Spotlight on going concern considerations for charity trustees
In August this year, the ICAS Charities Panel published Guidance for charity trustees on going concern.
As charities with 31 March year-ends approach their 31 December 2020 filing deadline for their trustees’ annual report and accounts and charities with 31 December year-ends plan their accounts preparation, I would urge the trustees of charities applying the Charities SORP to use our practical tailored guidance.
Charities with a filing deadline fast approaching
The trustees of charities with a 31 December filing deadline are faced with completing their going concern assessment in the midst of unprecedented uncertainty. Whether you are seeking to meet the filing deadline or anticipate that you may need to use the flexibility offered by charity regulators to file at bit later, your responsibilities towards the going concern assessment are the same.
A charity’s trustees must carry out an assessment of its ability to continue as a ‘going concern’. In the assessment, the 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 and signed.
There are no set rules for undertaking a going concern assessment and not all charities face the same financial pressures. Therefore, the assessment should be tailored to the particular circumstances of the charity.
Evidence in support of the trustees’ going concern assessment should include a cash flow forecast covering a period of at least 12 months from the expected date of approval of the accounts. Key assumptions used in preparing the forecast should be documented.
It may also be necessary to present a range of potential scenarios, from the most optimistic to the most pessimistic, in the form of cash flow forecasts, to reflect the degree of uncertainty that currently exists. Scenario planning has the potential to assist trustees manage their charity as it will help them to understand more fully the risks their charity is facing, enabling plans to be put in place to address any risks which come to fruition.
Where the going concern basis of preparation of the accounts remains appropriate, 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.
The charity’s auditor or independent examiner will make inquiries about the robustness of the trustees’ going concern assessment and conclusions drawn about charity’s going concern status up to the point they sign their own independent report.
It is likely that more charity trustees will identify material uncertainties relating to going concern when undertaking their going concern assessment at this time. It is essential to bear in mind that any material uncertainties identified as part of this process should relate to the specific circumstances of the charity. Conclusions may be informed, for example, by knowledge of how charities with similar purposes are being impacted by the COVID-19 pandemic or by how organisations in the charity’s supply chain are being impacted.
However, the general uncertainties we all face as a consequence of the COVID-19 pandemic and related control measures do not in themselves constitute material uncertainties for a specific charity.
Section 4 of our guidance sets out the three possible outcomes of a going concern assessment and the implications for the accounts. This section may be particularly helpful for charity trustees seeking to finalise and sign off their annual report and accounts shortly.
Charities looking to commence their accounts preparation
For the trustees of charities with a 31 December year-end or a year-end which is not too far away, planning for and then undertaking an initial going concern assessment at an early stage is really important. This may not feel like a priority right now given the challenges of keeping your charity running but the assessment could help identify any emerging financial risks which can then be managed and it may help the external scrutiny process to run more smoothly.
Updating cash flow forecasts more frequently than in more normal times is likely to be inevitable for many charities - it is vital that cash flow forecasts reflect a more challenging view of the next 12 months or more from the planned date of signing should one emerge. Even the assumptions underlying a charity’s ‘worst case’ cash flow forecast may deteriorate.
Auditors and independent examiners alike will be focusing additional work effort on scrutinising going concern assessments. Therefore, trustees should expect greater engagement from their auditor or examiner about the going concern assessment when their auditor or examiner is planning their own work. Undertaking an initial assessment in a timely manner and updating it as necessary up to the point of sign off will assist auditors and independent examiners to meet their responsibilities.
Sections 5 to 9 of our Guide will be particularly helpful to trustees preparing the supporting evidence for and undertaking their going concern assessment. The trustees’ going concern assessment should be an exercise tailored towards the particular circumstances of the charity and where the charity has paid staff, it will be important to work with executive staff and perhaps others to gather evidence and to conclude on the assessment.
Worth a mention at this point is the auditors are required to apply a revised version of ISA (UK) 570 on going concern, for the audit of periods commencing on or after 15 December 2019. For the most part this will mean that the first audits where the revised ISA (UK) is applied are periods ending on 31 December 2020. The revised ISA strengthens the work auditors will need to undertake on going concern, so it is not just the impact of the pandemic that will increase the auditor’s focus on the trustees’ going concern assessment. For trustees interested in finding out more about how the revised ISA will impact on the audit, ICAS has written commentary available which anyone can access.