Developments in the not-for-profit sector

In December 2018, the Charity Commission published a follow-up to the February 2018 review of matters of material significance. In the earlier review the Charity Commission noted that auditors had not always made their reports promptly when required to do so. During the year the Charity Commission has followed up its findings both with individual firms and the profession in general and plans to update the guidance in early 2019. The key reminders from the review were:

• There is a statutory duty for the auditor to make a report.
• Trustees need to be aware of the list of matters of material significance and the duty of auditors to make a report.
• Trustees should be reminded that they are required to report serious incidents to the regulator.
• Trustees are also encouraged to submit their audited accounts as soon as they are signed.

The current guidance on reporting matters of material significance can be found here and the full report here on the Charity Commission website.

In October 2018, reflecting the constant focus on safeguarding, the Charity Commission updated its guidance published in 2017 to include information on protecting staff and volunteers in a charity, working with children and adults at risk and working overseas.

The full guidance can be found here.

The guidance provides links to various checklists and other guidance available which will be valuable for trustees whose charities work in those areas. A visual summary is available of 10 actions that boards should take to ensure good safeguarding governance. Those key considerations are summarised below for trustees to consider with their Boards:

• Adequate safeguarding policy – subject to regular review
• Risks to beneficiaries and other connected with the charity identified and regularly reviewed and refreshed
• Safeguarding culture improved
• Recognising and reporting a safeguarding issue is understood
• Concerns raised
• Safeguarding training evaluated and current
• Posts requiring a DBS check identified
• Procedures for posts not requiring a full DBS check identified
• Learn from incidents
• Overseas due diligence

The original guidance was published in 2014, updated in September 2017 and then again in October 2018. The full guidance can be found here. The guidance emphasizes the need for trustees to make prompt, full and frank disclosure to the Charity Commission, even if it has already been reported to another authority.

A serious incident is an adverse event, whether actual or alleged, which results in or risks significant:

• harm to your charity’s beneficiaries, staff, volunteers or others who come into contact with your charity through its work
• loss of your charity’s money or assets
• damage to your charity’s property
• harm to your charity’s work or reputation

For the purposes of the Charity Commission guidance, “significant” means significant in the context of each individual charity, taking account of its staff, operations, finances and/or reputation.

The Charity Commission provides a number of reportable or non-reportable examples to assist trustees in deciding what may be reportable in the context of their charity.

Trustees (of charities with income of over £25,000) are required to confirm in their annual return that all incidents have been reported. If incidents are identified that should have been reported these incident reports should be reported before the annual return is filed.

Information Sheet 2 published in January 2019 focusses on the changes in respect of the accounting for gift aid payments made by a subsidiary to a parent charity where no legal obligation exists. It provides support for charities to implement those changes made to FRS 102 through the Triennial Review 2017 and the consequential changes to the SORP through SORP Bulletin 2.

The guidance is written primarily for the subsidiary entities of a charitable parent that applies FRS102. In summary, the impact of the changes on the subsidiary were that:

• A gift aid payment, intended to be made after the year end, could not be recognised at the balance sheet date where there was no legal obligation.
• Gift aid tax relief could be recognised at the balance sheet date, even where there was no legal obligation or liability, when the conditions were met and it is probable that the gift aid payment will be made.
• No current or deferred tax liability is recognised by the subsidiary in relating to a gift aid payment where the tax charge and corresponding relief effectively net off, resulting in a nil tax charge.
• Tax effects may still need to be recognised where for example the subsidiary does not intend to distribute all its taxable profits (current tax effect) or has an anticipate capital gain as a result of the revaluation of items in property, plant and equipment (deferred tax effect).
• Where the application of the amendments changes the entity’s accounting policy for expected gift aid payments and/or the related tax relief, and they are material, then a prior year adjustment will be required.
• Where as a result material gift aid income has previously been recognised by the parent entity in the absence of a legal obligation at the reporting date a prior period adjustment may also be required in the parent only statement of financial activities and balance sheet.
• Such prior period adjustments will only impact the individual accounts of the parent and subsidiary given that gift aid income is fully eliminated on consolidation.

Information sheet 2 provides for a number of scenarios and gives examples how the changes may be presented. Click here to read the full Information Sheet 2.

The guidance was first published by the Charity Commission in 2013 and was updated in November 2018 to add considerations for those charities who regularly host or hold events at their premises.

