Charity SORP Exposure Draft A Response on behalf of The Charity Law Association
The Charity Law Association Working Party
The Charity Law Association has 785 members principally solicitors and barristers but also accountants and other non-professional members.
This response has been prepared on behalf of the Charity Law Association by a working party the members of which were as follows:-
Diane Scott Cancer Research UK (Head of Legal Services) - Chair
Elizabeth Davis Blake Lapthorn Linnell (Solicitors)
Trevor James Sheen Stickland (Chartered Accountants)
Heather Lamont Kingston Smith (Chartered Accountants)
We confirm that we are happy for our comments to be made publicly available.
General Comments
We support the need for a Charity SORP. We believe that following the introduction of the 1995 SORP and the revised SORP in 2000 there has been a marked improvement in reporting by charities and increased accountability that has been of benefit to the sector.
The whole document is less user friendly than the 2000 SORP. Its language and general direction is understandable by accountants but less accessible for the lay trustee and non-accountant adviser. In particular the references throughout to accounting standards without any explanation even in Appendix 2 of their status is unhelpful.
The general tone is more prescriptive than the 2000 SORP. The document is a statement of recommended practice.
Although there are let outs for smaller charities the fact that a treasurer, who in a small charity may well not be an accountant, has to read several paragraphs before discovering there is an exemption for a small charity is unhelpful. We recommend that the format should be such that it is obvious at the outset where small charities are exempt from complying with any particular section.
The SORP should take account of the Standard Information Return to be introduced shortly to avoid unnecessary additional reanalysis and to minimize the burden on charities to respond to diverse and duplicated requests for information especially if one reporting initiative would suffice. These initiatives, together with Guidestar, must compliment one another and be coordinated.
Replies to specific questions
Our replies to the specific questions raised are as follows:-
A Does the proposed restructuring of the Trustees' Annual Report create a clearer focus for the reporting of a charity's performance and achievements and provide a clearer link between a charity's objectives, activities and results achieved?
Yes, and the re-structuring should deliver a report that is set out in a more logical order. Although most charities will follow the order laid down in the SORP there should be flexibility to reorder the matters covered if this assists in achieving clarity in the report.
B Does the section on reporting of achievements and performance create an appropriate framework, allowing for performance and achievements to be reported in a more meaningful way whilst providing sufficient flexibility in the choice of measures or indicators that a charity may adopt in reporting?
Yes, it creates a framework allowing for more meaningful reporting of performance and achievements, but the prescriptive nature could lead to it being used as a tick list. Charities should be encouraged to do more than tick the boxes.
C Does the introduction of a separate section dealing with a charity's structure, governance and management create a clearer focus for reporting of governance issues?
Yes, it will encourage charities to think through this area.
D Do you agree that the issues surrounding the measure and valuation of the contribution of volunteers prevent, at this stage, the recognition of this contribution within the SoFA?
Yes. We do not see any circumstances in which it would be possible or desirable now or in the future to recognize and measure the contribution of volunteers with any degree of accuracy or consistency between charities. We support the flexibility that already exists that allows charities to recognize this in the notes to the accounts if they wish.
E Does the proposed restructuring of the SoFA assist the reader in understanding the activities undertaken by a charity and the correlation between income streams and related activity costs?
Yes, but we would suggest the following in relation to Table A (para. 74) (the format of the SoFA):
In A incoming resources, charities should be able to adapt the order as appropriate to the charity, this would normally result in a charity listing the sources in order of size.
There appears to be a mismatch between the subheadings in A1 and those in B1, which does not serve the stated aim of making it easier to identify the link between a given source of income and its related expenditure. It is not clear why there is a separate line for fundraising trading under resources expended, but not under incoming resources.
In B resources expended, B2 charitable activities should be listed first, then B1 costs of generating funds and finally B3 governance costs. Charities exist to undertake charitable activities and not to generate funds.
Subject to the above, where possible the order of items in incoming resources should reflect those in resources expended.We do not consider the phrase generated funds to be appropriate or helpful, as it is not clear what these are but have not identified a more appropriate alternative phrase. The term ‘generated funds’ is new and needs to be defined in the glossary to help the reader understand which funds are generated and which are not.
F Do you agree that creating a greater focus on activities will enable charities to better present the cost profile of the work that they undertake?
Yes, but if this is to be achieved it will require more than a change in the words.
G In the context of an activity cost approach to SoFA categories, do you agree that it is appropriate for the disclosure of support costs and their allocation to be dealt with by a note to the accounts?
Yes, but smaller charities might want to show it in the SoFA and avoid detail in the notes.
