Get engaged in the Sorp consultation process, urges Rui Domingues, or you may have cause to regret it.
As readers of civilsociety.co.uk are well aware, the Charity Commission and OSCR issued a draft new Sorp for consultation in July. Based on Financial Reporting Standard (FRS) 102, it provides guidance for charities of different sizes on applying the new financial standard in charity situations.
As finance leaders, we have an opportunity to provide feedback on whether or not the new draft Sorp provides the right guidance for us.
Detailed briefings and seminars on the consultation document have been, or are being, produced by umbrella organisations and by audit firms.
There isn’t space in this article to look at all of the nuances, but I would like to mention the following broad themes that have struck me.
1. Modular format
As the Sorp framework is trying to help charities apply either FRS102 or the Financial Reporting Standard for Smaller Entities (FRSSE), the exposure draft has been structured around core modules relevant to all charities producing accruals-based accounts, with additional modules which only apply in certain other circumstances or for particular organisations.
One of the biggest questions for me is whether the modular structure is easy to use for the many charities that could report under the FRSSE.
For someone with experience of charity finance it is, in my view, fairly easy to work through the relevant modules and apply them appropriately. However, we need to be confident that part-time or less experienced finance professionals will also be able to apply the modules correctly. I think there is a major question about that.
There may be more that can be done to the structure of the Sorp, but this may also be about needing to do more to raise the general standard of financial skills in the sector.
2. Income recognition
As a result of FRS102 changes, the draft Sorp has changed the recognition criterion for income from “certainty” to “probability” of receipt.
This may have implications for, among other things, legacy income recognition and we need to assess whether the exposure draft is clear enough in defining when “probability” occurs.
Clarity on this issue may only come for individual charities when income recognition policies are discussed with their auditors. It may be that, in many cases, policies don’t change much from current practices, if proper evidence can be presented that “probability” was in effect the existing policy basis.
But how would such an outcome sit alongside the very definite expectation of change implied by FRS102?
3. Defined-benefit pension schemes
Under FRS102, payment plans to fund deficits in multi-employer, defined-benefit pension schemes will need to be recognised as liabilities.
This issue has been under the radar so far, but could lead to some big changes in charity balance sheets. It will require effective disclosure in charity accounts, and those of us involved with such schemes must certainly be prepared for the implications of this change.
4. Sofa format
The exposure draft has also brought in some changes to the format of the statement of financial activities (Sofa).
For example, the “governance” cost category found in the current Sorp has been dropped, and there are a number of other changes proposed.
I had a meeting with our charity’s corporate fundraising team recently; about how best to apply to be a company’s ‘charity of the year’. We need to translate our accounts information into something that will be more understandable to this potential stakeholder.
This has made me wonder whether we need to be more radical in how we present our income and expenditure figures generally.
This article has only scratched the surface of some of the issues we will face as finance professionals in the sector. It is really important that we each get a clear understanding of the issues that the Sorp exposure draft will help us with, and those which appear problematic.
So I make no apologies for repeating what I have said before – make sure you get involved in the Sorp consultation. It will definitely pay dividends in the long run.
Rul Domingues is finance director at Friends of the Elderly