Five tips for charity accounts success in 2019
Christine Scott shares five of her top ten tips for success in the preparation, independent examination and audit of charity accounts.
1. Be aware of the legislation
It is really easy to go wrong given the degree of legislative complexity around charity accounting and external scrutiny. If you do go wrong, this can lead to accounts being rejected by a charity regulator and/or Companies House. Failure to provide a charity client with the appropriate form of scrutiny may also lead to regulatory action by ICAS.
The legislative requirements which apply to a charity should be reflected in the engagement letter. When drawing up the engagement letter, don’t forget to review the constitution of a potential client. It may contain more stringent requirements than the law; most common is the requirement for an audit rather than an independent examination, even if the charity is below the audit threshold.
During the accounts preparation and external scrutiny process don’t forget to double-check that accounts and scrutiny thresholds are being complied with. Late adjustments can push a charity from receipts and payments accounts to ‘true and fair’ accounts or from independent examination to audit.
2. Always follow the strictest requirements
Generally speaking, charity law requirements are more stringent than other legislative requirements which may apply to a charity, for example, company law requirements.
Applying the strictest requirements doesn’t mean other legislation can be dis-applied (also, see Tip 1). For example:
- A Scottish charitable parent company preparing group accounts, due to exceeding the Scottish charity law threshold, must prepare its group accounts under both Scottish charity law and company law. The Scottish charity law threshold for group accounts is gross income of the group, after consolidation, adjustments of £500,000 or more.
- ICAS expects that as a matter of good practice charitable companies should not elect for audit exemption under company law when receiving an audit under charity law. We take a different view from the Financial Reporting Council and the UK charity regulators on this point.
- A charity registered with the Charity Commission for England and Wales (CCEW) which, due to its Scottish operations, is also registered with the Office of the Scottish Charities Regulator (OSCR) must comply with the Scottish Charity Accounts (Scotland) Regulations 2006 (as amended). The Scottish charities have a lower audit threshold than charities based in England and Wales because the Scottish Regulations have a lower gross income condition. In Scotland, a charity requires an audit if its gross income is £500,000 or more, whereas in England and Wales a charity requires an audit if its gross income is over £1 million.
3. ‘True and fair’ accounts must comply with the Charities SORP (FRS 102) in full
Charities are unable to take advantage of the presentation and disclosure concessions afforded by Section 1A for FRS 102.
There is no explicit statement within FRS 102 that charities cannot apply Section 1A and no specific prohibition within charity and company accounting regulations: this has led to uncertainty about the applicability of Section 1A. However, for a charity’s accounts to give a ‘true and fair’ view, compliance with the Charities SORP (FRS 102) and FRS 102 in full is required.
The Charities SORP (FRS 102) does not offer any concessions to charities which arise specifically from Section 1A. Since the FRSSE and the Charities SORP (FRSSE) were withdrawn from 1 January 2016, charities are largely limited to the report and accounts concessions afforded to them by the Charities SORP (FRS 102).
The Statement of Cash Flow exemption afforded by the Charities SORP (FRS 102) is stricter than the concessions afforded by FRS 102, in that the Charities SORP requires charities with a gross income of more than £500,000 to prepare a Statement of Cash Flows.
Entities, which are not charities, which are eligible to apply Section 1A but choose to comply with full FRS 102 don’t have to prepare a Statement of Cash Flows.
4. Charities are not entitled to the same accounts, scrutiny and filing concessions as non-charitable companies
As custodians of charitable assets and recipients of public money, through private donations and/or through public sector grants or contracts, charities are both required and expected to be more accountable to the public than, for example, private companies.
While there are concessions available to certain charities arising from charity law or from the Charities SORP (FRS 102), concessions arising under new UK GAAP or from company law may not be available to charities.
While some stricter requirements are generally known about, such as stricter audit thresholds for charities in each of the three UK charity law jurisdictions, there has been a degree of uncertainty around concessions available following the implementation of new UK GAAP from 1 January 2015 and related changes to company law and the withdrawal for the FRSSE from 1 January 2016.
Charities are not permitted to prepare and/or file abridged accounts or prepare and/or file micro-entity accounts under FRS 105.
Charitable companies are not permitted to file filleted accounts with OSCR. While charitable companies are not prohibited from filing filleted accounts with Companies House, doing so offers no added value to charitable companies and therefore is not good practice.
5. Don’t assume that accounting software filing options are appropriate
Do not rely on the filing options offered by accounting software. First, the software doesn’t always get it right as it may not be sufficiently tailored to the requirements of charities. Second, ICAS members should ensure they are familiar with the filing requirements which apply to their charity clients. These are more complex than they first appear.
Look out for five more tips next week.
