The essentials Accounting: A practical guide to reports

Sorp requirements on trustees' reports have changed. Nick Brooks and Penny Ryan offer a guide to meeting them.

Trustees have been required to comment on the activities of their organisations since the introduction of the charity Statement of Recommended Practice (Sorp) in 1995. However, the standard of that reporting has not met the expectations of either the Charity Commission or the Government.

As a result, the new requirements for the trustees' report have been made clearer and more prescriptive. There is now a specific requirement that charities should be reporting what they were established to do, what they actually do and how successful they are at doing it.

It states: "The report should help the reader understand the aims and objectives set by the charity, and the strategies and activities undertaken to achieve them. It may also, where relevant, explain how the objectives set for the year relate to longer-term strategies and objectives. The report should contain information that enables the reader to understand and assess the achievements of the charity in the year. It should provide a review of its performance against the objectives that have been set."

Performance measurement

Since the publication of the revised draft, much has been written about the need to identify indicators, milestones and benchmarks to assess performance, and many charities have been concerned that this could prove burdensome.

The Sorp actually says "it will often be helpful to identify" any such measures that are used to assess the achievement of the objectives, and it confirms that these measures may be both quantitative (expressed in terms of numbers) or qualitative (including feelings, opinions and judgements).

It also requires trustees to comment on factors within and without the charity's control that are relevant to the achievement of its objectives.

These might include relationships with employees, users, beneficiaries or funders, and the charity's position in the wider community. This will provide a focus for charities to thank and praise, but will also give a space to identify insurmountable difficulties and explain why things did not happen as expected.

There is a great deal of understandable reluctance to talk about failure, but individual Charity Commissioners have intimated that problems should be disclosed. Indeed, it is the mark of an intelligent organisation that it is prepared to be innovative and to learn from its mistakes, having put in place structures that enable it to mitigate the effects of failure.

One simple way of responding to these requirements is for the charity to look back at the end of the year and write a basic assessment. However, the charity could gain more by recognising these requirements as part of the strategic management process.

This article provides a practical guide to meeting the requirements of Sorp 2005. The suggested format for the annual cycle of planning, performance and evaluation is designed to enable charities to identify the information they need for the annual report and provide a framework for operational decision-making and development planning. The cycle begins with the planning process at the start of the year and will be most beneficial for the charity if it is linked with budget setting and any existing development or review cycles.

1. Identify charitable objects, aims and objectives - For many charities, their activities are unlikely to change significantly from year to year, but it is sensible to make a point of going through these steps formally each year to ensure the charity remains focused on what is important and remains within its objects.

Sorp requires the identification of the objects as set out in the governing document. This is often lengthy, but it is only necessary to refer to the principal objects - it might be helpful to view the entry in the register of charities to identify the key objects.

It is also necessary to identify the charity's aims. These are essentially the practical purposes of the charity and include the changes or differences it seeks to make through the activities. Aims are continuing and remain stable over time. They might be linked to a mission statement, which can also be included in the report. For some charities with precise objects, the aims and objects may coincide, but for most charities the aims will be clarifying their areas of activity.

The charitable objectives for the year may include a mix of continuing objectives and those relating to particular areas of work. For a simple grant-giving charity, the objectives and aims may overlap and remain constant from year to year. For example, for a charity whose objects are the relief of poverty and distress among musicians, both the aim and the objective are to identify needy musicians and provide grants to relieve identified needs (see box overleaf).

Alongside the charitable objectives, you are likely to have fundraising objectives. Sorp requires you to report these, and you might wish to identify them using the same process.

2. Identify strategies for achieving objectives - Objectives alone achieve nothing - it is the strategies and activities that you put in place that enable practical achievement. In a multi-objective organisation, each strategy or activity can be designed to meet more than one objective.

Strategy relates to the plans and processes adopted by the charity. For our distressed musicians, the strategy may be to make contact with musicians' groups and increase awareness of the charity by networking.

Activities are more tangible. For the musicians, the activity may be the awarding of grants. Sorp 2005 requires activity-based reporting in the accounts and that the activities identified in the trustees' report be consistent with those shown under the 'charitable activities' heading in the statement of financial activities.

