MHA is a national firm of accountants and part of Baker Tilly International, a top 10 global network of accountancy firms.
We have over 1,000 charity clients based in England, Wales and Scotland covering a wide range of sub-sectors, areas of activity and size, and provide assurance services including statutory audits and independent examinations as well as advisory services.
Our team has over 35 years’ experience of the sector.
Response to questions
Response options:
- Yes
- No
- No opinion
No.
Whilst the three tier reporting does cut down the administrative burden of charities, this is not outweighed by the burden of opting a three tier approach that adds complexity and increases the risk of non-compliance especially for charities with volatile income streams. Given Charities cannot adopt the micro-entity regime (FRS105) for reporting it would appear to us that the receipts and payments option for unincorporated entities offers an appropriate level of disclosure for very small charities. We do no see a significant benefit by adding a middle tier and given the proposed other changes to the SORP do not see an tangible exemptions between the middle and top tier that would warrant the creation of a three tiered approach. We would recommend maintaining the current two tiered approach. Medium/large company reporting requirements under FRS102 then add further disclosures, and therefore covers the ‘proportionate’ reporting threshold for the very large segment of the charity sector.
Response options:
- Yes
- No
- No opinion
No - we would suggest Tier 1 is aligned to the charity’s act audit threshold, again this would avoid any undue complexity. As noted above we would recommend the abolition of tier 2.
Response options:
- Yes
- No
- No opinion
Yes - the Exposure Draft is clear on the reporting requirements for each tier. However, technology could be used to better create bespoke versions of the SORP for each Tier which only includes the reporting requirements for that Tier.
Response options:
- Agree with tier 3
- Disagree - should be referred as tier 1
- No opinion
No opinion - we would suggest that rather than having tier 1-3 there is simply two SORPs one for larger charities (within the audit threshold) and another for smaller charities beneath the audit threshold.
No
Response options:
- Yes
- No
- No opinion
Yes but we think this has limited value. The prompt questions offer useful guidance and engourages reflective reporting guiding trustees away from just reporting upon financial matters, this will hopefully increase consistency and comparability as well. The real benefit of this reporting will be for the users of the accounts and we do not necessarily feel this will increase public understanding as the level of detail provided by each charity will still vary considerably.
Response options:
- Yes
- No
- No opinion
No – the requirements for demonstrating impact are insufficient for larger charities in our opinion. We feel that the impact a charity makes is it greatest performance measure. Therefore we agree that all tiers should make a statement on the impact they make – however for larger charities the ‘should’ requirements set out in para 1.32 of the exposure draft should be a ‘must’.
Response options:
- Yes
- No
- No opinion
Yes – however we do not consider the reporting requirements are sufficient to merit a separate heading within the Trustees Annual Report. We also encourage the cross referencing within the exposure draft to other reporting requirements for charitable companies under the Energy and Carbon Reporting 2018 regulations – we would encourage this to be continued as the sustainability reporting requirements evolve.
Response options:
- Yes
- No
- No opinion
Yes – however enhancements could be made. It would help Tier 1 charities if para 1.22 of the exposure draft were to be amended as follows: The report must include an explanation to help the user to understand the scale and nature of the activities undertaken by volunteers and the input from volunteers, where the activity generated for the charity is material to its operations or objectives.
Response options:
- Yes
- No
- No opinion
Yes – having the definition back in the SORP is helpful and helps trustees navigate this issue.
Response options:
- Yes
- No
- No opinion
Yes – charity reserves are often misunderstood and a topic of contention. We are encouraged by the requirement for a reconciliation to be provided where there is inconsistency between freely available reserves and the unrestricted funds carried forward at the year end.
Response options:
- Yes
- No
- No opinion
Yes, all charities - regardless of size – should be able to articulate their plans for the future and therefore this requirement is appropriate. However, the requirement does not detail what level of disclosure is required here and therefore could be assisted with the inclusion of a number of prompt questions to help give more guidance.
Response options:
- Yes
- No
- No opinion
No – we do not consider this a helpful addition. Accruals accounting is an accounting concept and covers a wide range of topics/items that the readers of accounts often struggle to understand. However, it is not our experience that the reason for including legacy debtors in the accounts is problematic is not because the reader is confused with the application of the accruals concept – the issue is because of the nature and value of legacy income such that it can increase the volatility of the accounts. Requiring an explanation as to how legacies are included within the accounts (on an accruals basis) is unlikely to resolve this issue, instead the majority of charities will choose to enhance their disclosure within their financial review to explain the volatility or uncertainty behind the income stream.
No
Response options:
- Yes
- No
- No opinion
Yes – it will help preparers of the accounts understand the difference between the two approaches. Natural classification is under utilised so hopefully this will encourage wider adoption.
No
Response options:
- Yes
- No
- No opinion
Yes - the presentation of the approach is well considered and understandable.
