The Charities SORP 2015/2016 and the larger charity
Annual Conference - 17 October 2015
Association of Church Accountants & Treasurers
Greyham Dawes, FCA, DChA, Hon. Treasurer
www.croweclarkwhitehill.co.uk
Overview of this one-hour session
 Is yours a “larger” charity - or do you just enjoy technical challenges?
 The Charities SORP’s “Methods & Principles” - what’s new in them?
 FRS102’s new terminology from its global “Conceptual Framework” basis
 Trustees’ Annual Report: new/changed disclosures from then on …
 SoFA & Balance Sheet: format/disclosure changes from 1 January 2015
 Accounts Notes: new/changed disclosures from then on …
 The Cashflow Statement – what FRS102 requires, with what choices?
 ‘First–year’ options under FRS102; but meanwhile: the FRSSE Options
 Thresholds changes for the SORP, for Group Accounts and for audit
 Compliance-planning for your charity: years starting in 2015 or in 2016
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About “SORP Methods & Principles”
 SORP(FRSSE) vs SORP(FRS102) - each follow FRS102’s Methods & Principles
 SORP(FRSSE) requires “current practice” (ie, FRS102) for all “non-exchange”
transactions (where practicable) and for transactions “not covered by an existing
accounting policy” under the FRSSE (or were you not using it before 2015?)
 Both new SORPs also redefine “Related Party” for transaction-disclosures
 The SORP’s 2008 Regulations apply until 2015 Regulations made: CC15c says
Reg.2 & Reg.8(5) specify SORP2005 “methods & principles” for all non-company
charities – so can auditors accept use of SORP2015 as a ‘true and fair’ override?
 SORP(FRSSE) lasts for one year only – so why may it be best for you to use it?
 FRC withdrawal of FRSSE w.e.f. 1 Jan.2016 leaves charities with only a revised
SORP(FRS102) which will disapply FRS102’s new Section 1A (“small companies
regime”) in favour of the SORP’s reliefs only for charities < £500k gross income:
 SORP2005’s successor is being amended for year-ends after 30 March 2015 to
redefine the “larger charity” as everyone exceeding £500k gross income as above
– thus ignoring the doubling of the Charities Act’s audit threshold from that date …
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These new “Methods & Principles” –
how might they affect your charity?
 Income/Assets and Expenditure/Liabilities become accruable at the point
when an inflow/outflow of economic benefit becomes “probable”
 Until then, disclosure as a “contingent” item is required by way of note
 (cf SORP2005’s “reasonably certain” receipt/payment for its accruability)
 Non-current assets/liabilities (> one year): NPV at a ‘suitable’ interest-rate
 ‘Fair value’ accounting is required for any non-basic “financial instruments”
(this mainly means derivatives, forex, interest-rate caps/collars &c)
 FRS102’s PBE Sections provide ‘anchor-points’ or hooks on which all the
SORP’s FRC-approved specialised accounting treatments are now hung
 New terminology used by FRS102 categorises charities’ gifts, grants,
donations & legacies as “non-exchange transactions” (as distinct from
the commercial world’s value-for-value trading or “exchange transactions”)
 But will all this change the look of your charity’s next accounts?
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Terminology used in FRS102 from its
global “Conceptual Framework” basis
UK company law terminology
Accounting reference date
Content
level 1
Accounts
 Content
level 2
Balance
Sheet
 and
Content
level 3
Capital
Reserves
Debtors
Diminution in value [of assets]
Group [accounts]
Individual [accounts]
Interest payable and similar charges
Interest receivable and similar
Minority interest
Net realisable value [ current asset]
Parent undertaking
P & L Account (I & E Statement)
Related undertakings
Stocks
Subsidiary undertaking
Tangible assets
Trade creditors
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FRS 102 terminology
Reporting date (alias “financial year-end”)
Financial Statements
Statement of Financial Position
Equity <CHARITY-equivalent = Total Funds>
Trade receivables
Impairment
Consolidated [financial statements]
Individual [financial statements]
Finance costs
Finance income / Investment income
Non-controlling interest <SORP: Group Accts.>
Estd. sale price less costs to complete and sell
Parent
Net Income Statement (or: “Comprehensive” Income)
Subsidiaries, associates and (corporate) JVs
Inventories
Subsidiary
Property, Plant/Equipt vs Investment Properties
Trade payables
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Trustees’ Report: the key changes
 “Key Management Personnel” names*; remuneration policy
for them (all charities > £500k - was: auditable charities only)
 “Major Risks” disclosure now prospective (for small charities:
any “uncertainties” over the charity’s continuing solvency)
 Total Reserves, derivation of any freely available reserves,
steps needed to match up to the trustees’ Reserves Policy
*complemented by the new Accounts Notes disclosure of the
aggregate cost of all their “employee benefits” (per FRS102)
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Trustees’ Report checklist for the
SORP’s small charities
Charities not exceeding £500k gross income (for 2015/6 onwards):
 Administrative Information (name, any regn. nos., regd./main address,
current trustees’ names (or directors of any corporate trustee), also any
ex-trustees’ names, as well as any trustees for the charity (ditto)
 Governance/Structure/Management:
 Type and [latest] date of charity’s written constitution
 How any new trustees are (i) recruited, (ii) appointed
 Public Benefit purpose(s); the year’s [main] activities
 Declaration of due regard for published CC guidance on Public Benefit
 Achievements of the year’s activities – best with SoFA-correlation
