The Importance of Reporting & Accounting for Charities

The Charity Commission has published guidance on reporting and accounting, which explains the different accounting and reporting requirements for different types of charity. The guidance is aimed at charity trustees as it sets out what they are required to do when preparing annual reports, accounts and annual returns.

The key obligations are:

  • maintain accounting records;
  • have an annual report, which is a review of the activities of the charity prepared by the trustees for each accounting year;
  • make the accounts available to the public on request, this is important for accountability although trustees are permitted to make a reasonable charge to cover costs such as photocopying and postage; and
  • complete either a full annual return or complete the relevant sections to update their details.

Preparation of accounts

According to the Charity Commission Guidance accounts can be prepared either on the basis of receipts and payments or on the basis of accruals. The receipts method is simpler and it is suggested where a non-company has a gross income of £250,000 or less. This method will summarize all money received and paid out by the charity for a particular year and provide details of its assets and liabilities. Accounts on the basis of accruals are prepared for non-income charities with gross income of over £250,000 during the year and all charitable companies must prepare their accounts in accordance with the relevant Statement of Recommended Practice (SORP). The accounts contain a balance sheet showing the charity’s financial position, a statement of financial activities and explanatory notes. In accountancy terms, the accounts are required to show a “true and fair view”.

Preparation of annual report

The detailed legal requirements for the trustees’ annual report are set out in the Charities (Accounts and Reports) Regulations 2008 (CAR Regulations) and SORP. While trustees may choose the layout of their report they should bear in mind the legal requirements. The size of the charity determines the rules applicable with larger charities being subject to statutory audit. However, all charities preparing accounts on an accruals basis whether large or small should refer to the SORP. According to the Guidance the information contained in SORP 2005 provides important direction which includes:

  • reference and administrative details of the charity, its trustees and advisers. However, there are exceptions such as where disclosure could lead to that person being placed in danger, the charity may exclude this information provided that the Commission has authorised this;
  • structure, governance and management – it should provide details of how the charity is constituted, its organisational structure, how its trustees are appointed and trained and how the charity’s decision making processes work;
  • a financial review – stating the policy on reserves and where any fund is materially in deficit, the circumstances giving rise to it and steps taken to eliminate it;
  • funds held as custodian trustees on behalf of others – this should be disclosed including information relating to assets held, names and objects of the charity or charities on whose behalf they are being held and details of safe custody including segregation of these assets from own assets; and
  • public benefit statement – a statement confirming the trustees have complied with their duty to have due regard to the guidance on public benefit.

For smaller charities not subject to statutory audit, they must also report the following:

  • objectives and activities – which may be limited to a summary description of the purposes of the charity and main activities, and
  • achievements and performance – this may also be a limited to a brief summary.

Charities subject to the statutory audit are under a further obligation to report the following:

  • additional information about the structure governance and management of the charity including; policies and procedures for induction of trustees or where this is not available a statement to that effect, organisational structure of the charity explaining decision making (which decisions are made by trustees and which are delegated to staff), where the charity is part of a wider network, the impact of this on its policies, relationship of the charity with third parties (such as subsidiaries or other charitable organisations it cooperated in pursuing its objectives), and a statement confirming the risks the charity is exposed to as identified by trustees, how they have been reviewed and systems and procedures  to manage those risks;
  • objectives and activities should be explained by referring to its long term objectives and how its activities undertake to achieve them. In particular, the trustees should consider the significant activities of the charity and include those in the annual report. If a charity, conducts a significant amount of its activities through grant-making, a statement should be provided setting out its grant making policies. Similarly, where a charity engages in social or programme-related investment activities in the context of its charitable activities, those should be explained. If a charity uses volunteers to a significant extent in its charitable or income-generated activities, this should also be noted in its annual report;
  • achievements and performance should contain information where the charity’s performance is reviewed against the objectives. This should be provided through qualitative and quantitative data explaining the outcome of activities and how objectives have been met, fundraising efforts, details of investment performance and external factors outside of the charity’s control relevant to the achievement of its objectives such as; relationship with employees, users, beneficiaries etc.;
  • financial review – should provide additional financial review information including a review of the financial position of the charity and its subsidiaries and a statement of the principal financial management policies; and
  • plans for future periods – should detail future objectives set and activities planned to achieve those objectives.

There are also additional requirements where group accounts are prepared and further guidance through new SORP’s for charities preparing their accounts on an accruals basis, which are detailed in the Guidance.

Changes to audit thresholds

With regards to reporting, a recent development to note is the change to the audit thresholds by the Charity Commission. This came into force on 31 March 2015 and it aims to reduce the regulatory burden for charities. The basic audit threshold has been increased from £500,000 to £1 million, which will mean that fewer charities will be required to have their accounts audited formally. With the introduction of the new threshold, charities below the set figure can have their accounts looked at by an increased pool of Independent Examiners, which the Charity Commission says ensures the level of assurance remains high.

Other changes include:

  • increasing the aggregate group income threshold at which parent charities should have group accounts from £500,000 to £1 million;
  • increasing the preparation of threshold of group accounts from £500,000 to £1 million; and
  • adding the Institute of Financial Accountants and the Certified Public Accountants Association to the list of professional accountancy membership bodies whose appropriately qualified members can carry out independent examinations of the accounts of charities with incomes of more than £250, 000.

Quality of reporting by charities and reporting on public benefit

The Charity Commission recently published a report where it analysed the overall quality of trustees’ annual reports and accounts. In doing so, it considered how useful such reporting is for users and how closely it complies with the basic legal reporting requirements. The Commission analysed 220 sets of charities accounts over two financial years, ending 31 March 2012 and 2013, respectively.

Its assessment found that 68% of the accounts in 2013 sample and 54% of the accounts in 2012 sample were of acceptable quality. It also found that there was a correlation between the size of the charity and the quality of its accounts, as 89% of charities with income over £500k were of acceptable quality; whereas that fell to 53% of charities with income under £250k. The most common reason for charities failing to meet the quality standard was the trustees’ annual reports, which were found to be inadequate.

With reporting on public benefit, the Charity Commission in another recently published report using the same sample found that only 27% of accounts in the 2012 sample and only 35% of the accounts in the 2013 sample fully met the legal requirement of reporting on public benefit. Despite public benefit being at the heart of what charities are about, this research suggests that most charities are failing to meet their public benefit reporting requirement. It also found that “the majority of charities’ annual reports were not demonstrating a clear understanding of the public benefit reporting requirement”. Further, similar research was commissioned by the Law Commission in 2011 and following the latest research, it seems that awareness of the requirement to report on public benefit does not seem to have improved significantly over time.

Where co-regulation by the Homes and Communities Agency applies to a charitable Registered Provider of social housing the Board’s annual report within the accounts must also certify compliance with the HCA’s Governance and Financial Viability Standard which includes a range of risk assessment and financial measures.

If you would like any advice or assistance on preparing annual reports or other aspects of charity or HCA governance please contact Daniel Milnes.


Nat Avdiu

About Nat Avdiu

Nat Avdiu is a Paralegal in the Contracts and Projects team at Forbes Solicitors. Nat provides updates for clients on a range of issues including: governance, data protection and freedom of information, procurement and charity law.
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