It is difficult to predict the financial or operational implications of the outbreak of COVID-19 on the UK economy or the organisations which operate within it. This update considers the potential impact of the new COVID-19 (coronavirus) on the yet to be published annual reports and financial statements of charities.
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The measures put in place by the government to limit the spread of the virus have been changing on a daily basis. It is expected, at least in the shorter term, the limiting of the movement of people by restricting flights and other travel, cancelling events, and closing venues, various business activities and schools will continue and may even increase.
All of these developments and measures may have a broad range of implications for charities. How the impact on individual charities will depend on a number of factors including the charity’s key sources of income, areas of charitable activity, staffing models, contractual relationships, the nature of the charity’s assets and liabilities and the charity’s underlying funds structure.
Charity Trustees will already be facing unexpected challenges to their charities and it will be important that these are reflected into the necessary decisions that have to be made when reporting on the charity’s activities and financial position.
Areas of focus
The key areas of focus of this update are as follows, being mindful that charities are diverse in their activities and their income generation and therefore, there may be some areas of focus not specifically addressed.
- Income recognition.
- Commitments and liabilities.
- Asset values.
- Going concern.
- Other financial statement disclosures.
- Trustees’ annual report.
- Government support.
Key messages
The key message is that management and Trustees will need to carefully consider the impact of coronavirus on the charity’s report and financial statements to ensure that these continue to reflect the financial activities and position of the charity in accordance with the Charities SORP.
- Funding agreements, contracts etc need to be reviewed to understand the obligations and rights of the relevant parties. For example, there will need to be a consideration of any specified time to perform and termination or break clauses. There needs to be an analysis of whether parties will be able to perform to deliver and if delivery is not possible or is delayed an assessment of the impact including whether the agreement is frustrated or rescinded. Force majeure clauses will need to be considered carefully.
- While the general rules relating to entitlement, probability of receipt and measurement for income recognition remain unchanged, the impact of coronavirus may require Trustees to reconsider these criteria for their different sources of income.
- Assets where the value has suffered an impairment will need to be reviewed and the impairment reflected in the financial statements.
- Charities will have to review debtors to ensure that the third parties remain in a position where they will be able to settle the amounts due or whether there will be a write down of the carrying amount.
- Borrowings need to be considered by the charity to ensure that it is not in breach of any related terms and covenants.
- Most organisations, including charities, are necessarily having to change their working structures in the short term. If these prompt a longer-term change in use of resources, then onerous contracts in respect of leasehold properties will need to be assessed.
- A key message to be considered within the Trustees’ Annual Report will be the impact of the coronavirus on the charity and how the charity will need to adapt and change its plans going forward. Trustees will need to assess how they can best explain the impact of coronavirus on the charity’s financial results and financial position, what are their plans for the charity to manage the financial impact going forward, including a discussion of the impact on the charity’s reserves and reserves policy and the level of reserves held.
- The Trustees’ assessment on the charity’s ability to continue as a going concern is already a key area of emphasis and importance and Trustees will need to take particular account of the impacts from the coronavirus outbreak and ensure they have the appropriate disclosures. This may also lead to a modified audit report.
- The government has already implemented a number of business support schemes, some of which will be available to charities and / or their trading subsidiaries depending on their circumstances. This is constantly changing and the details of entitlement and how any claims will be settled are still being developed. However, if a charity believes that it can benefit from any of these support schemes Trustees will need to determine when and how any such benefit should be reported in the financial statements.
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