Eight tips for Charities SORP accounts success

The Charities SORP requires the trustees’ annual report to include the names of all those who were the charity’s trustees during the reporting period and on the date the report and accounts were approved.

This is important as it is a charity’s trustees who are legally responsible for running the charity and for preparing and approving the trustee’s annual report and accounts.

While the disclosure requirements appear simple, it is important to bear in mind that information on appointment and resignation dates is required to the extent necessary to meet the requirements.

Charity law, in the charity law jurisdictions of the UK, does provide for disclosure exemptions in circumstances where disclosure could lead to a trustee’s safety being at risk. The Charities SORP requires an explanation of the reason for any non-disclosure and addresses how charities can achieve an exemption under charity law.

Company law does not provide an equivalent exemption for directors; therefore, the trustees of a charitable company who are also its directors for company law purposes must make the required disclosures.

Prior to this edition of the Charities SORP, charities with more than 50 trustees were required to disclose the names of only 50. However, under the Charities SORP (FRS 102), the names of all trustees, however many, must be disclosed other than where a charity law exemption has been applied.

Under FRS 102, charities must prepare their accounts on a going concern basis unless the trustees intend to wind up the charity, cease all charitable activities or have no realistic alternative but to do so.

Trustees are required to assess whether their charity is a going concern and whether they believe it will remain so for a period of at least 12 months from the date the trustees’ annual report and accounts are approved. Trustees must also consider whether there are any material uncertainties which may cast doubt on the charity’s ability to continue as a going concern.

Disclosures about a charity’s going concern status are normally addressed in the trustees’ annual report and in the accounting policies note. However, there is a specific Charities SORP requirement that “Where there are no material uncertainties about the charity’s ability to continue [as a going concern], this should be stated.” The requirement is for such a statement to be included in the accounting policies.

This statement tends to be missed. It is important that trustees comply with this requirement, and do not rely on other statements made elsewhere about going concern even where they imply that there are no material uncertainties.

Charities participating in multi-employer defined benefit schemes rely on the scheme’s actuary to provide information at the balance sheet date on their share of the scheme’s net defined benefit liability (for some charities their share may be a surplus).

Unless a charity has exited the scheme during the reporting period it will be required to record movements in its net defined benefit liability during the reporting period in the primary statements so that it reports the position correctly at the year end.

While the nuts and bolts of the accounting tend to be handled correctly, charity accounts can fall short in two key respects:

• The disclosures required by FRS 102 may be incomplete. These are onerous but, nevertheless, charities should be complying with these in full.
• The pensions accounting policy and narrative disclosures about pensions made elsewhere, including in the trustees’ annual report, can indicate a lack of a basic understanding about the accounting requirements themselves or the relationship between the scheme, the charity and any third-party guarantors.

On the whole, greater care needs to be taken by charities and their accountancy advisers: to understand the charity’s relationship with the pension scheme and any guarantors; and to comply with all the related accounting and disclosure requirements of the Charities SORP and FRS 102.

Charities and their accountancy advisers have to understand and apply the strictest accounts and scrutiny thresholds which apply in specific circumstances. In general, thresholds are applied correctly, which is great news.

Here is a reminder of the key thresholds which apply to charities registered with the Office of the Scottish Charity Regulator (OSCR):

• True and fair accounts rather than receipts and payments accounts are required if gross income is £250,000 or more.
• Group accounts are required if gross income is £500,000 or more.
• An audit rather than independent examination is required if gross income is £500,000 or more. Also, an audit is required if gross assets are more than £3,260,000.
• Additional reporting and presentation requirements for ‘larger’ charities under the Charities SORP (charities with gross income of more than £500,000).

Different thresholds apply in England and Wales, and Northern Ireland.  The most significant difference being the gross income condition for an audit in England and Wales, which is gross income of more than £1 million.

If a charity’s founding documents require true and fair accounts or an audit rather than an independent examination regardless of size, the founding documents will take precedence.

It is important for charities and their accountancy advisers to bear in mind the following:

• As soon as a charity exceeds a threshold, the stricter requirement applies. There is no automatic dispensation in the first year of a breach. However, a charity based in England and Wales, which is not a cross-border charity, can ask the Charity Commission in England and Wales (CCEW) for dispensation from independent examination or audit in a particular year providing certain conditions are met.
• Late adjustments to accounts could impact on the accounts and scrutiny requirements of a charity.
• If a late adjustment means an audit rather than an independent examination is required, the charity will need to appoint an auditor.
• Any accountancy adviser taking on a charity accounts preparation, independent examination or audit should meet their own professional body’s requirements, including having undertaken sufficient CPD.

Common examples of extraneous material are irrelevant accounting policies, other notes and line items where there is nothing to report. These may arise because they were relevant in a previous accounting period and not subsequently updated, or because they were automatically generated from an accounting software package.

At best extraneous material reduces transparency and may distract readers from other important information; at worst it can be misleading.

The Charities SORP states that:

“Charities should only disclose accounting policies that apply to material items or transactions. Charities should avoid providing unnecessary information for non-material items or transactions.

Although FRS 102 and this SORP need only be applied to material items or transactions, it is inappropriate to make, or leave uncorrected, immaterial departures from this SORP to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.”

Charities should therefore strike an appropriate balance between providing too much or too little information.

