Charity SORP Exposure Draft and Charity Financial Thresholds Consultations

In this episode, Gemma Archer rounds up the key points from the publication of Charities SORP exposure draft and consultations relating to the financial thresholds in charity law.

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Hello and welcome back to the Mercia Podcast. My name's Gemma Archer, and I'm a senior manager in the accounts audit and compliance team here at Mercia. Today I'm gonna be rounding up the key points from the publication of the charity Sort Exposure Draft. Its consultation and developments and consultations relating to the financial thresholds in charity law.

So first up is the charity Sort Exposure Draft, which was published at the end of March and is open from CO for consultation until the 20th of June, 2025. Whilst this is the third iteration of the sort under FRS 102, it's probably the version which has garnered the most interest since the transition to FRS 102 back in 2015.

So this edition incorporates the changes from the periodic review of FRS 102 with the most significant impacts in accounting affecting things like leases and revenue recognition. So. While charities receiving all of their income from non exchange transactions. So for example, donations, legacies, and other gifts will not be affected by these revenue recognition changes because they're accounted for under a different part of FRS 102.

Those charities that have more diverse income streams and do receive their income from what we call exchange transactions, such as contracts, subscriptions, trading income, for example, will need to apply the new five step model for revenue recognition in relation to those income streams. Charities that have leases will need to review their lease arrangements, as most operating leases are now required to be accounted for on balance sheet.

So what that means is that leased items will be presented as an asset and there'll be a corresponding liability on the balance sheet for the amounts that are owed under the terms of that lease. The exposure draft contains a brand new Module 10 B, which is dedicated to lease accounting, and it has some examples in there of things that are very specific to the charity sector.

So for example, what to do in situations where you might have, say a peppercorn lease or a lease at below market rate. So if you are looking to explore these changes in more detail, then you can find general FRS 102 updates covered in our Mercia accounting and audit update courses. Whilst there'll be more specific charity material included in a charity sort exposure draft bite-size course on leases and revenue.

In addition to the changes arising from the Periodic Amendments to FRS 102, the Sort Making Body took this opportunity to conduct a full review of the sort. So they've restructured the document a little bit. There's new modules in there. As I've said already, there's a new module 10 B for leases.

There's also a new module 10A on provisions. They've rewritten certain sections and they've also added additional examples and guidance. The area which has received the most attention in sort of commentary around this subject though, is the introduction of three tiers of reporting. So previous versions of the sort referred to smaller and larger charities.

And the distinction that we had was that smaller charities with those with gross income of 500,000 pounds or less when we are considering UK charities or 500,000 euros or less for charities in the Republic of Ireland larger charities with those with income of more than 500,000 pounds or 500,000 euros.

The exposure draft proposes that we will now have three tiers of reporting. So tier one would be those charities that apply accruals accounts and have a gross income of not more than 500,000 pounds or 500,000 euros. So essentially all of those charities that would have been smaller charities under the old regime.

Tier two charities are those with a gross income falling above the tier one threshold, so above 500,000 pounds or 500,000 euros of gross income, but their gross income does not exceed 15 million pounds or 15 million euros. Tier three charities will be those with a gross income that falls above that 15 million pounds or 15 million euro tier two threshold.

So what does that mean then? Well, really what it means is that charities in tier one would have to comply with requirements set out for that. Tier charities in tier two would have to comply with all the requirements for a tier one charity and a tier two charity. And charities in tier three would need to comply with requirements for tier one, tier two, and tier three charities.

So whilst the majority of the distinctions between tiers relates to the level of reporting in the trustees report, which is similar to the previous two tier system, there are some other areas of financial reporting and disclosure in the exposure draft in which tier one or tier two charities may have less of a reporting burden.

It is also worth noting at this point that not every module in the exposure draft has different requirements for each of those tiers. So there might be some cases where a module will only have. Requirements for tier one reporting only because all charities have to apply all of the requirements. There is, if you like, no relaxation or no exemption from reporting for those charities that are smaller.

There might also be modules where there are is. Only tier one and tier two specific reporting requirements because the exemptions will only apply to tier one charities and tier two. And tier three charities must apply the full requirements of a module. So it's actually. Probably a little bit less complex than it sounds when you first read it, but it's certainly worth just making sure that it's clear.

And in the exposure draft at least, they have made it very clear that there is, you know, this is the tier one requirements, here's the tier two requirements with lots of headings. So it is quite easy to navigate and to see what it is that you actually need to do depending on the tier that you are in.

So the area which has received the most attention is the requirement to prepare a cashflow statement. So the previous requirement was that any charity that was considered a larger charity under the charity stop was required to produce a cashflow statement. So, if you had gross income on of more than 500,000 pounds or 500,000 euro, you needed to produce a cash flow statement.

The exposure draft of the new sort proposes that only tier three charities, so those with gross income above 15 million pounds or 15 million euros are required to produce a cash flow statement. So that would actually take out vast numbers of charities at the lower end of the income threshold. Now what it is important to know is that in order for tier one and tier two charities to benefit from that exemption, they must meet the broader definition of a small entity in other applicable legislation.

So, for example, they must meet the definition of a. Small entity under the company's act if they're a charitable company, for example, to take advantage of that exemption. But in practice, that is likely to result in the majority of those charities, no longer having to produce a cash flow statement. The second area where that's particularly relevant is the basis of reporting in the sofa.

