11.2 SORP 2005

SORP 2005 applies to charitable companies as well as non-company charities.

• A charitable company must prepare a directors' report and accounts under the Companies Acts and must file these with Companies House. The accounts must be prepared on an accruals basis.

• The requirements for the Trustees’ Annual Report are the same as those for other charities and therefore the charity must comply with the Regulations. In practice charitable companies normally produce a directors' report and that report is expanded to contain all the information required by the Regulations and recommended by SORP 2005 to be included in the Trustees’ Annual Report.
• If the charitable company's income or expenditure is over £10,000, the trustees must also send us a Trustees’ Annual Report (or and suitably modified directors' report), the accounts and its Annual Return. Our requirements for an Annual Return are the same as placed on non-company charities.

There are two bases on which charity accounts may be prepared: the receipts and payments basis and the accruals basis. Briefly:

• Accounts prepared on the receipts and payments basis consist of an account summarising all money received and paid out by the charity in the year in question, and a statement giving details of its assets and liabilities at the end of the year. This is the simpler of the two bases and may be adopted where a non-company charity has a gross income of £100,000 or less during the year.
• Accounts prepared on the accruals basis contain a balance sheet showing the charity's financial position at the end of the year in question, a statement of financial activities (SoFA) during the year (and sometimes an income and expenditure account) and explanatory notes. Such accounts for charities are normally required, in accountancy terms, to show a "true and fair view" and are required to apply the methods and principles of SORP 2005 (unless a more specialist SORP applies) when preparing their accounts. Non-company charities with gross income over £100,000 during the year and all charitable companies must prepare their accounts on the accruals basis.

Receipts and Payments Accounts

This type of statement provides information on the actual receipts and payments made of an organisation within the fixed period of its’ financial year.   No account is taken of funds which should have been, but were not, received for services rendered during that accounting period.  Nor will it record payments due during the period but not paid.  In a small organisation where trustees know well the anticipated commitments, and the organisations limitations in funding, the Receipts and Payments method, together with a statement of the Assets and Liabilities, is very adequate for the purpose.  It is easily understood and practiced widely.

As an organisation grows, beyond a certain volume of activity and income, this type of account becomes less useful in the management of funds and a move to accruals accounting is necessary.

What are accruals accounts and what is the SOFA?

This accounting method adjusts for receipts and payments which were incurred within the accounting period but have not been received or paid. Together with the Balance Sheet, which provides a snapshot of the organisations finances at one particular point in time, and by accounting for all due transactions (accruals), it is possible for the accountant to produce what is considered ‘a true and fair view’ of the organisations’ financial situation.

ACCRUALS ACCOUNTS - THE BALANCE SHEET contain:

Fixed assets:

Assets held on a continuing basis (ie for the following year and beyond), for the benefit of the charity, either for functional use or for investment, are classified as fixed assets. Fixed assets can be intangible, ie non-physical, but they will normally all be tangible (eg land, buildings and equipment). Tangible fixed assets will normally be functional assets, for use by the charity in its own activities. Investment assets are those held purely for financial gain (either income or capital or both, depending on the trustees' investment policy).

Current assets:

That is, all other assets. These assets are normally easily realisable (ie converted to cash), and should be available for spending on current activities. They will include cash holdings, debtors, stocks, and occasionally investments, which are held so that the proceeds of sale are to be spent on activities. Some assets, classified as current, are not so easily realisable, particularly where the debtor is closely connected with the charity (eg a non-charitable trading company). Where the amount of the long-term debt is material, it must be disclosed in the Notes to the accounts. There may also need to be disclosure in the trustees' annual report.

Classification of  liabilities:

Current (short-term) liabilities:

That is, all amounts are due to be paid or otherwise satisfied within the following year. They may include:

bank overdrafts;

trade creditors;

tax and social security liabilities in respect of paid staff;

any incoming grant treated as "deferred income";

outgoing grants payable within the next year; and

short-term loans.

Long-term liabilities

That is, all amounts fall due after one year. This may include:

long-term loan repayment obligations;

the capital element of instalments due after more than 12 months under finance leases;

provisions for longer-term liabilities such as pension contributions;

the long-term element of any binding commitments in respect of charitable grants awarded; and

any likely future obligation to repay grants received where the event crystallising the liability (eg a property sale) is more than a year ahead.

The Statement of Financial Activities (SOFA) has replaced the Income and Expenditure Account in presentation of the spending detail.  For the lay person, is the amount which the charity has spent on management of the charity is now shown.  Accruals accounts are supported by full notes.

The Statement of Financial Activities (SOFA) must show:

• all the financial resources made available to the charity;

• all the resources expended during the year; and
• a reconciliation of all changes in its funds since the end of the previous financial year.

The SOFA will cover all the money and other assets entrusted to the charity in all funds managed by the charity, including multicellular and linked charities.

The SOFA should be in a columnar format to distinguish between funds which are subject to different legal restrictions (ie unrestricted and restricted income funds and endowments). All the funds of a particular type should be amalgamated together in their respective column. If the charity has no endowments or investment assets, the SOFA may look very similar to the traditional "income and expenditure" account, with the balance of unspent funds brought forward from the previous year.

Annual cycle of Financial Management

• Preparation of both core and project budgets, targeted to meet the bidding timetable of your main funders, perhaps the local authority.
• Monitoring of spend using variance analysis reports on a period basis, perhaps quarterly, to help the management committee understanding of the reasons for any serious variations. Particularly where these will affect delivery of services or financial commitments.
• Review of estimated budgets.
• Review of Financial Policies on an ongoing basis.
• Production of the year end statements
• Receipts and Payments with a Statement of Assets and Liabilities, or
• Accruals using the Statement of Financial Activities (SOFA) and the Balance Sheet.
• Audit or independent examination.
• Approval and signing of the accounts by the trustees before presentation to the Annual General Meeting.