Part three: New financial reporting standards - charities

Background

The new financial reporting standards are now in place (as at 1 April 2015) for registered charities.  Part one of this series summarised the different tiers of the reporting standards, and how to move between tiers.  Part two of the series outlined the non-financial information which is required to be included in the reports.  This is the final article in this series and summarises the rules for related entities and provides guidance as to when consolidated accounts are required.

Branches or divisions of a charity

For the purposes of the new standards, a registered charity is a “reporting entity”.  Some charities set up sub-entities to carry out their different activities (for example, a second hand shop, or a trust to manage properties).  For the purposes of financial reporting, these would be considered part of the “reporting entity” and the charity would need to include information about these branches in their performance report.

Related entities and consolidated accounts

Consolidated accounts are required when a charity holds a control relationship with another organisation.  Charities that maintain a control relationship or powers to govern the policies of other organisations are known as related entities.  Power to govern could be indicated by a charity’s ability to veto, overrule or modify decisions of an organisation’s governing group.  This may include decisions on revenue policy; how money is raised and spent as well as the ability to appoint/remove members of the governing body and close or wind up the organisation.  A control relationship exists if a charity receives a benefit from the power it holds over another separate organisation.  Charities may receive benefits from these other organisations by receiving portions of profit or surplus or the use of goods or services that contribute to the charity’s objectives.  Charities in these types of relationships will need to include information about these related entities and include these in their performance reports as “consolidated financial statements”. 

Consolidated financial statements present information about a charity and the organisation it controls as one single entity or the “reporting entity”.  When reporting on a consolidated financial statement, charities should combine their assets, liabilities, income, expenses and cash flows with those of the organisations it controls.  The combined expenditure of consolidated financial statements is required to better determine the charities correct reporting tier and could indicate that the charity is required to report in a higher tier.  Refer to part one of this series for further information about the applicable tiers.

This article is part three of a three part series. 

If you would like further information please contact Jessica Middleton on 07 958 7436.