SECTION: FINANCE

506091227 What does the adoption of SORP mean for the financial statements – the numbers

Published: 06.09.2012 |
Last Updated: 30.04.2013
carmichael
carmichael
Turlough Mullen

  Turlough is the firm’s audit partner responsible for charities and not-for-profit clients.   Turlough and is a member of the firm’s internal IT Committee and Risk Management Committee. Turlough does pro bono work for the charity sector through board membership

The form of financial reporting stipulated by SORP is completely different to that followed by normal accounting convention.  The main purpose of the accounts is to give a full view of the total incoming resources during the year and how they have been expended and show the overall financial position at the year end.  The “Profit and Loss Account” is replaced by “Statement of Financial Activity” (SoFA).

The structure of the SoFA is very different to a standard profit and Loss Account and should show income from various sources split between “restricted funds” and unrestricted funds”.  The term “restricted funds” means any income, donations, grants etc. that must be applied for a specific purpose as specified by the donor(s).   On the other hand “unrestricted funds” are those funds which are available for general use by the charity in pursuit of its charitable aims. A charity may earmark some unrestricted funds for a specific purpose at its own discretion and create a “designated fund”.

All expenditure during the year should be applied against either restricted funds, unrestricted funds or designated funds according to the purpose for which the funds are applied and at the same time be accounted for under three main headings of expenditure;

 

1.     Costs of generating funds

       2.     Charitable activities

       3.     Governance costs

 Because of their nature some costs will be easy to allocate into the three main headings of expenditure, other costs will have to be allocated on a reasonable, justified and consistent basis.  Sometimes it may be necessary and permitted to record the transfer of funds from one category to another, e.g. transfer unrestricted funds to cover a deficit on restricted funds.  All such transfers must be shown separately on the SoFA.  In this way the reader of the accounts can measure how the various funds have been applied and in what proportion, thus seeing the financial statements in a more transparent and accountable format.  The restricted, unrestricted and designated funds are kept separate at all times and reconciled between funds at the start of the year, income received, expenditure, transfers between funds and funds at the end of the year.

 The balance sheet structure specified by SORP is not too different from a balance sheet structure of a general business except that the funds of the charity which finance the net assets of the charity will be split between restricted, unrestricted and designated funds.  There are other smaller differences which will apply is special cases, e.g. disclosure of heritage assets separately from general fixed assets.

 The SORP document is very detailed and gives very clear guidance on the content of the Trustees’ report, the structure of the SoFA, its related sections and the balance sheet and how different items should be treated with helpful and practical examples in each section.

 

What are the advantages of adopting SORP

 

Although currently not mandatory for charity annual reports in Ireland, many Irish charities have made the decision to adopt SORP for annual reporting on the basis that it is best practice and gives full accountability and transparency.  The Irish charities that have adopted SORP clearly regard the annual report not just as compliance but as a means of communication to all stakeholders, especially funders.  Funding is now the greatest challenge facing most Irish charities and it is hard to imagine that funders will not be influenced by the quality of annual reporting by a charity and that may well be a deciding factor in assessing the viability of a charity’s work and thus influencing a funding decision.  A recent UK survey conducted by the Charity Commission into the key factors underpinning public confidence in the charity sector confirmed that 96% of respondents said that the annual report of a charity is of great importance to them in assessing a charity.  Remember, in UK SORP is mandatory for charity annual reporting.

 Adoption of SORP for annual reporting by a charity would indicate a number of factors at work within a charity;

 

·         A willingness to be more accountable and transparent

       ·         A willingness to communicate more clearly with all stakeholders

       ·         Effective accounting systems that enable such detailed reporting

 

Non adoption of SORP does not necessarily mean the opposite is true but as more Irish charities do adopt SORP those that do not may find that funding becomes more difficult and in time funders may impose adoption of SORP for annual reporting as a condition of funding.

 

Practical matters

 SORP annual reporting may not suit some charities but in most cases it will be the most appropriate basis for annual reporting.  If a charity is considering adopting SORP, early planning is essential.  The accounting systems of a charity planning to adopt SORP will have to be able to provide all the detailed information required by proper SORP annual reporting.  If this is not the case, the charity will have to set about revising its accounting systems to bring it up to the required standard.  To do this properly a charity will have to have a working knowledge of what detail and information is required of SORP annual reporting.

 Because SORP requires that the annual report should contain comparative values for each line entry a charity planning to adopt SORP will have to plan full adoption of SORP well in advance of the first annual report in SORP format.

