The impact of COVID-19 has led to new financial reporting issues for charities following the SORP.
In many cases the SORP already provides perfectly adequate guidance. For instance, debtor recoverability may be more difficult to assess in the current environment, and consideration of estimates and judgements, stock values or legacies may all present problems. However, the SORP already addresses these topics and the current situation does not fundamentally change the required approach.
Notwithstanding, there are some aspects of the current situation which the SORP does not address, or provides little guidance. This is especially true for situations which were not as common or significant as they may be now. These are the areas we consider in more detail below.
The Annual Report
The Charities SORP Committee has already issued guidance on this, which outlines the key areas trustees may wish to consider when preparing their trustees’ annual report, such as how the virus control measures affected the charity’s activities, and explaining any financial uncertainties. View the guidance for more detail here.
In addition, the Financial Reporting Lab of the FRC has made two important observations in their October update. They state that companies should not just confine themselves to “best case” and “realistic worse case” when setting out going concern considerations, but provide more background and scenarios.
They also address risk reporting, and point out that reporting in regard to the pandemic has evolved. Rather than COVID-19 being a stand-alone risk, it should instead by presented in terms of its effect on other risks, and any other longer term, knock on effects.
Various grants have become available from charitable institutions and the Government, including emergency funds and the Coronavirus Job Retention Scheme. In particular:
- Grants should be recognised, inter alia, on entitlement – furlough money will generally be received in the month to which it relates.
- Grants may be received to cover costs of staff usually charged to restricted funds. Unless the grant terms are specific, the income should be treated as unrestricted. Costs may then be either apportioned to unrestricted funds, or treated as restricted and covered by a transfer, which should be explained in the notes.
- Grants received to meet specific expenditure should not be netted off. Therefore, furloughed employment costs should still show as employee costs in full.
- Some grants such as the Small Business Grant Fund and Retail, Hospitality and Leisure Grant Fund are not time or performance related, and therefore the income should be recognised at the point of entitlement.
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Many charities are receiving additional support, especially through volunteer time. The principles of SORP Module 6 are unchanged.
Volunteer time must not be included in charity accounts. However, under the Job Retention Scheme, employees from other employers may volunteer for a charity. In this case, assess whether the services received are ones which the charity would otherwise have purchased and are part of the individuals’ “trade or profession and can be reasonably quantified”. If so, they must be included in the accounts.
There are a variety of situations where costs may be waived or deferred. These may include interest on loans, rents due and staff costs. It is important to be clear on the underlying basis of any such agreement. A deferral means the cost should still be accrued for, whereas a waiver represents income.
A revision to FRS102 affects temporary rent concessions occurring as a direct consequence of the COVID-19 pandemic and within a limited timeframe. The change requires entities to recognise such changes on a systematic basis over the periods that the change in lease payments is intended to compensate. The effective date for these amendments is accounting periods beginning on or after 1 January 2020, with early application permitted.
Where staff have voluntarily foregone income and are contractually entitled to it, then this should be treated gross and the full costs would therefore flow through to the disclosure tables. Trustees in this situation are likely to consider the materiality of the items in the context of the accounts and make sure that disclosures adequately explain the situation. Any bonuses should be treated on the same basis, as long as they are contractual.
The guidance in SORP 6.5 makes clear that commercial discounts are not income. Instead, for instance in the case of a property lease, the discount should be treated as a reduction in the cost over the life of the lease.
Charity finance teams will therefore need to assess exactly whether a waiver is a commercial discount or a gift to the charity.
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Some charities will have trading income sources which have been converted into gifts. Examples might include arts charities being donated presold tickets, or subscription income where no service can be provided.
Where a customer confirms that an item of trading income may now be treated as a gift, then that item should be reclassified as a donation. Where that confirmation is received after the year end, then that may be treated as an adjusting post balance sheet: it would depend on the exact terms of the underlying contract and facts.
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The main issues relating to expenditure concern presentation. As discussed above, furloughed staff costs should be treated on a gross basis.
Furloughed staff costs, and staff operating under the Job Support Scheme, should be treated in the same way as other staff costs in terms of disclosure. If staff have agreed to reduced levels of pay, and the charity employer voluntarily makes top up payments to staff, the full cost should be treated as staff costs. A note should be added to the staff costs note explaining the discretionary element in accordance with the SORP’s guidance on ex gratia payments (9.24).
Staff costs are allocated to the charitable activity in which they are engaged. If a charity has temporarily suspended activities, then staff costs should still be presented as relating to this activity. A subsequent decision to close an activity may represent a discontinued business and would require separate disclosures and accounting as set out in SORP 4.19.
Other costs may have been incurred on events and activities that were subsequently cancelled or postponed. The classification of this expenditure is not altered by that decision, however, costs relating to future events that would previously have been carried on the balance sheet may need writing off. Greater explanation of the results may be needed in the Financial Review section of the Annual Report.
Cost allocations, both direct costs and support costs, may require to be changed where the pattern of activity has altered significantly.
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Some assets will have their carrying value affected, perhaps because they cannot be maintained, or the related activity has stopped, or they are simply now not needed. Similar considerations apply to current and fixed assets. Where some sort of write down is required then this should be charged to the relevant charitable expenditure heading. The heading in the SORP “other expenditure” is not designed simply to reflect such exceptional costs (4.56).
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There are a number of loan schemes available and they should be treated in accordance with their terms. As many of these loans are to cover revenue expenditure, they impact deleteriously on a charity’s free reserve position. This will need explanation within the annual report.
Any holiday pay accrual needs to take into account furloughed staff as the holiday entitlement is unaffected.
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Use the SORP to address these issues
While we focus on some of the key areas, it is important to note there are many other broader issues the finance team will need to consider in statutory reporting as a result of the pandemic, affecting both the annual report and the accounts. There will probably be implications for the going concern basis for preparing some accounts, and many valuations will be subject to substantial fluctuations. The pandemic will undoubtedly throw some new accounting challenges into the mix as well. Nonetheless, the principles of the Charity SORP, and FRS 102, still apply.
Trustees are encouraged to ensure that accounts continue to be presented as transparently as possible. In particular, SORP 3.40 requires trustees to report on assets where there is a significant risk of material adjustment within the next reporting period. Depending on a charity’s year end, this may be a more common item of disclosure than before.
To discuss any of these issues in relation to your charity, please get in touch with your usual BDO Charity adviser.
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