Understanding the Statement of Financial Activities (SoFA) for Charities

Understanding the Statement of Financial Activities (SoFA) for Charities

In the Charity sector, financial transparency and accountability are paramount. To uphold these values, all charities preparing their accounts on an accruals basis must prepare a Statement of Financial Activities (SoFA) as part of its annual reporting requirements. It is more than a simple financial summary, SoFA offers a detailed look at a charity’s income and expenditures over a financial year, providing clarity and enabling the charity and its stakeholders to make informed decisions.

What is the Statement of Financial Activities (SoFA)?

Unlike a traditional Profit & Loss Account (or Income Statement), which is used in the corporate sector, the SoFA categorises income and expenses in a way that reflects the mission-driven nature of a charity’s work and includes all income, gains, expenditure and losses recognised in the reporting period (usually a year).

The SoFA showcases how a charity’s resources are allocated, whether through donations, grants, or other income sources, and details how those funds are spent on charitable activities, fundraising activities, administration and governance.

If the charity is classed as large, with an income over £500,000, then the activity basis of reporting should be used. This breakdown is invaluable for demonstrating both financial performance and responsible stewardship to donors, beneficiaries, funders, regulatory bodies, and other stakeholders.

Key Components of SoFA

SoFA organises a charity’s financial data into core categories that reveal a clear financial picture.

Income and expenditure must be analysed between the different classes of funds, depending on donor stipulations and intended uses:

  • Restricted Funds: These funds are earmarked for specific purposes/projects as explicitly stated by donors/funders.
  • Unrestricted Funds: Funds that the charity can use flexibly across different activities in line with their charitable purposes.
  • Endowment Funds: Often invested for the long term, with the charity typically using only the income generated to support their activities.

There is an additional category of Designated Funds where the donor does not state how the money should be spent, but the Trustees of the charity decide to set that money aside for specific purposes, for example a new project or purchase of new assets. These are designated from Unrestricted Funds, and any income and expenditure are usually included in the Unrestricted Funds column in the SoFA, but the balance of the fund is shown separately on the Balance Sheet.

The prior year comparatives should also be provided for all amounts presented in the SoFA, split into their classes of funds. This should either be on the face of the SoFA or shown prominently in the notes to the accounts.

Income

Income includes all the revenue a charity receives throughout the year. This category covers donations, grants, legacy gifts, investments, and any other sources that support the charity’s objects.

Expenditure

Expenditure in the SoFA is the outflow of funds used for various activities and operational costs.

This section is divided into:

  • Fundraising costs: the costs of raising funds, whether through campaigns, events, or other initiatives.
  • Charitable activities: costs associated with achieving the charity’s purpose, such as program costs or resources dedicated to beneficiaries. This will also include Governance Costs (costs ensuring the charity complies with legal and regulatory obligations, as well as costs for trusteeship, audits/independent examination etc), which must be separately analysed in the notes to the accounts.

Net Movement in Funds

This is one of the most crucial elements of the SoFA. The net movement in funds is a reflection of the charity’s financial health over the year. It’s calculated by comparing the total income to the total expenditure and indicates whether the charity has a surplus (more income than expenditure) or a deficit (shortfall) at the end of the year.

Unlike a Profit & Loss statement, the Charity SORP recognises income differently from normal accounting (accruals) rules; for instance, a grant received in one year but not fully spent will show in the SoFA in full during the year it is received, and the unspent amount will carry over to the following year. This approach helps charities ensure they have the resources available for multi-year projects, and stakeholders need to understand that surplus or deficit is often a reflection of this income allocation strategy rather than immediate surplus or deficit.

Here’s an example of a Statement of Financial Activities:

Source: Accounting & Reporting by Charities SORP (FRS102). Charities SORP (FRS102)

Not just the SoFA...

Every charity* needs to prepare several statements form the Trustees Annual Report and Financial Statements. These are:

  • Trustees Annual Report (TAR) – a narrative section to showcase what has happened during the year and what the plans for the future are (watch out for our future blog on the TAR!). Every charity must prepare a TAR, even if they are not required to submit accounts to The Charity Commission.
  • Statement of Financial Activities (SoFA)
  • Balance Sheet
  • Statement of Cashflows (Charities with income over £500,000)
  • Notes to the Accounts

* If your charity is a Charitable Incorporated Organisation or an Unincorporated Charity with income below £250,000 you can choose to prepare a simpler Receipts & Payments Accounts with a Statement of Assets and Liabilities, rather than the SoFA and Balance Sheet.

Summary

By detailing income sources and expenditures in a standardised format, the SoFA provides a transparent view of a charity’s finances during the year. This transparency is critical for donors and funders who want to know that their contributions are being used effectively and providing impact, which in turn encourages ongoing support. The SoFA also assures regulatory bodies that the charity is compliant and responsible in its financial practices, reinforcing public trust.

The SoFA also helps charities demonstrate how they are stewarding their resources, balancing income with strategic spending to further their purpose. With a breakdown of expenses, including fundraising and administrative costs, stakeholders can see the charity’s operational priorities, which aids in understanding how efficiently the charity is managed.

All of the reports should be clear, readable and understandable - I've met many Trustees in the past who have stated that they’ve not really been able to understand their year-end accounts because of the way they are presented - make sure they are easy to read in a font large enough to read and enough space to clearly see the different sections and information.

The reports combined are the ‘shop-window’ that the charity can use as a powerful tool to showcase their social impact, enhance trust and foster long-term donor and funder relationships.

Do you have a question about SoFA? Speak to a member of our team. 

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