 

My Top Tips
Top Tips
1
Check if SORP 2005 is suitable for annual reporting by your charity.
2
If so, become familiar with exactly what is required to adopt SORP properly – it is more than presentation of the numbers.
3
Check that the accounting systems in use will produce the information required to adopt SORP fully, if not upgrade the accounting system.
4
Plan well in advance keeping in mind that comparative numbers will be required for each line item.
Suggested reading
1
The Charity Commission website
2
The SORP itself “Accounting and Reporting by Charities; Statement of Recommended Practice (revised 2005)”
Can be downloaded from the Charity Commission website.
3
Accounting and reporting by charities in the Republic of Ireland by Teresa Harrington
Available from Chartered Accountants Ireland.
SECTION 4: FINANCE

506091227 What does the adoption of SORP mean for the financial statements – the numbers

Published: 06.09.2012 |
Last Updated: 30.04.2013
carmichael
carmichael
Turlough Mullen

  Turlough is the firm’s audit partner responsible for charities and not-for-profit clients.   Turlough and is a member of the firm’s internal IT Committee and Risk Management Committee. Turlough does pro bono work for the charity sector through board membership

My Top Tips
My Top Tips
My Top Tips
1
Check if SORP 2005 is suitable for annual reporting by your charity.
2
If so, become familiar with exactly what is required to adopt SORP properly – it is more than presentation of the numbers.
3
Check that the accounting systems in use will produce the information required to adopt SORP fully, if not upgrade the accounting system.
4
Plan well in advance keeping in mind that comparative numbers will be required for each line item.
Suggested reading
Suggested Reading
Suggested Reading
1
The Charity Commission website
2
The SORP itself “Accounting and Reporting by Charities; Statement of Recommended Practice (revised 2005)”
Can be downloaded from the Charity Commission website.
3
Accounting and reporting by charities in the Republic of Ireland by Teresa Harrington
Available from Chartered Accountants Ireland.

The form of financial reporting stipulated by SORP is completely different to that followed by normal accounting convention.  The main purpose of the accounts is to give a full view of the total incoming resources during the year and how they have been expended and show the overall financial position at the year end.  The “Profit and Loss Account” is replaced by “Statement of Financial Activity” (SoFA).

The structure of the SoFA is very different to a standard profit and Loss Account and should show income from various sources split between “restricted funds” and unrestricted funds”.  The term “restricted funds” means any income, donations, grants etc. that must be applied for a specific purpose as specified by the donor(s).   On the other hand “unrestricted funds” are those funds which are available for general use by the charity in pursuit of its charitable aims. A charity may earmark some unrestricted funds for a specific purpose at its own discretion and create a “designated fund”.

All expenditure during the year should be applied against either restricted funds, unrestricted funds or designated funds according to the purpose for which the funds are applied and at the same time be accounted for under three main headings of expenditure;

 

1.     Costs of generating funds

       2.     Charitable activities

       3.     Governance costs

 Because of their nature some costs will be easy to allocate into the three main headings of expenditure, other costs will have to be allocated on a reasonable, justified and consistent basis.  Sometimes it may be necessary and permitted to record the transfer of funds from one category to another, e.g. transfer unrestricted funds to cover a deficit on restricted funds.  All such transfers must be shown separately on the SoFA.  In this way the reader of the accounts can measure how the various funds have been applied and in what proportion, thus seeing the financial statements in a more transparent and accountable format.  The restricted, unrestricted and designated funds are kept separate at all times and reconciled between funds at the start of the year, income received, expenditure, transfers between funds and funds at the end of the year.

 The balance sheet structure specified by SORP is not too different from a balance sheet structure of a general business except that the funds of the charity which finance the net assets of the charity will be split between restricted, unrestricted and designated funds.  There are other smaller differences which will apply is special cases, e.g. disclosure of heritage assets separately from general fixed assets.

 The SORP document is very detailed and gives very clear guidance on the content of the Trustees’ report, the structure of the SoFA, its related sections and the balance sheet and how different items should be treated with helpful and practical examples in each section.

 

What are the advantages of adopting SORP

 

Although currently not mandatory for charity annual reports in Ireland, many Irish charities have made the decision to adopt SORP for annual reporting on the basis that it is best practice and gives full accountability and transparency.  The Irish charities that have adopted SORP clearly regard the annual report not just as compliance but as a means of communication to all stakeholders, especially funders.  Funding is now the greatest challenge facing most Irish charities and it is hard to imagine that funders will not be influenced by the quality of annual reporting by a charity and that may well be a deciding factor in assessing the viability of a charity’s work and thus influencing a funding decision.  A recent UK survey conducted by the Charity Commission into the key factors underpinning public confidence in the charity sector confirmed that 96% of respondents said that the annual report of a charity is of great importance to them in assessing a charity.  Remember, in UK SORP is mandatory for charity annual reporting.

 Adoption of SORP for annual reporting by a charity would indicate a number of factors at work within a charity;

 

·         A willingness to be more accountable and transparent

       ·         A willingness to communicate more clearly with all stakeholders

       ·         Effective accounting systems that enable such detailed reporting

 

Non adoption of SORP does not necessarily mean the opposite is true but as more Irish charities do adopt SORP those that do not may find that funding becomes more difficult and in time funders may impose adoption of SORP for annual reporting as a condition of funding.

 

Practical matters

 SORP annual reporting may not suit some charities but in most cases it will be the most appropriate basis for annual reporting.  If a charity is considering adopting SORP, early planning is essential.  The accounting systems of a charity planning to adopt SORP will have to be able to provide all the detailed information required by proper SORP annual reporting.  If this is not the case, the charity will have to set about revising its accounting systems to bring it up to the required standard.  To do this properly a charity will have to have a working knowledge of what detail and information is required of SORP annual reporting.

 Because SORP requires that the annual report should contain comparative values for each line entry a charity planning to adopt SORP will have to plan full adoption of SORP well in advance of the first annual report in SORP format.