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COVID-19 implications for charity accounting

This guide highlights a number of key issues arising from COVID-19 that may require consideration in connection with trustees’ annual reports and accounts for charities.

This is aimed at preparers of a charity’s reports and accounts, the trustees (who are ultimately responsible for them and therefore need to understand the potential impact of COVID-19 in this context) and others who rely on, or have a particular interest in, charity reporting and accounts.

This guide is not exhaustive and does not constitute advice. Each charity will need to consider its own circumstances. Charities should note that the accounting treatment adopted in management accounts for internal reporting purposes may differ from financial reporting requirements.

It is recommended that discussions are held with independent examiners and auditors at an early stage so that the key considerations for the trustees’ annual report and accounts can be addressed at the earliest opportunity.

This guide was published on 4 June 2020. The COVID-19 situation is fast-moving, and readers should consider whether any later developments will be relevant.

The Charities SORP (FRS 102), issued by the SORP-making body and recognised by the Financial Reporting Council (‘FRC’), provides guidance for charities on how to apply The Financial Reporting Standard applicable in the UK and Republic of Ireland (‘FRS 102’).

What are the key considerations around the timing of the preparation and approval of trustees’ annual reports and accounts?

Statements by FRC are helpful in highlighting some broad considerations of general relevance. In its guidance to companies, the FRC has commented that,

"Many companies are facing unprecedented uncertainty about their immediate prospects in an environment which may challenge or disrupt their usual management and governance processes. This uncertainty is likely to decrease over time as more information becomes available about COVID-19, the length and extent of social distancing restrictions in different countries, access to financial support measures made available by the UK and other governments, and the impact on the economy. The FRC encourages companies, as appropriate, to make use of the extension announced by the FCA to the deadline for publication of audited annual financial reports … At the same time companies should continue to provide information to investors on the areas of most immediate interest to them.”

Charities should also consider whether the extent of uncertainty that exists means that they should think about their financial reporting timeframes. In its guidance on audit issues arising from the COVID-19 situation, the FRC has commented that,

“the current situation should not undermine the delivery of high-quality audits. […] In current circumstances, additional time may be required to complete audits and it is important that this is taken, even at the risk of delaying company reporting.”

It has also highlighted,

"the need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, recognising that this assessment will take place right up to the point of signing the auditor’s report, and may need the provision of further evidence and information by management.”

Charities are also encouraged to make use of the ICAEW Checklist: implications of COVID 19 on the preparation of accounts under FRS 102.

Charities should also refer to the guidance set out by their charity regulator in relation to the timings for the filing of annual information, including trustees’ annual report and accounts. This is particularly the case for charities with an imminent filing date.

For incorporated charities, companies may apply to Companies House for a 3-month extension to be granted to their filing deadline. From 25 March 2020, those citing issues around COVID-19 will be automatically and immediately granted this extension.

What are the key considerations for the Trustees’ Annual Report?

Charities should ensure that they have taken into account the COVID-19 guidance issued by the SORP-making body.

Charities are also encouraged to consider the guidance to companies issued by the FRC. The FRC urges more extensive disclosures so that the user has a better understanding of how an organisation has adapted to the challenges caused by COVID-19 and the critical accounting judgments that it has made about its reporting and the future impact of the crisis. For those charitable companies required to prepare a Strategic Report, the FRC guidance is especially helpful.

In particular, charities should ensure that going concern has been appropriately reported – also see the question below on ‘What are the key considerations for charities in relation to preparing financial statements on a going concern basis?’

The Trustees’ Annual Report should be fair, balanced and understandable. It is therefore important that the narrative provided relating to COVID-19 should be proportionate to the risks faced by the charity. Where the impact of COVID-19 falls within a financial year, a charity should explain how it has managed to continue to support its beneficiaries. Charities should consider the language used when reflecting on the achievements for the year, particularly where the outlook of the charity is more uncertain as a result of COVID-19. The longer-term impact of COVID-19 on the charity should be discussed and, where the impact is low, this also requires explanation.

Charities should also refer to Module 1 of the Charities SORP (FRS 102).

What should charities consider in relation to significant accounting judgments and estimates?

The guidance to companies issued by the FRC states that,

“In the absence of any consensus view of the future path of the COVID-19 pandemic and its impact on the economy, users cannot expect all companies to apply consistent assumptions when there is such uncertainty. This lack of consistency makes the need for full disclosure of judgments, assumptions and sensitive estimates significantly more important than usual.”

Charities should consider revision of existing critical judgments and estimates as these may well have changed in their scope and require expanded disclosure.

