Statement of Financial Activity (SOFA) reporting
The Charities Commission (for England and Wales) and the Office of the Scottish Charity Regulator (OSCR) require charities, including charitable incorporated organisations, to apply the Charities SORP (Statement of Recommended Practice). From 1st January 2015 this is the SORP 2015 and two versions exist. Charities SORP 2015 (FRS102) and Charities SORP 2015 (FRSSE)
The Charities SORP 2015 (FRSSE) will only be valid until 31/12/2016 so Liberty Accounts offers compliance with Charities SORP 2015 (FRS102) only.
Regulators recognised that the usual business-type profit and loss presentation fell short of fully explaining all of a charity's activities and some years ago introduced the Statement of Financial Activities (SOFA) as the major financial schedule for Charities.
Compliant SOFA reports in both Income and Expenditure (Accrual basis) and Receipts and Payments (cash basis) formats are available for Not for Profit entities set up on the system.
By way of background the following topics are discussed: -
- Income and Expenditure versus Receipts and Payments
- Income and Expenditure Report - Accruals Basis SOFA
- Receipts and Payments Report - Cash Basis SOFA
- Comparing and Income and Expenditure SOFA with a Receipts and Payments SOFA
Income and Expenditure versus Receipts and Payments
An income and expenditure report is presented on an accruals basis.
In many respects the accruals basis for reporting a charities financial activities is the preferred option. Accruals accounts record the income and expenditure of the charity and the increase or reduction in its assets and liabilities. All income and charges relating to the reporting period must be taken into account without regard to the date of payment or receipt. Accruals accounts are compiled on a 'true and fair' basis in accordance with accounting standards
Larger charities and those charities that are also incorporated under the Companies Act 2006 must use the accrual basis and prepare a SOFA as an Income and Expenditure report.
Smaller charities, those with income of £250,000 pa or less, are also encouraged to use the Income and Expenditure basis where it provides a reader with a better understanding of the situation of the charity. The Charity Commission suggest this may be:
- Donors may require accruals accounts to be prepared as a condition of a grant.
Trustees may need to explain more about the use of their resources than simply cash movements.
- a charity has significant non-cash assets, or fixed assets which the trustees would like to value and depreciate in the accounts
- a charity has received significant non-cash donations, gifts in kind or valuable gifts of service/li>
- a charity operates a total return policy in relation to permanent endowment investments
- Growing in size and complexity
- the charity, despite having an income below the £250,000 threshold, is growing in size or complexity. For example the charity may use a trading subsidiary, or the charity is involved in joint operations with other charities.
- Receipts or payments from asset and investment transactions
- the charity has significant receipts or payments arising from asset and investment sales and purchase, and the trustees consider that the preparation of accruals accounts would explain these transactions more clearly.
- Programme related investments as equity or loan
- the charity carries out its activities mainly by making programme related investments by way of equity or loan rather than by making grants to beneficiaries and the trustees consider that the preparation of accruals accounts would explain these transactions more clearly
The Receipts and Payments basis is a relatively simple form of reporting and consists of a summary of money received and paid during the financial period. Unlike the Income and Expenditure basis there is no statutory requirements for Receipts and Payments reporting; although the Charities Commission offer some guidance notes with form CC16. As a Receipts and Payments SOFA is not prepared in accordance with accounting standards it does not necessarily offer a 'true and fair' view to the reader.
Liberty Accounts offers both form of SOFA reports. Define the preferred basis on the Organisation Profile.
Control - Organisation Profile - Accounting Options Tab
Select the format; either Income & Expenditure (Accruals Basis) or Receipts & Payments (Cash Basis). This selection controls the SoFA format offered under the Reports menu it does not means that transaction input is constrained in anyway, so normal accruals activity such as sales and purchases ledges are still available even if R&P is chosen.
If for any reason the other form of the SoFA report is required simply temporarily change the selection and produce the report.
Income and Expenditure Report - Accruals Basis SOFA
A SOFA report is run via the Reports menu, selecting Statement of Financial Activities.
Reports - Statement of Financial Activities
The SOFA may be run for all Funds or a particular fund.
The report will usually be produced with Funds summarised across Unrestricted, Restricted and Endowment. However if the user prefers to have each fund displayed in columns tick the 'All Funds by Column" box. Note this box cannot be ticked unless the Fund selection is 'All'
The report may be set to show comparative figures if appropriate.
The Income and Expenditure SOFA will include all items of income and expenditure and were relevant changes in values of assets and liabilities. It is consistent with the Charities SORP 2015 (FRS102)
Receipts and Payments Report - Cash Basis SOFA
The Receipts and Payments SOFA is prepared in the same way as described above for an Income and Expenditure SOFA
Reports - Statement of Financial Activities
The report is based upon cash transactions and so will not show non cash items such as depreciation or re-valuations. It will also not show the income from any sales invoices raised but for which a receipt had not been received in the period of the report. Supplier bills that have not yet been paid will also not show.
The Net Movement in Funds line from the Receipts and Payments SOFA will be the difference between the opening balance and closing balance for Bank Accounts plus the value of any system payroll journals that charge expenditure accounts.
It is important to comment upon the Total Funds Brought Forward line included on the report. For an accurate SOFA for any entity that has transfered from another accounting system, i.e. not a new charity; any required opening balances will need to be entered. It is not necessarily the opening balances from the Income and Expenditure report so specific receipts and opening balances can be entered.
The relevant figures are entered in the Funds Opening Balances (Receipts and Payments Basis). Enter the receipts and payments opening balances required as at a suitable date.
Entity Name - Opening Balances - Funds Opening Balances (Receipts and Payments Basis)
Comparing and Income and Expenditure SOFA with a Receipts and Payments SOFA
The differences between the two reports will relate to those items in the Income and Expenditure report that are of a non-cash nature. Note, if the payroll system is being used any payroll journals charging expenditure accounts are treated as cash items in the Receipts and Payments report. So things such as:-
- Any Depreciation charged
- Changes in any Customer balances from the start of the accounting period to those at the end
- Changes in any Supplier balances from the start of the accounting period to those at the end
- Purchases or disposals of investments or fixed assets
- Any non journals that have been posted to income or expenditure accounts with the exception of system payroll journals charging expenditure accounts
- Changes in the value of any other non cash asset or liability
By inspecting the items described above a user will be able to understand the differences between an Income and Expenditure SOFA and a Receipts and Payments SOFA for the same accounting period.