What to expect from the new charities SORP

The expected changes and how a new SORP might further help charities in their reporting and accounting

The Charities Statement of Recommended Practice (SORP) applies to all charities preparing their accounts on a true and fair basis except Higher and Further Education, Social Housing or Authorised Investment charities. The role of the SORP is fourfold:

• Provide advice to charities as to how to apply the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS102)
• Specify charity specific reporting requirements in addition to those required by FRS102
• Promote best practice in accounting and reporting including requirements and recommendations for the trustees’ annual report (TAR)
• Reflect local mandatory reporting requirements arising from company and/ or charity law in each of the jurisdictions of the UK and Ireland that affect charities.

Expected changes to the SORP due to the new FRS102

• Income (revenue) from contracts and trading- the new FRS102 drops the separate accounting solutions for goods and services and contracts in favour of a uniform five step approach to income recognition (see FRS102 section 23 ). The new approach will involve revisiting the basis on which a charity’s income from contracts, trading and other exchange transactions are identified and recognised. In many cases the recognition point will not alter but this can only be established by applying the five steps to each income stream for your charity.
• Income (revenue) from gifts including legacies and valuing donated goods and services- the current SORP was able to develop a solution for these types of income (also known as non-exchange income) based on that for goods and services with three criteria for recognition: entitlement, probable and measurement (module 5 paragraph 5.8 and module 6 paragraph 6.6) but now a new solution needs to be achieved based upon the new FRS102 approach to recognising gifts from legacies (see FRS 102 section 34). Every charity will need to apply the new recognition criteria to these forms of gifted income, including income from grants.
• Lease accounting- in particular by lessees - will be affected by changes from 1 January 2025 with most leases coming on balance sheet (FRS102 section 20). The only exceptions are for lessees that are ‘short leases’ or relate to ‘low value asset’ leases. Aside from the complication of valuing the ‘right-of-use asset’ and the ‘lease liability’, if a charity as lessee obtains a lease on concessionary terms (for example because the lessor is making the lease as a social investment) then the lessee must also separately identify what the grant element is.

Expected changes in charity specific reporting

Think small first, tiered disclosures and the definition of larger charity have all been topics under discussion in the SORP Committee. Having more tiers with different levels of detail required would affect both the trustees’ annual report and the charity specific options and disclosures in the charity’s accounts. (Company reporting has five tiers: micro, small, medium, large and Public Limited Company). More tiers are expected.

Natural Classification format for the Statement of Financial Activities (SoFA) has been a long standing option for smaller charities with a minimum of line items specified in the SORP (module 4 paragraph 4.22) but with more tiers could this option be made more widely available and have a higher profile in the next SORP?

Areas where specific jurisdiction requirements might be better incorporated

Company reporting - The current SORP is out of date (module 15) and so needs to be updated to reflect the changes anticipated from implementing reforms to company financial reporting in the UK following the Economic Crime and Corporate Transparency Act 2023. A consultation called ‘future of corporate reporting’ is due in 2025. Anticipated changes include requiring more information from smaller companies and removing the option to file ‘abridged’ accounts- these reforms will affect a charity’s trading subsidiaries.

Changes to UK charitable companies are coming into effect as a result of the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 (SI 2024/1303). These changes come into force for financial years beginning on or after 6 April 2025 and make changes to company size thresholds and some reporting requirements, though other disclosures such as energy reporting thresholds are set separately and likely to change in the future.

In Ireland the 2014 Companies Act and subsequent 2017 Companies Act made changes to company reporting. Once charity accounting regulations are made following the Charities (Amendment) Act 2024 then the SORP will become mandatory in the Republic of Ireland.

Fundraising reporting - Regulations applying in England and Wales require all charities subject to audit to make disclosures concerning public fundraising but these are not currently found in the SORP (module 1 paragraph 1.41) and the Fundraising Regulator has found compliance is not as good as it should be.

Governance Code - Each jurisdiction has its own code and reporting against a code is not currently required or indeed mentioned in the SORP (module 1) but given a code is mandatory in the Republic of Ireland the new SORP might be an opportunity to encourage public reporting against a governance code noting that most adopt a comply or explain approach.

Social investment - The development of the accounting and reporting of social investment has reflected innovation by the Charity Commission for England and Wales (SORP modules 20 and 21). The updated Charity Commission guidance has abandoned the distinction between programme related and mixed motive investment and simply refers to social investment. If followed through to the SORP then the reporting and accounting for these types of investment will need to be combined. 

Per the Commission: 

‘The expected financial return on a social investment can be a return of the money invested, plus capital growth or income. It can also be where your charity only expects to receive back some or all of the money you invested, with no capital growth or income’. 

Given the widespread approach of responsible investment related to ethics and values, mission, sustainability and ESG, how the new SORP differentiates social investment and financial investment will be a key issue for many charities. If social investment is broadly defined then it may be possible to reclassify financial investments as social investments, something the current SORP does not permit (see module 21 paragraph 21.25) and could be quite judgemental or controversial.

Balancing simplification with charity specific reporting

A common criticism of the SORP is that it is very long and detailed but against this another request often made is more help and advice particularly for smaller charities including examples. In considering the proposals charities will need to consider if the new SORP is providing enough or too much detail.

For charity specific items such as the trustees’ annual report and charity specific disclosures in the notes to the accounts, for example fund accounting, staff salaries and related party transactions, the SORP can readily be changed and charities should consider if they want to see change.

For items related to FRS102 the SORP has no latitude at all but charities can always provide feedback on those FRS 102 requirements that do not work for them, as without this evidence then the SORP process cannot lobby the Financial Reporting Council to make change.