Charities: one year on

David Chitty reviews the lessons from the first year of reporting under the new Charities SORP, which was designed to improve the flow of information to stakeholders

Most charities will by now have prepared their first report and accounts under the revised Charities Statement of Recommended Practice (SORP) issued in October 2000. The objectives of the SORP review were to learn from experiences of the application of the previous SORP (issued in 1995), to reflect developments in financial reporting, and to continue the improvement in reporting and accounting by charities. Although the Charity Commission has described the changes contained in the SORP as not being 'onerous' to apply, the first year of application has presented a new set of reporting challenges, and this article aims to identify some of the issues that have arisen.

It is important to remember that the formal title of the SORP is Accounting and Reporting by Charities. The addition of the word 'reporting' to the SORP's title indicates the greater emphasis that is now being placed upon the trustees' report and its role in explaining the charity's activities, aims and aspirations. In particular, as this is the report of the trustees, they must take responsibility for its preparation and content, and cannot delegate this task to outsiders such as the external auditors.

Support material on the SORP's application has increased during the course of the past year with the publication of several guides to charity reporting and accounting. Much useful information is available from the Charity Commission, and can be found on the Commission's website This includes CC62, Charities SORP 2000: What Has Changed, which summarises the main changes from the previous SORP, and can be used to ensure that the principal changes have been identified and addressed. A further essential publication is CC66, which contains seven complete examples of charity reports and accounts prepared in accordance with SORP 2000. The examples contain full trustees' reports, primary statements, statements of accounting policies and extensive notes to the accounts. They illustrate practice for all sizes of charity - from small, community charities through to large, diversified ones with international activities. CC66 contains some excellent illustrations of the application of SORP 2000 and is a considerable improvement on the more limited examples appended to the old SORP.

The Commission has also published a useful guide to risk management by charities, Charities and Risk. This guide will assist trustees with formulating their risk management policy, and disclosing details of this policy in the annual report. Disclosures about the reserves of the charity must also be given in the annual report and CC19, Charity Reserves, contains guidance on the calculation of reserves and formulating a reserves policy.

The trustees' annual report

Paragraph 31 of SORP 2000 requires the trustees' annual report to 'explain what the charity is trying to do and how it is going about it. It should show whether the charity has achieved its objectives during the year and explain its plans for the future. It should also help the reader of the report and accounts understand how the numerical part of the accounts relates to the organisational structure and activities of the charity.'

The approach to the trustees' report is less prescriptive than in the previous SORP. The report must provide a 'fair review' of the activities and achievements and must reflect 'successes and failures'. The best approach to preparing a trustees' report is to start with a blank sheet of paper, and to avoid repeating points - especially blocks of text - included in last year's report. The document must be an honest assessment, and focus on how the charity is pursuing its stated objectives and the trustees' intentions for the future. Some trustees' reports are still too bland or are still not being prepared by the trustees.

Two particular problem areas in the trustees' report concern the reporting of risk and reserves. For particular purposes, these disclosures must be given by all charities, and the disclosures must reflect the policies of the charity as decided by the trustees. In practice, some charities seem to have done little or nothing to formulate risk and reserves policies, and the resulting limited disclosures could prompt investigation by the Charity Commission.


SORP 2000 requires the trustees' annual report to disclose the charity's policy on reserves, stating the level of reserves held and why they are held. Responsibility for establishing an appropriate reserves policy lies with the trustees, as does the responsibility for justifying and explaining the level of reserves held. This process should be an integral part of the charity's financial management. The requirement has been introduced because of concerns over the level of reserves held by charities.

The reserves policy should cover only 'free' reserves, so it should not include permanent or expendable endowments, or restricted or designated funds. The SORP does not prescribe what the policy should be, nor does it suggest what the actual level of reserves should be, or set down the process for devising the policy. These are matters for the trustees to address, and will inevitably vary depending on the objectives and characteristics of the charity.

The trustees may wish to formally review what they consider the charity's 'free' reserves to be, and to decide what the optimum level of reserves should be. This needs to be based on a realistic assessment, bearing in mind factors such as income and expenditure forecasts, contingencies and future needs.

Although the reserves policy may be proposed by senior employees or a sub-committee of trustees, it should be formally ratified by the whole body of trustees and minuted. The policy should be periodically reviewed and compared to the actual reserves position. If the optimum levels have not yet been achieved, the steps being taken to address this should be documented and disclosed.


A statement must be given that the major risks to which the charity is exposed, as identified by the trustees, have been reviewed and systems have been established to mitigate those risks.

For many charities, giving these disclosures will be a major challenge, and trustees must support the disclosures by establishing a process of risk identification and risk management.

The statement about risk will need to be supported by evidence of the risk identification and management process. Trustees may want to include this as a regular item on their meeting agenda and when risk issues are discussed, they should be documented and the actions minuted.

