Understanding the Charities SORP
- barboramatusinska
- 5 hours ago
- 3 min read
Transparency and accountability are vital for the charitable sector, not only to comply with legal obligations but to maintain public trust. One of the key frameworks used by charities to achieve this is the Charities Statement of Recommended Practice (SORP).
It outlines how charities should prepare their annual accounts and report on their financial activities. The aim is to improve the quality of financial reporting and enhance comparability and understanding of information presented in charity accounts.
In Ireland, the use of the Charities SORP is not yet a legal requirement. However, the Charities Regulator encourages its adoption as best practice. Larger Irish charities, especially those with significant public or donor funding, often voluntarily prepare their accounts in accordance with the SORP to demonstrate high standards of financial stewardship and governance.
The regulator has indicated support for the move towards mandatory SORP reporting in the future, particularly for larger or more complex charities.
Key Features of the Charities SORP
Trustees Annual Report
The SORP requires a Trustees’ annual report that gives context to the financial data, including:
The charity’s objectives and activities
Achievement and performance during the year
Financial review
Plans for the future
Structure, governance, and management
Reference and administrative details
For incorporated charities, a Directors’ Report is still required but can be merged with the Trustees’ Report.
Statement of Financial Activities (SoFA):
The SoFA replaces the traditional profit and loss account. It shows all income and expenditure categorised by purpose (e.g., restricted vs. unrestricted funds).
The SORP requires expenditure to be reported on an activity basis to show how the charity has used its resources to further its charitable aims for the public benefit.
Income headings typically include:
Donations and legacies
Charitable activities
Other trading activities
Investment income
Other income
Attention must be given to grant income recognition where SORP requires using a performance model.
Expenses headings are:
Fundraising activities
These typically include seeking donations, grants, and legacies; operating membership schemes, holding events, contracting with agents to raise funds on behalf of the charity; operating charity shops; advertising, marketing and publicity costs, and investment management costs.
Charitable activities:
The charitable activities include costs incurred by a charity in undertaking activities that further its charitable aims for the benefit of its beneficiaries. They also can include support and governance costs relating to the governance of the charity apportioned to charitable activities.
Other
An additional heading can be added to identify significant charitable activities undertaken.
Fund Accounting:
The fund accounting emphasises the need to distinguish between different types of funds: unrestricted, designated, and restricted. The aim is to help stakeholders understand how resources are used.
Other Disclosure Requirements:
The SORP requires enhanced notes to financial statements, providing clarity on grants, governance costs, remuneration of key personnel, and other relevant details.
The charity must explain any policy it has for holding reserves and justify the reasons for holding them. If trustees believe that holding reserves is unnecessary, their report must disclose this fact and provide the reasons behind this decision.
Challenges for Irish Charities
While there are clear benefits, some smaller charities face obstacles in adopting the SORP, including complexity and resource constraints. The framework can be demanding for organisations without in-house accounting expertise. Implementing SORP reporting may require additional professional support, which could strain limited budgets.
It’s important to note that in order to adopt the SORP, charities require two years of accounting data, ready to report as comparative information. Therefore, planning is crucial.
Transitioning to the SORP requires applying the restricted/unrestricted classification to reserves brought forward. Charities need to trace the origins of all current funds to determine whether they are restricted, unrestricted, or endowment funds, even if the income was received years ago.
Crucially, the charities must ensure that their accounting systems are fit for purpose and that their records contain the required level of detail.
The SORP requires more detailed financial tracking and reporting. The charities should consider the following steps:
Upgrading the accounting software to support fund accounting
Adjusting their chart of accounts to align with SORP categories
Ensuring the ability to distinguish between different income streams
Some charities may need to consult with an accountant or auditor experienced in SORP-compliant accounts.
If full SORP compliance is too difficult initially, the charities should consider a phased approach:
Starting with adopting the SoFA and fund accounting.
Improving narrative reporting over time.
Implementing complete disclosures once the systems are ready.
Although not yet mandatory in Ireland, the SORP provides comprehensive guidance on how charities should prepare their financial statements to ensure consistency, transparency, and comparability.
Adopting the Charities SORP in Ireland is a significant step towards improved governance, greater accountability, and better donor confidence. While the process requires commitment, the long-term benefits far outweigh the challenges.
The key to success is to start early, seek professional support, and adopt the changes gradually. Contact our team of charity & not-for-profit experts today to start your journey.
