Whether any business combinations have been entered into in the comparative period. Any business combinations you have entered into will need to be restated and measured in accordance with SORP 2015 and this will involve recognising separate intangibles. However, business combinations undertaken prior to the transition date can either be exempted or restated Whether your charity s holiday year and financial year coincide. If not, you will need to calculate how much outstanding paid annual leave is owed to your staff at the period end Sign up for our charity newswire today by emailing guildford@alliotts.com Alliotts are registered to carry on audit work in the UK and regulated for a range of investment business activities; and licensed to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England and Wales. 7