Charity Reporting and Covid-19
Introduction
On 23 March 2020, the SORP-making body of the various charities’ commissions in the UK issued advice in the form of Implications of COVID-19 control measures and charity financial reporting. This advice concerns the financial reporting implications of COVID-19 (Coronavirus) that should be considered by trustees when they are preparing the charity’s financial statements.
It should be noted that the advice issued by the SORP-making body does not make any amendments to the Charities SORP (FRS 102) nor is the advice mandatory. However, it is recommended that the advice is considered in light of the significant impact that COVID-19 is having on charities across the country.
The impact of COVID-19 is being felt by all businesses given the significant level of disruption the pandemic has caused. In respect of charities, there could well be implications for the charity’s income, expenditure and commitments as well as an impact on the charity’s assets and liabilities. In some serious cases, the disruption caused by the pandemic may affect the charity’s ability to continue as a going concern.
Trustees’ annual report and risk reporting
The advice suggests that the trustees consider the impact on the financial statements as a result of the changing activities of the charity itself. For example, trustees may need to consider the impact on:
- fundraising;
- the changing circumstances of its staff and volunteers; and
- changes beyond the control of the charity – for example, demand for charitable services; effect of failing supply chains; and the values of assets and liabilities due to economic changes.
Trustees should consider the effect of changes in fixed asset values – for example due to impairment. In addition, investments may also have seen a decline in value given the virus’s impact on the worldwide economy. Such declines in values may have a detrimental impact on the financial position reported in the balance sheet for which the trustees may wish to include additional narrative in the notes to the financial statements for the purposes of transparency.
The advice sets out some useful suggestions which charity trustees may wish to consider. The table below outlines these suggestions, together with the relevant paragraphs of the SORP dealing with such issues:
| Issue that charity trustees should consider | Relevant paragraph of the Charity’s SORP |
| Where the charity reports main achievements, it may wish to consider how the restrictions put in place by the government have affected the charity’s activities | 1.20 |
| Any material uncertainties related to going concern and any uncertainties regarding the charity’s financial sustainability together with the steps that the trustees are taking to address these uncertainties (this issue is examined further later in the article) | 1.23 |
| How the contribution of volunteers have assisted the charity in managing in the changed circumstances | 1.39 |
| The impact the pandemic has had on the charity’s ability to carry out fundraising activities and how the trustees have managed this situation | 1.41 |
| How the outbreak of the virus has affected the charity’s staff, volunteers and beneficiaries including the implications for the charity’s operations and activities for the coming year | 1.45 |
| The financial and operational effects of the virus together with how the restrictions imposed by government have affected the charity’s principal risks and uncertainties during the reporting period | 1.46 |
| Whether there are any implications on the charity’s defined benefit pension plan and/or investments which the charity may hold | 1.47 |
| The impact of the pandemic on the charity’s reserves policy, level of reserves and any change to designated funds that have been set aside for future commitments | 1.48 |
| The likely impact of the government’s restrictions (and potential duration of these restrictions) on the future aims and activities of the charity | 1.49 |
| The impact of the restrictions on any wider network of which the charity is a part and how this affects the charity’s operations | 1.51 |
True and fair view
The trustees are required to ensure that the financial statements which they prepare for the charity give a true and fair view. The advice acknowledges that this is based on an assessment that the charity’s reported income, expenditure, assets, liabilities and funds are fairly described and presented as at the reporting date.
To enable a true and fair view to be presented in the charity’s financial statements, the trustees must ensure that they take into consideration all relevant information regarding the conditions that exist as at the reporting date. In some unfortunate cases, this may mean that the charity is considered not to be a going concern and hence the financial statements will not be prepared on a going concern basis. This issue is considered later in the article.
Subsequent events
Subsequent events (often referred to as ‘post balance sheet events’) give rise to either ‘adjusting’ or ‘non-adjusting’ events. Adjusting events are those events which occur after the reporting date but whose conditions exist at the reporting date and which affect the items in the balance sheet and statement of financial activities. Module 13 of the SORP deals with such events.
An example of an adjusting event would be where stock for resale is overstated in the financial statements because it is sold for less than cost after the reporting date, but before the financial statements are approved. Here, the sale post year end provides evidence that selling price is less than cost so the stock should be written down to its selling price less costs to complete and sell in the financial statements.
Another example would be where a debtor goes bankrupt shortly after the reporting date; this is evidence that the charity had suffered a loss at the reporting date and hence the debtor should be written off in the charity’s year end financial statements.
Non-adjusting events are those events which occur between the reporting date and the date of approval of the financial statements. The conditions giving rise to non-adjusting events do not exist at the reporting date, but where they are material the nature of them should be disclosed in the financial statements. An estimate of their financial effect or a statement that such an estimate cannot be made reliably should also be disclosed.
The advice provides two examples of non-adjusting events as follows:
- a material loss in value of an asset subsequent to the reporting date; and
- a material loss in the value of investments.
So, where the charity has an investment measured at fair value, it will be recognised in the balance sheet at its fair value at the reporting date. If the fair value of this investment falls significantly after the reporting date, the financial statements do not recognise this fall in value. The charity should disclose a non-adjusting event describing the fall in value of the investment after the reporting date together with the financial effect (i.e. the value of the decline in value).
