Good Governance and the Charities’ SORP 2015

Written by Sheena Gibson, Director, Henderson Loggie

Do any of the changes to charity accounts, as introduced under the new Charities’ SORP 2015, affect the disclosure on governance of the charity or is SORP 2015 just concerned with the presentation of figures within those accounts?

For some charities, under the new Charities’ SORP 2015, additional narrative will be required within the Trustees Annual Report for accounts prepared for the period beginning on or after 1 January 2015. Whilst this will be the first time such explanations have been included within the Annual Report, much of this should already be contained within the charity’s own governance policies, and Trustees should consider this and existing governance policies, as appropriate, in advance of the new SORP coming into force.

  • All charities now need to state within the Annual Report their current policy on the reserves they hold and explain why they are held. If the Trustees have decided that holding of reserves is unnecessary the Annual Report must disclose this and provide the reasons behind this decision. Trustees should already be considering the level of reserves they hold, but now it will be important that they document such decisions within Board papers.
  • Charity Trustees should produce and maintain a full risk register, documenting each risk to which the charity is exposed, and documenting the controls that are in place to ensure that, as far as possible, each risk cannot occur. The register should be reviewed periodically and updated as necessary on an ongoing basis.

In previous years’ accounts it has only been necessary to comment that the Trustees have considered the risks to which the charity is exposed, and that they are satisfied that systems are in place to mitigate those risks. Under SORP 2015, the Annual Report must document the risks which the Trustees consider to be relevant to the charity, and then must also explain the proposed procedures they have put in place to address each risk in turn. Ideally, this should be taken directly from the previously prepared risk register.

  • SORP 2015 also requires that within the Trustees’ Report the policies adopted by the charity for setting and reviewing on an annual basis the remuneration of its key personnel is explained, including any benchmarks used in the process. This is a matter of good governance and Trustees should ensure they have a robust system in place for considering the remuneration of their senior staff.

Why are there two versions of the Charities SORP 2015, effective for accounting periods beginning on or after 1 January 2015, and what is happening to the FRSSE SORP?

Two versions of the newly released Charities SORP 2015 have been created: – a full FRS102 SORP, and the reduced disclosure FRSSE (Financial Reporting Standard for Smaller Entities) SORP which can be adopted by smaller charities. Small charities are defined as those charities who meet two of the three criteria for two consecutive accounting periods: Gross income not exceeding £6.5m; total assets not exceeding £3.26m; and average employee numbers of not more than 50. The FRSSE SORP gives exemption from certain disclosures within the accounts, markedly there being no requirement for a cash flow statement to be produced.

The Financial Reporting Council, who issue the FRSSE, have now confirmed that the FRSSE is to be withdrawn for accounting period beginning on or after 1 January 2016, and so if a charity wishes to take advantage of the exemptions available under FRSSE SORP 2015, those regulations can only be followed for one year, after which the FRSSE cannot be used. This means that a charity currently adopting FRSSE accounts under the FRSSE SORP will require to restate the accounts as prepared in previous years to the new FRSSE SORP 2015 for the first accounting year beginning on or after 1 January 2015 and then, for the subsequent financial year, will require to restate the accounts again, since the FRSSE will no longer be in force.

Is it in the best interests of my charity to apply FRSSE SORP 2015 whilst it is still available?

It will be the decision of each board of trustees on whether the FRSSE SORP 2015 is adopted, knowing that the accounts will likely require further restatement the following year, or if the charity opts to move straight to the full FRS102 SORP when the 2015 regulations come into force.

The joint SORP making body is consulting on certain elements of the 2015 SORPs, in particular, the removal of the FRSSE SORP and amending the FRS102 SORP but introducing a new section for smaller entities, as a replacement for full FRS102 compliance. The consultation closes 18 September 2015, after which the final findings will be published, and it will be clearer what exemptions, if any, will be available to smaller charities.

We would recommend discussing the choice of which SORP to apply with your accountant, but, ultimately, it is the responsibility of the Trustees to ensure they act in the best interests of the charity.

From 1 April 2015 charities in England and Wales will not require an audit unless Gross income is above £1 million. Are there any plans for Scotland to increase the charity audit threshold from the current level of Gross income of £500,000?

At the current time, OSCR has, as far as we are aware, no plans to increase the charity audit threshold from the current level. From a governance standpoint, it is the Trustees’ responsibility to consider whether, for charities with income below £500,000, an independent examination is sufficient to fulfil the needs of the charity or if a full audit should be considered.