 Reserves Policy/Level; Details of any fund-deficits; Review of Financial
Position; Review of any ‘going concern’ uncertainties
And that’s it – except (if yours is also a custodian-charity):
 Details of assets held, for which other charities and why; segregation
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Trustees’ Report checklist for the
SORP’s ‘larger’ charities
 Administrative Information: as for “small” charities, plus retained advisers
 Charitable Companies outside the “Small Companies” regime:
– Directors’ Report (admin. information) – can be combined with:
– Strategic Report (ie, as a special section) – to comprise:
 [Public Benefit] aims & objectives; strategies; KPIs; significant activities;
achievements; impact/outcomes (must be for parent and subsidiaries)
 “Key Management Personnel” names & policy for their remuneration
 Main fundraising activities/achievements/efficiency* (ditto)
 Investment performance; policies (+ for grantmaking & social investing)
 Principal sources of income; Contribution made by volunteers
 Financial review, Reserves, Solvency, Future Plans, Principal Risks &
Uncertainties = disclosure & mitigation-plans, going forward
 Declaration of due regard for CC guidance on Public Benefit
 Companies Act audits only: “Relevant Audit Information” declaration
* + any impact on efficiency if spending on ‘fundraising for the future’
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“Key Management Personnel” for the
larger charities’ required disclosures
Consider who are your “key management” (and thus also “related parties”):
 FRS102: “persons having authority and responsibility for planning, directing and
controlling the activities of the entity, directly or indirectly, including any director”
 FRS102/33.7: Accounts Note disclosure* of their aggregate “employee benefits”
SORP(FRS102) disclosure requirements (and SORP(FRSSE) similarly):
 1.51 (TAR): “arrangements for setting the pay and remuneration of key management
personnel and any benchmarks, parameters or criteria used in setting their pay”
 9.31. “Although the trustees control and manage the administration of a charity, the
day- today management of its activities may be delegated to senior management
personnel who report to the trustees. …”
 9.32. “All charities must disclose the total amount of any employee benefits received
by trustees and key management personnel for their services to the charity. …
charities subject to charity audit should [consider] the information needs of their
funders and other stakeholders in making their accounting disclosures.
 SORP then suggests disclosing for “the charity’s Chief Executive Officer or highest
paid staff member, or … “its key management personnel on an individual basis”!
Q: Which staff in your Senior Management Team directly exercise trustee-powers?
Q: *Cost of employee’s taxable emoluments as well as non-taxable retirement benefits?
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Operational reporting in the TAR
- a more detailed checklist …
What the SORP continues to require – now for all ‘larger’ charities:
 “aims” [cf mission statement] (as well as Objects summary)
 [impact] changes/differences sought through [operational] activities?
 [targets] main objectives [previously set] for the year (eg, KPIs)
 strategies (ways & means) for achieving those objectives
 significant projects/services (per the Accounts) contributing to
achievement of the annual objectives
 Beneficiary-selection policy for any material grant-making or for
any material “social investment” activities
 Volunteers’ contribution, if significant (total hours? indicative value?)
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Achievements reporting in the TAR
What the SORP continues to require – now for all ‘larger’ charities:
 Objects-related operational performance for the charity and subsidiaries
against your objectives as set for the year
 Explanation of any benchmarks/milestones/success-indicators you use
(qualitative or quantitative) for assessing outcomes from your activities
 Comment on (external) factors affecting performance that are (a) within
or (b) beyond your control (staff-, beneficiary-, funder-relationships and
“position in the wider community”?)
 Investment performance against your investment objectives (if material
investments held)
 Fundraising performance against your objectives - distinguishing
current results and “fundraising for the future” (ie, for legacies, or donordatabase start-up, etc.) (this was non-mandatory under SORP 2005)
 Future plans/strategy and “key objectives” for the future, also any
special factors/influences involved
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TAR: Reserves Disclosures
The charity must explain any policy it has for holding reserves
and state the amounts of those reserves and why they are
held. If the trustees have decided that holding reserves is
unnecessary, the report must disclose this fact and provide
the reasons behind this decision.
– SORP(FRS102), Module 1.22
Module 1.48 says this statement should split the total funds held between:
 (i) restricted funds (ie, endowment capital* and special-purpose income)
 (ii) designated/committed funds (with the timescale for spending them)
 (iii) funds locked up in fixed assets for the charity’s own use (includes
“social investments”) and
 (iv) the balance of funds held as reserves and (if need be) what steps
the trustees are taking to align that figure with the policy figure that is
considered appropriate given their future plans as disclosed.
*there is no duty to spend trust capital – unlike the duty to spend trust income …
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What if Free Reserves are nil?