The impact of COVID-19 may not necessarily have an impact on the amounts recognised in the financial statements depending on the charity’s reporting date. This is because the virus was only discovered in February 2020 and hence a charity with a December 2019 reporting date will be less likely to have an adjusting event in respect of the virus. However, for charities with January 2020 year ends onwards, adjusting events in respect of the pandemic are more likely.
Going concern
The issue of going concern has moved up the ranks of importance more than ever during the pandemic.
The trustees are required to assess the charity’s ability to continue as a going concern at each reporting date. This will then lead them into concluding whether the financial statements should be prepared using the going concern basis of accounting or otherwise. In doing this, they must take into account all information about the future at the date of approval of the financial statements.
The assessment of going concern is a forward-looking exercise and it is to be done for a minimum of period of at least 12 months from the date of approval of the financial statements. This is a minimum period and it is not limited to 12 months from the date of approval of the financial statements – it can go further. Trustees must keep in mind that the review period is not just 12 months from the reporting date as this would mean an inadequate assessment of going concern is carried out.
The trustees must focus attention on the charity’s available unrestricted funds and reserves, borrowing facilities (including overdrafts) and any other forms of financial assistance that may be available.
Charities which are not a going concern
If the trustees conclude that the charity is not a going concern and hence the going concern basis of accounting is inappropriate for use in the financial statements, the trustees must prepare the financial statements on a basis other than the going concern basis. The trustees must disclose in the financial statements that the going concern basis has not been used. The trustees must then consider the impact of this on the charity’s accounting policies (especially where judgements and estimates relating to the valuation of assets and liabilities are concerned). The trustees must also consider whether the decision not to prepare the financial statements on a going concern basis triggers the need to recognise additional liabilities (such as where contracts may become onerous).
The advice confirms that where the charity’s accounts are not prepared on a going concern basis, assets may be valued on the basis of recoverable amounts which may be realised upon disposal. Liabilities may be valued on the likely value that could arise when they are crystallised.
Trustees should disclose any significant assumptions they make as to the nature of disposal and its impact on valuations of assets and the judgements as to the market or disposal values assigned. Consideration should also be given to any impairment in respect of operational and other assets. The SORP at Module 12 provides the requirements for impairment of assets.
Defined benefit pension plans
Unlike defined contribution plans, defined benefit plan liabilities are recognised on the charity’s balance sheet (plan surpluses are only recognised if the surplus is recoverable through a cash refund or reduced pension contributions).
The valuation of assets and liabilities for a defined benefit pension plan (also referred to as a ‘final salary pension plan’) may be affected by changes in financial markets for shares, other securities and government bonds. An adjusting event would not arise where any changes to conditions occur after the reporting date.
Liabilities and provisions
Additional liabilities and provisions may need to be recognised in the charity’s financial statements for costs arising from disruption to supply chains, availability of staff and the charity’s inability to fulfil any contractual obligations due to current restrictions. Additional costs or penalties may also arise because of a failure by the charity to meet any performance targets meaning that additional liabilities (or provisions for liabilities) may be recognised in the charity’s financial statements.
Unless any change to conditions at the reporting date results from this information, the charity would not class this as an adjusting event thus no additional liability would be recognised (but a non-adjusting event may need to be disclosed). Events after the end of the reporting period are dealt with in the SORP at Module 13.
Audit and external scrutiny
The current government restrictions may impact on the charity’s ability to prepare financial statements and the availability of auditors or independent examiner to undertake their review. The trustees will need to carefully consider any alternative means of verification and providing evidence which may involve extra effort or require additional time to complete.
Current restrictions will more than likely affect any previously planned timetables for reporting, including convening of meetings to approve the financial statements, which may need to be rescheduled or held by other means.
Reporting matters to the regulator by trustees
The charity regulators have provided guidance on their respective websites where the trustees consider there is a matter regarding beneficiary welfare or the charity’s ability to continue which they may need to notify to the relevant regulator.
Filing issues
The advice confirms that a disagreement relating to the going concern status of a charity between the trustees and the auditor or independent examiner is not a reason for non-submission of the financial statements. Once the auditor or independent examiner has provided their report, the annual report is then filed with the registrar.
If circumstances are such that the trustees’ annual report and accounts (or directors’ annual report and accounts) are going to be filed late, then the trustees must consider the impact of the late filing by having regard to information published by the relevant charity regulator.
Companies House have issued guidance that confirms they will require trustees and directors to inform them before the filing deadline if the accounts will be filed late and have said that they may grant a filing extension of up to three months. Any extension granted by Companies House will be at their discretion and will not affect the filing deadlines for subsequent years accounts. If the accounts are filed late at Companies House and permission for a filing extension has not been obtained before the original filing deadline, a penalty will be levied.
Conclusion
The impact of the pandemic is being felt across all sectors of business and has caused a significant amount of disruption. Preparers of financial statements for charities must ensure they have an understanding as to the wider implications of the virus on financial reporting (e.g. post balance sheet events and going concern) and consider any additional reporting requirements carefully.
Category: Accounting and standards, Audit
