This guidance provides a brief introduction to what the Charities Statement of Recommended Practice (the SORP) is and to the options available to small charities in preparing their accounts and annual report. It also signposts further sources of help and advice.
This section is designed to help trustees and executive staff in charities who are responsible for preparing their charity’s annual report and accounts, who are not fully familiar with the rules governing charity accounts. The types of accounts that can be prepared and sources of help are summarised below to help you.
The Statement of Recommended Practice (commonly referred to as the SORP) is issued by the Charity Commission and the Office of the Scottish Charity Regulator (OSCR) and basically gives instructions as to how charities are expected to report their activities, income and expenditure and financial position in their annual report and accounts.
Your charity’s annual report and accounts:
The annual report and accounts together form a package that provides accountability to stakeholders in the widest sense. The purpose of your charity’s annual report and accounts is to demonstrate to your funders, donors, beneficiaries and suppliers in an open and transparent way:
Every charity is expected to produce an annual report and accounts that explains where your money came from and what you did with it. However, the SORP only applies if your charity uses 'accruals based accounting' – that is, reports its income and expenditure on the basis of when the activity happens, rather than when you receive and spend the cash.
Not all charities are required to report their financial information in exactly the same way. What you have to do depends on the size of your charity’s income in your accounting year and the assets held at the end of the year. If your charity is not required by law to have an audit then you can prepare a simple annual report and a simpler presentation can be used for your accounts. If your charity is larger in size and is required by law to have an audit then you should follow the guidance set out in the SORP.
In England and Wales the statutory audit thresholds for accounts ending on or after 1 April 2009 are: gross income in the year is more than £500,000 or your total assets exceed £3.26m and the gross income in the year exceeded £250,000. For financial years beginning on or after 1 April 2008, but ending before 1 April 2009, the same gross income threshold applied but with a lower assets threshold of £2.8m applying when gross income exceeds £100,000.
Charities that are required by the law to be audited by a registered auditor must follow the SORP in full for both the annual report and accounts. If you are unsure if you require an audit, look at Appendix 4 of the SORP which sets out the various thresholds in full. For details of the audit threshold applying to previous years see Audit, independent examination and other reporting thresholds for charities
In England and Wales you do not have to prepare accruals accounts if all of the following apply:
For financial years ending before 1 April 2009, the income threshold was set at the lower level of £100,000. If these conditions apply then you have the option of preparing your accounts simply on the basis of the cash you receive and spend, and you do not have to comply with the SORP. This is called receipts and payments accounting.
As noted above, in England and Wales, if your charity’s income is £250,000 or less for a financial year ending on or after 1 April 2009 then provided your charity is not a company you can prepare receipts and payments accounts. Remember that for earlier financial years if your income is over £100,000 you must prepare accrual accounts. If you prepare receipts and payments accounts then the accounting recommendations of the SORP do not apply to your accounts at all.
Receipts and payments accounts are basically a statement of the cash you received and what you spent it on. You do not have to summarise the income and expenditure according to the activities that you undertook during the year, you may summarise your receipts and payments in any way you feel is helpful to those using the information. However, you do need to say what assets (things that you own or sums of money owed to your charity) and liabilities (money that you owe to others) you have and these should be listed in what is called a Statement of Assets and Liabilities. It you have land, property or other assets used by the charity in its work, you do not have to value them if that is difficult provided you describe them in your statement of assets and liabilities.
If your charity is registered in Scotland, your receipts and payments accounts must be set out in a particular way. For more information on the layout please refer to the OSCR website.
For small charities preparing receipts and payments accounts we provide guidance on the form and content of the Trustees’ Annual Report. The annual report for a small charity need not be as detailed as those of larger charities who are expected to follow the recommendations of the SORP in full.
If you are preparing accruals accounts, whatever type of charity you are (a trust, an association, a charitable incorporated organisation or a company), you are required to prepare, in accordance with the SORP, what are called ‘primary’ financial statements.
In addition, notes to the accounts should be given which explain in more detail how your income and expenditure is made up, and gives extra information about particular assets and liabilities or particular payments, for example on payments to trustees.
The SORP allows small charities considerable freedom in how they set out their SOFA and appendix 5 of the SORP sets out the simpler requirements applying to small charities.
In addition to the financial information provided by accounts, the SORP also requires you to produce a written explanation of what activities were undertaken for the public benefit and plans your charity had for the year in question and how you did against what you planned to do. This information is to help those people who read your annual report and accounts (who may be donors, funders, beneficiaries or suppliers) to understand your work and to be reassured that you are managing your charity well. Your written explanation should expand on some of the detail contained in your accounts. This narrative information is contained in a report which accompanies the accounts and is know as the Trustees’ Annual Report.
If you are a small charity, which for the Trustees’ Annual Report purposes means your charity is below the audit threshold, the information you provide in the written section will not need to be detailed. You are allowed to keep it simple and easy to understand. All you need to do is provide a summary of the activities you undertook during the year for the public benefit and how they help to support your charity’s objectives (particularly your charitable objects which you will have defined in your governing document). In England and Wales the report must also confirm the trustees have had regard to our guidance on public benefit.
To help people understand the financial aspects of your charity when they are reading your report and accounts, you need to explain what your reserves policy is (i.e. what money you have set aside for a ‘rainy day’ and why); whether there is any aspect of your finances where you are in deficit, why that deficit arose and what, if anything, you are doing to deal with the deficit.
However the SORP is designed to help people understand what you do and how you do it. So it makes sense for small charities to follow as many of the recommendations contained in the SORP as is reasonable depending upon the size of your charity. If you wish to provide more information because you believe it will help the readers of your annual account report and accounts, then you are free so to do, but you do not have to provide extra information.
A checklist for the simplified annual report for small charities is set out in table 11 of appendix 5 of the SORP.
If your charity is also registered as a company with Companies House then you also need to ensure that your annual report and accounts comply with company law. More information as to what these requirements can be found on the Companies House website: www.companieshouse.gov.uk
Whether preparing accruals accounts or receipts and payments accounts, the Charity Commission provides model packs with model accounts formats, trustees’ annual report templates and additional advice. The Office of the Scottish Charity Regulator also provides a model pack and example accounts for receipts and payments accounts.
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