In a recent consultation, the Financial Reporting Council sought views on whether the Financial Reporting Standard for Small Entities (FRSSE), a statement of recommended practice - or Sorp - which is being launched for financial years beginning in 2015, should be withdrawn after one year. Regardless of the outcome, this is likely to be merged into the full charities Sorp (FRS 102 ) as early as 2016. The FRSSE Sorp is for charities with fewer than 50 employees, an annual income of less than £6.5m and total assets of £3.26m or less.
Both new charity Sorps will affect organisations with accounting periods starting on or after 1 January 2015. The changes will not affect charities with a March year-end until 2016, but charities specialists are warning against complacency.
There is a real concern that the withdrawal of the FRSSE could catch some charities out. For smaller organisations, reporting financial information may not be a priority until audit time, and there is a risk that they may miss the significance of this change.
The uncertainty surrounding the future of the FRSSE means that some organisations may wish to prepare to adopt the FRS 102 now. Deciding to take this action could also give them an opportunity to account for some of their pensions liability ahead of the Sorp’s introduction and so minimise any impact on stakeholders when the full extent of their liability (potentially back-dated over two years) is reported in the accounts.
Once the FRSSE is withdrawn, even small charities will need to re-state information dating back over two years in order to comply with the full reporting standard. This could have a significant effect on some organisations, in particular those with a large pension deficit.
For example, if a charity has a 15-year deficit repayment plan in place and is paying out £6,000 per month, it may be possible to designate and ring-fence reserves now, ahead of the incoming Sorp, in order to demonstrate in the trustees’ report that funds have been set aside to meet future payments and absorb the liability. This will allow the organisation to present a much more favourable picture to stakeholders when FRS 102 takes effect.
Use the Sorp to your advantage
The aim of the Sorp is to ensure that the public, beneficiaries, employees, funders and donors get fair and balanced information about a charity’s activities and impact, including a reference to negative factors where appropriate.
Ensuring that financial information is presented clearly and that the organisation is up to date with the latest changes could bring benefits and ultimately help to attract potential donors.
Risk planning and changes to the trustees’ annual report
Although the timing is uncertain, it is inevitable that the FRSSE will be withdrawn. When this happens, some charities could lose a number of exemptions.
Planning for the transition to report under the full standard requires charities to consider the enhanced information which must be included in the trustees’ report, and understand how this will be collated and presented. For example, charities will be required to provide a description of the principal risks and uncertainties facing the organisation and its subsidiary undertakings together with a summary of strategies for managing those risks. Charities will also need to include more detail on how the board of trustees interacts with key management, including increased disclosure on pay and performance appraisal processes.
Resources and keeping trustees informed
Smaller charities with squeezed budgets cannot allow resourcing issues to become a barrier when preparing for these changes. Reporting financial information is not always a priority, but in this instance charities need to make it one, otherwise they could end up suffering both financially and reputationally.
As part of this, trustees and board members must be kept informed about the changes and when the charity plans to implement the full standard. It might be useful to provide trustees with a timeline of events leading up to 2016.
The transition to either the FRSSE or the FRS 102 means that all charities, regardless of size, will need to compare and restate financial information from the accounting period 2014/15 to 2015/16 as part of their reports and accounts.
It will still suit some smaller charities to wait until the changes affect them before adopting the full standard, but it is important that those organisations are aware of the inevitable withdrawal of FRSSE. For some, preparing for FRS 102 now could help them to minimise the impact of the new reporting requirements.
The main focus for any third sector organisation is on delivery and income generation, but it is important to understand that failing to prepare financial information ahead of this legislative change could impact on a charity’s reputation.
Simon Atkins is charities specialist and partner at the accountants Clement Keys