Accounting and Reporting by Charities - Statement of recommended practice
Comments from ACCA
October 2004
ACCA is pleased to have this opportunity to comment on the exposure draft of the above Statement of Recommended Practice (SORP). The draft SORP was considered by ACCA's Charities Panel and their views are set out below as responses to the Commission's specific questions in the Invitation to Comment.
A. Does the proposed restructuring of the Trustees' Annual Report create a clearer focus for the reporting of a charity's performance and achievements and provide a clearer link between a charity's objectives, activities and the results achieved?
B. Does the section on reporting of achievements and performance create an appropriate framework, allowing for performance and achievements to be reported in a meaningful way whilst providing sufficient flexibility in the choice of measures or indicators that a charity may adopt in its reporting?
The trustees' report is in many ways the most important component of annual report by charities. Its narrative form is more accessible than the financial statements and it is probably read by more stakeholders. We very much support the redrafting of the guidance on the trustees' report. Framing this in terms more of objectives and overall aims is a much better approach than providing a tick list of items to be included, which could be a criticism of the current SORP.
Many of the matters covered should be addressed by trustees of all charities large and small. The obligation to report, for example on the reserves policy and the charity's strategies for achieving its objectives, is a useful means of ensuring that these matters have been properly addressed by the trustees. While we agree with the limitation in paragraph 36 of the requirement on smaller charities, they should be strongly encouraged to make these disclosures for the reasons already noted.
Paragraph 31(c) should be clarified as to whether these are the objectives that were set for the year being reported on or the objectives for the year ahead.
C. Does the introduction of a separate section dealing with a charity's structure, governance and management create a clearer focus for the reporting of governance issues?
Yes.
D. Do you agree that the issues surrounding the measure and valuation of the contribution of volunteers prevent, at this stage, the recognition of this contribution within the SoFA?
Yes, we agree. The valuation methodologies are not sufficiently widely accepted to allow the recognition of income and expense for contributions by volunteers. The disclosures suggested for the trustees' report are appropriate. Charities should be encouraged by the SORP to take this further and include as disclosure items in their reports
- estimates of the value of such intangible income, which may encourage the development of valuation methodologies
- the actual costs of volunteers that are included in their results. The volunteers may not be paid a salary, but there are nonetheless costs associated with them � for instance reimbursement of travel costs, supervision of their activities and support costs.
E. Does the proposed restructuring of the SoFA assist the reader in understanding the activities undertaken by a charity and the correlation between income streams and related activity costs?
We do not support these proposals. The further analysis of the costs of generating funds we support as useful information. The structure proposed, however, seems rather cumbersome and leaves little flexibility for it to be adapted to the particular circumstances of different sorts of charity. We recognize that providing one format to fit all sorts of charities is difficult to achieve satisfactorily. Perhaps the SORP is attempting to be over-prescriptive here. Frequent changes in these sorts of requirements are not in themselves a good thing and so can only be justified by bringing about significant improvement. We are not convinced that this proposal represents significant progress.
In the section �Incoming resources' the use of the terms �income', �incoming resources', and �activities' is confusing. Incoming resources is used at the higher levels (items A, A1 to 3), but at the more detailed level this switches to income. Item A1b simply becomes activities. Similar considerations apply to the use of the terms �costs' and �activities' in the �Resources expended' section. It is also not clear how closely linked some of the items are, for instance A1b and B1b
Our suggestions for other improvements would be
- Item A1b might be �Income from fundraising activities'
- Item A2 would be better described as �Income from primary purpose trading'
- The description of B1b is particularly cumbersome and might be better described as �Costs of fundraising activities'
- Items B4 to B6 would be better with a new designatory letter as there is no reason to think of them as sorts of resources expended
F. Do you agree that creating a greater focus on activities will enable charities to better present the cost profile of the work they undertake?
Yes, we support an activity based analysis.
G. In the context of an activity cost approach to SoFA categories, do you agree that it is appropriate for the disclosure of support costs and their allocation to be dealt with by a note to the accounts?
Yes. This is often a significant matter and should be disclosed.
H. Do you agree with the introduction of a governance cost category within the SoFA?
Yes, this seems an appropriate description.
I. Are the proposals in relation to attributing costs between the activity categories of the SoFA practical? If not, how might they be improved?
The guidance provided seems helpful and appropriate. The disclosure requirement in paragraph 152 for the basis of allocation is important.
J. Do the criteria proposed for determining when information provided as part of fundraising activities may be regarded as educational assist in identifying joint costs that may be allocated in part to charitable activities?
We agree with the difficulties involved in some cases of distinguishing one form of information from the other, but also agree that the distinction is worth making. We are content with the guidance provided.
K. Do you agree that where an objective or activity is pursued by a combination of direct service provision and grant funding of third parties the focus in the SoFA should be the analysis of the objective or activity rather than the method by which it is undertaken?
L. Do you agree that it is nevertheless appropriate for the notes to the accounts to differentiate between direct service provision and the funding of third parties by way of grant?
We agree with the treatment in the SoFA. We also agree that the extent to which a charity's objectives are achieved directly or through grant making is an important disclosure. This allows users to understand better the cost structure, numbers of employees and financial risks of the charity.
M. Do you agree that it is appropriate for the SORP to continue to allow information listing details of the largest institutional grants made by a charity to be provided through a separate publication?