There are also likely to be new critical judgments and estimates with a material impact on the accounts.

These may include, for example, material uncertainties about asset valuations (particularly where market volatility exists or where there is reliance on valuation specialists) and impairment considerations, the duration and extent of social distancing measures and the availability and extent of support through government support measures.

How should charities approach events after the reporting period?

The impact of COVID-19 may be challenging when deciding what is an adjusting or non-adjusting post-balance sheet event. As a result, disclosure will be important in enabling a user of the accounts to understand the approach that the charity has taken. The FRC appreciates that judgements in this area will not be universally the same. This distinction will be highly dependent on the year end of the charity.

See also ICAEW’s article: ‘Coronavirus: How to distinguish adjustment from non-adjusting post balance sheet events’.

Charities should also refer to Module 13 of the Charities SORP (FRS 102) and Section 32 of FRS 102.

What are the key considerations for income recognition by charities?

Charities should evaluate each income stream to determine if there is any impact from COVID-19 on the income recognition criteria set out in Module 5 of the Charities SORP (FRS 102), namely entitlement, probable receipt and reliable measurement.

In the circumstances of COVID-19, there may be variations to performance-related conditions for donations, contracts or grants that will result in income being recognised at a different point in time.

There should be specific consideration also around the fund accounting for income streams, in respect of donor-imposed conditions.

Examples affecting income recognition by charities include:

  • Challenge or sporting event income (where income has been received) –
    • Potential deferral of income may be required for events that have been postponed before the year-end and are now due to take place after the year end.
    • For those events that are cancelled, charities will need to consider whether there should be any repayments of entry fees or donations.
    • There are also further considerations in relation to any event income received which is donated to the charity despite the event cancellation, in lieu of a refund being made, as well as any gift aid that may then be possible to claim.
  • Membership fees – Charities should consider whether any refunds, future credits or enhanced benefits will be offered, and the accounting in relation to these.

Where significant sums of donated income have been recognised in advance of receipts, charities should ensure that there have not been any changes in the circumstances of the donor which mean that these donations may not be received.

There may also be factors which prevent previously recognised grants being received.

There are additional considerations for gift aid distributions to charities from their trading subsidiaries. Charities should also refer to the question below on ‘Are there any other relevant considerations for charities?’

What are key considerations for expenditure recognition by charities?

Charities should evaluate expenditure for any impact from COVID-19 on the expenditure recognition criteria set out in Module 7 of the Charities SORP (FRS 102), namely obligation, probable payment and reliable measurement.

Examples include:

  • Has the charity entered into agreements with third parties that are now onerous due to changes in operations?
  • For grant-making charities, are there factors that might lead to previously recognised grant expenditure being derecognised?
  • In relation to rental holidays, have lease terms been renegotiated in a way that impacts on the accounting for lease commitments?
What should charities be considering when accounting for government initiatives?

It is important for charities to consider the nature of the government initiatives which are applicable to them. Grants, waivers or reduction of charges payable and loans will have different accounting treatments.

For each government initiative, charities should consider:

  • Trustees’ Annual Report – to what extent should the use of the government initiative be commented on in the Trustees’ Annual Report?
  • Timing – when should the income / expenditure and assets / liabilities be recognised?
  • Presentation and classification – how should the resulting income / expenditure and assets / liabilities be presented in the primary statements and the notes to the financial statements? Are these funds restricted and are there are any conditions attached to the funding?
  • Further disclosures – should there be additional disclosures of the use of the government initiatives in the notes to the financial statements as well as disclosure of any significant judgements and estimates associated with the accounting for them?

Charities should consider if there are any other implications from the recognition of income or expenditure from government initiatives.  This includes, for example, impacts on support cost allocations. 

Examples of government initiatives that are commonly applicable to the charity sector include:

  • Coronavirus Job Retention Scheme (‘furlough scheme’)
  • Coronavirus Business Interruption Loan Scheme
  • Retail, Hospitality and Leisure Grant Fund

There is a Bitesize Briefing on accounting for COVID-19 support schemes at the ICAEW coronavirus hub. While aimed at general commercial businesses many of the questions charities need to ask are covered in the webinar and related resources.

What are key considerations for the recognition of assets by charities?

Charities should consider each asset category to determine the impact, if any, from COVID-19 on the fulfilment of the initial and subsequent measurement criteria (set out in FRS 102 and the Charities SORP (FRS 102)). Asset valuations should reflect the circumstances at the balance sheet date. But charities should also consider if events after the reporting period also require disclosure (see related question above for further information).

Charities should consider whether there are any indicators of impairment that require a change in asset values.

