Euan Morrison details the news SORP guidelines
The UK Government’s updated Charity Statement of Recommended Practice (SORP) has now been published, giving third sector organisations confirmation on its statutory reporting framework going forward.
These new standards, which will come into effect to cover financial year-ends from December 2026 onwards, follow the publication of draft SORP guidelines in March. This was followed by a consultation period running to the end of June.
While there were no major surprises from what we heard in that consultation, the new guidelines accompany some significant changes to accounting practices that will need to be carefully managed by UK and Irish charities.
The first such change relates to the accounting of property and other assets charities lease from others. Rent payments for offices and other properties had historically been recognised as a cost only when these were due for payment. Under the new SORP, charities will now be required to treat any remaining lease payments as a fixed asset, with a corresponding liability for these shown in creditors. This will significantly change how the balance sheet of many charities will look, even if the impact on the annual income and expenditure will be more limited.
Another key change revolves around how certain types of income are to be recognised. A complex five-step process when accounting for income is now mandatory which could lead to it being brought into the financial statements earlier or later than under previous rules.
While this alteration will make little difference to the likes of investment income, donations or legacies, it could present some significant challenges the many not-for-profit entities that have contract related income.
Other changes to the SORP were mainly presentation related, but in many cases this these will require charities to disclose more, rather than less, in their financial statements. This will likely demand detailed consideration between charity management teams and their trustees as to what is included in trustees’ reports and notes to the financial statements. Charities whose existing disclosure of such items may have been less than optimal will especially need to take note.
This step change in approach over disclosure should be widely viewed as a positive for the charity sector as it has the potential to ensure more useful information is provided to users of financial statements. This in turn should also help charity boards to be much clearer about their policies on financial reserves and sustainability among other governance matters.
The new SORP does bring challenges for third sector organisations but it could also enhance reporting standards. Over the coming months we will be reviewing the new requirements in detail to offer advice to our clients over what changes will be needed in their specific circumstances.
Charities should focus on completing the first year of financial statements prepared under the new standards without it impacting on their normal year end reporting timetable. This will likely require management and trustees to take early and careful advice on what they have to do, and when, and engage with key stakeholders including funders where necessary.
Euan Morrison is head of charities at accountants and advisors CT.
