On the accounting and regulatory front, charities, their finance staff and accountants have had plenty on their plates lately. From the recent transition to FRS 102 requirements (the Charities SORP (FRS102)) to the demise of the small charity SORP (the FRSSE SORP), new disclosures and revised regulations have come in wave after wave.
In March last year the Charities (Protection and Social Investment) Act 2016 came into force adding an additional requirement on large charities – the need to include fundraising standards information in the annual report. But, even if we were to put aside for a moment the concerns about how well resourced charities of all sizes are to make sense of complex accounting rules and put them into effect, as layer upon layer of disclosure is added, are readers of charity annual reports any better off?
This month, ICAEW relaunches its Charity Manifesto, a document that underscores its commitment to the charity and voluntary sector. In the year to March 2016, the sector generated over £70bn in income, chief executive Michael Izza points out, and one in five ICAEW members volunteer for charities in their spare time.
However, the sector was hit hard last year by the financial collapse of two children’s charities as well the closure of two fundraising companies, Fundraising Initiatives Ltd (FIL), which went into liquidation with debts exceeding £3.3m, and Person to Person Direct, its sister company, which closed at the same time owing employees wages.
FIL’s troubles originate from two protracted legal battles; there has been no suggestion of wrongdoing at the company. However, its collapse left charities, including the RSPCA and the British Heart Foundation, short of promised donations. When donations fail to reach their intended beneficiaries public concern rightly grows – as do calls for increased transparency and more robust corporate governance.
The ICAEW manifesto makes a number of recommendations for the sector, among them, greater emphasis on measuring and reporting on outcomes, impacts and user friendly statutory reporting. “Pivotal to rebuilding trust is the need for charities to be transparent in what they do and how they do it,” the Charity Manifesto’s authors write.
While it is undoubtedly good for charity reporting to be reviewed in the pursuit of transparency and efficiency, the current review process has its flaws, according to charity specialists. The previous statement of recommended practice, SORP 2005, stood for 10 years. The move to SORP 2015 (FRS 102) brought in significant changes, including the fair value requirements that are the hallmark of FRS 102.
“FRS 102 and associated fair value requirements significantly affected both disclosure and the recognition and valuation criteria in the financial statements of charities,” confirms Laura Masheder, senior manager at Garbutt & Elliot. “Transitional adjustments around multi-employer defined benefit pension scheme liabilities, accelerated revenue recognition and the recognition
of donated goods are the most commonly reported and are often material in size.”
The evolution towards FRS 102 has had positive outcomes, she says. SORP 2015 (FRS 102) brings charity reporting towards greater transparency and into the digital age.
“Its online modular structure, the use of ‘must, should and may’, specific guidance on topical matters such as social investments and the availability of model accounts and help sheets all made the Charities SORP (FRS 102) more accessible than its previous paper-based counterpart,” says Masheder.
However, the requirements of the SORP are arguably disproportionately onerous for the charity sector. “The requirements of the SORP go above and beyond those of FRS 102, with more information required in the trustees’ annual report, more detail of activities and expenditure, analysis of funds that are given for particular purposes and a greater level of disclosure than would be required of a purely commercial entity of the same size,” says Joanna Pittman, partner at specialist charity firm Sayer Vincent.
The question becomes: where to next? Charles Worth, head of business law at ICAEW, suggests that the direction of the SORP 2015 consultation exercise is quite broad and not driven just by the change brought in by FRS 102. The fact it also coincides with a review of FRS 102 is unfortunate in his view. “Is this the right time to be making changes?” he asks. “Unless dictated by experience to date with FRS 102, you might think not.”
The Financial Reporting Council is due to review FRS 102 in 2018, with an Exposure Draft on the next Charities SORP expected after that. One of the questions raised in the Charity Commission consultation rests on threshold. It asked whether a third tier of reporting for the largest charities should be introduced, for instance. Nick Sladden, national head of charities at RSM UK, doesn’t think it’s appropriate. “It adds another layer of complexity. Unpicking all the different thresholds does take some understanding,” he says.
Gillian McKay, ICAEW’s head of charity and the voluntary sector, argues there is not necessarily an easy fit between FRS 102 and charity accounting. The requirement to make an aggregate disclosure of donations made by related parties is likely to prove unwieldy for trustees. Making all the connections and including them, particularly in a context where many individuals are likely to want to remain anonymous, raises huge practical issues for trustees, many of whom are volunteers themselves, she says.
Pittman agrees. “This is a difficult disclosure for charities who regularly receive donations from members of the public, who may include trustees and other related parties. We have asked the SORP committee to consider changing this requirement to exclude non-exchange transactions that are within the normal course of business of a charity,” she says.
Another key issue, which stems from the fair value emphasis of FRS 102, is putting a value on donated stock. There are a lot of differing opinions on this in the profession says McKay. Previously, donated stock within a charity retail operation would not be recognised on the balance sheet as the value is not determined until the point of sale. Others would argue that if an entity is unable to put a value on its stock then it has an issue with stock accounting. Those charities with sophisticated retail operations will have been able to accommodate this requirement. “But you bring about accounting requirements that didn’t previously exist,” says McKay.
An issue that looms large in charity reporting as a result of recent failures is the matter of reserves. Due to the sensitivity around charities holding too little or too much in their reserves the Charity SORP (FRS 102) included a specific requirement for larger charities.
“Larger charities are required to describe their reserves policy and approach to reserves so readers understood performance against target. It is likely this disclosure will be expanded to include commentary around why reserves are held, reasons for using reserves and the basis of calculation,” says Masheder.
With increased requirements and disclosures, the trustees’ report has become a particular bone of contention, with disclosures and standing information taking up increasing amounts of space and resources. Sladden cites one client with only six members on its pension scheme, but the reporting and disclosure impact nevertheless runs to four pages of pension scheme disclosures within the trustee report. RSM’s response to the SORP consultation emphasises that while the SORP provides useful resources for preparers, it could provide more assistance to those who prepare the trustees’ report.
Pittman agrees. “The list of things to comment on in the trustees’ report continues to grow, but as the report gets longer, will people read it? The key challenge for 2017 will be how to deliver better reporting, yet prepare a report that is readable and accessible to the charities’ donors and beneficiaries,” she says.
Time will tell
While most of the Charity Commission consultation themes are laudable – the importance of risk management, generating reports that can elucidate whether charities make a difference to the public’s benefit, the emphasis on enhanced analysis – Pittman says the Commission and the profession should let the sector get used to the new requirements and focus on improving performance. “If charities have an opportunity to understand and comply with FRS 102 SORP, this should provide sufficient information [to readers of accounts]. Charities have only had one opportunity to prepare accounts under FRS 102 SORP so far. We feel the level of charity reporting will improve from SORP 2005.”