SORP (Statement of Recommended Practice) reporting is pivotal in providing charity-specific guidance for these and other income streams, complementing the more general FRS 102.

In Accounting for Charities 2024 Lindsay Webber looks at the intricacies of accounting for donated goods and services and legacies under SORP, outlining the key principles and best practices in financial reporting for charitable organisations.

Introduction to SORP Reporting

SORP serves as a supplemental standard to FRS 102, tailored specifically for charities. It emphasises the recognition, valuation, and disclosure of various income streams, including those unique to the charitable sector such as donations, grants, and legacies. A comprehensive SORP set of accounts typically includes a Statement of Financial Activities (SoFA), a balance sheet, a cash flow statement, and accompanying notes. For smaller charities, certain exemptions may apply, such as a simplified trustees report and exemption from presenting cash flow statements.

Donated Goods and Services

Charities often receive various forms of donations, which can include both goods and services. Recognising and valuing these donations correctly is crucial for accurate financial reporting.

Recognition Criteria

The recognition of donated goods and services hinges upon three key criteria: entitlement, probability, and measurement:

• Entitlement: The charity must have control over the economic benefits from the donation.
• Probability: It should be more likely than not that economic benefits associated with the donated goods or services will flow to the charity.
• Measurement: The fair value of the goods or services must be measurable reliably.

Donated goods must be measured at fair value unless it’s impractical to do so. In cases where direct evidence of fair value isn't available, alternatives can be used, such as the cost paid by the donor or the resale value if the charity intends to sell the donated item.

Valuation Approaches

Donated goods can present practical challenges in valuation. For example, charity shops often receive bags of clothes and books. Rather than valuing each donated item individually, which is impractical and costly, these goods are usually recognised as income when sold.

For services and facilities, the valuation process revolves around the cost the charity would have otherwise incurred. If a service or facility is donated and the charity would have needed to purchase this service or facility, the fair value of the donation must be recognised as income. If not, the donation is not recognised.

Legacies

Legacies represent a significant income source for many charities. Accounting for legacies can be complex, requiring strict adherence to recognition criteria similar to other forms of income.

Recognition Criteria

The recognition of legacies is contingent on the following:

• Entitlement: The charity must be entitled to the legacy, which typically means that a valid will exists, the donor has passed away, and there are sufficient assets in the estate.
• Probability: It must be probable that the legacy will be received, meaning all other uncertainties must be resolved, such as settling of the estate debts and any challenges to the will.
• Measurement: The value of the legacy must be measurable reliably. This involves estimating the fair value of the asset bequeathed to the charity.

Practical Guidance

A legacy is recognised when the charity has sufficient evidence that a gift has been left to them and the executor is satisfied that the property in question will not be required to satisfy claims in the estate. The legacy is recognised after there has been grant of probate, the executors are satisfied that there are sufficient funds in the estate to pay the legacy and any conditions related to the legacy have been met or are within control of the charity.

Financial Accounting and Reporting Procedures

To bolster transparency and accuracy in financial reporting for charities, certain best practices should be observed:

• Detailed SoFA: The Statement of Financial Activities should be detailed, breaking down income and expenses by activity rather than type. For instance, income from a charity shop and related expenses should be presented together to demonstrate the net result of that specific activity.
• Comprehensive Notes: Notes accompanying the financial statements should explain the accounting policies and provide additional information about critical elements such as donated goods, services, legacies, and fund movements.
• Annual Reports: Trustees’ annual reports should include disclosures required under SORP, which supplement those mandated by the Companies Act 2014. Charitable Companies must meet both sets of requirements. These reports provide a narrative context to the financial statements, enhancing stakeholders' understanding of the charity’s financial activities and stewardship.
• Small Charity Exemptions: Smaller charities (typically defined as having a turnover of less than €500,000) can benefit from simplified reporting requirements, such as exemption from preparing a cash flow statement. However, they should still strive to adhere to best practices in financial reporting to maintain transparency.

Ethical Considerations and Transparency

Transparency is a cornerstone of ethical financial reporting, especially in the charitable sector where public trust is paramount. Proper valuation and recognition of donated goods, services, and legacies ensure that financial statements provide a true and fair view of the charity’s financial health.

Navigating SORP reporting, particularly for donated goods and services and legacies, requires a comprehensive understanding of the recognition, valuation, and disclosure principles. By adhering to the guidelines provided under SORP and bolstered by FRS 102, charities can ensure accurate and transparent financial reporting. This not only fulfils regulatory requirements but also fosters trust among donors, beneficiaries, and the broader public, ultimately supporting the charity’s mission and longevity.

For the full session, please click here. The course includes:

• A recap of the requirements to prepare accounts and have them audited, including the proposals under the Charities (Amendment) Bill 2023;
• Selecting an appropriate accounting framework;
• Key accounting issues for charities applying the SORP; and
• The future of financial reporting for charities.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.