H Do you agree with the introduction of a governance cost category within the SoFA?
Yes, but the amounts may be small and therefore not very meaningful. The main items likely to be included under ‘governance’ are audit fees and trustees’ meeting expenses – both of which are disclosed separately in the notes.
I Are the proposals in relation to attributing costs between the activity categories of the SoFA practical? If not, how might they be improved?
Whilst we agree with the principle we are not convinced that the proposals are practical. For many charities the apportionment proposals may require cumbersome measurement processes to be put in place but the apportionment reported will be difficult to audit. Consistency is important and any change in the basis of apportionment must be justified and explained in the notes to the accounts. Comparatives must also be changed.
J Do the criteria proposed for determining when information provided as part of the fundraising activities may be regarded as educational assist in identifying joint costs that may be allocated in part to charitable activities?
Yes, this does provide clarity in an area that has seen inconsistency.
K Do you agree that where an objective or activity is pursued by a combination of direct service provision and grant funding of third parties the focus in the SoFA should be the analysis of the objective or activity rather than the method by which it is undertaken?
Yes, this permits easier comparison between charities undertaking similar activities, where one employs staff directly and the other uses the services of another organisation.
L Do you agree that it is nevertheless appropriate for the notes to the accounts to differentiate between direct service provision and the funding of third parties by way of grant?
Yes, if the notes do not contain this information it will be difficult for a reader of the accounts to fully understand the activities.
M Do you agree that it is appropriate for the SORP to continue to allow information listing details of the largest institutional grants made by a charity to be provided through a separate publication?
No, to ensure transparency, we believe these should be listed within the notes to the accounts.
N Do you agree that a liability for a voluntary grant payment should be recognised once the offer has been formally communicated to the recipient and no conditions, that may prevent payment remain within the control of the donor charity? If not, what alternative recognition principle would you apply?
Yes, but we believe the SORP should acknowledge that depending on the terms of the grant, the charity’s liability for a grant awarded may not extend beyond the next review date, or even beyond benefits already provided at the balance sheet date.
Nevertheless, some trustees may wish to recognize a ‘constructive obligation’ for funding beyond the point to which a strict liability exists. Where they choose to do so, we believe these obligations should be identified (where material) within the relevant notes to the accounts
It is understood that the Public Sector and Not for Profit Committee of ASB in relation to its work on the Statement of Principles for Public Benefit Entities, accepts that a multi-year grant can be analogous to a ‘performance related contract’. As such it could be treated as work in progress and accounted for on a time apportionment basis. Consistency between this SOP and the Charities SORP should be sought.
O Where a multi-year grant payable is conditional on an annual review, do you agree that evidence of the operation of the review process is sufficient to demonstrate the operation of the condition? Alternatively, do you believe that the full commitment of multi-year funding should be recognized unless evidence exists of the donor charity using the review process to rescind future funding?
Yes, operation of the review process should be sufficient. The fact that funding is only rarely withdrawn does not mean that rigorous reviews are not carried out and that if the review process should reveal shortcomings, that future funding will not be rescinded
P Do you agree that grants which contain specific conditions linking payment to the performance of a particular level of services or unit of output, in a way that is analogous to a contractual arrangement, should be recognized to the extent that the specified service or goods have been provided?
Yes, but it may not always be easy to apply in practice. It would be helpful if it was clear that multi-year grants could be (depending on the circumstances) a performance related grant – the draft wording may be construed to infer that they are mutually exclusive.
Q The Exposure Draft continues to allow the recognition of donated services within the SoFA where a demonstrable cost is borne by the donor and a current value to the recipient charity can be measured. Is this appropriate? If not, should the guidance limit recognition of such contributions to those services that the charity would have been obliged to purchase in the absence of the gift?
If the donated service is one that the charity would otherwise have purchased in order to carry out its functions then it should be recognized in the SoFA. If it is a service that would not have been purchased it should not be recognized. However, there may be few instances where it could be argued that a charity is ‘obliged’ to purchase the donated service. An example of a service that might have to be recognized would be rent free premises for occupation by the charity (but not if the premises are over and above the actual space requirements that the charity would be willing to pay for).
R Application Note G to FRS: Reporting the Substance of transactions requires that revenue represents the fair value of the right to consideration arising. Do you believe that the proposals in the Exposure Draft are consistent with the reasoning of this Application Note?
Yes
S Do you agree that the term heritage assets is more appropriate terminology for this category of asset?
Yes, but we are concerned that the definition is narrower than the previously used historic and inalienable and that this may not be readily understood.
