From January 2015, charity accounting will follow an updated set of rules - one that has involved a long and complex process of development.
Accounts filed by any charity that is also registered as a company, or any charity with an income of more than £250,000, will have to follow a new version of the Statement of Recommended Practice.
The Sorp is set by the Charity Commission and the Office of the Scottish Charity Regulator, advised by a committee including regulators, finance directors, auditors and academics. It interprets the accounting standards set by official bodies and is the main document followed by charities when they prepare their accounts.
The latest Sorp came into force in 2005 and is normally reviewed every five years. But the latest update has been delayed because the Financial Reporting Council, the body in charge of accounting standards in the UK and Ireland, has been working on a new standard that will bring UK reporting for mid-sized entities into line with international requirements. That process began in 2004, was originally intended to take four years and has been delayed several times.
The development process finally came to an end earlier this year with the publication of the financial reporting standard, FRS 102. The upshot is that the existing charities Sorp requires revision to bring it up to date.
In July, the commission and the OSCR jointly published a 200-page "exposure draft" of the new Sorp and there was subsequently a consultation, which closed on 4 November, on the proposals.
The response to the draft appears to have been broadly positive, but those working in the field still feel there are many issues to be debated before the final version is published, which is expected to happen in June next year.
Here we look at some of the areas covered in the draft charities Sorp and the sector's reactions to the proposals.
Length and complexity
The draft Sorp is a complex document: its 200 pages cover 29 modules, 14 of which apply to all charities; the other 15 apply to specific issues such as investments, mergers and pensions that many organisations will not need to worry about.
Nigel Davies, deputy head of accounting policy at the Charity Commission, says it has been designed to help charities read only the sections they need to and make it accessible to smaller charities.
But the length and complexity of the draft has led to some criticism. Nick Sladden, head of charities and social enterprises at the accountancy firm Baker Tilly, says in its consultation response to the draft of the charities Sorp that it has become "considerably longer than other sector Sorps" and that it could be improved by removing some of the detailed accounting guidance and disclosure requirements. He points out that the Sorp is aimed at those familiar with accounting practices, so a lot of the repetition is unnecessary.
Chief executive pay
Whether the updated Sorp should require charities to disclose the exact pay of the chief executive is a point of discussion. The latest draft of the Sorp retains the existing system of requiring charities to disclose the salaries of any member of staff earning more than £60,000 a year, in bands of £10,000, without naming the individuals involved. But the Sorp-setting bodies are interested in whether they should include the chief executive's salary.
Davies says he cannot report yet on the responses to the consultation, but says that during a series of roadshows with charities and their accountants to discuss the Sorp, he encountered "a north-south divide". He says the idea that pay should be disclosed got stronger support in Scotland, Wales and Ireland. But in England, many, including the Charity Finance Group, do not favour changes.
Kat Smithson, policy officer at the CFG, says: "The current disclosures actually give a better overview of senior pay than a note offering just the chief executive's exact salary."
Debate also continues about when and how charities should account for multi-year grants. Under the existing rules, they have some discretion to recognise the income only in the year they are likely to spend it. This process is often referred to as matching.
Charities often receive large lump-sum grants from funders intended to last several years. But if they record it on the day it is received, they will appear to have years in which they record a vast surplus and others when they record a considerable loss. But the draft Sorp does not permit this matching process.
"We're moving away from matching," says Smithson. "You won't be able to match at all. That isn't popular with some finance professionals."
Similarly, it is not clear when charities should recognise a legacy on their balance sheets, says Smithson. There is currently wide disagreement about when to recognise legacy income, with some charities recognising it when probate is granted and others on receipt of the income.
The draft Sorp says that "receipt of a legacy is probable when, following probate, the executors have established that there are sufficient assets in the estate, after settling any liabilities, to pay the legacy; and any conditions attached to the legacy are either within the control of the charity or have been met".
Charities that get a lot of legacy income might be able to recognise legacies at an earlier date than those that receive only a few, says Smithson. This is because smaller charities are often reluctant to recognise a legacy as there are a number of potential pitfalls and legal issues, but larger organisations can usually calculate relatively accurately what percentage of legacy commitments they will eventually receive.
Another hot topic is whether charities should disclose a list of the grants they have made and whether this should be required in the accounts or in a separate document.
The draft Sorp says that charities that make grants to institutions must disclose details of "a sufficient number of these institutional grants so that the user of the accounts can develop an understanding of the range of institutions the charity has supported".
The Directory of Social Change has called for more information to be presented in accounts, saying that charities are often not transparent if they are given the option of publishing this information elsewhere. The DSC says in its consultation response: "It is our experience that too many trusts fail to provide information about material grants made upon request. This is important information that allows fundraisers to target their applications more effectively to the most appropriate funder."
However, many others say that this amount of information is clutter, and charities should not include several pages of information about grants in their accounts.
Charities in multi-employer defined-benefit pension schemes are also required to disclose more information about their liabilities. Charities in these schemes might not be able to work out their exact debt to the scheme and do not have to disclose it in their accounts as a result.
However, the Sorp says that from 2015 onwards they will have to disclose for the first time if they have agreed to make repayments to compensate for a shortfall (see page 28). This change was made by the Financial Reporting Council and is not under debate. This is likely to leave many charities looking substantially poorer.
Don Bawtree, head of not-for-profit at the accountancy firm BDO, says: "People are saying it will make them appear insolvent. It certainly will be a bit upsetting to put this liability on your balance sheet. But you always owed the money. It's a more accurate reflection of your position."