Accounting: Pricing your assets

The Charity Commission is revising the annual Statement of Recommended Practice. Paul Gates discovers how small, medium-sized and large charities are preparing themselves for its introduction in March 2005.

The National Gallery has become £36m richer in the last year - or at least that's what the accounts suggest at first glance. But while the gallery has bought new paintings, it doesn't have cash to burn. The figures are purely the result of changes to charity accounting regulations.

The Statement of Recommended Practice, or Sorp, governs the dark arts of charity financial reporting. And it's being updated once again.

Under the current proposals, the trustees' report will be expanded, charities will have to disclose their ethical investment policies, and all manner of transaction types - from heritage assets to governance costs and grant payments - will be treated differently.

The proposals, which will apply to all charities over the audit threshold (expected to soon change to £500,000 per annum), are likely to be implemented for all accounting periods beginning on or after 1 March 2005. And this is the latest date - early adoption is encouraged.

The implications vary according to the size of the charity.


Accounting proposals for heritage assets has emerged as the most controversial area in the Sorp revision.

The old Sorp had two special categories: historic assets, such as artefacts and memorabilia; and inalienable assets, normally buildings or land given as gifts with severe restrictions on use. Charities had discretion on whether or not to capitalise these assets.

The revised Sorp replaces these with a single category called heritage assets. These must be held for preservation or conservation objectives.

New heritage assets must be capitalised at cost.

However, heritage assets acquired in previous accounting periods can be excluded from the balance sheet if reliable cost information is difficult or expensive to obtain.

This approach is inconsistent, as some artefacts and buildings must be listed on the balance sheet, while others can be left off. The Sorp discusses resolving this inconsistency but, due to the difficulties involved, it suggests maintaining the current position.

The National Gallery is one of many organisations that disagrees with the new policy. It believes that there isn't a true market for these assets as they are completely unique. Any form of valuation, it says, is difficult to gauge and is thus flawed.

The gallery also believes that historic cost valuations are misleading.

For example, it owns The Baptism of Christ by Piero Della Francesca. Using historic cost accounting, it is worth £241 - the amount the gallery bought it for in 1861. But today it is worth tens of millions of pounds.

The National Trust supports the gallery's position. Director of finance Andy Copestake says: "The National Trust statute allows us not to capitalise heritage assets. It's barmy - the reader will be utterly confused."

The Sorp committee also considered requiring that charities put a financial value on volunteers. The trust is less concerned about this. It already provides an estimate of their value in a footnote to the Statement of Financial Activities (Sofa). The committee recognised that not all charities hold this information and it would cause significant changes to reported income, so it was dropped.

The proposal that charities should report their ethical investment policy has also proved controversial. Some organisations believe all charities should invest ethically. Others believe the nature of investments is a matter for management and trustees.


Christopher Yates, finance director, National Gallery

We do not agree with the proposals for heritage assets and the need to put a value on the gallery's collection. It makes the financial statements misleading because we record the donations to buy paintings, but we don't record the expenditure. There are huge balances flowing through that distort the accounts.

In 2003/4, we took almost £36m in donations, all spent on paintings we are not allowed to sell. The money's gone, but if you read the accounts you don't realise this, as the balance is booked to reserves. Consequently, our fundraising department has a lot of difficulty with international donors, particularly in the US.

Depreciation also doesn't work. The useful life of paintings is so great we can't estimate how long assets will last. The collection dates from 1250 and those items have survived. It becomes even more ridiculous when you talk about Stonehenge or the bones of a pterodactyl.

US institutions don't have to capitalise their collections, and international accounting standards also allow you not to capitalise.

We feel a stewardship note outlining the nature and utilisation of the collection and explaining its priceless nature would be useful - but any attempt to value the collection runs into some of the same problems as valuing it on the balance sheet.

Even the old system where you accounted for acquisition costs in the year of acquisition gave a much more balanced view.


The Charity Commission believes that financial reporting of grants that are made over a number of years is inconsistent and it plans to tighten the rules governing this.

Under the new Sorp, if evidence exists of regular review and payment conditions, the grant maker can account for the grant over the years of distribution.

However, if it appears that the conditions will always be met and the grant maker will not realistically be able to avoid paying, then all of the grant must be recognised as a liability in the first year.

This could have a significant effect on charities that make large grants over a number of years.

Roger Morris represents the Association of Charitable Foundations on the Sorp Committee. He says: "It's not an area where we have room for manoeuvre. We have to comply with the relevant accounting standard, FRS 12. The 1995 Sorp was the first to highlight the need for consistency of treatment. Some grant makers will be impacted, but most have become more stringent on liability recognition over the past few years."

The Barrow Cadbury Trust manages approximately £75m of assets and distributes £4m per annum in grants. Chief executive Sukhvinder Stubbs says: "The main thing we're looking forward to is greater emphasis on impact. In the past, there was lots of emphasis on bean-counting.