Trustees should be in a good position to use their knowledge and wider experience to identify a variety of risks facing the charity, such as financial, operational, and regulatory risks, as well as - perhaps of most concern - risks in connection with damage to the charity's reputation. A practical way to capture this information is through the development of a high level 'risk register'. This could highlight the major risks, then document the controls, procedures or other factors in place to manage, mitigate or eliminate them. The register should be reviewed regularly by the trustees to ensure that it remains complete and up to date.

The risk management process should become part of the charity's day-to-day activities, as opposed to an exercise divorced from what the charity is trying to achieve. It may enable the trustees to identify areas where more risk may be taken, or where opportunities are not being fully exploited. The risks facing the charity will exist, whether or not the trustees choose to recognise and address them - it is better to identify and manage them with confidence than to be exposed to them unwittingly.

Statement of financial activities (SOFA)

Some changes to the format of the principal reporting statement, the SOFA, were introduced by SORP 2000. These changes should not have caused any particular problems, but charities should ensure that the revised captions for 'incoming resources' and 'resources expended' are applied consistently in future years. Appropriate disclosures should be given in the statement of accounting policies about how items of income and expenditure have been allocated in the accounts.

The SORP also requires charities to apply, for the first time, 'line by line' consolidation when bringing their subsidiaries into the consolidated SOFA. This particularly affects trading subsidiaries, and charities should ensure that the revenue of the trading subsidiary is reported separately as an incoming resource and that the costs incurred by the subsidiary are reported under resources expended as a 'fundraising cost'.

SORP 2000 introduced clearer guidance about revenue recognition. This guidance particularly affects accounting for legacies and intangible income. Legacies must be recognised on an accruals basis, once the charity has received clear information regarding the timing and amount of receipts from an estate. Cash accounting of legacies has often been used by charities, and this is no longer permitted for material receipts. Charities must also account for the 'deemed income' and 'deemed expenditure' represented by gifts of goods and services where the donor is clearly bearing the cost of the gift and the benefit is measurable. This would cover, for example, the provision of rent-free or heavily subsidised accommodation, the provision of services or the use of assets such as vehicles or IT equipment.

Inalienable and historic tangible fixed assets

The most significant accounting change in the balance sheet concerned the treatment of inalienable and historic tangible fixed assets.

FRS 15, Accounting for Tangible Fixed Assets, requires all tangible fixed assets to be capitalised, even if they have been gifted or acquired on terms that they can never be sold or can only be used for purposes particular to the objects of the charity.

The SORP, however, permits some charity assets to remain off balance sheet under certain circumstances. These arise if reliable cost information is not available and conventional valuation approaches lack sufficient reliability or significant costs are involved that may be onerous compared with the additional benefit derived by users of the accounts in assessing the trustees' stewardship of the assets.

As an example, suppose a charity operates nature reserves on several sites of redundant farmland. The land has been acquired through various purchases, gifts and bequests. Reliable cost figures may not exist for the current land holdings and it may be difficult to determine a reliable and objective basis of valuation for them. Therefore, it would appear appropriate to leave these assets 'off balance sheet'. However, new acquisitions are acquired for a known cost and a reliable value can be attributed to new gifts and legacies. Also, if a visitor centre were to be constructed on one of the sites, then the costs of the construction should be capitalised and depreciated.

FRS 17, Retirement Benefits

This controversial accounting standard was published shortly after the SORP was issued. Its requirements apply to any preparer of 'true and fair' accounts, including charities. Although it is intended that the implementation of the full accounting requirements of this standard is to be deferred by two years until 2005, all the standard's disclosures must now be given. Therefore, any charity with a defined benefit pension scheme must disclose in the notes to its accounts all the information required by the standard. This information includes details of the actuarial position of the scheme at the charity's year-end, and the only source for this information is the scheme's actuaries. A number of charities have found that actuaries will only provide this information for a fee, which some charities are reluctant to pay. Should charities be unable to present all the information required by

FRS 17, reasons for omitting the disclosures will need to be given in the notes, and the auditors will have no choice but to qualify their audit opinion. Charity audits

Charity auditors are reminded that a revised version of Audit Practice Note 11, The Audit of Charities, was issued earlier this year. The guidance in the Practice Note has been updated to reflect the changes made in the SORP review. In addition, the Practice Note contains revised audit report formats, which must be used now.


Although the structure of charity accounts has not fundamentally changed, the revised SORP has introduced a series of detailed changes. The purpose of these changes is to improve the flow of information to the stakeholders of the charity. The first year of application of the revised SORP has been a year of learning, and as with the implementation of the 1995 SORP, the changes will be particularly noticed in the second year of application.

David Chitty is technical partner at Chantrey Vellacott DFK and joint author of Charities: an Industry Accounting and Auditing Guide, published by CCH

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