So it has always been the case that if you were a smaller charity, so one with income of. 500,000 pounds or euros or below, you could elect to prepare your sofa, your statement of financial reporting on either the natural classification or the activity basis of reporting. However previous iterations of the sort.

Didn't make that choice particularly obvious, and it didn't include examples of what a sofa prepared on a natural classification basis would actually look like. So what's pleasing to see in the exposure draft is they've made that, that they've made that choice for tier one charities only, a lot more obvious, and they've also included a new example of a sofa prepared on that basis, which I think will be welcomed by those smaller charities.

So if you are interested in learning a bit more about these changes, we will have a charity sort exposure, draft bite-sized course available that covers those reporting changes. So. In addition to the sort exposure draft and its consultation, we've got a consultation from the Department of Digital Culture, media and Sport DCMS to review the thresholds in charity law in England and Wales.

Now this consultation is considering all of the charity thresholds and there's actually 17 different thresholds that are being considered here. So they're looking at everything from registration to accounting, to reporting to audit, to fundraising. And it's worth being aware if you're going to look at this proposal that there are usually.

Two or three options for each threshold de depending on which ones they are in the consultation. So there's usually an option to essentially vote to keep it the same or to increase it by inflation, or in some cases buy another measure. And there are one or two where DCMS have actually indicated which of those they would recommend.

So not every case. But in some cases there is a recommendation. So we're going to have a little bit of a look at those areas that will be of particular interest to listeners of this podcast. If there are any that have got recommendations, I will point those out as we go through. But just be aware that there are some, which the government have indicated are recommended.

So, the annual return, first of all then. So currently if you are a charity with gross income of over 10,000 pounds, then you are required to complete an annual return. So it's been recommended in the consultation that the level that this level of gross income should be recom should remain the same.

So this was set back in 1995. So 10,000 was set in 1995. But the second option that they've included for respondents to consider is to raise this by inflation over the period. And if we did that, it would take that threshold to 20,000 pounds. So this is one of those thresholds where there's just two options and one of those options is recommended by DCMS.

We then get onto sort of the independent examination thresholds. So we've got first of all the level at which a charity's gross income requires it to be independently examined. So right now we've got an. A threshold of over 25,000 pounds. So if you're a charity with gross income of over 25,000 pounds, you are required to be independently examined.

The other thresholds that have been considered here are an inflationary increase to, almost 40,000 to 40,000 pounds or an increase to 30,000 pounds. No indication in that one of whether DCMS recommend a particular level but certainly worth considering. In addition to that, we also have requirements around who can actually perform an independent examination of a charity's accounts.

In terms of when a charity's growth income gets to a certain size a. The independent examiner has to be a qualified person within the legislation. So currently charities that have growth income of over 250,000 pounds are required to be independently examined by a qualified person, but other thresholds being considered here are increases to either 300,000 pounds or 400,000 pounds.

Again, no indication from DCMS on what they recommend here. It is also worth noting that those 250, 300 or 400,000 pound gross income levels are the same options that are being floated for when a non-company charity must prepare accruals accounts instead of receipts and payments accounts. So right now, a non-company charity.

Must prepare a cause account when its gross income is over 250,000 pounds. But they are looking at potentially raising that to either 300 or 400,000 pounds. For group accounts and this includes both when you need to prepare group accounts and when you need to have them audited. There is an aggregate income threshold, so right now a charity I.

Which when you aggregate its income with that of its subsidiaries, if that exceeds a million pounds, then it must prepare group accounts and it must have those group accounts audited again. Proposals in there to potentially raise this to either 1.2 million or 1.5 million pounds. Alternatively, retain the same level of a million pounds.

The last one is the sort of general audit threshold. So, currently charities require an audit when they exceed 1 million pounds worth of gross income. Again, the proposal. Just like with group accounts is to raise this to either 1.2 or 1.5 million or retain it. And it's also worth being aware that the, they're also looking at the asset threshold for charities that have income of less than a million pounds.

So this is something that sometimes gets a little bit forgotten, but if you are a charity with income of less than a million pounds. Your assets exceed 3.26 million, then you do actually require an audit. The proposal is to potentially raise that threshold for the assets to either 4 million or 5 million pounds.

What's quite interesting with these audit thresholds here is that at the end of March, the Scottish government announced that the audit income threshold for charities in Scotland is going to be raised from 500,000 pounds to a million pounds. We are still waiting for the reg regulations to implement this, and they're expected to be out in autumn 2025.

So we're obviously watching that space, but it. It's, I suppose in some respects, unfortunate timing that the England and Wales thresholds are also being looked at, because of course it would be nice if we could have a consistent audit threshold in particular across UK charities. But as it.

As it looks, it may well be the case that the England and Wales audit threshold does increase beyond that 1 million pounds. So we'll have to wait and see of course. But it's something just to be aware of, particularly if you are dealing with cross border charity. So those registered in Scotland, but also in England and Wales.

So the DCMS consultation closes on the 12th of June, 2025. So if you do have an interest in that, then do get responding to that. It's available on the Gov UK website. Very easy to find. So if you would like further information on the Mercia of courses that I've mentioned in this podcast, then please visit our website and get in touch with us.

Thank you for listening, and we'll be back with another episode very soon. Bye.