Inside the SORP-making process

What is a SORP?

From a financial reporting perspective, Statements of Recommended Practice (SORPs) provide additional guidance or requirements on accounting for transactions unique, or of particular importance, to a specific sector or type of legal entity.

There are currently SORPs for seven industries or sectors:

• charities;
• further and higher education;
• social housing;
• authorised funds;
• investment trust companies and venture capital trusts; 
• limited liability partnerships; and
• pension schemes.

SORPs supplement rather than replace UK accounting standards. SORPs might therefore include sector-specific explanations or interpretations of the requirements of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

For example, grants from the government or other funding bodies are common in further and higher education. While FRS 102 sets out accounting requirements for both government grants and non-exchange transactions, the Further Education and Higher Education SORP provides supplementary guidance, including sector-specific interpretation of the requirements of FRS 102 and examples to support preparers in applying its requirements.

In cases where an issue is specific to a certain sector and not addressed by UK accounting standards, a SORP may mandate its own requirements. For example, the Charities SORP, rather than FRS 102, includes accounting and disclosure requirements for the different types of funds a charity may have (such as restricted income or endowment funds).

By providing additional requirements and guidance, SORPs reduce the risk of inconsistent practice within a particular industry, leading to higher quality reporting.

SORP-making bodies

The FRC itself is not responsible for the production of SORPs. Where the FRC believes that an industry or sector has special financial reporting issues and the application or interpretation of UK accounting standards requires clarification, it may recognise another body as a SORP-making body (SMB), allowing it to issue a SORP. For example, The Investment Association develops and issues the SORP for the Financial Statements of Authorised Funds.

An SMB must represent the whole or a major part of the relevant industry or sector, and must share the FRC’s aim of high-quality, understandable financial reporting that is proportionate to the size and complexity of the entity and information needs of users.

Updating a SORP

Each SMB must undertake an annual review of its SORP to consider any developments which could affect the SORP and its compliance with the SORP policy. This review considers factors that could indicate a need to revise the SORP, including implications for the SORP of amendments to UK accounting standards and any evidence of widespread or significant departure in the relevant industry or sector from any part of the guidance contained in the SORP.

If an SMB determines that its SORP should be revised, the SMB must first seek approval from the FRC. This allows the FRC to check that the SMB’s work will not overlap with one of its own projects, or that the SMB is not planning to undertake a project that the FRC would rather conduct itself.

Once approval has been received from the FRC, the SMB may revise or develop its SORP. Stakeholder participation should occur throughout the development process. This could involve formal engagement through public consultation or stakeholder participation in standing groups established to draft sections of a SORP, or informal consultation and outreach activity.

Following FRC review and approval of any proposed revisions, a public consultation is required (unless the FRC agrees this would be disproportionate, for example, if only administrative changes to the SORP are proposed). Consultation feedback is used to finalise the amendments to the SORP, with the SMB required to inform the FRC of the main comments and how it has responded to them. Following FRC approval of the final draft, the SMB may publish the new edition of the SORP.

Common misconceptions

While some SORPs focus mainly on issues that are not addressed by FRS 102, others include relatively comprehensive summaries of FRS 102’s requirements as well as interpretation of the requirements in the context of the industry or sector. In these cases, a preparer might assume that it is not necessary to refer to FRS 102. However, where a SORP summarises underlying accounting requirements, this is likely to reflect an attempt by the SMB to contextualise the SORP’s guidance or otherwise make the SORP more user-friendly. It is important to remember that SORPs are not stand-alone documents and must be applied alongside UK accounting standards and legal requirements.

A related misconception concerns the powers of an SMB. To the extent that a SORP summarises and interprets the requirements of FRS 102, there is potential for stakeholders to believe that the SMB, rather than the FRC, is able to amend a requirement or its scope. For example, in the recent consultation on the draft Charities SORP, some stakeholders questioned the appropriateness of requiring small charities to apply new lessee accounting requirements. However, the scope of lease accounting requirements is determined by FRS 102 and, for charities, aspects of both the Charities Act 2011 (which applies to charities in England and Wales) and the Companies Act 2006 (which excludes companies that are charities from being treated as micro-entities). It is not in the gift of the SMB to exempt a sub-set of charities from lease accounting requirements.

An SMB only has latitude to amend the requirements that it has set itself, which can usually be identified in a SORP by the phrase “this SORP requires”. Stakeholders should therefore remain mindful of the range of consultations they may wish to engage with to comment on the UK’s financial reporting framework; consultations issued by the government or the FRC should not be overlooked by preparers that apply a SORP.

Thinking ahead, preparers might consider engaging with the Government’s upcoming consultation on the Modernisation of Corporate Reporting. This consultation, rather than a consultation on a SORP, will allow stakeholders the opportunity to influence the legal framework underpinning the UK’s reporting framework.

Insights from a SORP-making body

Amie Woods (Charity Commission for England and Wales) and Laura Anderson (Office of the Scottish Charity Regulator), two of the Joint Chairs of the Charities SORP Committee, stress the importance of viewing SORPs as part of the wider corporate reporting framework.

With respect to the production of high-quality reporting requirements, Laura commented on the thoughtful nature of the feedback the SMB received in its recent consultation. With an eye on future consultations, Laura noted the importance of hearing a wide range of voices and encouraged users of financial statements and academics as well as professional bodies and preparers to engage with SMBs.

Referring to recent amendments, Amie noted a tendency for SORP-users to wait for the SORP before engaging with new accounting requirements. However, amendments to a SORP will always follow after amendments to the underlying standard. SMBs do not get early sight of amendments to FRS 102 and must wait until such amendments have been issued publicly before they can complete detailed drafting of a SORP. Amie emphasised that preparers are able to get ahead on preparations for any new requirements by referring to FRS 102.

Reiterating the challenges that SMBs face with respect to timelines, Laura reflected on how such challenges can also create opportunities. For example, early engagement activity ahead of the finalisation of amendments to FRS 102 allowed the Charities SORP Committee to consider stakeholders’ experiences with the previous edition of the SORP without being “derailed” by discussions of new requirements. Laura noted that it is important for stakeholders to appreciate the environment SMBs work in – shifting sands rather than a static environment.

As a final word of caution, Laura advised preparers not to be misled by the use of “Recommended” in the title of a SORP. While a preparer would be forgiven for thinking that a Statement of Recommended Practice sounds optional, it is not. Each SORP sets out its intended scope, but the requirement to apply a SORP arises from sector specific legal or regulatory requirements, such as charity law, pension scheme regulations or listing rules.