Understanding Charity Accounts “reading between the lines” Creating Conversations Voluntary Sector Conference Chester Racecourse 26 March 2019

Agenda Champion’s Charity Team Understanding Charity Accounts: Things you can ‘ignore’ Things to look out for Dig a little deeper Where is all the cash?

Champion’s Charity Team Sue Harris – Audit Partner Services to the voluntary sector Head of Charity team at Champion 20 years’ experience of working with the charity and not for profit sectors In addition to audit, Sue has extensive experience of providing best practice advice and assurance on systems of internal control External audit Independent Examination Statutory accounts preparation Accounting and reporting advice Systems review and assurance Investigations Heather Stockton – Audit Manager Champion culture 9 years’ experience of working with the charity and not for profit sectors Specialises in providing practical, hands-on assistance with all aspects of accounting and statutory reporting as well as audit Sage certified advisor and experienced in Xero and Quickbooks “Do the right thing because it’s the right thing to do”

Things you can ‘ignore’ Why? Comments Gains and losses on investments and investment properties Because they are not realised gains or losses There is an option to add a sub-total ‘net income/expenditure before gains and losses on investments’ so that you can identify the charity’s ‘operating’ result.   The ‘undue cost or effort’ exemption has been removed (for periods commencing 1 January 2019) so all investment properties will be revalued through the SOFA in future unless occupied by group entities Gains and losses on non-investment property revaluations This is shown below the net income/expenditure line in the SOFA Donated services There will be an equivalent charge in expenditure The two figures will net off to nil Holiday pay accrual Because it is unlikely to be paid Impacts on SOFA on transition to FRS 102 or if there is a significant increase in your staff numbers but you could be carrying a material provision

Things to look out for Things to look out for Why? Comments Actuarial gains and losses on defined benefit pension schemes Because they could indicate significant future expenditure Previously multi-employer schemes could be accounted for as defined contribution schemes. Under the new SORP any agreement to fund historic deficits must be provided for as a liability of the charity.   One-off significant sources of income (eg donations or legacies) Because they may not be repeated Look for large increases compared to prior year. Income recognition policies – deferred income Is income being recognised too early or too late? In general, all income and donations should be recognised on receipt unless there are specific recognition or performance criteria attached. If income is being deferred, the reason why should be explained in the accounts. Related party transactions Any donations received from related parties with restrictions attached should be disclosed in the related party note. Consider the impact such donations may be having on the activities of the charity.

Dig a little deeper Questions you should ask Why? Comments Income recognition policies - legacies. Recognition criteria changed from ‘virtually certain’ to ‘probable’ ie, more likely than not to be received. Check not recognising too early or too late!   It is generally accepted that the charity becomes ‘entitled’ to legacy income when they have been notified of the distribution and it has been confirmed that all claims on the estate have been satisfied (otherwise the amount due cannot be ‘reliably measured’). Some charities are still over-cautious. Fundraising/events - income and related expenditure. Are fundraising activities and events generating a net income or net cost? The notes to the accounts should provide ‘an analysis of the material components of income’ (including the nature of fundraising activities) and ‘a relevant analysis of the activities included in each expenditure category’. But this may not provide the level of information you want to enable you to assess the benefit of fundraising activities. Further detail should be available if requested. Grant funding and going concern If the charity is materially dependent on grant funding, you need to know that the grants are going to be renewed. The going concern note to the accounts should explain the nature of grants received and the renewal arrangements where these are material. Many are renewed annually ie could end within 12 months of the date of approval of the accounts. If they are not renewed, what would happen?

Where is all the cash? Where to look Why? Comments The Cash Flow Statement is more informative than you think! It shows how cash resources have been utilised. The Cash Flow Statement shows the amount of cash generated from the operations of the charity by stripping out the non-cash movements from income and expenditure.   Reserves policy section in the Trustees’ Annual Report. This is intended to explain the policy the charity has for holding reserves, state the amount of those reserves and why they are held rather than being spent on charitable purposes. It should also explain the purpose of any material amounts that have been designated. Larger charities (income over £500k) are encouraged to include more information including a statement of the actual ‘free’ reserves held, comparing this with the reserves policy and explaining, where necessary, what steps are being taken to bring these in line, given their plans for the future activities of the charity. Remember that not all reserves are equal! Restricted reserves may not be available to cover operating costs. Similarly, a decision would have to be made before designated reserves could be used on general expenditure. The policy should also take into account the level of unrestricted reserves that are tied up in fixed assets as these will not be available to support operating costs. If the trustees have decided not to hold reserves, this decision should also be explained and justified. Analysis of net assets between funds Relates to point above re the reserves policy This note identifies the amount of unrestricted funds which are tied up in fixed assets and therefore not readily available to fund operating costs.

Sue.harris@championgroup.co.uk QUESTIONS