Charity Finance's annual SORP Compliance Checklist is a comprehensive guide for charities preparing accruals accounts. Since publication earlier this year, the impact of Covid-19 has led to new issues.
In many cases the SORP already provides guidance and the current situation does not change the required approach. Furthermore, the Charities SORP Committee has issued guidance on annual reports during the pandemic. Notwithstanding that, there are some aspects which have not been addressed.
Income accounting
Grants – Grants, including the Coronavirus Job Retention Scheme (furlough), should be treated in accordance with SORP module 5.
- Grants should be recognised, inter alia, on entitlement – furlough money will generally be received in the month to which it relates.
- Grants may be received to cover costs of staff usually charged to restricted funds. Unless the grant terms are specific, the income should be treated as unrestricted. Costs may then be either apportioned to unrestricted funds, or treated as restricted and covered by a transfer.
- Grants received to meet specific expenditure should not be netted off. Therefore, furloughed employment costs should still show in full.
- Certain Covid-19 related grants are neither time nor performance related, and so are recognised in full at point of entitlement.
Donated services – Many charities are receiving additional volunteer time. The principles of SORP module 6 are unchanged. However, under the furlough scheme, employees from other employers may volunteer. If the services supplied are ones which the charity would otherwise have purchased and are part of the individuals’ “trade or profession and can be reasonably quantified”, then they must be included in the accounts.
Waivers – It is important for charities to be clear on the underlying basis of any cost that is waived or deferred. A deferral means the cost should still be accrued for, whereas a waiver represents income.
Where staff have voluntarily foregone contractual income, then this should be treated gross. Trustees should consider if they need to make adequate disclosures. Any contractual bonuses should be treated on the same basis.
Commercial discounts are not income. Instead, for example in the case of a property lease, the discount should be treated as a reduction in the cost over the life of the lease.
Income conversions – Where a customer confirms that an item of trading income may now be treated as a gift, then that item should be reclassified as a donation. Where this occurs after the year end, then that may potentially be treated as an adjusting post balance sheet event.
Expenditure
Furloughed staff costs should be disclosed in the same way as other staff costs. If the employer voluntarily tops up staff pay, this should be treated as part of staff costs.
If a charity has temporarily suspended activities, then staff costs should still be presented as relating to this activity. A subsequent decision to close an activity may represent a discontinued business and would require separate disclosures and accounting. Costs may have been incurred on events and activities that were cancelled or postponed. The classification of this expenditure is not altered by that decision. However, costs relating to future events that would previously have been carried on the balance sheet may need writing off.
Cost allocations, both direct costs and support costs, may require to be changed where the pattern of activity has altered significantly.
Liabilities
As many loans are to cover revenue expenditure, they impact deleteriously on a charity’s free reserve position. This will need explanation within the annual report.
Any holiday pay accrual needs to take into account furloughed staff as the holiday entitlement is unaffected.
Assets
Some assets will have their carrying value affected, perhaps because they cannot be maintained, or the related activity has stopped, or they are not needed. Where some sort of write down is required then this should be charged to the relevant expenditure heading.
Don Bawtree is a senior adviser and Peter Lewis is a senior manager at BDO
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