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The role of the Charity SORP in International Financial Reporting Standards

This newsletter has covered the introduction of International Financial Reporting Standards for small and medium sized entities (IFRS for SME’s) and for public benefit entities (PBE’s).

What is changing?

The PBE standard will probably need to cover a number of areas of difference from the SME standard:

  • The primary statement currently called the Statement of Financial Activities
  • Fund accounting and the concept of restriction
  • Programme-related as opposed to financial investment
  • The impairment of assets which are held to deliver services free or at a subsidy and which need to be valued in terms of service potential and not future cash flows
  • Constructive obligations.

The PBE standard will also need to cover narrative reporting in the Trustees’ Report. Currently, the IFRS for SME's covers the financial statements but not the Directors’ Report. The Statement of Recommended Practice: Accounting and Reporting by charities (SORP 2005) covers a great deal of narrative reporting matters, such as governance, public benefit, effectiveness and impact.

What does this mean for charities?

The role of SORP’s is also in question as the ASB wishes to simplify the accounting framework. Some SORP’s will continue such as the Financial Reports of Pension Schemes as this guidance is not currently available in IFRS.

In the case of charities, housing associations and education, there may be a benefit in continuing to have supplementary guidance on how to apply the accounting requirements of the PBE standard, perhaps in the form of Statements of practice.

The Charity Commission could develop Statements of practice for charities in applying the IFRS for PBE's, under the oversight of the ASB. Most commentators seem to want IFRS to be a ‘one stop shop’, with all the information in one place.

This indicates that supplementary guidance such as Statements of practice need to be kept to a minimum between say charities, registered social landlords and higher education institutions to keep the standard for PBE’s to a manageable length. This may require a harmonisation of the information which is contained in the relevant SORP’s, so that the same matter is explained in the same way, regardless of the type of organisation concerned.

This has never happened before as there has been no need until now.

What are our views?

This would be a significant and important body of work and would be one reason why the PBE standard is unlikely to be published before 31 December 2011, the target date for the SME standard. (Other reasons are that the SME standard has been published in draft and consultation ended on 1 February 2010, whilst the PBE standard has yet to be published.

Also, the SME sector generally has greater accounting resources that the PBE sector.) There could be merit in the SME regime being introduced in advance of the PBE regime, to allow PBE’s to learn from the implementation experiences of SME’s.

In anticipation of this change to the status and format of the Charity SORP, the Charity Commission and OSCR (The Office of the Scottish Charity Regulator) commissioned research carried out by Professor Noel Hyndman and his team at Queen’s University Belfast on the benefit and value of the SORP. The report was published this month as RS 21, Charity reporting and accounting:

Taking stock and future reform. The link is:

http://www.charitycommission.gov.uk/publications/rs21.asp

The key findings are:

‘Concerning SORP:

  • The SORP is a force for good. Auditors and preparers believed that the SORP should, and was in an ideal position to, shape practices within the sector (2.1bii).
  • There was support for the suggestion that the SORP be written for small charities with ‘add-ons’ for medium and large charities (3.3). (The SORP currently classifies small charities as those below the statutory audit threshold as defined in charity law.)

Concerning the Trustees’ Annual Report:

  • The consensus was that, on balance, funders were the key or primary stakeholders for all charities regardless of their size, jurisdiction and even the nature of their activities (2.1ai).
  • There is a need for balance in reporting by presenting both successes and failures (2.1aii).
  • The results of the questionnaire indicate almost total agreement across all groups on the value of reporting achievements (2.1cii).
  • There was strong support across all groups for the ‘story’ approach (whereby narrative explanations are used, drawing on nonfinancial performance information where available, to complement and interpret the financial statements). However there was concern that the need to report static, recurring information was taking away from this approach and diluting the impact of the Trustees’ Annual Report (3.2).

Concerning the financial statements:

  • Preparers and auditors advocated that the Charity Commission or OSCR and the future SORP needed to develop clear definitions (with examples) of the different types of reserves, especially regarding the calculation of ‘free’ reserves (2.3d).
  • Given that the Statement of Financial Activities (SOFA) has been used for over 10 years and is now established in the sector, there is no widespread desire for reverting to a more business-like format and presentation (3.4).

The focus on the face of the SOFA should be on distinguishing between restricted and unrestricted funds with any necessary additional detail provided in the notes to the financial statements (3.4).’

The target date for applying the IFRS for PBE's is the 31st December 2012 year end, although this is very likely to be too ambitious as noted above. Our view is that the Charity SORP is more than an accounting framework. It is a document which arises from a community of interested and committed individuals and organisations. From time to time, the Charity Commission and OSCR host ‘roadmap events’ to discuss matters of policy such as this.

There were some 200 attendees at the event in London on 4 December 2009. Professor Noel Hyndman presented his report as above and Ian Mackintosh, Chair of the ASB, explained his approach to an IFRS for PBE's. There were a mix of trustees, charity staff, funders, preparers, auditors, users and regulators present to give the views of different constituencies.

These roadmap events in the past have been followed up by roundtable events around the country, attended by over 1,000 people.

As the Queen’s University, Belfast research showed, SORP 2005 is a force for good and needs to find its place within IFRS for PBE's to maintain and develop best practice for charities.

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