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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 intended to be applicable for charity reporting and accounts taking into account of the COVID-19 pandemic as an event after the reporting period and as an event during the reporting period.

This guide complements wider ICAEW guidance to highlight sector-specific considerations. Links to general guidance regarding the implications of COVID-19 on financial reporting and audit can be found below:

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. It has been the experience of charities that the preparation of charity reporting and accounts takes longer, particularly in a remote working environment, including the gathering of data, future financial forecasts, consideration of additional required disclosures and providing independent examiners and auditors with sufficient and appropriate supporting evidence; forward planning is vital.

This guide was published on 18 December 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 for 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 […] 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 for auditors and matters to consider where engagements are affected by coronavirus (COVID-19), the FRC has commented that,

“the pandemic should not undermine the delivery of high-quality audits. […] 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.

The filing deadlines for company accounts and other documents, such as the annual confirmation statement, have been extended under regulations passed in June 2020 which are applicable for filing deadlines up to and including 5 April 2021. Click here for guidance on filing extensions with Companies House.

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 for companies issued by the FRC as well as its COVID-19 Thematic Review published in July 2020. 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 judgements 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. The ICAEW’s wider guidance on how to improve disclosures when preparing accounts in accordance with FRS102 may also be helpful and can be found here.

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 judgements and estimates?

The guidance for 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 judgements, assumptions and sensitive estimates significantly more important than usual.”

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

There are also likely to be new critical judgements 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.

Charities should note that the new requirements incorporated in, ISA (UK) 540 (Revised) ‘Auditing Accounting Estimates and Related Disclosures’, applicable for periods beginning on or after 15 December 2019, increase the extent of procedures which auditors will need to perform.

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 adjusting 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.

Charities should also consider whether administrative delays (for example, where documents are received by post, whether expected or not) may impact on the supporting documentation available in respect of the recognition of income or related accounting judgements.

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.
    • For virtual events which are run over a period, charities will need to consider the period over which the income is recognised, particularly where the events span across multiple reporting periods.
  • 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 from 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?’

Where these areas include significant accounting judgements or estimates, these require the appropriate additional disclosure to provide further explanation.

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?

The FRC’s amendment to FRS102 regarding COVID-19 related rent concessions can be found here. The ICAEW has also issued a helpsheet on this topic, which can be found here.

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.

ICAEW’s general guidance on how to account for government initiatives can be found here but charities may need to consider additional factors.

Government grants are recognised once there is reasonable assurance both that the entity will comply with any conditions and that the grant will be received.

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 accounting policies and 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.

The Charity Tax Group maintains a list of government initiatives that are commonly applicable to the charity sector; examples include:

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

Charities in receipt of government grants under the Coronavirus Job Retention Scheme (CJRS) should:

  • Ensure that all CJRS grants are claimed correctly in accordance with HMRC guidelines and staff are paid accordingly.
  • Ensure that staff time is not charged against a funded project if the relevant staff are on furlough, and the salary is therefore already paid by the CJRS grant.
  • Ensure the treatment is clear, consistent and explained within the accounting policies, including:
    • Under FRS 102, grant income should be presented gross (and not netted off against expenditure).
    • As the scheme is designed to compensate for staff costs, the amounts received should be recognised in the income statement over the same period as the costs to which they relate.
    • Where material, charities should disclose how the CJRS grant and associated staff costs are presented within income and expenditure in the SOFA and the notes to the financial statements.
    • If applicable, charities may need to consider the accounting treatment and disclosures where they have topped up the furlough scheme payments to 100% of employees’ salaries.

Charities may need to consider the wider impact of the CJRS grant, for example in their allocation of support costs, particularly where this has previously been performed on a per capita basis.

Depending on the accounting policies and presentation for the CJRS grant, charities should consider how this impacts on their performance measures, for example fundraising ratios which are disclosed.

Charities should confirm the accounting treatment with their auditors (or independent examiners).

For government-backed loans, these may not be at market rates therefore there are additional presentation considerations in relation to the interest payments and fees paid by the government, as set out in the ICAEW helpsheet .

Some forms of government assistance are subject to state aid considerations, most notably the Retail, Hospitality and Leisure Grant Fund which is, for example, subject to an €800,000 limit.

Charities should also consider the risk of clawbacks from COVID-19 support schemes, which may need to be reflected within disclosures in relation to significant accounting judgements and estimates, where appropriate.

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. Further information is also provided in this ICAEW helpsheet .

Please note that there may be a related impact on VAT reclaims and partial exemption calculations, for example if the ratio of taxable to exempt income is changed.

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 (for example, where recommended by RICS for some property valuations) 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. This is particularly important where information, for example from Smee & Ford, is delayed. 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
  • Restructuring
  • Onerous leases, for example those arising from office or retail closures

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. These can arise, for example, where non-compliance with laws and regulations (including with the Fundraising Regulator, Information Commissioner’s Office, Gambling Commission, etc.) as a result of changes to the charity’s control environment or other processes.

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 for 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, extensive guidance has also been published by the ICAEW.

Charities should note that the new requirements incorporated in ISA (UK) 570 (Revised) ‘Going concern’, applicable for periods beginning on or after 15 December 2019, increase the extent of procedures which auditors will need to perform.

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 for 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 costs borne by the parent charity are recharged to the trading subsidiary, have these arrangements been examined in light of the trading conditions as a result of COVID-19?

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? Charities should re-confirm that payments already made were legal distributions. See ICAEW’s Introduction to the Law on Dividends for more information on the law on dividends and other forms of distribution.

There are specific factors for a parent charity to consider when exploring providing financial support to a trading subsidiary. Further guidance is provided by the Charity Commission for England and Wales, and charities may wish to seek legal advice to support the basis for their financial support.

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 and 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.

In addition to the experience of charities that the preparation of charity reporting and accounts takes longer, independent examinations and audits also take longer, particularly in a remote working environment.

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.”

Related resources

Further information is available in theICAEW Coronavirus (COVID-19) hub.

The SORP-making body has published example Trustees’ Annual Report and Accounts on the Charities SORP microsite. Versions of the examples to consider the impact of the COVID-19 pandemic are in preparation.