Examples of the carrying value of assets that charities should consider include:

  • Validity of prepayments, e.g. venue deposits for events planned to take place in the next accounting period
  • Change of plans for assets under construction, particularly where there are delays – the business case should be re-assessed
  • Stocks, particularly those which are perishable or with a short life

Charities should pay attention to the valuation of investments, especially unlisted investments. Property measured at fair value requires consideration given the wider economic impact of COVID-19, including tenant distress and agreed rent holidays on yield-based valuations.  Where specialists’ valuations have been given with reservations (as currently recommended by RICS for property valuation) additional disclosure regarding the extent of estimation uncertainty is likely to be required.

Charities with legacy income should also consider the valuation of any accrued legacy income, and whether the fair value of the legacy income receivable on the balance sheet remains appropriate.

Charities should evaluate what factors will impact on the ultimate value of the legacy and how these should be disclosed where legacy income is a material source of income.

Paragraph 5.35 of the Charities SORP (FRS 102) states that,

“Charities should measure or estimate the fair value of the legacy income receivable based on the information available. The fair value receivable will generally be the expected cash amount to be distributed to the charity from the estate. Legacy income must only be recognised when it can be measured or estimated with sufficient reliability.”

The classification of assets as being current or non-current also requires review.

Charities should consider if there are contingent assets that may need to be recognised or disclosed, such as contested insurance claims for business interruption.

Are there any specific considerations for charities in relation to the valuation of assets in defined benefit pension schemes?

As with the valuations mentioned above, charities should pay attention to the valuation of assets in defined benefit pension schemes.

Defined benefit pension scheme portfolios may include investments, including unlisted investments, and property. In particular, property valuations may be affected by the wider economic impact of COVID-19, due to tenant distress or agreed rent holidays impacting yield-based valuations.

The level of uncertainty may increase significantly where market volatility exists, or there is a heavy reliance on valuation specialists who may be required to be cautious in how they report. This may impact the basis on which net defined benefit pension scheme assets or liabilities are recognised in the financial statements.

What are key considerations for the recognition of liabilities by charities?

Charities should evaluate each category of liabilities to determine if there is any impact from COVID-19 on the fulfilment of the initial and subsequent measurement criteria, set out in FRS 102 and the Charities SORP (FRS 102). It is important that the valuation of liabilities should reflect the circumstances at the balance sheet date, and charities should also consider events after the reporting period (see related question above for further information).

Examples that charities should consider include:

  • Inclusion of overdraft facilities and any loans accessed from government schemes
  • Breaches of covenants or agreement of covenant waivers
  • Rent holidays
  • Tax deferrals
  • Holiday pay accruals

The classification of liabilities as being current or non-current also requires review.

Charities also need to consider if there are additional contingent liabilities that need to be disclosed.

What should charities consider in relation to fund accounting?

It is important that charities continue to take account of the principles of fund accounting, including restricted funds.

Examples that charities should consider in the light of COVID 19 include:

  • Impact of investment losses on total return policies for endowments
  • Where there is a repurposing of funds with the agreement of donors
  • Where performance-related conditions are relaxed only for a period of time

Charities will need to consider the relevant detail of all specific agreements and government initiatives. Judgement may be required (and if material should be disclosed) regarding the status of funds spent under eased conditions and any remaining unspent after easing ends. Charities should seek legal advice where appropriate.

Charities should also refer to Module 2 of the Charities SORP (FRS 102).

What are the key considerations for charities in relation to preparing financial statements on a going concern basis?

Charities will need to ensure that preparing their financial statements on a going concern basis remains appropriate, and this is an area where there should be early engagement with trustees and auditors.

This will include preparing a going concern analysis and supporting forecasts covering a period of at least 12 months from the date when the financial statements are authorised for issue. This should conclude whether the going concern basis of preparation is appropriate or not and whether there are material uncertainties in relation to this. It is important that the going concern assessment considers qualitative factors in addition to quantitative factors. Charities should reflect on the appropriate duration covered by financial forecasts for their context and circumstances, which is likely to be beyond the minimum 12-month period.

The SORP-making body has issued guidance on the Implications of COVID-19 control measures and charity financial reporting. In particular, “attention should be given to the available unrestricted funds and reserves, credit facilities (such as overdrafts), and any other forms of financial assistance available to the charity.”

As part of these financial forecasts, charities should consider the impact of different scenarios. The guidance to companies issued by the FRC encourages boards to consider “different time periods for the continuation of social distancing […] on their company’s revenues, costs (both fixed and variable) and cash flow requirements.”

