Of the many details in almost 200 pages that make up the new Statement of Recommended Practice for charity accounts, one in particular has attracted the attention of finance professionals in the sector.
The revised Sorp for charities that abide by the FRS 102 accounting standards comes into force for financial years beginning on or after 1 January 2015. On the same date, the first-ever separate Sorp will also be launched for smaller charities that choose to use the FRSSE accounting standards - although this Sorp is likely to be merged into the FRS 102 Sorp as early as 2016.
In the FRS 102 Sorp, the Statement of Financial Affairs, one of the most prominent parts of a charity's annual report, has been changed so that charities must state net gains or losses on their investments – whether they are realised or unrealised – above their net income or expenditure for the financial year.
Short-term volatility makes attractive graphs but is not the full story when it comes to investing. Many investments are made with the plan of cashing in only after decades; from now on, if the financial markets take a tumble or hit a spike on the date of a charity's financial year-end, that charity's Sofa will show a net income or expenditure that is an artificial representation of their situation.
The knock-on effects could be substantial. "Fundraising for some charities can be affected by the reporting of significant surpluses or deficits in any one year," says Alistair Fraser, a partner at the accountancy firm Mazars. "The gain or loss on investments can create volatility if it is seen as part of the overall surplus or deficit."
However, there is a way around this. The Sofa contains a blank row above the two where investment gains or losses, and income including investments, are stated. This was deliberate, according to Pesh Framjee, a partner at Crowe Clark Whitehill, who sat on the committee that created the Sorp: he told a recent Charity Finance Group conference that he could see the argument for investments being reported above net income for private companies, but that it was "crazy" to apply this to charities. "People don't want their income to be infected," he said. "So we put a line in there."
Charities can put whatever they like in the spare line. The common suggestion from accountants is to use it to state income excluding investments. Charities can also change the layout or typeface of their report to give less prominence to the income figure that includes investments.
The number of charities with sufficient investments for this to be necessary is small, but all charities might ask why a Sorp has been created with a provision that is, according to a Sorp committee member, crazy.
"The Sorp committee had no choice because there is a requirement to abide by FRS 102," says Simon Erskine, the charities technical partner at MHA Macintyre Hudson. He says it is a good thing that this single standard applies across sectors to create transparency. FRS 102 also includes provisions for public-benefit entities that do not have charity status. That is a step in the right direction, he says, because it could mean non-charitable campaign groups are more accountable in distinguishing between restricted and unrestricted funds. The new standards might complicate areas such as investments, but there are benefits - a case of gain and loss, one might say.