In the June newsletter, we asked accountants, advisers and independent examiners of smaller charities to participate in research commissioned by Power to Change, the Charities Aid Foundation and the Lloyds Bank Foundation.
The research aimed to increase understanding of how small charities experience accounting regulation and guidance, including the charity’s experience of preparing annual accounts, and how the rules and guidance might be improved to better serve small charities (defined as having annual income up to £0.5m). The research findings will inform the next iteration of the Charities SORP which is currently in development.
What are the research findings?
As expected, smaller charities at the higher end of the income spectrum are more likely to use the SORP than the smallest charities. Overall, an analysis of charity accounts found that around 3 in 5 smaller charities currently use the SORP.
However, the research found that about a quarter of accounts examined used an undetermined accounting basis. This indicated that a significant portion of the smallest charities have “muddled, low quality reporting practices” due to low levels of understanding of charity accounting requirements. The report recommends further investment in training and guidance for small charities in preparing their annual accounts, and advocates simplification of the SORP for small charities.
Furthermore, focus groups highlighted a low awareness of the choice of Receipts & Payments (R&P) or SORP (accruals) basis for preparing the accounts, and the report recommends more publicity to promote the R&P option so that small charities do not find themselves pressurised into using SORP when it is not required.
The research findings on small charities’ understanding of key charity accounting concepts are more positive with evidence of real progress in fund accounting and reserves, although further progress was needed to raise awareness of grant recognition and fair value accounting in accruals-based accounts.
Reliance on external advisers
The research found that most small charities consult external accountants or independent examiners when preparing their annual report and accounts.
“The distribution of the work of accounts preparation is shared between small charities and their external advisors, however some small charity treasurers appear unfamiliar with the work involved, SORP requirements, and judgments made when preparing and examining a set of accounts.”
Clearly, there is more work to do in raising understanding of financial reporting requirements among trustees and independent examiners alongside the SORP revision. The survey responses indicated a demand for better training and guidance materials, supporting the preparers and examiners of charity accounts with webinars, templates and case studies that cover a broad array of small charities and their activities or transactions.
Please share your suggestions of what guidance would be most useful to you – you can send your ideas and requests to me (email@example.com).