Charities across the country are now working in an environment that is completely different to the one they were in just months ago as the COVID-19 situation continues to impact their daily operations. The virus and measures taken to contain it have undoubtedly impacted financial and economic activity. This has several accounting ramifications that charities will need to carefully consider when preparing their Trustees’ Annual Reports and financial statements for 2019 and 2020 year ends.
Our report indicates key areas that management and trustees should consider when assessing and reporting the impact of COVID-19 on the charity. Every charity will be impacted in different ways and will need to make their own assessment of the impact on their financial statements. However, we have identified some of the key challenges for the sector, along with the potential financial reporting and regulatory impact, to support preparers of charity accounts navigate through some of these key issues.
Paul Rao outlines some of the key considerations from the report:
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.
For a more in-depth look into how these and other issues will affect your financial reporting, download our report [ 896 kb ].
To discuss the implications on your charity, please get in touch with Paul Rao.
- COVID-19 control measures and financial reporting by charities, Charities SORP, 2020
- How to report a serious incident in your charity, Gov, 2019