COVID-19 – Understanding the potential impacts on Charity Financial Reporting
In response to the exceptional circumstances we find ourselves in due to the COVID-19 pandemic the SORP-making body have issued guidance around the potential implications for charity financial reporting. Here we consider the key points and how this might impact on your financial reporting.
When preparing their report charity Trustees should be alert to the following key areas:
- Main achievements: how has the virus affected the charity’s activities?
- Going concern: explain any financial uncertainties and the steps being taken to address these uncertainties.
- Volunteers: how have volunteers have helped the charity continue its work?
- Fundraising: the impact on fundraising and steps taken to manage this.
- Principal risks and uncertainties: how financial and operational impacts have affected the principal risks and uncertainties?
- Valuations: whether there are any potential implications for the carrying values of certain assets and liabilities in the Financial Statements?
- Reserves policy: have there been modifications to the reserves policy and designated funds?
- Charitable purpose/aims: the impact of the virus and longevity control measures of on the future aims and activities of the charity?
Trustees are responsible for ensuring that the Financial Statements give a true and fair view. There are a number of key factors/area to consider when formulating an opinion on this true and fair view with regard to the COVID-19 outbreak.
Post balance sheet events: The Financial Statements must reflect any adjusting post balance sheet events. Adjusting events are those events occurring after the period end but before the approval of the Financial Statements which provide evidence of conditions existing at the year end e.g. potential impairment of unlisted investments or investment properties.
These should be adjusted where there is evidence of the conditions existing at the reporting date. So December 2019 year end accounts are far less likely to be subject of an adjusting event than a 31 March 2020 year end as the COVID-19 crisis developed into 2020.
Trustees will also need to consider including relevant disclosures on non-adjusting balance sheet events in order to show a true and fir view. The disclosure of non-adjusting events provides readers with relevant information about events after the period end but before the accounts were signed off which have a material impact on the organisation e.g. a material loss in the value of an assets such as investments subsequent to the reporting date.
Going concern considerations: When assessing the ability of an organisation to continue to adopt the going concern basis of accounting for a period of no less than 12 months from the date the Financial Statements are approved. Consideration should be give to information such as budgets, income forecasts, and contractual arrangements in place, expenditure, access to government support schemes and cash-flows. For all charities this assessment must be made with due regard to unrestricted funds and free reserves, credit facilities such as overdrafts, and any other forms of financial assistance available should also be considered. Charity Commission Guidance has been clear in that it is not appropriate for charities to use restricted funds for unrestricted purpose, these balances must remain ring-fenced. However, it may be that funders are particularly pragmatic in the current situation and may well approve a lifting of such restrictions around funding.
The FRC issued guidance for company directors in 2016 ‘Guidance on the going concern basis of accounting and reporting on solvency and liquidity risks’ which is available for download here. This guidance may be particular useful for charity Trustees when making their assessment of going concern.
The Trustees are required to state the basis of preparation and their rationale for adopting it in the notes to the Financial Statements. In the current economic situation is very likely that all organisations will review and expand this section of the Financial Statements such that it will be much less “standard” than is may have been in the past.
Alternate basis of preparation: if the going concern basis cannot be adopted key accounting policies should be reviewed in particular judgements and estimates relating to the valuation of assets and liabilities including known wind up costs. Where Financial Statements are not prepared on a going concern basis assets and liabilities would be valued on the basis of realisable value.
External scrutiny and audit reports
As far as the going concern concept for financial statements nothing has changed from an auditors’ perspective. The auditor is bound by the same rules as they were before the COVID-19 outbreak. What has changed is the level of focus and attention that Trustees and management need to give to their future financial expectations in order for auditors to undertake the procedures required by the audit standards.
The impact on an audit opinion comes into play either where such areas of material uncertainty exist and are adequately disclosed, or where the auditor disagrees with the conclusions drawn by or disclosures made. Either of these situations could lead to some form of modified audit opinion.
The teams here at Garbutt + Elliott are working hard to support charities though this difficult time. This include help with furlough scheme grants, support around the production of cash flow models to support lending and funding bids and practical support around the content of your Financial Statements
If you would like any further information on how our team could help you, contact firstname.lastname@example.org.