Charity finance professionals that want to keep the existing Financial Reporting Standard for Smaller Entities should make sure they respond to the Sorp consultation, says Helena Wilkinson.

The Sorp consultation continues in full swing. In the past couple of weeks CFG’s technical forum has collated feedback from all its recent events, ICAEW ran an open forum on the consultation document, and the Charity Commission itself is holding a number of events before the consultation closes early next month.

I thought it would be interesting to pick up on some of the more controversial and topical themes which are emerging from these discussions.

Senior management team salaries are causing a stir following recent press coverage of the subject. The debate is split between those who think the current Sorp requirement for staff costs to be disclosed in total is sufficient, while others feel that each individual salary of senior management team members should be disclosed for transparency and accountability purposes.

Other issues, not surprisingly, include legacy accounting, mixed-motive investments, grants payable disclosures, the transfer of governance costs to support costs, trustees’ report disclosures and the terminology in the Sofa.

Most surprising debate

However, the most surprising debate – which is definitely growing in impetus and dividing the sector in its views – is whether the Charity Commission should ‘disapply’ the Financial Reporting Standard for Smaller Entities (FRSSE) for charities?
The Sorp does not have to allow charities to be able to use the FRSSE and so could insist that all charities just have to follow the new GAAP (FRS 102).

There are two camps on this debate. On one side is the view that charities should not have the option to use the FRSSE.  Proponents of this argument say that Sorp 2014 would be significantly shorter if it only covered the application of new GAAP. It would also be less confusing to navigate because it would only have to deal with the application of one set of accounting standards.

Furthermore, as an updated FRSSE has to be consulted on in the next couple of years, it would negate the need to have yet another revised Sorp issued following that FRSSE consultation. Such a further revision to Sorp 2014 could be straightforward if the FRSSE changes are minimal; but alternatively a significant Sorp rewrite might be required if the changes were more substantial.

It is also clear that the ability to use FRSSE is only a temporary measure in any case, as it will only be around for a limited time before it is dropped by the FRC at some point in the future.

Those who feel that disapplying the FRSSE would be a good thing also point to the fact that the accounting differences between the FRSSE and FRS 102 are not that great.  The main differences for charities, on the whole, are the requirement to prepare a cashflow statement, the need to discount assets and liabilities that will mature in more than one year from the balance sheet date, and the need to deal with interest-free loans or rent-free periods. Other differences, such as the treatment of goodwill, are less likely to apply to charities.

In addition, the consultation draft of the new Sorp requires that where a charity that is adopting the FRSSE undertakes a new transaction, for which it does not have an existing accounting policy, then it needs to follow FRS 102 in applying the accounting treatment for such a transaction. This will lead to statutory accounts that are being prepared under both old and new GAAP, which will make any comparability extremely difficult and somewhat confusing.

So those on this side of the debate are arguing that we should just drop the FRSSE option, as the benefits to the charity sector do not outweigh the extra complexity it would bring to the new Sorp.

On the other side of the fence are those who argue that smaller charities should be given the opportunity to stay within UK GAAP by using the FRSSE, and thus having a period of grace before the new GAAP applies to them and they have to make the transition to the new accounting standards.

However, even in these cases there will still be some transition as very few charities have actually applied the FRSSE in their most recent accounts, as the benefits were not that significant compared to applying the current Sorp 2005.

The government is currently consulting on micro-entities, which may lead to further simplifications for smaller organisations being required. If the FRSSE is dropped from the Sorp, then the introduction of any micro-entity benefits would require more of a Sorp rewrite than merely updating the FRSSE in this regard.

What is clear is that there is no consensus between the two views.  Responses to the Sorp consultation over the coming month are likely to include suggestions to both keep and get rid of the FRSSE.

If you want to keep the FRSSE, I suggest that you respond to the consultation without delay.

Helena Wilkinson is a partner and head of the charities and not-for-profit team at chartered accountants Price Bailey