We see no problem with this, as long as the information is publicly available.
N. Do you agree that a liability for a voluntary grant payment should be recognized once the offer has been formally communicated to the recipient and no conditions, that may prevent payment, remain within the control of the donor charity? If not, what alternative recognition principle would you apply?
We agree with these recognition criteria.
O. Where a multi-year grant payable is conditional on an annual review, do you agree that evidence of the operation of a review process is sufficient to demonstrate the operation of the condition? Alternatively, do you believe the full commitment for multi-year funding should be recognized unless evidence exists of the donor charity using the review process to rescind future funding?
We agree that the existence of a review process would be sufficient. The definition of liabilities in FRS12 requires that there is an obligation which the entity cannot realistically avoid. A review clause and process would seem to provide a means by which the obligation might be avoided, however little it might have had to be used in the past.
While any unrecognized multi-year funding commitments would not be liabilities, or indeed contingent liabilities, we do think there is a case for the disclosure of their existence and of their magnitude by way of note.
P. Do you agree that grants which contain specific conditions linking payment to the performance of a particular level of services or unit of output, in a way that is analogous to a contractual arrangement, should be recognized to the extent that the specified service or goods have been provided?
The distinction between grants and quasi-contractual arrangements will be difficult to draw in some cases. So on the income side paragraph 80 would defer grants where payment is �linked to the performance of a particular level of service� until the service is performed. Paragraph 90 states that grants should be recognised in full and �should not be deferred even if the resources are received in advance of the performance of the activity funded by the grant�. The SORP might explore the distinction in principle a little bit further than it does at present. Is the distinction, for instance, to do with exchange as opposed to non-exchange transactions, entitlement to payment (cash flows) or the obligation to return any unspent amounts? In this context the sub-headings �Contractual arrangements' and �grants and donations receivable' are rather simplistic and stress legal form rather than substance.
Q. The Exposure Draft continues to allow the recognition of donated services within the SoFA where a demonstrable cost is borne by the donor and a current value to the recipient charity can be measured. Is this appropriate? If not, should the guidance limit recognition of such contributions to those services that the charity would have been obliged to purchase in the absence of the gift?
In principle the donor's cost of an item is not necessarily the best basis for measurement by the recipient. We accept, however, that the proposed treatment in the SoFA should continue on practical grounds. As noted in our answer to question D above a reliable agreed basis for measurement has not yet emerged.
R. Application Note G to FRS 5: Reporting the Substance of Transactions requires that revenue represents the fair value of the right to consideration arising. Do you believe that the proposals in the Exposure Draft are consistent with the reasoning of this Application Note?
The draft SORP appears to be silent on this subject.
S. Do you agree that the term heritage assets is a more appropriate terminology for this category of assets?
We agree that heritage assets is a better description than historic assets.
T. Are you content with the proposal that continues to require the capitalisation of newly acquired heritage assets? If not, what alternative would you favour and how would you reconcile this to generally accepted accounting practice?
We accept that the current position is not ideal, in that newly acquired heritage assets would be recognized, whereas those acquired before FRS15 might not be capitalized. We see no better solution which would justify a change and so would support the proposal that the treatment continues.
U. Do you agree that inalienable assets that are not of a heritage nature should be capitalised?
Yes. Inalienable assets can be used in providing the activities of the charity and so should be recognized as an asset. We do not see, however, that any relevant information would be provided by revaluing the items, given that any uplift in the current value cannot be accessed. Indeed the revaluation might be misleading information. So while we agree with paragraph 269, we would not allow revaluation under 270(a) for example.
V. Do you agree that the criteria for the exclusion from capitalisation of previously acquired heritage assets should be applied on an asset by asset basis? If not, please explain why.
No. This would be an impractical requirement for owners of significant number and range of such assets, such as museums. Categories or groups of similar assets would be adequate in our view. It is not apparent to us where this asset-by-asset approach is specified in the SORP.
W. Do you consider the stewardship disclosures for heritage assets set out in paragraph 272 to be sufficient, particularly where such assets are not capitalised on cost/benefit grounds? If not, what particulars could be added to the disclosures, for example, would an estimated or indicative value of non-capitalised assets be helpful to readers and be a practical disclosure for preparers of accounts to provide?
The information in 272(a) will be helpful. The emphasis on disclosing cost or value of heritage non-capitalised assets acquired in 272(b) will not produce helpful or relevant information for users. The details of the proceeds, on the other hand, of disposal of heritage assets would be helpful, particularly where the items have not been capitalised.
X. Are there any other new developments or sector specific transactions that you believe the revised SORP should address?
No.
Y. Is the additional guidance on the accounting treatment of fundraising start-up costs and databases sufficient? If not, what further guidance do you consider necessary?
Yes.
Z. Does the need to allocate support costs (see Glossary GL 42) to relevant activity categories create a burden for small charities? If so, do you consider it would be appropriate to increase the threshold, allowing a natural classification of costs, to the audit threshold of £500,000 gross income proposed for charities in England and Wales by the Charities Bill?
We do not support the change in audit threshold, without there being good evidence that there is a significant benefit to outweigh the clear risk to the reliability of the financial statements of charities falling in the £250,000 to £500,000 range.
We do, however, consider that the thresholds for charities should be kept as straightforward as possible. The definitions of small charities for disclosure and assurance purposes should therefore be aligned as much as possible.