Even low reserves must have a policy statement – if only
for fundraising or risk-management reasons …

When don’t you need to retain any income in reserve?

How (and why) to avoid negative free reserves resulting
from over-designating retained income to ‘ring-fence’:


Fixed Assets needed for church use in future

funds internally committed for future church projects
Any fund-deficits must be explained (ie, to show that no
‘breach of trust’ is involved), together with details of any
remedial action [to be] taken …
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SoFA principles checklist –
or is your charity unaffected?
‘Probable’ assets & liabilities are all accruable (cf ‘contingent’: disclose only)
‘Fair Value’ of goods donated for sale/spending, for own use or for free distribution
FRS102 “transitioning” option to ‘freeze’ a property’s revaluation or its “fair value”
Charity-mergers at book values (cf revaluation to ‘fair value’ for an acquisition)
Restructuring of a charity – or only of its trustee-body?
Donor-imposed restrictions: capital-retention or ‘purpose’ vs ‘administrative only’
Branch-accounting vs Group-accounting for corporate charity branches
FRS102: Equity-accounting for a corporate JV, as for an Associate (unless already
having been using the “Gross Equity” method and still using the FRSSE)
Grant-accounting and the SORP’s solution to the problem of the ‘contract culture’
Governance Costs; Volunteer Help; Investment Gains/Losses
‘Total Return’ endowment investment accounting: the options
Columnar presentation for a discontinued/acquired ‘business’ vs fund-accounting
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SoFA format: Income & Endowments
1. Voluntary Income & Endowments from all sources,
including Donations, Legacies and also some Gifts/Grants
2. Charitable Activities fees &c (inc ‘performance-related’ Grants)
3. “Other” trading-type activities, inc. all fundraising proceeds,
also from selling donated goods, from Social Lotteries, &c
4. Investment income/interest, also property rentals/lettings
5. Other – eg, a disposal gain on non-investment fixed assets;
any conversion of trust capital* into income &c (= inter-fund)
(*endowments)
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SoFA format: Expenditure
“Larger” charities (>£500k: year-ends after 30 March 2015;
previously: those above the Charities Act audit threshold):
 Purpose-related summary of total costs, as previously
 Support Costs now includes “Charity Governance” costs
 Cost apportionment methodology and results (£ or %)
 Care: apportioning “core costs” to Restricted Funds
 Fundraising costs versus Charitable Trading costs:
 External borrowing costs (“finance costs”)
 Sales-administration; Marketing & Publicity costs &c
“Small” charities: follow your Standard Form of Accounts
(eg, natural classification by expense – or any ‘suitable’ way)
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SoFA: ‘Holding’ Gains/Losses
 Realised and unrealised investment gains/losses on a
single line within net income (using a sub-total line?)
 Charitable companies with material fund-movements in
endowment capital (in or out): I & E Summary needed
 Gains & Losses section (the new ‘STRGL’):
 revaluation of operational (ie, non-investment) assets
 Actuarial gain/losses on a DB pension scheme &c
 Other gains/losses (eg, on foreign currency)
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Related Party disclosures

