How should charities account for the CJRS?
As the Coronavirus Job Retention Scheme (CJRS) comes to an end, charities which have received funding from the scheme will be reporting how much they have received in their financial statements.
Charity employers, similar to other employers, have not received funding like this before and while charities are used to accounting for funding from third parties, the nature and purpose of CJRS funding requires specific consideration.
The Charities SORP Committee has published updated model trustees’ annual reports and financial statements to assist charities to address the impact of the coronavirus pandemic.
The accounting guidance set out in the article is based on the requirements and guidance of Accounting and reporting by charities: A statement of recommended practice (FRS102) (the Charities SORP) and the Charities SORP Committee’s illustrative examples.
The Charities SORP has not been amended to include requirements or guidance on how to account for CJRS funding. However, the illustrative examples are treated as authoritative for the purposes of this guidance, which creates consistency across the charity sector.
This guidance specifically refers to the Arts Theatre Trust model financial statements. The scenario is that the Arts Theatre Trust is a company limited by guarantee, operating a theatre and related activities with one trading subsidiary. The pandemic has affected its ability to operate and the charity faces a challenging financial position and has taken up government financial assistance.
The Arts Theatre Trust is registered with the Charity Commission for England and Wales. However, for the purposes of accounting for CJRS funding, it is relevant to any UK charity applying the Charities SORP.
Ultimately, professional judgement may be required to arrive at the correct treatment based on the specific facts and circumstances of individual charities.
What is the nature of CJRS funding?
CJRS funding is grant income.
What recognition and measurement requirements apply?
Under the Charities SORP, charities must apply the ‘performance model’ when accounting for government and non-government grants. They do not have the option of applying the ‘accrual model’, which is available to non-charitable companies.
The ‘performance model’ does not distinguish between revenue and capital grants for measurement and recognition purposes. It also applies to grants regardless of whether the funder has imposed performance-related conditions, other types of condition or no conditions at all.
Income must only be recognised when all of the following criteria are met:
- Entitlement – control over the rights or other access to the economic benefit has passed to the charity.
- Probable – it is more likely than not that the economic benefits associated with the transaction or gift will flow to the charity.
- Measurement – the monetary value or amount of the income can be measured reliably and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. (Charities SORP, paragraph 5.8)
For a charity to have entitlement to CJRS funding, it must have fulfilled all the conditions attached to the grant by HMRC.
A charity must recognise grant income on a gross basis in the Statement of Financial Activities (SoFA).
How should CJRS funding be presented in the SoFA?
Under the Charities SORP ‘larger’ charities are required to present their income and expenditure on an activity basis and ‘smaller’ charities are encouraged to do so. This guidance follows the activity basis of presentation.
The Charities SORP defines ‘larger’ charities as those charities with a gross income of more than £500,000 in the reporting period. ‘Smaller’ charities are all other charities applying the SORP.
Under the activity basis, grant income is classified in the SoFA as either ‘income from donations and legacies’ or ‘income from charitable activities’.
Grants with no performance related conditions attached are classified as ‘income from donations and legacies’. However, grants which have performance related conditions attached are classified as ‘income from charitable activities’.
CJRS funding is considered by the Charities SORP Committee to have performance-related conditions and therefore it should normally be presented in the SoFA within ‘income from charitable activities’.
In the Arts Theatre Trust illustrative example, CJRS funding is treated as a separate activity and is therefore presented as a separate line item on the face of the SoFA. This treatment is further reflected in the notes to the financial statements.
In the example, the CJRS is treated as a material component of income.
Restricted or unrestricted?
Charities applying the Charities SORP use fund accounting to distinguish between restricted and unrestricted funds.
In the Arts Theatre Trust example, CJRS funding is treated as unrestricted. Why should this be the case given that the funding must be used to pay salaries and wages?
The funding is treated as unrestricted as the grant conditions do not require that it must be used to fund a specific purpose or project. Instead, the funding can be used to pay the salaries and wages of any staff, subject to the general terms and conditions of the CJRS.
Charities and their advisers should refer directly to the requirements and guidance in the Charities SORP and the updated model trustees’ annual reports and financial statements when assessing the treatment of grant income, including CJRS funding.