Gold plating, i.e. overcompliance with requirements, is also quite common. For example:

• Preparing true and fair accounts when the size criteria for receipts and payments accounts are met.
• Having an audit rather than an independent examination when the size criteria for an independent are met.
• Preparing a strategic report when a charitable company meets the company law criteria for a small company.

While there may be good reasons for overcompliance, trustees should understand the reasons for it and consider the costs versus benefits too. If overcompliance arises from the charity’s founding documents or to meet a funder’s preference, trustees may wish to consider amending their founding documents or asking their funder to reconsider.

Where the trustees consider it appropriate for a charity to meet stricter requirements, these should be complied with in full. For example, if a charitable company states that it has prepared a strategic report it should meet the appropriate company law requirements or rename the report to appropriately describe what it is.

The Charities SORP module on the Trustees’ Annual Report requires a charity to include the following in its financial review:

“The charity must explain any policy it has for holding reserves and state the amounts of those reserves and why they are held. If the trustees have decided that holding reserves is unnecessary, the report must disclose this fact and provide the reasons behind this decision.”

This reporting requirement strongly implies that if a charity holds reserves or doesn’t hold reserves, it must have a policy which deals with this.

Setting and keeping a reserves policy under review is not an accounting issue, it is a management issue and therefore should be part of a charity’s business planning process. Monitoring a charity’s financial position relative to its reserves policy is also necessary for a charity’s trustees to assess whether their charity is a going concern.

Calculating a charity’s reserves is an area that does cause difficulty; for example, the amount of reserves reported in the financial review may not be consistent with its balance sheet.  This can, therefore, lead to the commentary surrounding the reserves to be inaccurate and could be indicative of weaknesses in the way a charity is being governed.

Both OSCR and the CCEW have issued guidance to assist charities in calculating their reserves.

OSCR’s Charity Reserves Factsheet sets out the following approach to calculating reserves:

• Total charity funds less restricted funds and endowment funds equals unrestricted funds.
• Unrestricted funds less tangible fixed assets and designated funds equals available reserves.

While designated funds are normally excluded from a charity’s reserves, the Charities SORP does treat this as a matter of judgement. The glossary of terms in the Charities SORP states that:

“[A] 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.”

Care should be taken to ensure that figures about reserves and the supporting narrative provided in the financial review comply with the Charities SORP and are supported by the charity’s balance sheet.

If a charity has decided to exclude its designated funds from the calculation of its reserves, it is good practice to state that fact. However, a charity in this position should still comply with reporting requirements for designated funds within the financial review.

Those responsible for the scrutiny of a charity’s accounts must ensure that they provide a report which is properly tailored to the circumstances of their client. It goes without saying that the form and content of the report must also comply with the most up-to-date guidance and standards.

External scrutiny reports should be tailored to:

• The charity’s legal form. For example, there should be no company law references in reports relating to Scottish charitable incorporated organisations (SCIOs) or charitable incorporated organisations (CIOs).
• Reflect the correct legal basis of the independent examination or audit. For example, a charity based in Scotland and regulated solely by OSCR should be examined under Scottish charity law.  No reference should be made to the independent examination directions issued by the CCEW.
• Comply with the most up-to-date standards and guidance. Auditor’s reports should comply with International Auditing Standards (ISAs) (UK) applicable to the reporting period. Each of the three UK charity regulators, OSCR, the CCEW and the Charity Commission for Northern Ireland, issue guidance on independent examination.  The UK charity regulators review and update their guidance fairly regularly.

Location of ‘Bannerman wording’ in the auditor’s report

The revision of the suite of (ISAs) (UK), published in June 2016, brought about significant changes to the form and content of auditor’s reports.

Auditing standards in the UK and illustrative auditor’s reports published by the Financial Reporting Council have never referred to the ‘Bannerman wording’ which provides clarification to the report’s addressees about the use of the auditor’s report.

However, the June 2016 revisions do have an impact on the location of the Bannerman wording in the auditor’s report.

Prior to the implementation of ISA (UK) 700 ‘Forming an Opinion and Reporting on the Financial Statements’ (revised June 2016), Bannerman wording had been typically located towards the beginning of auditors’ reports. Based on the revised ISA (UK) 700, the latest guidance is that this wording should be included in towards the end of the report between the ‘Auditor’s responsibilities for the audit of the financial statements’ and the auditor’s signature.

The heading used to accompany the wording is typically ‘Use of our report’.

Joint guidance from the UK charity regulators on reporting matters of material significance is intended to assist independent examiner’s and auditor’s to comply with their statutory duty to report and to bring as much consistency as possible across the UK’s three charity law jurisdictions: England and Wales, Northern Ireland; and Scotland.

Concerns that independent examiners and auditors had been under reporting matters of material significance prompted the UK charity regulators to include a requirement in the joint guidance that the qualification of an independent examiner’s report or modification of an auditor’s report must always be considered a matter of material significance.

Included within the definition of a qualified independent examiner’s report is reference to any matters of concern to which attention is drawn.

Included within the definition of a modified auditor’s report is a non-standard audit opinion, an emphasis of matter and any reporting of a material uncertainty related to going concern.

The independent examiner or auditor should also provide additional information about the qualification or modification beyond the wording included in their report. Any action taken by the trustees to address any of the issues leading to the qualification or modification must be reported too.

This requirement could lead to trustees being more resistant to auditor’s issuing a non-standard report. However, examiners and auditors must remain objective and independent.