Section 2 Preparing fully accrued accounts

Fully accrued accounts must be prepared by a charity that fulfils at least one of the following criteria:

• has a gross income for the year of £250,000 or more
  
  
• is a company or a Registered Social Landlord or a Community Benefit Company or a Higher or Further Education Institution
  
  
• the governing document or any enactment of Parliament says the charity should prepare fully accrued accounts, or accounts that give a true and fair view of its financial affairs
  
  
• a third party, for example a funder, requires fully accrued accounts
• the trustees have decided that they will prepare fully accrued accounts.

See Preparing Accounts in Part 1: The Overview, to check what type of accounts a charity must prepare.

While a charity with a gross income under £250,000 may be able to prepare accounts on a receipts and payments basis, the charity trustees may decide to prepare fully accrued accounts because they want their accounts to show the financial affairs of the charity on a true and fair basis. However, because fully accrued accounts must follow the SORP and, if independently examined, be examined by a qualified independent examiner (see section 3.3), charity trustees should fully consider the implications of deciding to prepare fully accrued accounts if they are not otherwise required.

Accounts prepared using the accruals basis should recognise income when the effect of the transaction or other event results in an increase in the charity’s assets. This normally depends upon entitlement to the resources, probability of receipt and a reliable estimate of the amount.

This is not necessarily the same date as when monies are received.

Expenditure should be recognised when the liability is incurred, which is when there is a legal or constructive obligation committing the charity to the expenditure. This is not necessarily the same date as when monies are paid out.

It is generally recognised that for a statement of account to give a true and fair view of a charity’s affairs it should be produced on the fully accrued basis. This means that they must be prepared in accordance with UK Generally Accepted Accounting Principles (GAAP) and the methods and principles of the SORP.

The SORP sets the framework for charity financial reporting in the UK for any charity preparing fully accrued accounts. Charitable companies and charities with income of £250,000 or more will always be required to prepare fully accrued accounts. 

Two new editions of the SORP were issued in January 2015. These were based on the relevant accounting standards at that time – FRS 102 and the FRSSE. 

Following the withdrawal of the FRSSE for accounting periods starting on or after 1 January 2016 all charities preparing fully accrued accounts should now be using the Charities SORP (FRS 102).

The SORP aims to:

• improve the quality of financial reporting by charities
• enhance the relevance, comparability and understanding of information presented in accounts
• explain and clarify the interpretation of accounting standards when applied to charities.

Schedule 1 of the 2006 Regulations specifies that fully accrued accounts must be prepared in accordance with the methods and principles of the SORP. This reference has been updated to reflect the new editions of the SORP and includes reference to any SORP update bulletins.

Registered social landlords and further or higher education institutions must prepare their accounts as specified in their own industry Statement of Recommended Practice (SORP). Their accounts must contain an income and expenditure account in place of the statement of financial activities along with a balance sheet and notes to the accounts.

Given the complexity of both the SORP and the preparation of fully accrued accounts, charity trustees may wish to consider using professional accountants when preparing accrued accounts if the charity does not have the skills in-house.

This document will only provide a general outline and the key requirements for fully accrued accounts because further, more detailed, information can be found in the SORP.

Copies of the SORP can be downloaded at www.charitiessorp.org  

Hard copies may be purchased from CIPFA: www.cipfa.org

Under the 2006 Regulations, the statement of account for fully accrued accounts must consist of:

• a Trustees’ Annual Report from the charity trustees of the activities of the charity. The content of the annual report is detailed in the SORP. There are different requirements depending on the size of the charity. The annual report is a crucial component of the statement of account and its preparation should actively involve the charity trustees. It provides information that is not contained in the financial statements that will enable a reader to understand how the numerical information relates to the organisational structure and activities of the charity
  
  
• an external scrutiny report from either an independent examiner or auditor
  
  
• a statement of financial activities (often referred to as the SOFA) of the charity that gives a true and fair view of the income and expenditure resources of the charity and their application during the financial year
  
  
• a balance sheet that gives a true and fair view of the state of the financial affairs of the charity at the end of the financial year
  
  
• a statement of cash flows, if appropriate
  
  
• notes to the accounts that explain the accounting policies adopted and explain or expand on the information contained within the main accounting statements. See the SORP for more information.

The balance sheet and trustees’ annual report must be signed by one of the charity trustees on behalf of all the charity’s trustees. Both documents must also specify the date on which the statement of account of which they form part was approved by the charity trustees.

The trustees’ or directors’ report of a charitable company is often signed by the company secretary. Where the company secretary is not also a charity trustee the report must be signed by a charity trustee; it may in addition be signed by the company secretary.

The statement of account must be prepared in accordance with the methods and principles set out in the SORP.

Additional information must be provided in the notes to the accounts where the statement of financial activities and the balance sheet are insufficient on their own to provide a true and fair view.

If compliance with the SORP for the preparation of accounts would not be consistent with giving a true and fair view, the trustees should depart from the SORP to the extent necessary to give a true and fair view. We would anticipate this happening only in very rare circumstances; any such departure must be explained in the notes to the accounts.  

To allow comparisons to be made any figures in the statement of financial activities or balance sheet must include the corresponding amount for the previous financial year or period. Where the corresponding amount referred to has a different definition it must be adjusted to allow a comparison to be made.

Where there is no figure to be shown in the statement of account but there was a corresponding amount in the previous year, then the previous year’s figure must be shown.

The statement of financial activities must distinguish between unrestricted, restricted and endowment funds. However, where a charity has more than one fund in any of these categories the statement of financial activities should present the total funds held in each. The notes to the accounts must then explain in sufficient detail the content of the unrestricted, restricted and endowment funds so that the reader gains a full understanding of the accounts.