Charity Accounting Software

The Charity Statement of Recommended Practice is mandatory for all charities – regardless of size. It is a 200-page A4 document of additional reporting requirements that are layered on top of FRS 102.

Unfortunately, and unintentionally, the SORP is ambiguous and poorly written.  Complying with the SORP creates financial reports which are overly complex and fail to inform the normal reader.

But that does not matter, although you may not like the SORP as a charity treasurer or advising accountant, you must comply with it. Sorry.

However, help is at hand.  We are publishing the “The Plain English Guide to Implementing the Charity SORP” at the end of the year with a RRP of £20.

Yes!  There are some minor changes in the Trustee’s Report for “small” charities which are defined as those with a gross income of less than £500,000 for UK charities or €500,000 for Irish.

The aim of the Financial Reporting Council is “to promote transparency and integrity in business”. With regards to charities the aim is to help readers understand three things in particular:

1. What are the objectives of the charity?
2. What activities does it undertake to achieve those objectives?
3. How are those activities funded?

Unfortunately, it only partially meets those objectives.  The list of requirements for the Trustee’s Report ensures a comprehensive narrative that explains the first objective of what the charity is trying to achieve and allows for a good description of the activities.

The financial statements are overly complex and unhelpful. The Statement Financial Affairs is the most important report in the SORP and is equivalent to a Profit & Loss Account with a summary balance sheet added at the end.  Even experienced readers of accounts find it difficult to judge whether the charity is succeeding or failing.

The SORP was created by some very clever and very experienced accountants, who were probably too clever and too experienced to recognise that what they had produced was far too complicated for charities many of whom rely on unqualified volunteers to fulfil their financial roles.

Even for experienced accountants the SORP is very daunting and made even more so by the ambiguities and problems in its construction.

The SORP is extremely difficult to implement properly unless you have a multi-dimensional accounting system like Aedon.Accounting.

Most charities use starter packages which have a business-oriented chart of accounts that might allow for different departments or cost centres, but certainly don’ support the three-dimensional need to record the nominal code, fund and activity on all purchases. These simpler packages are simply not sophisticated enough to make compliance with the SORP easy.

However, help is at hand.  We are publishing the “The Plain English Guide to Implementing the Charity SORP” at the end of the year with a RRP of £20.

The SORP is extremely difficult to implement properly unless you have a multi-dimensional accounting system like Aedon.Accounting.

Most charities use starter packages which have a business-oriented chart of accounts that might allow for different departments or cost centres, but certainly don’ support the three-dimensional need to record the nominal code, fund and activity on all purchases. These simpler packages are simply not sophisticated enough to make compliance with the SORP easy.

However, help is at hand.  We are publishing the “The Plain English Guide to Implementing the Charity SORP” at the end of the year with a RRP of £20.

Three-dimensional accounting simplifies the implementation of the Charity SORP.

On every type of income (sales invoice) you record not only the classification of the income using the nominal or general ledger code for that income type, but also the fund that it goes into.

Then, for every purchase invoice you record not only they classification of the expenditure using the nominal code, but you record the activity it was spent on and the fund that is being used to pay for it.

In system terms you record the classification of the income or expenditure using the nominal codes, and then use the Fund analysis code to manage the balance in the fund and the Activity Analysis code to identify which activity is being supported.

Recording this extended information, which is necessary to comply with the Charity SORP, is simple with Aedon.Charities.

The Statement of Financial Activities is the charitable equivalent of a Profit & Loss report for ordinary businesses, which is extended by including balance sheet information for the movement in the funds.

It uses standard classifications of income and expense which are intended to assist with the comparison of different charities.
However, these classifications are then divided according to the different funds which they were paid out of making the whole report far too complex to read easily.

If the SOFA were an Olympic dive, it would have a degree of difficulty of 4.9 out of 5!

Charities are not businesses and therefore create surpluses or deficits in their income and expenditure.  These are accumulated year on year as fund, which are also described as reserves.

Under the Charity SORP the surpluses and deficits are recorded against each fund and then accumulated in the same way in the accumulated funds or reserves.

There are essentially two classes of fund: Unrestricted and Restricted.

Unrestricted funds can be applied for any of the charity’s activities. When they are set aside for a specific purpose, they are called Designated. The undesignated funds are called General.

Restricted Funds can be either Income Funds or Endowment Funds. Income funds can be spent in full on the activities defined by the donor. Endowment funds hold capital that can provide an income to be used for the charitable activities.

The Endowment funds are further divided into Permanent Endowments which are held indefinitely or Expendable Endowments in which the capital can be spent at the discretion of the trustees.

The SORP uses this diagram to explain the different types of funds.

The Charity’s activities are the means of achieving its charitable objectives. They are defined in the Trustee’s statement.

Unfortunately, although the initial definition is clear, the SORP then proceeds to use the term activity to also define the different classifications of income expenditure in a a very confusing manner.

It would have been much easier if they had used a different term such as “Classification”. This is how we define the different dimension axes that are necessary to comply with the SORP in what we refer to as 3-Dimensional Accounting.