The new charities SORP has a more explicit requirement to state within the annual report and accounts an assessment of going concern status. Richard Weaver explores further.
Going concern is not a new concept and has been a fundamental aspect of auditing and reporting for many years. With the renewed emphasis within the standard, and greater public awareness of charity collapses, it is more important than ever that trustees, through their senior leadership teams, formulate a process to evidence this assessment as part of their approval of the statutory accounts.
What are the requirements?
The principle is that at the point of signing the accounts, the trustees (NOT the auditors), should assess the going concern of the charity. This means that the trustees should assess whether the charity can continue its operations and meet its liabilities as they fall due for a sufficient post-year-end period. This is commonly deemed to be 12 months from the date of signing.
What happens if you don’t have 12 months’ sight?
Going concern is considered by many to be a bit of crystal ball gazing, and it can be an exercise in the unknown for many charities that are reliant on renewal of annual funding agreements. If a charity with a March year-end signs off in July/August, but only has committed funding until March the following year, what then? In principle the charity would not have sufficient postyear- end sight and could not sign off as a going concern without other supporting evidence. Other evidence may be the availability of draw-down on cash reserves or sale of investment assets, or committed funding from another source, for example.
If this is not possible, then it is likely that additional disclosures will be required within the report and accounts referencing the significant uncertainties around future funding. Indeed the Charity Commission has reported an increase in what are called ‘emphasis of matter paragraphs’ within audit reports which highlight these risks and uncertainties to the reader. This is a catch 22 situation though, as it then raises concerns in the heads of donors and funders as to whether the organisation is one which should be supported. It has also led the Commission to carry out follow-up investigations of a sample of those that have filed accounts with emphasis of matter paragraphs. Therefore, it is always best to try and find a way to avoid such a disclosure.
Are there other options available?
It is perhaps worth considering whether your year-end date works for you. If your year-end was September rather than March, say, you might sign off in January/February, by which time you may have better sight of whether contracts and/or grants are going to be renewed in March, which then gives you 13/14 months’ sight.
How do we support trustees making this judgement?
In order for trustees to assess the going concern of the charity, they should have sufficient information and evidence to give them that 12 months’ view. We often see finance and audit committees review the accounts and receive the audit findings reports, but rarely do we see them review and recommend to the boards that they have also considered evidence of going concern. We would recommend that the finance committee or audit committee be given this additional responsibility with a caveat that the forecasts need to stretch to 12 months from the date of the board meeting, not the finance/audit committee meeting.
This information should contain:
- Profit and loss forecast for the period
- Updated rolling cashflow for the period
- Assessment on the linkage between estimated results and the availability of reserves and /or cash
- Any additional information on projects, funding or commitments that are known to impact the next 12 months
- Available levers that could be employed to manage any uncertainties.
Critically this information should also make clear the analysis of results and a distinction between restricted and unrestricted funds, to give trustees comfort that they will also not fall foul of committing breaches of trust by using restricted funds to support unrestricted activity.
The information required will be different depending on the type of charity you are and the way in which the cash and expenditure flows during a cycle. For example:
A grantmaking charity which is reliant on investment performance
The charity may have significant investment funds which are a number of years’ worth of annual expenditure. On the face of it not a going concern issue, but the paper to trustees should concentrate on the availability of cash, budgeted income and spend to confirm that there is sufficient liquidity in the business to manage the future business plan of the charity.
A membership body which receives membership fees annually
This charity is often cash-rich at a point in the year when the fees are received, so it will be important for trustees to understand the cashflow implications of the cycle and show that they have sufficient cover from other income streams or reserves to draw down on.
A service delivery charity
Its reserves are often lower compared to the size of the business than the above two examples. It is likely to be reliant on grants or local authority contracts, and will need to assess the contracts in place at year-end, those that are being bid for or subject to renewal in the next 12 months, a review of the success rate of previous applications, and the availability of other funding, or finance. Critical to an assessment of going concern will be a cashflow that projects sufficiently into the future to give trustees that level of comfort. For some it may be a bit of crystal ball gazing, but without this sight, additional disclosures may be required.
What should be minuted?
What is also important for trustees is that they then minute that they have considered the information provided and confirm that they believe the charity is a going concern. Trustees are assessed on the decisions you reach at the time you make them and so it is key that minutes accurately document the decisions reached and the information that supported those decisions. Hindsight is, after all, a wonderful thing.
Richard Weaver is head of charities and not-for-profit at haysmacintyre
Civil Society Media wishes to thank haysmacintyre for its support with this article