Charity SORP COVID-19 update
During these unprecedented times, trustees and management must consider the impact of the COVID-19 virus pandemic on their charitable organisations and their reporting within their financial statements.
Alongside a wide range of supporting documentation issued by the Charity Commission and sector bodies, the SORP Working Party (the body responsible for amending and updating the FRS 102 Charity SORP), has issued helpful additional guidance outlining their expectations of the areas for consideration at this time.
The guidance can be found here and our commentary on the main considerations are as follows:
The trustees annual report
- ”In reporting the main achievements of the charity (paragraph 1.20) explaining how the virus control measures affected the charity’s activities
- Taking the opportunity to explain any financial uncertainties regarding the charity’s financial sustainability and consideration of going concern (paragraph 1.23) and the steps being taken to address these uncertainties
- Explaining how the contribution of volunteers, where appropriate, assisted the charity in its work in managing in the changed circumstances (paragraph 1.39)
- The impact on the charity’s ability to fundraise (paragraph 1.41) and how the trustees managed this situation
- How the outbreak of the virus has affected staff, volunteers and beneficiaries and the implications for the charity’s operations and activities for the coming year (paragraph 1.45)
- How the financial and operational effects of the virus and the control measures relating to the virus affected the principal risks and uncertainties facing the charity during the reporting period (paragraph 1.46)
- Give consideration whether there are any implications for any existing or potential defined benefit pension liability (paragraph 1.47) and investments the charity holds (paragraph 1.47)
- Consider any impact on the charity’s reserves policy, level of reserves and any change to designated funds set aside for future commitments (paragraph 1.48)
- Consider the likely impact of the virus control measures and potential duration of the control measures on the future aims and activities of the charity (paragraph 1.49)
- The impact of the virus-related control measures on any wider network of which the charity is a part and how this affects the charity’s operations (paragraph 1.51)”
Moore Kingston Smith charity team commentary
The trustees annual report is a charity’s opportunity to outline its activities, achievements and impact for the financial period under review. Aligned with this, the annual report also incorporates key disclosures such as ’principal risks and mitigations’ and ’future plans’ for the charity. For the vast majority of charities, the COVID-19 pandemic will have had (and will continue to have) a significant effect on many of these areas and this should be outlined in the relevant section of the trustees annual report to assist the readers of its financial statements.
Impact on a charity’s reserves policy (paragraph 1.48 outlined above) is particularly relevant during the pandemic. A reserves policy (using guidance such as CC19 from the Charity Commission) should have been developed to provide financial assistance to your charity should any of your principal risk crystallise or an unforeseen event occur. The Commission’s own guidance on COVID-19, which can be read here states that “Reserves can be spent to help cope with unexpected events like those unfolding at present.”
The guidance also includes helpful examples and year-end considerations for post balance sheet event disclosures as a result of the pandemic, although care will need to be taken to ensure that these disclosures are applicable to the charity and its specific year-end position.
Going concern
The guidance states:
“The measures involve a high degree of social disruption which has an impact on the delivery of and demand for the activities of charities, the availability of staff for work, and levels of illness across society which will affect the beneficiaries of charities. There are therefore potential implications for charity income, expenditure and commitments, and the value of charity assets and liabilities. In some cases the implications may be so severe as to cast doubt upon a charity’s financial sustainability.”
and
“When assessing their charity’s ability to continue to adopt the going concern basis of accounting, trustees should consider all available information about the future at the date they approve the accounts. In particular giving consideration to information from budgets and forecasts for income, expenditure and cash-flows. Attention should be given to the available unrestricted funds and reserves, credit facilities (such as overdrafts), and any other forms of financial assistance available to the charity.”
Moore Kingston Smith charity team commentary
The going concern principle is an assumption that underpins the financial reporting framework and SORP upon which your charity’s financial statements are prepared. It remains the trustees responsibility to undertake an assessment as to whether the charity remains a going concern as at the date of the financial statements approval. During the pandemic, it will be important that trustees consider all potential variables that may affect this going concern assumption and prepare sufficient supporting documentation in order to reach their conclusion. In these uncertain times, we are recommending to our charity clients that detailed assumption based cash flow forecasts are prepared for at least twelve months from the date of expected sign off. With regards to budgets/forecasts, ’scenario planning’ may be more applicable by modelling a number of different outcomes for the charity over the same twelve month period, given the high level of uncertainty regarding the effects of the pandemic in certain areas.
Our audit work in relation to the going concern will need to be more detailed for all of our charity clients, as a result of the higher levels of estimation uncertainty, various significant assumptions and the continued fast paced nature of the pandemic and the control measures in place. Ensuring that your charity has undertaken a detailed going concern review at the earliest opportunity during the audit process will assist in ensuring the audit remains as efficient as possible.
Trustees and management may also find the recent FRC publications with regards to going concern a helpful additional resource, where the FRC concluded that:
“We anticipate in the current circumstances that the auditor’s going concern work will be more extensive, require more evidence, and will continue to be performed through to the point of signing the auditor’s report. In view of this, more evidence may be required from the entity and the auditor should set a clear expectation with the audited entity of the additional time that will be needed to complete the audit in this area to the high standard that users of the financial statements will expect.”
The importance of disclosure
The SORP Committee’s focus on the need for detailed disclosure particularly in respect of judgements and estimates made, given the current level of uncertainty, is further reinforced by the FRC:
“Similarly, companies should disclose significant judgements made in applying accounting policies that have the greatest effect on the financial statements. The requirement to do so (IAS 1 paragraph 122) is normally distinguished from the requirement of IAS 1 paragraph 125 regarding sources of estimation uncertainty. However, at this time, we encourage companies to provide as much context as possible for the assumptions and predictions underlying the amounts recognised in the financial statements, irrespective of any narrow interpretation of the requirements. Such information will help users to understand the amounts presented.
Relevant judgements and assumptions might include the:
- availability and extent of support through government support measures that have been announced;
- availability, extent and timing of sources of cash, including compliance with banking covenants or reliance on those covenants being waived; and
- duration of social distancing measures and their potential impacts.
In the absence of any consensus view of the future path of the COVID-19 pandemic and its impact on the economy, users cannot expect all companies to apply consistent assumptions when there is such uncertainty. This lack of consistency makes the need for full disclosure of judgements, assumptions and sensitive estimates significantly more important than usual.”
You can access all our insights on our Coronavirus Hub which keeps you up to date on the latest help and support available during the COVID-19 pandemic. Should you require further assistance on any of the matters raised above, please contact your usual Moore Kingston Smith Charity Team Partner.