Understanding the regulatory framework
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CloseRegulatory financial requirements for charity finances, including SORP and SOFA, fund accounts and annual trustee reports.
Statement of Recommended Practice (SORP)
The way in which all charities report on their accounts is guided by the Statement of Recommended Practice: Accounting by Charities (SORP) issued by the Charity Commission in conjunction with the Accounting Standards Board.
The SORP contains guidance on good practice regarding the suitable treatment and presentation of charity accounts. The SORP is regularly updated and the latest revision is simply referred to as SORP 2005.
The SORP requires legal and accounting interpretation and you should rely on professional expertise for this. Here we identify the key requirements of SORP.
Statement of Financial Activities (SOFA)
The SORP replaces the profit and loss account (more commonly seen in the commercial sector) with the SOFA. The intention is to remove the concept of profit as a measure of success or failure, since this is not appropriate for charities. In the SOFA charities should show all incoming resources and all resources expended for the financial year.
Fund accounting
Charities are required to show all their incoming and outgoing resources, assets and liabilities belonging to specific funds in the accounts. The different types of funds are:
- permanent endowment funds
- expendable endowment funds
- restricted funds
- unrestricted funds
- designated funds
- general funds.
Annual accounting requirements for charities in England and Wales
This section sets out the format in which charities must present their annual accounts and by when they should be submitted to the Charity Commission. The basic requirement is for larger charities to prepare a SOFA and a balance sheet.
Trustees' annual report
In addition to the annual accounts, trustees of registered charities are required to prepare an annual report to be submitted to the Charity Commission together with the accounts. The content of the annual report includes:
- reference and administrative details
- structure, governance and management
- objectives and activities
- achievements and performance
- financial review
- plans for the future
- any funds that the organisation holds as custodian trustees for other charities.
Source: Published with permission from Cass Centre for Charity Effectiveness. This material is taken from "Tools for Success: doing the right things and doing them right", published in October 2008. Download or buy your copy from Cass Centre for Charity Effectiveness.
Useful links
- Guidance charity accounting and reporting: the essentials - Charity Commission
- Understanding SORP - NCVO
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