02 April 2020
As a result of the measures being put into place to contain the COVID-19 virus, last week the Charities SORP-making committee issued guidance on the financial reporting implications.
It should be noted that this is merely advisory to help charities in these unprecedented times and not a formal amendment to the SORP. The matters highlighted in the guidance should however be considered by all charities who are yet to approve their accounts.
The full Charities SORP Committee guidance related to COVID-19 can be found here.
Our summary of the areas of financial reporting that are likely to be impacted is set out below.
Trustees’ Annual Report
Trustees have a duty to report a fair and balanced view on the activities of their charity and this narrative should be inclusive to the date of approval by the Board. As COVID-19 is a significant event that will impact the charity, trustees will be required to highlight that this event has occurred and how it has impacted, and is likely to impact the charity. In a lot of cases the full extent of how charities are to be impacted is not yet known and again, it is ok to be candid in this regard.
We should remember that the Trustees Report is the opportunity to tell the charity’s story alongside the numbers. A user should be able to pick up last year’s report and look at the ‘Plans for Future Developments’ section and then relate that to what the charity has reported this year. How trustees’ set the scene before approving their Annual Report this year will help the connection with the following year’s report when the full effects of COVID-19 are likely to have played out.
Going concern
We are all aware that trustees have a duty to consider whether their charity is a going concern for at least 12 months after approving their accounts. When the last two weeks have felt like a year, 12 months can seem like a lifetime. No one has a crystal ball however trustees should consider all available information about the future at the date they approve the accounts. This will include information that should usually be considered such as budgets and forecasts about income and expenditure and cashflows, paying particular attention to the level of unrestricted funds the charity currently holds. In addition, the charity should also consider the impact on any future funding that was due to be received. This can be done by checking the terms and conditions and the obligations by the charity to fulfil such funding, as well as considering any financial assistance that may be available to them, either from the government or other charitable organisations.
If accounts cannot be prepared on a going concern basis this will need to be disclosed. Consideration should then be given to the accounting policies and in particular the judgements and estimates used to value assets and liabilities. Consideration will also need to be given to the value of any operational assets.
Post balance sheet events
There are two type of post balance sheet events that trustees should consider:
- Adjusting
- Non-adjusting
As a reminder, adjusting post balance sheet events are those occurring where conditions existed at the year end. The disclosure of non-adjusting events provides useful and relevant information about the charity to the users.
Charities with December reporting dates are unlikely to have adjusting post balance sheet events as only a few cases of the virus had been reported at this time. They will however be likely to have to report non-adjusting post balance sheet events and the disclosure should also include, where relevant, the impact on the asset values of the charity – i.e. those who are lucky to have large investment portfolios.
Charities with reporting dates ending in 2020 may well have year-end balances affected by adjusting post balance sheet events as the situation around the spread of the Coronavirus is evolving daily, sometimes even hourly. The up-to-date position will need to be assessed carefully at the point at which the accounts are to be approved.
Defined benefit pension schemes
In the same way in which charities own investment asset values may be impacted, so may the assets and liabilities of the defined benefit pension schemes of which the charity is a participating employer. Trustees of the charity may wish to contact the trustees of the pension scheme to assess any potential implications for the charity, whether it be a change to the liability to be reported on the charity’s Balance Sheet, or a change to the contributions payable. The conditions set out above for post balance sheet events continue to apply here as to whether year end numbers will need to be adjusted.
Provisions and liabilities
Charities providing goods and services to their beneficiaries will need to consider whether there has been any impact to their costs arising as a result of disruption to their normal supply chains. One simple example of this is social care charities, who provide care in the community, currently having to pay much higher costs for items such as hand sanitiser and Protective Personal Equipment (PPE). Another example would be the ability of charities to fulfil contractual obligations or performance targets which may give rise to additional costs or penalties. As with defined benefit pension schemes, the conditions for post balance sheet events also continue to apply.
To sum up, the key messages from the guidance are:
- Charities will be impacted in different ways. It is important for charity trustees to understand the impact on the delivery of their activity and their governance including their finances
- Where a charity is preparing a set of accounts and these have not yet been approved, trustees should consider whether information needs to be included to explain the impact of the COVID-19 situation on their charity
- There could be changes to the financial statements needed as a result of the COVID-19 situation and it is important that trustees understand and consider these.
As always, the above is just a brief summary so please get in touch with your local UHY charity and not for profit expert for further advice specific to your charity.
