Charity Commission’s Statement of Recommended Practice (SORP)

Charity Commission’s Statement of Recommended Practice (SORP)

The Charity Commission’s Statement of Recommended Practice, affectionately known as SORP, summarises how charities preparing accounts under the accruals basis should be applying accounting standards to those accounts.  The SORP was intended to be updated every five years.  Compliance with the SORP is mandatory for charities.

SORP (2005) was updated in June 2008 and applies to all accounting periods beginning on or after 1 April 2005, the new updated SORP’s (FRS 102 SORP and FRSSE SORP) apply to accounting periods commencing on or after 1 January 2015.

This latest update was delayed as a result of the fundamental changes to the existing UK accounting standards (UKGAAP). The Financial Reporting Council (FRC) have now published Financial Reporting Standard (FRS) 102 and, as a result, the guidance for charities has been updated to take into account these changes. Smaller entities, including charities, have been able to claim certain reporting exemptions under Financial Reporting Standards for Small Entities (FRSSE), and this is still the case. For this reason, two SORPs have been drafted. One to account for smaller charities reporting under the new FRSSE 2015 and the other to account for all other charities reporting under the FRS 102.

From 1 January 2016 the FRSSE 2015 is being withdrawn and is being replaced with a new standard, FRS 105 which will deal with micro entities (turnover less than £632,000).  As a result, any charity adopting the FRSSE SORP may have to change their accounting policies twice in succession. Charities therefore have the opportunity to adopt the FRS 102 SORP early, which is what most charities are opting to do.

Over the past few years the various SORP’s issued have improved the quality of financial reporting by charities, bringing consistency and understanding within the preparation and interpretation of the many charity accounts that are prepared.  Copies of the various SORP’s can be downloaded from the Charity Commission website (

The main areas covered by the SORP are as follows:

  •  General introduction

Content of the Trustees’ Annual Report, including historic and other charity data, its objectives, activities, achievements and performance.  The Report must state the charity’s policies in respect of trustees, risk, investments, reserves and making of grants.  The Report must clearly indicate how the charity meets its Public Benefit Requirement and confirm that the trustees have regard to the Charity Commission’s guidance on this all important matter.

  • General accounting principles

Statement of financial activities (SOFA) clearly setting out incoming resources and resources expended (together with the matching of relevant income and expenditure, transfers between funds, and other recognised gains and losses).

  • Balance sheet

Cash flow statements, consolidation of subsidiary undertakings, disclosures etc.

Therefore, if you are a charity preparing accounts on an accruals basis and your accounting period commences on or after 1 January 2015 you must decide which SORP to use.  All charities (excluding charitable companies in the Republic of Ireland) are eligible to use the FRSSE SORP if two of the three following criteria are met:

  •  Gross income not exceeding £6.5m (€ 8.8m);
  •  Total assets not exceeding £3.26m (€ 4.4m); or
  •  Employs no more than 50 staff.

The changes between the SORP 2005 and the new SORP’s can be summarised as follows:

Trustees’ Report

The main changes that will affect all charities are:

  •  The reserves policy must now explain the policy that is in place and why reserves are held are held at a particular level. Where no reserves are deemed necessary, this must be stated along with the reasons why; and
  •  Previously under the SORP 2005 a concession could be granted restricting the number of Trustees disclosed to 50. This has been removed.

The main changes that will affect larger charities (larger being those that generally require an audit) are:

  •  They must explain the financial effect of significant events;
  • They must provide a description of the principal risks faced by the charity as well as plans and strategies for managing these risks. This is rather than a statement concerning risk management per SORP 2005; and
  • They must disclose the pay and remuneration of the charity’s key management and personnel.

Statement of Financial Activities (SoFA)

The basic layout concerning the columnar presentation has remained the same, but there have been some distinct changes to the headings included in the SoFA. This has been done to make the accounts easier to understand. A detailed breakdown of this can be found on the Charity SORP website:

Comparatives are still required to be included, however the level of detail has changed. The charity must now include a comparative for each fund (unrestricted, designated, restricted and endowment), compared to just a total in SORP 2005; this can be included as a note to the accounts so as to make the presentation easier.

The final key change is that all gains and losses on investments (both realised and unrealised) must be recorded within the surplus or deficit for the year rather than as a separate line below the surplus or deficit as is now the case with SORP 2005. This is not a requirement in the FRSSE SORP.

Balance Sheet

There have been no substantial changes to the layout of the balance sheet (also known as the Statement of Financial Position), and this will still follow the format specified by the Companies Act 2006 with adjustments for fund accounting.

Some key changes to the way in which items are accounted for are as follows:

  •  Debtors that are recoverable after more than 12 months must be discounted to present value;
  • Property that is let or occupied by another group member should be recognised as an investment property. This is not a requirement under FRSSE SORP; and
  • Where investment properties are revalued to record them at fair value, this revaluation must be done by an independent expert. Where it has not been done by an independent expert, this fact should be disclosed. The FRSSE SORP permits alternative approaches to revaluations.

Statement of Cash Flows

FRS 102 has defined the three mandatory headings as operating activities, investing activities and financing activities. Eligible parent charities may opt to report using disclosure exemptions permitted by section 1 of FRS 102.

This disclosure is optional under the FRSSE SORP.

Accounting Policies

The accounting policies have remained reasonably unchanged. Some specific policies have been changed, but these only affect a small number of charities. These are listed in more detail in the FRS 102 SORP modules.

Income Recognition

SORP 2005 required income to be recognised when it was ‘virtually certain’ that the income would be received. This has changed so that it is now recorded when it is ‘probable’ that it will be received.

Donated Goods

The SORP 2005 required that income from donated goods, such as goods donated to a charity shop, was recognised when the goods were sold. FRS 102 recognises the income at the point of receipt and at fair value, i.e. when the donated goods are received. However, this rule is relaxed where it is impractical to value the goods at the date of donation.

Recognition of Expenditure

Discounting to present value is required for liabilities and provisions under FRS 102 if they are due for payment in more than 12 months.

Related Party Transactions

The key changes in FRS 102 are:

  •  The total amount donated by trustees must be disclosed; and
  • If Trustees’ expenses have not been reimbursed and the amounts are material, they must still be disclosed.

Other Changes

All charities must disclose the number of staff earning more than £60,000 per annum with disclosure being in bands of £10,000.

In conclusion, the main differences between the FRS 102 SORP and FRSSE SORP are that those charities reporting under FRSSE SORP are able to report broadly as they have in the past together with the benefit of reduced disclosure. However, the FRSSE SORP is unlikely to continue beyond 2016, by which time all charities will then be required to report under FRS 102 SORP. Some reduced disclosure will still be available for smaller charities under FRS 102 SORP but all charities will have the new accounting treatments for certain accounts areas and will have to account for items in accordance with the new regime of FRS 102.

Are you complying with the SORP?  Do you understand what is required of you as trustees?

This article has been designed to be a rough guide to the key alterations being implemented for accounting periods commencing on or after 1 January 2015. For more information specifically relevant for your charity, please do not hesitate to contact Nick Brown who will be happy to provide further advice.