Response options:
- Yes
- No
- No opinion
No - whilst the module is drafted in a similar manner to that of the other SORP modules which makes it understandable, the complexity involved in a new recognition model of contract income only makes it harder to navigate. More consideration should be given to the first section on ‘understanding the nature of income, a greater use of headings and sub-heads could help avoid misunderstandings. The 5 step recognition model is only applicable to exchange transactions – this could be highlighted by using a flow chart. Performance related grants are placed in, what appears to be, their own section. The module then flows quickly away from theory and into specifics like membership subscriptions and income from royalties rather than having a section break which would be beneficial.
Response options:
- Yes
- No
- No opinion
Yes – we think a separate module would help avoid confusion over which types of transactions need to apply the 5-step process.
Response options:
- Yes
- No
- No opinion
Yes – unless the module is going to be split into two modules then the disclosure should follow each transaction group.
Response options:
- Yes
- No
- No opinion
No opinion – this practice already happens and certain sectors, like academies, use designated funds to represent their entire balance of fixed assets. Other SORP’s (such as the Further and Higher Education SORP) advocate the deferral of capital grants which are then released in line with depreciation of the asset. This approach would be well received by the users of the accounts in our opinion.
Response options:
- Yes
- No
- No opinion
Yes – however we would note that the portfolio approach to legacy accounting is not well used within the sector yet it has prominence within the module which could be removed and highlighted within an appendix.
Response options:
- Yes
- No
- No opinion
Yes – in our view the removal of entitlement recognition criteria will not fundamentally change the recognition point of the majority of legacies. However there are certain processes that most legacy’s follow, such as the granting of probate and the creation of estate accounts – both of which could be given greater prominence in determining when a legacy is recognised. Indeed the term ‘normally’ is used in para 5.90 of the ED. However if a stronger more prescriptive approach were given this might lower levels of inconsistency and judgment – for example a legacy is not normally recognised until probabe has been grant or a reliable measurement is not normally arrived at until the draft estate accounts are produced.
As noted above, we consider exchange transaction and non-exchange transactions should now have their own modules. The British Universities Finance Directors Group have published their considerations on the Further and Higher Education SORP and in doing so have created two guidance notes that explore situations that are likely to arise when applying the new revenue recognition criteria for exchange transactions -Revenue BUFDG : British Universities Finance Directors Group. A similar document would be well received for the Charities SORP.
Response options:
- Yes
- No
- No opinion
Yes - the module is easy to navigate.
Response options:
- Yes
- No - do not understand a specific section
- No - do not understand recognition exemptions
- No - do not understand disclosure requirements
- No - do not understand time value of money
- No opinion
Yes - the module is well written and understandable, however it could benefit from the use of flow charts.
Response options:
- Yes
- No
- No opinion
No – the second example on page 158 deals with a social donation lease – however it is not clear how the social donation element would then be recognised – in full in year one or over the life of the lease and would it then form part of the lease liability or would it be recognised as deferred income.
Response options:
- Yes
- No
- No opinion
Yes – however you may wish to consider charities with large and/or complex estates and consider whether any aggregation could take place to ensure the accounts remain concise.
The Exposure Draft could make better use of flow charts and diagrams to help aid the user. Secondly, the British Universities Finance Directors Group have published their considerations on the Further and Higher Education SORP and in doing so have created guidance notes that explore situations that are likely to arise when applying the new lease accounting model - BUFDG : British Universities Finance Directors Group. A similar document would be well received for the Charities SORP.
Response options:
- Yes
- No, this should be required of all tier 2 and 3 charities
- No, this should be required of all charities
- No opinion
No – this should be required of all tier 2 and 3 charities. Cashflow is a fundamental primary statement and should apply to all charities other than those small charities.
No
Response options:
- Yes
- No
- No opinion
Yes – the borrowing from a permanent endowment fund is a complex and comes with increased compliance risks. Trustees must do all that they can to ensure that such acts are properly documented for prosperity. When fund accounting issues arise they can be as a result of historical mistakes or misinterpretation so understanding decisions that have been made on the trust for investment are important.
Response options:
- Yes
- No
- No opinion
Yes – this is an area of complexity and contains legal risks.
We would encourage table 19 to contain a glossary of terms beneath it to help users undertint the terminology used and how it is applied in para’s 20.5 to 20.12.
Response options:
- Yes
- No
- No opinion
Yes – the old terms were not well understood and inaccurately applied.
Response options:
- Yes
- No
- No opinion
Yes – this is a useful simplification.
Yes
Response options:
- Yes
- No
- No opinion
Yes – the SORP could be clearer on the ramifications of this change to comparative figures and what it would expect the disclosure to be. An information sheet on SORP26 transition could cover this.
No
Response options:
- Yes
- No
- No opinion
No – we feel that the reporting requirements for smaller charities continue to increase whilst, in the corporate environment they are decreasing due to increase in small company thresholds. Whilst we appreciate public trust needs to be maintained – there must be a balance between proportionate reporting and administrative burdens. This SORP does not provide significant decreases in reporting requirements.
Response options:
- Yes
- No
- No opinion
Yes – given that FRS105 is not permitted to be adopted, FRS102 will offer little exemptions that can be afforded to charities.