Redefined in the new SORP to include any donor of land and also
to make all RP transactions “material” (no de minimis level)
 Trustee-benefits – individual disclosures, as previously
 Trustee-donations – aggregate disclosure for FRS102 compliance
 SORP: Total staff costs (unless shown on face of SoFA)
 Split: Pay; NI; DC Pension Contribns; DB Scheme operating
costs (not: finance costs); Other Benefits; Severance Pay
 Average staff numbers employed (plus their FTE, if you like)
 FRS102: Total* for all “key management personnel” (SMT)
 SORP: all staff employed (including by a Related Party)
 ‘Higher-paid’ emoluments** from £60k up, in £10k bands
 SORP 2005: Nos. in (i) DB and (ii) DC pension schemes
* Emoluments (“employee-benefits”) – in aggregate for non-trustees
** now all charities: no. (if any) in each band
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Balance Sheets – the key issues
Heritage Assets rules will cover FRSSE charities also (see next Slide)
Operational Fixed Assets - FRS102 transitioning* option to ‘freeze’ at “fair
value” now (or at previous valuation) as their deemed “historical cost”
Mixed Motive Investment Assets to be classed as commercial investments
Social Investment assets (held primarily for Objects–related purposes) are
separately shown (ie, investment in a charitable project through a third
party (can be a Subsidiary/JV): Historical Cost basis; Impairment writeoffs (as grant-expenditure) for irrecoverable amounts as at year-end
Basic financial assets/liabilities: no change; “fair value” for ‘complex’ ones
(ie, hedging; options; forward contracts; interest-rate ‘swaps’ ,etc.)
‘Probable Assets’ to be accruable: Legacy-marketing & Donor-database
development costs still can’t be capitalised - but under the new SORP
donor-pledges, pipeline legacies, etc., will be accruable if counting as
‘probable’ assets (but of course no accrual of ‘contingent’ assets!)
‘Probable’ Liabilities to be accruable: inc. DB#/DC pension commitments
(#no longer “notional”) but also staff holiday &c entitlements …
(*refers to prior year figures as the comparatives in first FRS102-based accounts)
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Heritage Assets – if any

FRS102 concept: assets of special historic, artistic, scientific,
technological, geophysical or environmental significance “held
principally for the asset’s contribution to knowledge & culture”

SORP(FRSSE) applies the above to “small” charities also:

Investment assets are excluded from the definition

Operational use for unconnected purposes: only if only incidentally

Other qualifying assets are heritage if normally “held for preservation
/conservation”, eg, museums/galleries; church assets (SORP-18.7-11)?

Balance sheet segregation of any capitalised heritage assets

Nature, extent, purpose, access-details; five-year movements history
build-up for capitalised & non-capitalised assets; or else a pointer to
this information elsewhere (eg, website?)