There are two clear advantages. Looking at impact enables us to focus more on the end result. This is beneficial when working with our service delivery groups, many of which are at grass-roots level.

"Secondly, focusing on impact allows us to focus on strategy. We published guidelines last year setting out our social objectives. We're now looking for groups to help us meet these objectives."

Stubbs says that the changes will be worth the effort and the cost. "It will lead to additional work changing reporting formats, but this cost can be seen as an investment. The exact implications aren't known yet.

We expect leadership from the accountancy profession: good practice, templates and formats." She adds: "Overall, we welcome the Sorp revision and will be adopting it early."

It isn't just the method of reporting outgoing resources that is affected.

Recognition of incoming resources has also changed. The commission wants the impact of all transactions on a charity's net financial position to be shown clearly.

Under the proposals, all incoming resources should be shown as gross once there is entitlement (control over the resource), certainty of receipt and ability to measure the amount. Again, this may be complicated in situations where grant funding arrangements are tied to a service level agreement or long-term contract.

Whether the charity has control over the resource will be linked to proof that any conditions have been satisfied. Of course, many other donations are made with strings or conditions attached. If these conditions are outside the charity's control, it cannot recognise the income until the conditions have been met.

The Sorp also proposes a clearer distinction between voluntary income and trading activities. This distinction can be quite technical.

These changes are designed to allow the reader to understand clearly the relationships between incoming resources and resources expended. The income and cost categories on the Sofa have consequently been renamed and redefined.


Nick Brooks, head of not-for-profit, accountants Kingston Smith

Charities need to plan in advance rather than waiting until the end of the year to prepare for the Sorp.

For medium-sized charities with Service Level Agreements or Long Term Contracts, management need to think how they will show the 'fair value' of income at year-end.

This should be discussed with advisers during the first financial year when the revised Sorp is introduced. Existing project funding could be based on regular payments, but the work might not have been done. Some projects might get money up-front. You need to think ahead as the accounting treatment may differ.

Organisations that give research grants will also need to do some forward planning. They might want to tighten up researcher contracts and impose stringent conditions to allow annual accounting.

Many research grant contracts have conditions, but the substance of these contracts is that payment will always be made.

The accounting treatment will show all payments falling into one year.


The revised Sorp increases the importance of the trustees' annual report, which is meant to explain what a charity is trying to do and how it goes about it.

It gives more prescriptive detail on what should be included. Trustee training and recruitment policies and procedures must be disclosed. Objectives, and the strategies and activities to meet them, should be communicated, along with significant plans for the future. The trustees' duty of "public accountability and stewardship" has been brought to the fore. Some trustees will need training to prepare them for these extra duties.

According to the Charity Commission: "Performance information enables an organisation to assess its progress against stated objectives, enabling the assessment of organisational impact and informing the development of future strategies."

Professor Paul Palmer, academic representative on the Charity Commission's Sorp committee, says that the big issue is getting the trustees to focus on the report: "They'll need to introduce appropriate performance indicators and systems to identify and report on how they are conducting stewardship from March 2005. I don't see much evidence of this so far."

It is vital that trustees develop a clear strategic plan, he adds. "They must show how this strategy and their operations, including proven achievements, meet the objectives of the charity. It is basic management, really. If trustees' time is spread too thinly, this will cause issues."

More work requires more time and more money. This hits small charities hardest. Head to Head Training works with adults in London and receives £1.25m per annum in restricted funding. "We were recently visited by the Adult Learning Inspectorate," says the charity's chief executive Sonia Green. "They questioned how much our trustees really knew about equality and equal opportunity. We've got to find a way of getting them the information in manageable chunks."

This experience has prompted Green to start addressing some of the Sorp proposals already.

Her advice to others is telling: "You've got to understand what the changes mean. Then you need to get alongside someone who's gone down that road already. That's what we've been doing - stealing policies and procedures, then tweaking them to suit us. There's no point in reinventing the wheel."

Charities need to align management information systems with Sorp requirements and be capable of capturing quantifiable information.

Palmer adds: "For example, if the charity provides an advice centre, I would expect reporting to show what services are provided, how many people are seen, and measures of how effective the advice provision is."


Murtaza Jessa, partner, charity specialist Trustient

If your annual income exceeds the revised audit threshold of £500,000, you will need to think about changes.

In some cases, the new Sorp will definitely increase costs. The revised format of the Sofa requires some changes to match income to expenditure.

If your current system doesn't support this you will need to allocate employee time and maybe buy in some professional help. Auditors and charities will need to plan this work together. You could limit the cost by having an early planning meeting, which will help to phase the work.

Lots of charities have trustee training and education programmes in place, but smaller charities may not. Many of our new clients don't have written procedures or proper job descriptions.

If you don't, you really need to get your act together and put something in place. Some charities used to take on whoever would help as a trustee - now they need to be more careful.

All these changes require resources, and resources are limited. But the worst thing you can do is nothing.

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