Category Archives: SORP

Jargon busters

Here is some notorious and meaningless jargon that have been explained in simple and meaningful words.

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 financial year to which the accounts relate 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 and the SORP.

Balance sheet is a statement of the assets, liabilities and funds of the charity at the end of the reporting period (accounting period).

Community interest company is a limited company which operates as a business providing community benefit.

Deferred income consists of resources received by a charity that do not meet the criteria for recognition as income in the statement of financial activities (SoFA) because entitlement to the income does not exist at the balance sheet date. Deferred income is not recognized in the SoFA until the charity is entitled to the income. Instead, deferred income is disclosed as a liability in the balance sheet.

Designated fund is a portion of the unrestricted funds of the reporting charity that has
been set aside for a particular purpose by the trustees. For example, the value of functional fixed assets used to further the charity’s aims may be identified as a separate designated fund. Designated funds continue to count as part of the unrestricted funds of the charity, but the trustees may choose to exclude designated funds from the calculation of the charity’s reserves.

Endowment funds are resources received by the charity that represent capital. A feature of endowment funds is that charity law requires the trustees to invest it or to retain and use it for the charity’s purposes. The term endowment applies to permanent endowment, where the trustees have no power to convert it into income and apply it, and to expendable endowment where the trustees do have this power.

Funds is a legal term for the money and other assets held on trust. A fund may be
unrestricted and available to apply or spend on any of the purposes of the charity or it may be restricted to a specified purpose or purposes.
Restricted funds may be either endowment or restricted income funds, depending on
the nature of the restriction. Where the fund is not endowment and is held on trust for
spending on specific purposes, it is known as a restricted income fund. Each fund is a
pool of resources that is held and maintained separately from other pools because of the circumstances in which the resources were originally received, or the restrictions on that fund which determine the way those resources are subsequently to be treated.

Governance costs are the costs associated with the governance arrangements of the
charity. These costs will normally include internal and external audit, legal advice for trustees and costs associated with constitutional and statutory requirements, for example the cost of trustee meetings and preparing statutory accounts.
Included within governance costs are any costs associated with the strategic as opposed to day-to-day management of the charity’s activities. These costs will include any emoluments for trusteeship, the cost of charity employees involved in meetings with trustees and the cost of any administrative support provided to the trustees.

Related parties is a term used by the SORP that combines the requirements of charity law, company law and the Financial Reporting Standard for Smaller Entities (the FRSSE). The term is used to identify those persons or entities that are closely connected to the reporting charity or its trustees.

Reserves are that part of a charities income funds which are freely available.

Restricted funds may be either endowment or restricted income funds, depending on the nature of the restriction. Where the fund is not an endowment fund and is held on trust for spending on specific purposes, it is known as a restricted income fund.
The resources (the assets and liabilities) of each restricted fund are held and maintained
separately from other funds. This is in recognition of the circumstances in which the
resources were originally received, and/or the restrictions on that fund that determine the way those resources are subsequently to be treated.

Statement of financial activities (SoFA), analogous to a statement of comprehensive
income, shows the charity’s income, expenditure, gains and losses and transfers between funds during the reporting period (the financial year). The statement reconciles total funds brought forward and total funds carried forward at the end of the financial year.

Statement of recommended practice (SORP) is the official recommendation on the way a charity should report annually on its resources and activities.

Unrestricted fund is a legal term for the unexpended resources held by a charity on trust, comprising money and other assets that can be used for any of the charitable aims of the charity. The use of unrestricted funds is not restricted to any particular charitable purpose of the charity.