Policy disclosures on acquiring, preserving, disposing of assets

Accounting otherwise as for operational fixed assets inc. annual
reviews for evidence of ‘impairment’ (cf ‘service potential’ test)
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Investment Asset accounting

Valuation and classification largely unchanged – except
that the bid price (“fair value”: FRS102-11.27) is now to
be used for quoted investments under the new SORP

“Social Investment” assets – same as SORP 2005

Mixed-motive investment: commercial rules apply

Investment-pooling as before: endowed and other
restricted trust funds (in addition to unrestricted funds)


Charity Commission Schemes creating a pool charity

Trustee Act 2000 arrangements for ‘DIY’ pooling

Principle: pool entry/exit only with same-day revaluation
Internal versus external Investment Pools
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Charity ‘Branch’ accounting
Under English law

“Charity Branch” accounting takes precedence – Charities Act 2011

“Special Trust” = “Restricted Fund” of the related charity

Charity Commission ‘directions’ can determine all branch-accounting*

A charitable company’s trust funds are always branch-accounted

Its charitable subsidiary company (if any) can only be consolidated*
Under Scottish law

In Scotland, ‘collating’ connected** charities together as one avoids (i)
separate filing with OSCR and (ii) consolidated accounts
**wide definition: common or related charitable purposes OR common
control# OR unity of administration (#same trustees)
*The New SORP excludes all ‘corporate’ charities from “charity branch”
status (ie, ‘sub-audit’ charities’ entity accounts will omit them, and if taking
the cash-accounting option (also for CIOs) can just ignore them completely)
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Charity Groups for consolidation
 Charities Act requirement catches all groups above the £1m
audit threshold: S.I.2015/322: years ending after 30 March 2015
 SORP: group accounts must be prepared if required by law: this
makes them optional best practice for ‘larger’ charities < £1m …
 Specific exemptions – the SORP follows FRS102:
 Immaterial “results”; insolvent liquidation (cf duty of care)
 severe long-term restrictions (preventing “subordination”)
 ‘Control + Benefit’ rule interpreted to include benefit to Objects
 Commercial interpretation only for a non-PBE ‘parent’ (FRS102)
 Line-by-line SoFA consolidation for all group trading activities
 Unmodified charity-unfriendly ‘equity-accounting’ for Associates,
corporate JVs & Consortium undertakings, even though the lack
of equity-investors in a charity makes the FRS102 distinction of
income/assets under shared (not: sole) control irrelevant in any
charity’s consolidated accounts –
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The Cashflow Statement (FRS102)
Required for all charities under FRS 102 (2015); optional for small charities under
FRS102(2016) = those up to the SORP’s £500k ceiling only
Cash inflows and outflows for three basic kinds of activity:
► Operating Activities* (includes all voluntary income; also “social investment”)
►
Investing Activities (also includes purchase/sale of functional fixed assets)
►
Financing Activities (inc. endowment capital cashflows; also any borrowings)
*Gross or net** cashflows can be shown here
**Note required for adjustments from SoFA net income/expenditure to derive the
figure of net operating cashflow for year
Note required: Reconciliation of Balance Sheet to net cash inflow/outflow for year
Cashflow Statement is not needed for a parent or a subsidiary if group Cashflow
Statement is presented
Gross operating cashflows summarise Receipts & Payments by type, but in total
for Charity/Group – not by type of fund, as needed for SORP compliance. Whilst
readily understandable by the general public, this needs more work than showing
net operating cashflows – hence its unpopularity among trained accountants …
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‘First –year’ options for SORP(FRS102);
but don’t overlook the FRSSE Option!
Adopting SORP(FRS102) where SORP2005’s 2008 Regulations still apply – see CC15c
(March 2015) Guidance until the new SORP’s delayed 2015 Regulations are in place:
 The TAR’s new disclosures are non-mandatory; the old ones (see CC15c) are mandatory
 Accounts required under company law must follow the new SORP for a ‘true and fair view’
 Q: Will your auditors agree that for accruals-based accounts prepared under charity law,
you can invoke the “true and fair override” to adopt the new SORP instead of SORP2005?
