COVID-19 is causing major and systematic problems for charities, with escalating demand, funding issues and everyone having to adjust their working practices. Carol Rudge explains how this will affect financial reporting once people have more time to consider the implications.
The COVID-19 pandemic and the reaction to it has caused numerous operational issues for the charity sector, including:
The ability to fund-raise, including events being postponed or direct debits/memberships cancelled by donors
The closure of charity shops
Access to beneficiaries with social-distancing measures in place
An increase in demand from beneficiaries
Staff sickness and absences
Unfortunately, these issues are likely to have a significant impact both in the short and long term and sadly we have already seen many charities having to furlough a significant number of their team members. Therefore, organisations need to consider how this could affect their financial reporting.
Financial reporting issues to consider:
The Statement of Recommended Practice (SORP)-making body have published comprehensive guidance1 on the impact COVID-19 may have on financial reporting in the sector, and we have highlighted the key areas of consideration below:
Trustees' annual report
Additional disclosure is likely to be required around COVID-19 in most areas of the trustees' annual report, including the impact on main achievements, future plans, volunteers, fundraising, governance, principal risks and uncertainties, financial review, going concern and reserves.
Investments and pensions
There is likely to be a fall in the valuation of investments, which may have a knock-on effect on the valuation of defined benefit (DB) pension schemes. For instance, there may be a significant difference between any estimated investment return on fund assets versus actual returns, thereby considerably impacting any DB pension scheme liabilities. The financial reporting ramifications from investments and pensions should be reflected in the financial statements and explained fully in the trustees' annual report.
Significant judgements and estimates
During the outbreak, any disclosures on significant judgements and estimates will need to be sufficiently detailed and updated to reflect the current situation, as well as any changes in underlying assumptions and sources of estimation uncertainty.
Going concern and any associated material uncertainties will need significant consideration and may have an impact on both the audit report, narrative financial reporting and accounting policy disclosures in the accounts. In the most severe situations, the appropriateness of the going concern basis for accounting may need to be reviewed.
Post-balance sheet events
Both adjusting and non-adjusting events will need to be considered. However, for December 2019 year ends, adjusting events are less likely as the pandemic began in 2020 and post balance sheet events only need to be adjusted for where there is evidence of conditions existing at the reporting date.
I would encourage all organisations to read the SORP guidance when preparing their financial statements to ensure that they have considered all relevant points.
Other issues to consider:
Governance and controls
Social-distancing measures will inevitably have a knock- on effect on both maintaining effective governance and internal controls. Where possible, charities are being encouraged to replace physical checks and meetings with virtual ones. However, where this is not possible, it is vital that charities document the reasoning why and what alternative measures they have put in place.
Impact on audit work and external scrutiny
Social distancing is also likely to have a significant impact on how auditors obtain the evidence they require, as well as how they communicate. Planned audit approaches are likely to change, and you are likely to see an increase in use of technology. Auditors and charities will need to work together to identify what alternative measures are possible in the current environment without reducing the quality of audit evidence.
Reporting to the regulator
If there is a significant financial and/or operational impact charities will also need to consider whether a serious incident2 needs to be reported to the regulator, and if so, auditors are likely to also need to report a matter of material significance.
Delays in submitting annual returns and financial reporting statements
If you expect there to be a delay in submitting your annual return or financial statements then the Charity Commission has requested that you contact them.
Early engagement with key stakeholders
In uncertain times it is particularly important to be in constant dialogue with all key stakeholders. Make sure you have early conversations with lenders to discuss the possibility of amendments to covenants if in danger of being breached. You may also want to have discussions with actuaries, engaged to support with defined benefit pension schemes, regarding updates to the assumptions used and timing of their report to obtain the most accurate valuation.
COVID-19 guidance for charities
The amount of information and constant updates can be overwhelming and it's worth regularly checking key websites for guidance on both the operational and financial aspects that are being updated regularly:
The National Council for Voluntary Organisations (NCVO) have a dedicated page3 on the pandemic, which is being updated regularly. This covers a variety of topics including: protecting staff, volunteers and beneficiaries, contingency planning, and financial implications.
The Charity Commission have published a page of FAQs regarding COVID-19, which may be a useful resource for those charities with similar concerns4. Some of the key topics covered are around support for paying staff, use of restricted funds, alternatives to face-to-face meetings and key contact details for reporting to the charity commission.
As noted previously, the SORP-making body have issued guidance5 on the financial reporting ramifications of COVID-19.
Although not specific to the charity sector, the Financial Reporting Council (FRC) are continuously updating their advice on the impact of the pandemic on financial reporting and audits. This is relevant for both companies and auditors6.
To discuss the implications on your charity, please get in touch with Carol Rudge.