3. Identify what success means - The more tangible and discrete an activity is, the easier it is to identify what is seen as success. In some cases success will be a finished product - for example, an objective that involves building a hospice clearly succeeds when the building is completed. In other cases success may be measured in terms of occupancy or usage rates, or perhaps in a well-received service.

Success for some objectives may be multi-faceted; for others a single outcome may be the shared end product of a variety of activities. Where an activity or strategy extends beyond the accounting period, you will find it is helpful to identify milestones to gauge whether the activity is on track.

Sometimes it is difficult to identify what makes an activity successful.

In these cases you may find it helpful to consider what would make the charity believe a particular activity is not working and should be discontinued or modified. The converse might then provide a definition of success.

4. Consider how success will be measured - Evidence of success can come from a variety of sources. It could be generated internally - such as the collection of numbers of users, waiting times or user surveys. Or it can be generated externally - such as inspection reports, reviews of productions or performances, or thank-you letters from user families.

Both quantitative and qualitative evidence can help to establish the effectiveness of activities and might be considered as indicators. Benchmarking is another form of evidence. It involves comparing a charity's results with those of another organisation. This can also be carried out internally by comparing different activities - so an organisation running residential homes might compare its costs per bed in different units.

Your main purpose as an organisation is obviously not the collection of information to use as evidence, so the evidence you choose should be easy to collect and cost-effective. In many cases the chosen evidence will already be required for reporting to funders and its collection will already be embedded in systems. If additional information is to be collected you will need to identify who will be responsible for collection.

5. Identify potential influencing factors - The charity is required to comment on what factors have been relevant to the achievement of the objectives.

For example, for some organisations the weather may play a significant role. By identifying factors at the planning stage, staff can be instructed to keep records of how they actually impact on operations rather than relying on gut feeling at the end of the period.

6. Performance - The main part of the cycle will be the performance or implementation phase. For trustees this is a monitoring phase and most charities will have a mechanism for reporting progress back to the board at regular intervals.

If your organisation does not already have such a mechanism, you might find it useful to receive regular reports based on the evidence identified above.

7. Evaluation - At the end of the period or on completion of an activity, the evaluation stage begins. The overall effectiveness of each activity or strategy should be considered. This will mean looking for the influencing factors previously identified and at the evidence collected as part of the process, alongside management accounts information.

You should then ask the following key questions for each activity or strategy:

- Has this activity or strategy been successful in its own right?

- If not, could small changes made now increase the likelihood of success?

- Even if the activity or strategy has been successful, could it be more useful?

- Does this activity or strategy continue to meet the charity's aims?

8. Reporting - The 'objectives and activities' section of the trustees' report should include information about objects, aims, objectives and the strategies and activities undertaken to meet them. In the 'achievements and performance' section there should be a summary of the results of the activities and of supporting evidence. Information about influencing factors should also be reported in this section.

SAMPLE REPORT

We have chosen as an example a simple organisation - a charity that aids musicians in difficulty.

Objectives and activities

The principal object of the charity is the relief of poverty and distress among musicians. To meet this object the charity has the aim and objective of identifying needy musicians and providing grants to relieve identified needs. In practical terms it has a strategy of making contact with musicians' groups to increase awareness and has a programme of grant-making (see grant policy below).

Achievements and performance

At the start of the year the trustees identified £300,000 as being available for grants. The criteria we adopt are quite vigorous and, although the number of applicants increased to 460 (from 405 in 2004), only 398 met our criteria. We will review the criteria over the next six months with a view to increasing the range of people we are able to help.

The increase in the number of applicants reflects the commitment of the trustees to informing musicians of our existence and the enthusiastic welcome we received from those musicians' groups we contacted for the first time. We plan to build on these links next year.

- More detailed examples and planning and evaluation process pro formas can be downloaded from www. kingstonsmith.co.uk/toolkit

Nick Brooks is head of the not-for-profit sector group at Kingston Smith Chartered Accountants. He is a trustee of three charities. Penny Ryan is a senior manager in the not-for-profit group, and has been particularly involved in advising on compliance with Sorp.

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