The Sorp Revision: Loss-making contracts

By finance expert Don Bawtree

Don Bawtree
Don Bawtree

If an organisation is losing money on a contract, it needs to recognise the loss straight away in its accounts. For charities, this often occurs with leases, where the property cannot be sub-let; but the new Sorp introduces another area.

What happens when a charity has a contract with a service commissioner, such as a local authority, and the income does not cover all the costs? Often this happens because the charity wants to bring something extra to the work.

The Sorp requires charities to look at the contract carefully. If the terms include an extra charity benefit, this needs to be taken into account in working out whether it is loss-making.

On the other hand, where any loss is because the charity wants to add extra benefits to the service, then it is not a loss-making contract. But there are two considerations. First, you may have a constructive obligation to offer something outside the contract: that would amount to the same accounting treatment as showing a loss. Second, you must be clear that treating the loss-making activity as a "charity extra" is justified.

Finance Advice

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