Key going concern considerations for charity trustees: between the covers of our guide
In this ‘between the covers’ edition of our Guidance for charity trustees on going concern, Christine Scott and Colin Kerr highlight the essentials.
Our ICAS Charities Panel guide is there to assist charity trustees to:
- Assess their charity’s ability to continue as a going concern and to prepare a trustees’ annual report and accounts which properly address the relevant requirements.
- Understand the work of their charity’s auditor or independent examiner on going concern.
Crucially, it covers financial management considerations for charity trustees during times of significant financial uncertainty for their charity, including at times of a national emergency.
Christine Scott, Head of Pensions and Charities at ICAS, shares the key takeaways from the guide:
Colin Kerr CA, Chair of the ICAS Charities Panel, on why ICAS developed the guide to support charity trustees address going concern issues:
A summary version of the guide is shared below.
Section 1: Going concern – how the trustees’ annual report and accounts look to the future as well as the past
For the purposes of the accounts, there is a requirement to consider and report on the viability of the charity in relation to the ‘going concern’ accounting concept and to ensure that the trustees’ annual report is consistent with the conclusions from the trustees’ assessment of the charity’s ability to continue as a going concern.
Section 2: Scope of the guidance
The guide is primarily for the trustees of UK charities preparing their trustees’ annual report and accounts in accordance with:
- FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland; and
- The Charities SORP (FRS 102) - Accounting and Reporting by Charities: Statement of Recommended Practice applicable to charities preparing their accounts in accordance with the Financial Reporting Standard applicable in the UK and Republic of Ireland.
FRS 102 and the Charities SORP (FRS 102) must be applied by any charity preparing accounts which give a ‘true and fair view’. This includes all charitable companies.
Section 3: Why are the future prospects of the charity relevant when preparing the trustees’ annual report and accounts for the previous year?
The trustees’ annual report and accounts are generally seen as a record of the previous year’s activities and transactions and a snapshot of the charity’s assets and liabilities at the end of the year.
However, the trustees’ annual report and accounts both have forward looking elements. For example, there are requirements around the disclosure of any material uncertainties relating a charity’s ability to continue as a going concern.
Where a charity ceases operating or is expected to cease operating, the going concern basis of accounting will no longer be appropriate. In such circumstances, the trustees will need to review and update the accounting policies note and consider other relevant disclosures. In some situations, it may be necessary to make changes to the presentation and monetary value of items on the charity’s balance sheet.
Section 4: Do the trustees need to make a formal assessment of the charity’s ability to keep operating?
Yes, it is the responsibility of the trustees, as a body, to carry out an assessment of the charity’s ability to continue as a ‘going concern’. In their assessment trustees should consider all available information about the future, covering at least 12 months from the date on which the trustees’ annual report and accounts are approved by the trustees, as a body, and signed on their behalf.
There is no set process for undertaking a going concern assessment, but a charity’s independent auditor or independent examiner will ask the trustees for evidence to demonstrate that their conclusions about their charity’s going concern status are reasonable in the circumstances.
By preparing the accounts on a going concern basis, the trustees are not providing a cast iron guarantee that the charity will continue as a going concern, merely making judgements about the evidence available about the charity’s circumstances at the time the accounts are signed off.
Section 5: How can the trustee board make a formal going concern assessment?
The future is of course uncertain, so assumptions will need to be made. Having enough cash (and/or access to other sources of funding such as grants or overdraft facilities) is crucial. A good starting point is to prepare a cash flow forecast for at least 12 months from the expected date that the trustees’ annual report and accounts will be signed off.
Section 6: How can the trustee board reflect the future in cash flow forecasts at times of significant uncertainty, including at times of national emergency?
Unless the charity is operating as usual, the trustees will need to adjust the expected cash flows to take account of the changes in circumstances, considering issues specific to the charity and other charities which share similar charitable purposes (for example, any threats to supply chains and the timing and manner in which charities with similar purposes are emerging from a national emergency) as well as the broader environment (for example, financial supporters having to tighten their belts and the ability of debtors to pay on time).
