1. Charity Accounts in 2012 Understanding your Obligations Kenny McDowell – Head of Charities & Education Group Euan Morrison – Audit Manager 10 November 2011

2. Charity Accounts - Understanding your Obligations  Financial statements framework  Your accounting obligations and Key Performance Indicators  Reserves – categories/common issues/reserves policy  Heritage Assets  IFRS Outlook  iXBRL www.chiene.co.uk 2

3. Financial Statements Framework  Legislative  Unincorporated  Charities Accounts (Scotland) Regulations 2006  Statement of Recommended Practice (SORP) 2005  Incorporated  All of the above and Companies Act  SCIO www.chiene.co.uk 3

4. Financial Statements Framework (cont’d) 4 Charities Accounts (Scotland) Regulations 2006 Charities Accounts (Scotland) Regulations 2006 Companies Act 2006 Accounting and Reporting by Charities – Statement of Recommended Practice (SORP) 2005  “Fully accrued” accounts  All incorporated charities  Larger unincorporated charities Receipts and Payments Accounts Smaller charities

5. Financial Statements Framework (cont’d)  External Scrutiny  Audit  Legal regulatory process  To provide opinion on truth and fairness  Governed by auditing standards  Only provided by regulated firms  Independent Examination  Opinion in accordance with accounting records www.chiene.co.uk 5

6. Financial Statements Framework (cont’d) Independent Examination  Smaller charities  Lower cost  Less intrusive  Examiner qualifications  Report on record keeping and accounts requirements  Level of comfort? 6 Audit Larger charities Constitutional requirement Funder requirement? Higher cost More time consuming “True and Fair View” www.chiene.co.uk

7. Financial Statements Framework (cont’d) 7 Statement of Recommended Practice – “SORP”  Comprehensive and detailed standard  Statement of Financial Activities – “SOFA”  Prescriptive format (fund and activity reporting)  Categories of income and expenditure  Relationship between income and expenditure headings  Trustees Annual Report linkage to financial statements www.chiene.co.uk

8. Your accounting obligations and Key Performance Indicators 8  Accounts prepared under SORP – True and Fair concept  Stewardship of Reserves  Going Concern  Common Issues under SORP  Income recognition  Funds carried forward vs deferred income  Expenditure and accruals  Recognition of grant commitments  Multi-year funding www.chiene.co.uk

9. Key Performance Indicators 9  Commercial  Unrestricted surplus  Unrestricted net current assets  Adequacy of closing restricted funds  Cashflow/outlook www.chiene.co.uk

10. Key Performance Indicators  OSCR Supplementary Monitoring Return  “Exception reporting” triggers  Importance of Trustees’ Annual Report and notes to the accounts 10 www.chiene.co.uk

11. Exception Reporting  Significant variances from prior year  Failure to apply funds for charitable purposes  Cost of generating funds vs funds raised  Relative level of resources expended  High governance costs  Liquidity and reserves levels  “Working capital” issues  Transactions with Trustees  Trading subsidiary activity and finances www.chiene.co.uk 11

12. Reserves 12 Unrestricted funds Restricted funds GeneralDesignatedIncomeEndowment ExpendablePermanent

13. Reserves  Common issues  Use of restricted reserves for unrestricted purposes  Accounting for restricted and designated reserves expenditure  Focussing on total reserves level as “free reserves” rather than unrestricted reserves  Liquidity of reserves  Designating and undesignating reserves  Use of designated reserves 13 www.chiene.co.uk

14. Reserves Policy 14  Trustees’ Annual Report should state levels and why they are held  Definition of “free reserves”  Setting a reserves policy  Core unrestricted expenditure  Commitments  Represent in months  Negative reserves  Targets www.chiene.co.uk

15. Heritage Assets 15  Financial Reporting Standard 30  Accounting periods commencing on or after 1 April 2010 www.chiene.co.uk

16. Heritage Assets 16  Definition: “A tangible asset with historical, artistic, scientific, technological, geophysical or environmental qualities...........” “................ that is held and maintained principally for its contribution to knowledge and culture.” www.chiene.co.uk

17. Heritage Assets 17  Accounting and reporting implications  Valuation  Capitalise where cost or value information is available  Internal valuations may be used  Cost / benefit www.chiene.co.uk

18. Heritage Assets 18  Accounting and reporting implications  Disclosure (whether capitalised or not)  Separate from other fixed assets in accounts  Information on nature and scale  Details of policies  Details of valuation  5 year history of movements  Where not capitalised, explanation why www.chiene.co.uk

19. Heritage Assets 19  Ongoing assessment and reporting  Impairment  Depreciation?  Prior year adjustment  Interaction with SORP  Financial Reporting Standard for Smaller Entities (FRSSE) www.chiene.co.uk

20. 20 International Financial Reporting Standards – (“IFRS”)  Current UK position  IFRS applicable to quoted companies only, and therefore not charities  Changes effective January 2014 www.chiene.co.uk

21. 21 International Financial Reporting Standards – (“IFRS”) Current proposals – 3 tiered approach 1. Consolidated quoted companies – IFRS, as adopted by EU 2.“FRSME” new standard based on IFRS for Small and Medium Sized Entities 3.Smallest entities – Financial Reporting Standard for Smaller Entities – “FRSSE” as at present www.chiene.co.uk

22. 22 International Financial Reporting Standards – (“IFRS”) Effect on charities?  Likely to fall into Tier 2 – FRSME  FRSME does not deal with transactions and situations unique to charitable and public benefit entities  Accounting Standards Board have drafted Financial Standard for Public Benefit Entities – “FRSPBE” www.chiene.co.uk

23. 23 International Financial Reporting Standards – (“IFRS”) Effect on charities?  Mandatory for Tier 2 size entities whose “primary objective is to provide goods or services for the general public, community or social benefit”  Will apply in addition to the charity SORP  Tier 3 size charities will continue to be subject to local regulations and the charity SORP www.chiene.co.uk

24. 24 Other developments - iXBRL  “inline eXtensible Business Reporting Language”  Electronic format for submitting financial statements and tax computations www.chiene.co.uk

25. 25 iXBRL  Applicable to companies filing with HMRC from 1 April 2011  Likely also to be required for accounts filed at Companies House in the future  Applicable to incorporated charities and unincorporated associations  Charities not exempt from submitting corporation tax returns if requested by HMRC www.chiene.co.uk

26. 26 iXBRL – Concessions for charities  Transitional concession by HMRC  Smaller charities only (income < £6.5m for the period)  Will accept accounts in PDF format  Unincorporated associations may also use PDF  Where iXBRL does apply?  Conversion software available  Additional costs www.chiene.co.uk

27. Kenneth McDowell kenneth.mcdowell@chiene.co.uk Euan Morrison euan.morrison@chiene.co.uk 27 www.chiene.co.uk