A tale of two SORPs
Christine Scott, of ICAS looks ahead to the publication of two new Charities SORPs.
The Charities SORP Committee has announced that it will issue two versions of the new Statement of Recommended Practice (SORP) during summer 2014: an FRS 102-based version and a FRSSE- based version.
Both versions will apply to accounting periods commencing on, or after, 1 January 2015 when FRS 102: The Financial Reporting Standard applicable in the UK and Republic replaces all existing UK accounting standards.
A number of respondents, most prominently ICAS, highlighted that insufficient attention was given to the Financial Reporting Standard for Smaller Entities (FRSSE) in the exposure draft, hence the reason that two versions of the SORP will now be published.
However, the FRSSE, which is based on the out-going UK accounting standards, is likely to be withdrawn by the Financial Reporting Council (FRC) at some point rather than updated to reflect FRS 102. This will mean that at a future date UK charities preparing true and fair accounts will all have to apply the FRS 102 –based version of the SORP. At that point, the FRSSE-based version will be withdrawn and the FRS 102-based version will remain in place without the need for significant changes.
An analysis of SORP consultation responses was published alongside the SORP Committe's announcement. The analysis, available on the SORP microsite, provides charities and their advisors with a bit more information about what to expect when these much anticipated documents are finally published.
In the past, the Charities SORP has been largely viewed as a one-stop shop for the preparation of charity accounts. This is not the case for the two new SORPs where reference to either FRS 102 or the FRSSE will be essential. The SORP Committee has therefore undertaken to distinguish between the requirements of accounting standards and the additional requirements of the SORP.
Although the vast majority of charities preparing true and fair accounts are eligible to use the FRSSE, it is not safe to assume that that it will be business as usual. In fact, charities and their advisors need to carefully consider where change is required and where change may be desirable in view of the fact the FRSSE has a limited shelf-life.
There are nearly 188,000 registered charities in the UK and just over 54,000 must prepare true and fair accounts. Of the 54,000, over 96% are eligible to use the FRSSE and less than 4% are required to apply FRS 102. In reality, compliance with the current version of the SORP means that many charities which claim to apply the FRSSE do not benefit much by way of concessions due to the additional requirements placed on them at present.
Those charities applying the FRSSE must therefore decide whether or not to abandon the FRSSE from 1 April 2015 and move to full FRS 102. This would be a once and for all change and would avoid a piecemeal approach to the adoption of the new SORP. Charities taking this approach should note that they will have to prepare a statement of cash flows as there is no opt-out available under FRS 102 for small entities.
Those charities which don't apply the FRSSE but which are eligible to do so could decide to adopt the FRSSE from 1 April 2015. This would have the advantage of delaying the move from old UK GAAP to new UK GAAP. However, this would only be delaying the inevitable and would result in piecemeal changes over more than one accounting period. The first tranche of changes would arise from the new FRSSE-based SORP which is likely to align accounting practice with the new FRS 102-based SORP where there is scope to do so i.e. where alignment is possible without introducing technical conflicts. The second tranche would apply when the FRSSE was withdrawn and full compliance with FRS 102 and the related SORP would be required. Preparation of a statement of cash flows could be delayed until the charity implements FRS 102, if this option were to be adopted.
There will be pros and cons attached to the above options and these will need to be considered carefully by the 52,000 plus charities eligible to use the FRSSE and their advisors. Although we know a lot about what the new SORPs may contain, there is still a high degree of uncertainty surrounding the final published versions given the extent of the technical and practical challenges the SORP Committee has faced.
For those who are interested in more detail about the ICAS view on the draft Charities SORP the ICAS Charities Committee's response is available on the ICAS website.