Section 7: What are the specific considerations for charity trustees?
Whether it is ‘business as usual’ or a charity is facing significant uncertainty, the position of a charity trustee is subtly different from that of a director of a commercial company. The priority of a trustee board is not to protect shareholders’ investments or to maximise financial returns.
Although many of the questions (and many of the solutions) for continuing to be financially viable will be identical, the premise is not. The over-riding question is whether the charity can continue to fulfil its charitable purposes. To that end, there are three fundamental considerations for charity trustees:
- Can (or should) the charity continue its core activities?
- Can sufficient cash flow be secured?
- Is there adequate management information to enable good decision-making?
Where the charity faces financial or other pressures but its activities are unrestricted, i.e. not subject to funder imposed conditions or contract, the charity can take steps to shore up its finances for better times by reducing its operations to a sustainable level, ensuring that essential unavoidable costs are met. To that end, the sufficiency of its existing cash reserves is of fundamental importance.
For a charity, the challenges are distinct from those of companies with share capital. Few charities have debt facilities: in practice, many financial institutions will not lend to charities, as the reputational risk (to them) of forcing a charity to close is highly sensitive. Charities may be able to reach an understanding with their bank that payments, including payroll, will be honoured. Regardless, the charity will need to look for ways to maximise its cash flow.
If actions can generate a short-term cash flow that keeps the charity operating, then that is the path to take. Trustees should look for regular updates and must continue to stress-test all key assumptions. As and when the position eases, then options can be considered for re-booting the charity’s wider business plan, but trustees should exercise close control over such decisions.
During any period of significant uncertainty, including at times of national emergency, the level of reserves and their utilisation during that period will be fundamental to building and sustaining confidence with external stakeholders. Surviving difficult times may well lead trustees to rethink radically their policy on reserves.
Section 8: Can different assumptions be equally valid?
There is no ‘one size fits all’ series of assumptions that will be appropriate for every charity. In part that will be due to size, or to regional location, but it could also depend on the history and reputation of the charity or on the precise type of operations that it undertakes.
What is vital is setting out the rationale for all the key assumptions that have been built into financial models, i.e. cash flow forecasts and budgets. The assumptions should be tested by the charity’s executive staff team, where there is one, and/or by the trustees.
Section 9: What is the relationship between cash flow forecasts and budgets?
From the point of view of conventional wisdom, recognising that modern entities (unless very small) no longer use cash accounting, the income and expenditure budget is the primary business decision that any board makes each year.
From there, the principal management information over the course of the year is the record of performance against that budget. The cash flow forecast is obviously important and acts as a check on the budget.
For a charity operating in a challenging environment, cash is the operational reality. If the bills cannot be paid and the payroll cannot be met, then the income and expenditure forecasts, in the budget can be somewhat academic.
So, during a period of significant uncertainty for a particular charity, including at a time of national emergency, the cash flow forecast is at least as important as the income and expenditure forecast, possibly more so.
Section 10: Working with the auditor or independent examiner
Both auditors and independent examiners are required to include the trustees’ going concern assessment within the scope of their work. The requirements placed on auditors mean that their work on going concern is more extensive and specified more precisely than that of independent examiners.
At times of national emergency such as during the COVID-19 pandemic, inevitably, there will be an increased level of uncertainty presenting new challenges. These new challenges will likely lead to changes in the familiar working practices of auditors and independent examiners. Greater planning and co-operation are essential during such times to manage additional resource and cost pressures.
Section 11: Going concern reporting requirements relevant to the trustees’ annual report and accounts in detail
For trustees interested in finding out more about the current reporting and accounting requirements around going concern, the guide brings these together in one place.
For additional guidance on this important topic, our full guide is available to support trustees, charity finance staff and charity advisers.