News in focus: Is the new financial return surplus to requirements?

While the Charity Commission sorts through responses from charities to its proposals for a new financial statement, Paul Gates explores possible implications a revised version may have for the voluntary sector.

The Charity Commission is reviewing more than 150 responses to its proposals for a new financial reporting statement of recommended practice (Sorp), and key issues are already emerging. Accounting for heritage assets and volunteer time, revisions to the trustees' report and the possibility of increased audit fees are causing the most consternation.

The Sorp is the document which sets out how a charity should report on the resources entrusted to it and on the activities it undertakes. The review is led by a Sorp committee, comprised of representatives from charities, the Charity Commission, accountants and academics. The last revision took place in 2000.

The main proposals are a restructuring of the trustees' report, along with greater and better disclosure of costs and grants. But these are not the areas that are generating the most debate.

Ray Jones, the Charity Commission's policy accountant, who sits on the committee, confirms that the accounting treatment for heritage assets is the most contentious topic.

These are assets of historical, artistic or scientific importance (excluding investments) that tend to be recorded only if acquired recently. Including them on a charity's balance sheet can make it look richer than, in practical terms, it really is - especially if a covenant prevents it from selling, say, important works of art.

"The existing Sorp allows you not to capitalise previously acquired assets if there is a qualifying cost/ benefit argument," says Jones. "But a London museum may have billions of pounds of exhibits off the balance sheet, and to capitalise on only new acquisitions worth millions paints a misleading picture."

The Sorp is proposing a clearer definition of heritage assets and reducing categories from two to one. But it is not recommending any real changes to current accounting practices in this respect, and this has not pleased everybody - especially those who wanted all heritage assets excluded from the calculation.

The Charity Finance Directors' Group (CFDG), for example, is critical of the committee's stance on heritage assets. Policy and campaigns officer Sophie Chapman says: "We've consulted with our members and almost all of them had problems with it. Capitalisation creates a distortion within the financial statements and causes a surplus to be recorded where no surplus exists."

The commission has also rewritten guidelines for the trustees' annual report in an attempt to close the gap between what charities currently report and the needs of readers. Nick Brooks, charity expert at accountants Kingston Smith, says: "Forward planning is essential. Charities will need to assess performance against milestones, benchmarks and indicators. Charities have been playing fast and loose - we need greater comparability."

Another committee member is Pesh Framjee, a partner at accountancy firm Deloitte, who says the old Sorp attempted to elicit performance assessment, but wasn't clear enough: "Now we've been more explicit, tied the trustees' report into the accounts, and built linkage between the words and the numbers."

Different perspectives

Accountants differ on whether the costs of compliance will rise. "The revised Sorp shouldn't add greatly to compliance issues or costs," says Framjee. "It's an evolutionary change and the direction charities are going anyway," says Framjee.

But Brooks is concerned for small and medium-sized charities. Drawing attention to the revised accounts layout, he says: "Will there be more auditor costs for amending accounts? Probably. The draft Sorp is not user-friendly. Much of the language is technical and quite obscure, even for specialist accountants.

"It's difficult for anyone but a specialist to ensure compliance, and it's not a good thing if charities have to pay more of their cash to accountants to redraft their financial statements. More and more detailed information should not be confused with better information."

The CFDG recommended valuing volunteer time in charity accounts, but the Sorp committee rejected this option.

"Volunteer valuation is a very important area and the committee gave it a lot of consideration," says Framjee. "Lots of charities are missing a trick here to show how they add value.

"A number of them do disclose an estimate of this value at the bottom of their statement of financial activities (Sofa), but the difficult bit is that many charities don't have this information to hand. They need guidance on measuring the value of a volunteer."

Volunteer calculations

The commission has identified significant concerns over volunteer valuation.

Small charities that depend on volunteers fear being fined for not keeping adequate books and records. Small charities worry that a change could take them over the audit threshold (which is currently £250,000 and will be raised to £500,000 in the new Charities Bill). It is also not clear that volunteers always make an economic contribution that can be turned into cash.

Another concern is that the new Sorp's demand for information on matters such as ethical investment policy goes beyond accounting boundaries. Teresa Bray, finance director at the Scottish Council for Voluntary Organisations, is worried at the expansion of Sorp regulation. She says: "We do not believe it's appropriate for these disclosures to form part of an audited report. We're seeing regulators wanting to use accountants as regulators."

Otherwise, the revisions are being broadly welcomed. Paul Palmer, professor of voluntary sector management at the City University Centre for Charity Effectiveness, is a committee member. He says: "This Sorp revision is an incremental rather than a radical revision. We do not expect the burden of regulation to increase significantly."

Greg Andrews, chief executive of New Philanthropy Capital, says: "Making sure charities understand costs and allocate them appropriately is very important in pricing and service delivery. More transparent allocation is useful to the users of accounts."

But Charles Nall, finance director at the Children's Society, believes the changes could have gone further. "The proposals are a little bit loose for cost allocation, and we need tighter control on what is attributable to what."

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