Reconciliation of any restated Accounts figures on first adopting FRS102 (eg, 2016/7):
 Applies to any restated comparatives for (i) opening balances in 2016/7 Accounts ie, =
adjustments to B/F carrying values of assets/liabilities/funds in 2015/6, and (ii) net income
for that prior year ie, = adjustments to figures in previously published 2015/6 SoFA;
 Summarise all changes to previously published accounts figures, as at prior year-end, for:
 any property revalued* to “fair value” – aggregate increase or decrease in BS value
 any employee-benefit liabilities not previously accrued
 any multi-employer pension fund deficit-funding commitment not previously accrued
 any changes to the carrying value of “non-basic” financial instruments/securities
*as that property’s deemed historical cost going forward
 Summarise all (material) changes in restating the 2015/6 SoFA figures as comparatives
NB: SORP(FRSSE) exempts you from Cashflow Statement and delays FRS102 adoption
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FRS102 “transitioning” explained
FRS102-35.12/.13: “An entity shall explain how the transition … to [FRS102 has] affected
its reported financial position and financial performance [eg, for 2016/7]”, as regards:
(a) the nature of the change in accounting policy [from old to new GAAP]
(b) reconciliation of [total funds] at (i) date of transition [prior-year start-date under new
GAAP] with (ii) [previous Balance Sheet date to that under old GAAP]
(c) reconciliation of [net income for 2015/6] under old GAAP and under new GAAP
Example: If adopting* a “fair value” of £2.5m for a long-held property being used by the
church charity (land £1m; buildings £1.5m), carried at a depreciable cost under FRS15
of (say) £0.5m, and now with a 50-year UEL and ultimate disposal value at current prices
estimated at (say) £1.5m (ie, land £1m; buildings £0.5m):
 (b) Funds* restated from (say) £15.1m as at 2014/5 year-end to £17.1m on transition
 (c) Net income for year 2015/6 restated from (say) £473,000 to £453,000
*Nil adjustment under (b) if “freezing” an existing “current value” as deemed cost – but
material changes in estimates of residual value and depreciable amount under FRS102
affect depreciation prospectively from 2015/6 – hence the change reported under (c).
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Regulatory threshold-changes
Company Audit exemption (only if “claimed”): “small” company/group size-limits*:
£10.2m (was: £6.5m) T/O; £5.1m (was: £3.26m) B.S. gross assets; 50 staff (max)
 Rule: company must not exceed any two of these this year if it did so last year
Non-company charities and “small” companies/company-groups:
1. Charities Act audit by an eligible auditor** becomes mandatory if:
 > £1m*** gross income (£250k if gross assets value >£3.26m); but also if:
 > £25k gross income unless opting for Independent Examination****
* S.I.2015/980 w.e.f. 6 Apr.2015 for years from 1 January 2016 (or 2015, if wished – but
not for claiming Company Audit exemption if that is not otherwise available)
** FRC-supervised auditors – ie, members of CCAB bodies or of AAPA or AIA
*** S.I.2015/321: effective for financial years ending after 30 March 2015 (was: £500k)
**** Above £250k, IE is only by an eligible auditor, or else by a fellow of ACIE or member
of CIMA, ICSA, AAT or (for year-ends from 31 March 2015) of IFA or CPAA
2. Charities Act consolidated accounts: all Charity Groups > £1m*** gross income
3. SORP(FRS102) ‘smaller charity’ reliefs: < £500k gross income (all UK jurisdictions)
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Planning for change: your financial year
starting in 2015 – versus 2016
Charity-size affecting regulatory requirements >£500k? And > £1m?
Property ownership – freehold or leasehold?
Functional versus investment property carrying values
Property’s existing (gross) carrying value on the Balance Sheet?
Options under Old GAAP: either historical cost or a current valuation
Options under the new version of the Charities SORP for your charity:
- a year ending after 30 March 2015 if > £500k income and < £1m (audit)
- a year starting in 2015, under SORP(FRSSE) or else SORP(FRS102)
- years starting in 2016 or later, under the revised SORP(FRS102)
Impact of FRS102 on Standard Accounts Formats (eg, C of E; Methodists)
Other issues under FRS102 (inc. charitable company merger/restructuring)
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Issues for the Larger Charity
under the new SORP from
1st January 2015 onwards
Time for questions?
Or write them down for the
Q&A Panel in the Conference’s
final session?
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