Many charities further their charitable purposes by arranging events and meetings involving speakers, as well as by distributing literature and other educational materials, including online. Charities involved, in particular, in advocacy and education must make sure that they tread an appropriate line – this includes both avoiding championship of certain political views and in making sure they are not seen to encourage terrorism and support terrorist ideology.

Key points for trustees are about appropriate due diligence and ensuring that events and literature do further their charitable activities. The guidance is clear that the right to freedom of expression is an important element in furthering educational charitable purposes, and enabling debate and discussion is an important part of this. A compliance summary published by the Charity Commission to support trustees is available here.

In December 2018, the Charity Commission issued guidance to think tanks; this focused on how trustees could demonstrate clearly that their activities advance education for the public benefit. The guidance states that trustees must ensure that the charity’s outputs (for example, research reports, articles, seminars) are balanced and neutral, and that there are robust processes and procedures in place that can provide assurance on how the charity ensures this is the case.

Some of the key challenges to trustees include ensuring research

• has sufficient value in educational terms;
• furthers the charity’s purposes;
• is available (either directly or indirectly) to the public, or a sufficient section of the public; and
• presents the public with information that permits them to form their own opinions.

Trustees are reminded that they are fully responsible for the activities of the charity and therefore must make sure that they have appropriate controls over activities. These controls should include periodically reviewing the activities and their impact; and signing off reports that may be controversial or generate significant media interest and the related communications plan.

The guidance also reminds trustees that they should familiarize themselves with the CC9 guidance on campaigning and political activity. Any campaigning or political activity carried out by the charity must accord with CC9 and be in pursuit of solely their educational purposes.

In December 2018, the Charity Commission published a review of 105 accounts submissions covering accounting years ending during the twelve months to 31 December 2016. The sample was from charities with an income of more that £25,000 and the focus of the review was on the description of activities in the trustees’ annual report; whether an appropriate audit or independent examination report was included; and whether the primary statements were consistent.

70% of the accounts reviewed met the minimum standard – a fall from 74% in the prior year. The key failing was around providing little or no information on the charities purposes and the activities carried out to achieve them.

The full report can be accessed here. The Deloitte review of charity trustees reporting for December 2017 and March 2018 year ends is currently underway. Previous survey results and checklists for the trustees’ reporting requirements can be found here.

In December 2018, the Charity Commission published a review of 105 accounts submissions covering accounting years ending during the twelve months to 31 December 2016. The sample was from charities with an income of more that £25,000 and the focus of the review was on whether there was an explanation of the activities undertaken by the charity to further its purposes for the public benefit; and whether a statement was made by trustees’ that they had due regard to the Charity Commission’s guidance on public benefit.

52%, compared to a prior year 51% demonstrated a clear understanding of the public benefit reporting requirement. However the number of charities explaining the activities that furthered their charitable purposes fell from 71% to 66%.

The Charity Commission reported that they are not only looking for a standard statement, but in addition evidence of some reflection on the difference that the charity’s activities had made. For example:

• explaining why the trustees believed that the activities provided public benefit.
• explaining who had benefitted from what the charity had done, a particular group of beneficiaries or the wider public.
• explaining the impact of what the charity had done, such as how the charity’s services had led to improvements in people’s lives.

The full report can be accessed here. The Deloitte review of charity trustees reporting for December 2017 and March 2018 year ends is currently underway. Previous survey results and checklists for the trustees’ reporting requirements can be found here.

In November 2018, the Charity Commission published a review of 106 accounts submissions covering accounting years ending during the twelve months to 31 December 2016. The sample was from charities with an income of more that £500,000 and the focus of the review was on whether the charity had explained its reserves policy; and whether the charity’s level of reserves was correct. This review was carried out due to concerns about the lack of transparency about reserves held and the basis of charities’ calculations.

The review showed that while 97% of the charities sampled included at least a reference to their reserves policy in the trustees’ annual report only 64% of charities included all of the following: the policy on reserves; stated the level of reserves held; and stated why reserves were held.

The Charity Commission also considered whether the reserves figure was in line with the guidance included in Charity reserves: building resilience (CC19) which sets out a process for calculating the level of reserves. Results showed that only 22% of the charities sampled disclosed a reserves figure in accordance with the guidance and 33% of the sample did not state a reserves figure at all.

The Charity Commission is considering whether additional guidance is necessary but recommends that all trustees should follow the steps in the guidance in developing and explaining their reserves policy.

The full report can be accessed here. The Deloitte review of charity trustees reporting for December 2017 and March 2018 year ends is currently underway. Previous survey results and checklists for the trustees’ reporting requirements can be found here.