This guidance also states that where a material uncertainty exists, disclosures should be “as specific to the entity as possible. Users will wish to know how and when the uncertainty might crystallise and its impact on the resources, operational capacity, liquidity and solvency of the company.”

Where the conclusion is that there is no material uncertainty and the going concern basis of preparation is appropriate, the application of any significant judgements in relation to this should be clearly disclosed, as set out in Module 3 of the Charities SORP (FRS 102).

In addition to the FRC guidance referenced above, further guidance has also been published by the ICAEW.

Charities should also refer to the question below on ‘Will there be any impact on audit opinions?’

What else should charities consider in relation to disclosures?

Charities are reminded of the following guidance to companies issued by the FRC,

“The need for narrative reporting to provide forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business viability and the methods and assumptions underlying that assessment. […] At this time, the need for fuller disclosure is paramount.”

Are there any other relevant considerations for charities?

Charities should also consider whether the following matters are applicable to them:

Charitable objects

Where a charity has engaged in new or different charitable activities, as a result of COVID-19, have the charity’s trustees satisfied themselves that this is in accordance with the charity’s governing documents and its charitable objects? If so, has this been appropriately documented?

Trading subsidiaries

Have separate going concern assessments been prepared for trading subsidiaries of parent charities?

Will any post year-end gift aid payment to a parent charity result in going concern considerations for the trading subsidiary?

Where future losses are anticipated by the trading subsidiary, have these been factored into the expectation of a gift aid payment after the year end. In particular, would a gift aid distribution be legal at the date it is expected to be paid? See ICAEW’s Introduction to the Law on Dividends for more information on the law on dividends and other forms of distribution.

Individually material items

Where a charity’s activities have been materially curtailed by COVID-19 measures and ongoing costs (for example relating to furloughed staff) have been supported by government initiatives, does this require revised presentation to ensure that a true an fair view is presented?

For example, where the impact of government grants and other initiatives, such as rates holidays, is material; are there additional disclosures or modifications to presentation required in the notes to the financial statements or as line items in the primary statements to ensure that the underlying charitable activity can be clearly understood?

Where additional line items in primary statements or analysis in disclosure notes (for example cost allocation and apportionment) are necessary, charities should consider the balance between the value of additional information and potentially confusing complexity.

Insurance cover

Does the charity have insurance cover in place which could mitigate some of the adverse financial impacts of COVID 19, for example, business interruption or event cancellation?

Have the criteria, as set out in paragraphs 5.53 to 5.55 of the Charities SORP (FRS 102), been met to recognise the amount of the insurance reimbursement, if this is a factor?

Apply for extensions for the filing of financial statements

In view of the significant issues for charities to consider as a result of the impact of COVID-19, they may wish to think about applying for an extension for filing their accounts, for example, with the charities regulator(s) and Companies House.

Charities should consider whether the planned financial reporting timeframe remains appropriate or whether it should be extended.

Will there be any impact on audit opinions

Auditors will be considering the impact of COVID-19 on all organisations, including charities. 

The FRC’s guidance on audit issues arising from COVID-19 states that,

“Companies, and in particular their audit committees, understand it is vital that auditors have sufficient time and support to carry out their work to an appropriate standard, including reassessing work done to reflect changed circumstances – in some cases, this may need companies to reconsider their reporting deadlines. Where auditors are unable to obtain sufficient, appropriate audit evidence to support their audit, they will need to consider necessary modifications to their audit opinion.”

Subsequent to this, the FRC has issued clear guidance to provide further explanation, including a particularly useful flowchart, in relation to modified audit reports: Modifications to Independent Auditors Reports and Opinions

The ICAEW has highlighted that more modified audit reports may be expected as a result of COVID-19 uncertainties.

Charities should note that independent examiners and auditors have a duty to report a matter of material significance,

“on making a modified audit opinion, emphasis of matter, material uncertainty related to going concern, or issuing of a qualified independent examiner’s report identifying matters of concern to which attention is drawn, notification of the nature of the modification/qualification/emphasis of matter or concern with supporting reasons including notification of the action taken, if any, by the trustees subsequent to that audit opinion, emphasis of matter or material uncertainty identified /independent examiner’s report.”

The charity regulators recognise that at times of national emergency the normal conduct of an external audit or an independent examination may be disrupted. Therefore,

“In times of national emergency, unless the legal duty to report is relaxed by Government, the auditor or examiner must still report matters of material significance; however where a modified opinion, an emphasis of matter, or a matter identified by the independent examiner is solely due to the exceptional circumstances of the national emergency affecting the conduct of the audit or the independent examination then this is not considered to be reportable as a matter of material significance to the charity regulator.”