Part two: New financial reporting standards - charities

Introduction

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.  This part outlines the non-financial information which is required to be included in the reports.

Entity information

The new reports must contain a general descriptive summary to provide information concerning a charity’s activities including what it does and how it is organised.  This is necessary to assist the public’s understanding and to help with the interpretation of the performance report.  This should include the following details:

• The charity’s name, type and legal basis (for example, charitable trust or incorporated society);
• A purpose or mission and the key difference or awareness the charity is trying to achieve;
• General information on the structure of the charity’s operations.  This should include governance arrangements and details of those holding governing and managerial positions in an organisation;
• A brief overview of the charity’s main sources of income and resources (as a brief introduction as this is covered further in later sections of the financial report);
• The main methods used to raised funds (if applicable);
• Details of  volunteer numbers and information about reliance on any goods or services provided to the organisation;
• Any additional information that may assist the public to gain an overall understanding of the particular charity.

The above points are required only for the purpose of a summarised introduction to the financial reports.  The details of each point are required to be expanded on in the financial performance report headings, set out in more detail below.  The amount of detail required will depend on the size of the charity and the complexity of its operations.

Statement of service performance

A charity should provide mainly non-financial information under this heading.  This information is required to help understand the activities of the entity during a financial year. This can be broken down into two main sections:

• Outcomes: what a charity is seeking to achieve in terms of their impact on society.  This is closely related to its mission or purpose as outlined in the entity information above but this section should aim to provide further specific details on its short to mid-term goals.
• Outputs: this section should provide quantification of the goods and/or services that a charity has delivered in the current year.  A charity is not expected to provide detail on every output in a year, rather only the outputs that are significant to performance.

Statement of financial performance

The performance report will need to include financial statements that show details of a charity’s revenue and expenses (balance sheet) and the resulting surplus or deficit from each financial year.  Revenue, for the purposes of financial statements, is income other than that received from borrowings or asset sales.  Examples of revenue may include public donations, philanthropic grants, donations, membership fees received, and proceeds from goods and services to a charity on its own account.  Expenses are regarded as day to day expenses of an organisation such as petrol, rent, office supplies, advertising, salaries/wages and power.  Capital expenses are not required to be reported.  These are fixed asset purchases of significant value to an organisation and that last longer than 12 months.  For example, motor cars, computers, furniture, as well as additions to existing assets such as buildings or land, all of which will not need to be reported. 

Statement of financial position

Charities will be required to provide details regarding their total current assets and liabilities.  This is essentially a snapshot of what the charity owns and owes and the value of its member’s financial interest in the charity.  “Current” for the purposes of the report means assets or liabilities that are expected to be cashed within the following reporting period.  For example bank accounts, cash, debtors and prepayments, inventory, property, equipment and investments.  Liabilities that are required to be reported may include bank overdrafts, creditors/accrued expenses, employee costs payable, unused donations or grants and any loans owed by a charity.

Statement of cash flows

Cash flow statements are required to inform those interested about a charity’s cash movements during a financial period.   A statement of financial performance indicates the revenue and expenses while a statement of cash flow provides those interested with information around the timing of transactions.  A charity’s cash flow statement is comprised of payments and receipts from operating and investment/financing activities.  For instance a charity will need to report on receipts from operating activities such as donations, fundraising, fees, subscriptions, goods and services and dividends and any operating payments made to suppliers and employees.  Investment receipts may include things like property, equipment or capital from members while investment payments comprise payments to acquire property, equipment or capital repaid.

Next steps for registered charities

While the financial side of the reports will not be different to what was done previously by many charities, the non-financial aspects of the new reports will be.  No doubt some charities may find the extra steps time consuming where resources are already stretched.  Other charities may see the changes as an opportunity to reflect on the overall purpose of the organisation and how it is achieving or attempting to achieve that purpose.  This reflection may lead to a refocusing of the activities long-term.  In any event, the information will be available to the public, funders and other stakeholder, and may influence how charities are supported by these stakeholders.   

This article is part two of a three part series.  The final article in this series will summarise the rules for related entities and provide guidance as to when consolidated accounts are required.

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