COVID-19: Charity financial reporting questions
This article was last updated on 26 March at 10:32.
Content of Trustees’ Annual Report
COVID-19 will have a significant impact on the drafting of Trustees’ Annual Reports.
Each charity will need to consider the impact of COVID-19 on its activities, financial position and future plans.
The key areas of the Trustees’ Annual Report where we would expect to see reference to the impact include:
- Principal risks and uncertainties
- Financial Review – this would include impact on future reserves position, changes to post year investment values and impact on defined pension scheme liabilities
- Future plans – the impact the epidemic will have on being able to achieve the plans set out, whether these plans have now changed or where core delivery of services will change.
More widely, the Trustees’ Annual Report represents an opportunity for the trustees to communicate how they are taking account of the key challenges faced by the charity. It may well be appropriate for trustees to report on the impact of COVID-19 on their charity’s ability to deliver its charitable purposes during the year, any impact on the charity’s wider strategy and on its beneficiaries, in addition to the specific considerations of risk, reserves and financial resilience noted above.
The SORP Committee has issued detailed guidance on the implications of COVID-19 for charity financial report, which can be found here.
Post balance sheet events note
A post balance sheet event is an event that occurs after the end of the reporting period but before the financial statements are approved and authorised for issue by the trustees.
There are two type of post balance sheet event:
- Adjusting events; and
- Non-adjusting events
An adjusting post balance sheet event is an event which provides additional information about conditions that existed at the reporting date, which affect items in the balance sheet, or reported in the statement of financial activities. Material adjusting events are required to be reflected in the financial statements and the effect should be disclosed in the notes to the financial statements and, if sufficiently significant, in the Trustees’ Annual Report.
A non-adjusting post balance sheet event is an event which relates to conditions that arose after the end of the reporting period, but which may have a material impact on the charity in the subsequent period and is therefore useful to the reader of the financial statements. Material non-adjusting events are required to be disclosed in the notes to the financial statements.
Examples of adjusting events that may arise due to COVID-19 include:
- The valuation of a legacy that was subject to the disposal of substantial assets that have subsequently declined in value
- New information concerning the recoverability of a debt
- New information that indicates that the charity may not be a going concern
- If there is uncertainty about the charity being a going concern, this must be disclosed. If the charity is no longer a going concern, the accounts must be restated on an appropriate basis.
Examples of non-adjusting events include:
- The announcement or implementation of a major restructuring
- The announcement of a new fundraising appeal or the degree of success achieved by a fundraising appeal
- A material decline in the market value of investments
- The commencement of major litigation
- The entering into of significant commitments or the identification of material contingent liabilities or the giving of material guarantees
- Investments and pension schemes
For charities with significant investments and/or defined benefit pension schemes, it is likely that the impact of COVID-19 on financial markets will lead to a disclosable non-adjusting post balance sheet event due to a material decline in investment values after the reporting date.
- Cancellation of events
Where charities are forced to cancel or postpone events for which attendance fees are charged, amounts received in advance of those events and held as deferred income at the balance sheet date may be repayable and may therefore be genuine liabilities. If the decision to cancel the event was taken after the balance sheet date, this would be a non-adjusting post balance sheet event.
If the charity’s events are organised through a trading subsidiary, whose sole activity is the organising of events, then this may have an impact on the subsidiary’s going concern status and on the recoverability of any intragroup debt owed to the parent charity. In these circumstances, there may be an adjusting post balance sheet event, because the cancellation decision will have an effect on the circumstances at the balance sheet date.
Disclosure in the notes to the accounts for non-adjusting events after the end of the reporting period.
For each category of non-adjusting event, the notes to the accounts must provide details of the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.
Going concern assessment and disclosures
All charities are required to assess the appropriateness of the going concern basis of accounting when preparing their financial statements. Charities are required to adopt the going concern basis of accounting, except in circumstances where the trustees determine at the date of approval of the financial statements either that they intend to liquidate the charity, to cease operating, or have no realistic alternative to liquidation or cessation of operations. Under the going concern basis of accounting, the charity is assumed to continue operating for the foreseeable future without the intention or need to liquidate or seek protection from its creditors. Assets and liabilities are therefore recorded on the basis that they will be traded or settled in the normal course of business.
Many charities will be affected, either directly or indirectly, by the COVID-19 pandemic and its resultant economic effects and uncertainty. The trustees’ assessment of the charity’s ability to continue as a going concern will need to reflect the likely impact on the charity’s various revenue streams and the degree of uncertainty that exists over the range of potential outcomes. Many charities have diversified sources of income, which may protect them from uncertainty to an extent, but this will also add to the complexity of the going concern assessment because there will be many more different scenarios to consider.
Charities already face more onerous disclosure requirements than commercial undertakings with regard to going concern and it is important that the trustees’ assessment, both of the appropriateness of the going concern basis of accounting and of the potential presence of material uncertainties which may cast doubt on the charity’s ability to continue as a going concern, is robust.
Audit reports and additional work
While logistical challenges in the provision and review of sufficient appropriate audit evidence may be overcome by the benefits of remote working and cloud-based IT systems, or alternative audit procedures, the rapid spread and financial impact of the virus will have many implications for the recognition of balances and transactions in the financial statements, as noted above, and will complicate the audit process. These will affect the risk assessments of auditors and may require additional time to make relevant judgements, consider or to obtain audit evidence and will have implications for the form and content of the audit report. These matters will all take time for management and auditors to resolve, and again will require careful co-operation and the need to assess the appropriateness of the reporting timetable. Trustees should consider whether a delay to the normal reporting timetable may be preferable if the alternative is a modification to the audit opinion.
Gift Aid from subsidiary
Will the trading subsidiary still be able to afford the gift aid when the deadline comes? Whether it is accrued or not, the payment needs to be made within nine months of the year end for them to be able to claim the tax relief. If it cannot be paid and this is clear in forward cash flows, is a tax provision required in the accounts?
Income recognition and judgments
Charities with legacy pipelines or regular fundraising events may have well-established methodologies for measuring these income streams, based on the past performance of estimates or other metrics. Are these metrics still applicable? Can we rely on events taking place as planned, with the expected levels of attendance? If events do not go ahead, will we be obliged to repay donors for amounts received in advance? Are we taking proper account of asset price volatility in estimating legacy values?
Have you modelled a range of possible outcomes? Have you stress-tested the charity’s reserves? Have you considered unrestricted cash flows separately? Do you have contingency plans/available finance?