Accounting rules are ‘ill-suited’ to charities and need reform, regulators say

01 Jul 2021 News

Charity accounting rules should be simplified, according to a joint statement by the sector’s regulators.

The Charity Commission for England and Wales, along with its counterparts in Scotland and Northern Ireland, has called on the Financial Reporting Council (FRC) to “declutter” the statement of recommended practice (SORP), which provides the framework for charity accounting.

In a letter to the FRC, the regulators said the SORP was too closely aligned with the requirements of private companies rather than charities, and that they were likely to request further “wholesale changes” to accounting rules in the future.

‘Ill-suited to charities’

The regulators said that they were drawing on recommendations from advisory committees appointed last year, made up of experts from around the sector.

Focusing on the application of financial reporting standard guidelines, known as FRS 102, the regulators said that “in implementing this framework, it is now very clear, in our view, that a number of developments in for-profit accounting are ill-suited to charities”.

The letter to the FRC said that regulators believed recent developments in private sector accounting had had a “particularly distorting effects on charity financial reporting” which needed correcting.

Need for a dedicated standard

The technical recommendations include simplifying the detail of financial disclosures required of small charities through the SORP, which could “facilitate the development of tiered reporting” and “remove clutter and focus reporting on the needs of the user of charity accounts”, the letter said.

The regulators called on the FRC to “consult on developing a conceptual framework for not-for-profits and the development of a dedicated financial reporting standard”.

The mechanisms for “measurement, presentation and disclosure” in accounting are currently “unsuitable for the readers and users of charity accounts”, they added, and said that “there is now a need for a solution wholly developed with not-for-profits at its core”.

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