Accounts, what does the new Charity SORP mean for you?
As students and teachers start a new school year, finance staff are now finalising the finances for the year ended 31 August 2014 and preparing draft statutory accounts ready for audit.
The Charity SORP (Statement of Recommended Practice) sets out how charities, including academies and free schools, should prepare their annual accounts and report on their finances. Its requirements are incorporated into the Academies Accounts Direction, which set out how academies and free schools must draw up their annual report and accounts.
A revised SORP has just been issued which will apply for the year-end 31 August 2016 onwards, based on new accounting standards that also come into force then. The balance sheet at 31 August 2014 will form the opening position for the comparative figures in the first set of accounts under the new format. So now is the time to ensure you have everything ready that you will need then. You will also need to think about a few changes and decide how you will deal with them when the time comes.
The SORP is an interpretation of the financial reporting standards and generally accepted accounting practice in the UK. Because these are changing, the SORP has to be updated. The introduction of Financial Reporting Standard 102 (FRS 102) has been a radical departure as this brings together a whole series of piecemeal standards and guidelines on general accounting into a single standard. FRS 102 also includes specific sections on public benefit entities such as charities.
What is different in the new SORP?
There is not as much change as you might think but there are some issues to consider now for your opening balances.
Employee benefits - FRS 102 puts greater emphasis on the recognition of short term employee benefits such as any paid annual and sick leave that the employee is entitled to during the accounting period, but has been carried over to after the balance sheet date, and will be paid in the following period. These amounts will now have to be accrued within the accounts if they are material in value.
You will need to estimate this figure as at 31 August 2014, as this will form part of the opening position for the comparatives of the first set of accounts prepared under FRS 102. Whilst most staff will take holidays only in the school year, staff on maternity leave or sick leave may have significant accrued holiday due that you need to provide for at the year-end. Keeping a record now of any amounts due at 31 August 2014 will mean you are prepared for the new SORP when it comes in.
Property valuations - Fixed assets at valuation no longer have to be revalued every 5 years, but whenever is sufficient to give a reasonable valuation within the accounts. In addition, upon transition to FRS 102 there is an option to revalue property to fair value (current market value) from cost as a one-off transaction. There is no requirement to continue with revaluations following this revaluation. This is therefore a potentially beneficial option for schools looking to boost their balance sheet without having to perform regular ongoing valuations. A downside is that this will lead to increased annual depreciation charges and may cause deficits. If you think you may wish to take up this option, you will need a valuation at 31 August 2014 to form the opening valuation.
Defined benefit pension scheme – In theory FRS 102 no longer requires a valuation from an independent actuary every year if the basis of the valuation has not significantly changed and there is no reason to consider that the value has changed significantly. In practical terms however, it will only be possible to know whether the valuation of a pension scheme has changed by obtaining a valuation from an actuary. So if you used to be a local authority school and have office staff in the local government pension scheme then you will still need to obtain the equivalent of the current FRS17 pension valuations.
Other key issues to affect academies and other charities in the new SORP will be:
· all entities have to prepare a statement of cash flows
· all charities must disclose the total amount of all employee benefits received by ‘key management personnel’ for their services to the charity – these are the senior managers
· all charities must disclose the fact that there were no employees who received pay over £60,000 or disclose the number of employees remunerated above £60,000 in bands of £10,000
· charities are encouraged to disclose their remuneration policy in the governors' annual report
· governance costs are no longer shown as a separate row in the Statement of Financial Activities (SoFA) but must be disclosed in the notes
· comparatives are required for each column of the SoFA, but may be provided in the notes to the accounts
· gains and losses on investment assets are part of the income or expenditure of the charity and therefore go 'above the line'
· material items should be disclosed separately in the accounts, as should extraordinary items
· all charities have to make a statement about going concern, either explaining any material uncertainties or risks to cast doubt on it or the factors that support it
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