Charities must prepare now for SORP reporting

The Charities (Amendment) Bill 2023 was enacted on 10 July 2024, though it is not yet operational as we await formal commencement through ministerial order. No matter when the bill becomes operational and subsequent financial regulations are introduced, fully compliant Charities Statement of Recommended Practice (SORP) reporting for charities with income and expenditure in excess of €250,000 is going to happen – and it could become mandatory for reporting periods as soon as those commencing on 1 January 2026. These companies are also mandated to have a statutory audit.

Charities will need to have two years of accounts ready to report as comparative information – i.e., 2025 information will also need to be reported in the 2026 accounts. In short, preparation and planning needs to start right now.

Aidan Ryan, Director, Crowe Ireland walks through the steps to take now, what’s changing, and how Crowe can help your organisation.

What’s happening currently?

At the moment, many charities are choosing either to not report in accordance with the Charities SORP at all or are choosing to apply only parts of it. Neither of these options will be available anymore. Charities need to take a look at where they stand and take action if needed.

How to prepare for Charities SORP

“The work starts now,” says Aidan. “In order to transition from current standard Irish Generally Accepted Accounting Principles (GAAP) to reporting under the SORP, charities will need to ensure that their teams are up to date and their systems are fit for purpose.” In other words, it’s not simply a case of preparing a set of accounts going back two years. There’s a fundamental change to anticipate in terms of the level of detail and form of financial statements.

To quote the Charities Regulator guidelines themselves, “Given the technical nature of the [SORP] document, it is likely that the input of qualified accountancy professionals would be required.”

Existing FRS102 financial reporting merely requires companies to give a “true and fair view” of their financial position and surplus or deficit for a given accounting period. Many charities make use of a small companies exemption and file abridged financial statements. While this may comply with company law, it is no longer going to be the acceptable benchmark to satisfy. The Charities SORP introduces charities-specific requirements that call for enhanced reporting in accounting, formatting, increased detail, and additional disclosures.

SORP format

• Charity Trustees’ Annual Report
• Statement of financial activities (SOFA)
• Balance sheet
• Statement of cash flows
• Notes to the financial statements

[Source: Charities Regulator]

In other words, from the four- or five-line income statement that most trading companies can report, SORP moves us towards a table of information with multiple different categories to cover. These may include classifying:

• Whether income is from donations and legacies, charitable activities, fundraising etc.
• Whether expenditure is related to raising funds, charitable expenditure etc.
• Whether income and expenditure is restricted, unrestricted (designated or non-designated) or endowment funds

Restricted funds are funds that are subject to conditions, for example the purpose or project it is intended to support or the terms of an appeal which generated those funds. It is possible that a charity will have several restricted funds with different conditions or purposes, each of which would require analysis from an accounting perspective to enable the necessary disclosure within its financial statements.

Unrestricted funds, by contrast, are not dependent on any conditions or restrictions. It is at the discretion of the trustees/directors to spend such funds to further the charity’s purposes. Where a trustee board or board of directors sets aside funds for specific purposes, these are classified as designated funds. Such designation of these funds does not make them restricted funds, it merely earmarks those funds for a particular intended future purpose.

Endowment funds are funds received that are required to be invested or kept as capital. Often, a charity will be permitted to spend the income earned on the invested funds. As above, this income may be restricted or unrestricted income depending on its conditions.

Income recognition

Generally speaking, income recognition under the Charities SORP is consistent with FRS102. However, under the SORP, it looks at income streams that tend to be specific to charities in far greater detail. Furthermore, there are certain accounting policy choices under FRS102 which are not permitted under SORP. Examples include:

• Grants: FRS102 offers the choice of applying the accruals model or the performance model when recognising income, whereas under Charities SORP the performance model must be applied. In essence, where there are no performance-related conditions relevant to a grant (i.e., an organisation’s entitlement to a grant is not contingent on it delivering a specified level of service or units of output), the grant must be recognised as income in full, regardless of the timing of when those grant funds are spent.
• Legacies: FRS102 does not deal with legacies specifically, whereas the Charities SORP offers guidance in terms when a charity can determine it is entitled to the legacy income and when it should deem it probable that the income will be received. This relates to the grant of probate, the establishment of sufficient assets in the estate (after settling claims) and meeting any other specific conditions connected with the legacy.
• Donated goods and services: donated goods and services should be recognised at fair value (i.e., a market value) as both income and expenditure (or an asset) when received. However, often charities receive substantial volunteer help which may have a significant impact on the charity’s ability to operate. Charities must include a description of the role played by volunteers, as well as an indication of their contribution, within the financial statements, but no value in respect of the volunteers’ contribution should be recognised in the income or expenditure numbers.

Reporting of expenditure

Similarly, the way charities spend their money will be subject to greater standards of transparency under the Charities SORP. “Almost every non-profit will have spending on charitable activities,” Aidan explains. “Most individual expenses incurred or grant funding issued can typically be tied directly to raising funds or charitable activities, but there will be elements of expenditure, such as support costs, which will not be directly attributable to either. These include governance costs, payroll administration, HR, IT, management costs, rent, etc.”

As a result, charities applying the SORP will have to develop a basis for allocating these costs across each of its activities. Given the judgemental nature of this exercise, this is likely to be of particular interest to external auditors. Any allocation basis will need to be reasonable and supportable (potentially requiring the availability of data-driven evidence), applied consistently from year to year, and appropriately disclosed.

Changes to reporting of reserves (fund accounting)

As noted earlier, a determination will need to be made as to whether income and expenditure is restricted, unrestricted (designated or non-designated), or endowment funds. Transitioning to the SORP will also require this process to be applied to reserves/funds coming forward. The significant obstacle to overcome in this case is that charities will have to go back historically to track the source of all current surplus funds as either restricted, unrestricted or endowment funds, even if the income was received years ago.

Conclusion: The task may be bigger than you think

Although SORP is intended to nourish the long-term health and transparency of the charity sector in Ireland, there’s a certain amount of suffering (albeit administrative) required now. It’s never too early to embrace that pain, advises Aidan.

1. Auditors will be signing off on more information than before, so more time needs to be factored into the financial reporting process to prepare end of year accounts.
2. The training and capabilities of the finance team may be due an upgrade, even up to leadership level. There’s a learning curve to navigate for board members as well as management teams. Remember that the transition arrangements likely need to be in place for two years in advance, to report comparative information up to standard.
3. Resolving personnel knowledge gaps and system limitations starts now. When (not if) the SORP finally becomes mandatory, everything needs to be up to speed and in place.

How Crowe Ireland can help

This is one scenario where high-level professional advice at an early stage reaps dividends down the line. Crowe Ireland can advise on the next practical steps to take, or assist with a complete review of financial data as well as internal processes and systems.

Our audit and accounting advisory service can help you set up your processes now to account for transactions, train your key people, and adapt how costs are recorded.

But it’s not as simple as creating fresh categories for income and costs.

Whole teams and departments might now need to take a step back, review processes and update the way revenue and costs are reported across charitable activities, fundraising, support costs etc. It’s a formidable task for charities, but well within the capabilities and expertise of Crowe Ireland.

Crowe Ireland provides expert advisory services to numerous charities and other not-for-profit organisations. To learn more about the impact of new regulations from a compliance and financial reporting perspective and how we can help you, get in touch today.