T Are you content with the proposal that continues to require the capitalisation of newly acquired heritage assets? If not, what alternative would you favour and how would you reconcile this to generally accepted accounting practice?
We accept that charities receiving funds to acquire a heritage asset must account for the receipt of the funds and their utilisation. There is no guidance in the SORP concerning the capitalisation or otherwise of expenditure on major refurbishment to heritage assets that have not been capitalised.
U Do you agree that inalienable assets that are not of a heritage nature should be capitalised?
Yes, but there will be serious cost implications if a professional valuation is required and therefore informal valuations should be permitted, provided they are on a reasonable basis.
V Do you agree that the criteria for the exclusion from capitalisation of previously acquired heritage assets should be applied on an ‘asset by asset’ basis? If not, please explain why.
Yes, but asset by asset should be defined. For example is it individual paintings in an art gallery or is it the collection?
W Do you consider the stewardship disclosures for heritage assets set out in paragraph 272 to be sufficient, particularly where such assets are not capitalised on cost/benefit grounds? If not, what particulars could be added to the disclosures, for example, would an estimated or indicative value of non-capitalised assets be helpful to readers and be a practical disclosure for preparers of accounts to provide?
In the interests of transparency an indication of the value of the assets should be included for assets that have not been capitalised. A reasonable proxy could be the insured value. We fully understand and accept that this is not the open market value but it would give the reader of the accounts a figure that would assist their understanding.
X Are there any new developments that you believe that the new SORP should address?
The SORP should take account of the exposure draft for Public Benefit Entities.
Y Is the additional guidance on the accounting treatment of fundraising start up costs and databases sufficient? If not, what further guidance do you consider necessary?
Yes, but rather than referring to UITF 24 we would prefer to see an explanation in paragraph 158 (a).
Z Does the need to allocate support costs (see glossary GL42) relevant to activity categories create a burden for small charities? If so, do you consider it would be appropriate to increase the threshold, allowing a natural classification of costs, to the audit threshold of £500,000 gross income proposed for charities in England & Wales Charities Bill?
Yes it will create a burden, which will be heaviest in year one and less thereafter. Charities below the audit threshold should be permitted to use a natural classification of costs.
AA Are there any further disclosure concessions that could be made for smaller charities? If so, would your suggestions be consistent with the statutory duty of accruals accounts to show a true and fair view?
No
Other Issues
Legacies
Paragraphs 103 – 107 do not address adequately the point at which a legacy should be recognized and we understand that accounting practice in this area varies widely within the sector. In particular use of the words ‘sufficient’ in paragraph 104 and ‘unlikely’ in paragraph 105 do not assist in ensuring clarity and consistency in the reporting.
In any event it should be borne in mind that :
a. No entitlement to a legacy exists until probate has been granted.
b. Legacies are abated if there are insufficient assets.
c. Specific assets (e.g. stocks and shares) can change in value between the date of
notification and the date of transfer to the charity.
Programme Related Activities
Paragraph 286 does not adequately recognize the range of programme related activities undertaken by charities. There should be flexibility to report in the most appropriate manner. Some charities undertake programme related activities as part of their normal charitable activities, hoping for a possible return but not regarding them as an investment. Funding to many projects, for example, might be more appropriately recognized on the balance sheet as debtors rather than as investments.
GL36 defines Programme Related Investments but is confusing investments and charitable activities.
FRS 17
We are concerned that the adoption of FRS 17 will require charities to recognize pension fund surpluses or deficits in the SoFA and we are concerned how any surplus or deficit would be reflected in charities accounts. The SoFA is neither an income and expenditure account nor a profit and loss account and yet for the purposes of FRS 17 it is to be treated as such. We believe that full immediate recognition of a surplus or a deficit could distort a charity’s financial reporting to an extent that could mislead users of the accounts.
We recommend that charities should report any surplus or deficit separately rather than as a movement within unrestricted funds.
Research
There is a lack of clarity concerning research. The SORP needs to distinguish between scientific and similar research and research undertaken to assist the charity in the fulfillment of its role.
Charitable Associates
Charities are encountering problems of accounting for charitable associated entities. It is accepted that where a charity has significant influence but not control over a commercial entity the charity should account for its interest on an equity basis. There are cases where a charity has power to appoint a significant number (but not a majority) of trustees to another charity and in such cases the associate has been accounted for on an equity basis. Provided the appointing charity has no right to an interest in the assets of the appointee charity we believe this to be incorrect. The SORP should clarify this and if and how the consolidating charity should account for this.
Life Memberships
Where material the notes to the accounts should disclose the accounting treatment of life memberships.
