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2020 Innovation

Charity Accounts and Audit Update Bill Telford, Telford Financial Training Ltd

http://www.the2020group.com/

2020 Innovation Charity Accounts and Audit Update


1 Introduction .................................................................................................................................. 2 2 Charity Accounts -CC feedback .................................................................................................. 6 3 SORP Information Sheet 1 .......................................................................................................... 7 4 Gift aid and trading subsidiaries ................................................................................................ 10 5 Revisions to FRS 102 and charities .......................................................................................... 13 6 Investment property .................................................................................................................. 17 7 Revised ISAS and charities (periods commencing on or after 17 June 2016) ......................... 19 8 Directions and guidance for independent examiners ................................................................ 26 9 Whistle blowing ......................................................................................................................... 30 10 Reporting and public benefit ..................................................................................................... 36 11 Appendix 1 - Charity governance, finance and resilience: 15 questions trustees should ask .. 39 12 Appendix 2 - Example audit report limited company charity ..................................................... 44 13 Appendix 3 – Example independent examiner reports ............................................................. 46 14 Appendix 4 - Independent examiner’s checklist........................................................................ 50

Charity Accounts and Audit Update 2020 Innovation


1 Introduction

1.1 The charity sector under pressure

The charity sector could be said to be under more pressure than ever before. There is more cynicism among donors, and increased scrutiny in the media, Parliament, and of course, from the Charity Commission.

In this course we will review issues directly affecting the financial statements and audit of charities as well as issues of general concern which may impact on matters to be reported in the trustees’ report or accounts or may give rise to a report to the Charity Commission

1.2 Charity News

1.2.1 Introduction

A review of CC news and the CC website indicates that the are a number of core issues, where the CC has concerns about the extent to which trustees understand their responsibilities, and whether trustees are compliant.

The implications for the auditor or independent examiner of these issues may be

(a) direct, for example there may be a requirement for disclosure within the accounts, and where omission of such information would be a qualification issue, or

(b) indirect where there is an issue for disclosure in the trustees’ report.

In all cases a good auditor or independent examiner will be concerned to see that trustees are alert to the guidance, and give assistance and advice, subject of course to ethical requirements.

The following issues have been dealt with in Charity News since the last webinar.

1.2.2 Charity Commission News 57 (9 May 2017)

The following matters were dealt with in CC News 57:

(a) Campaigning during the election period. Trustees reminded of need to comply with guidance in CC 9; (b) What’s your induction policy for new trustees; (c) New digital services launched allowing change of name and objects on-line (d) NHS charities no longer need permission from Secretary of State to change name or governing

document; (e) Warning against the use of cash couriers; (f) Reminder about accounting requirements; (g) New accounting templates produced with Companies House; (h) Registered providers of social housing which are charities no longer need consent from Homes and

Communities Agency or Welsh ministers in relation to land in Wales to dispose of land or grant mortgages and are now generally required to comply with sections 117-121 of the Charities Act 2011 for disposals and section 124 for mortgages.

(i) Making the right decision for your charity referred to CC guidance ‘it’s your decision guide’. (j) Charities and automatic enrolment (k) Are you demonstrating commitment to bets fund raising practice? (l) Fundraising preference service – are you ready? (m) Larger charities – testing your resilience against fraud (n) Automatic disqualification update.

1.2.3 Charity Commission News 58 (2 October 2017)

The key contents were:

(a) Submit your annual return and final deadline for 2016; (b) Have your say on 2018 annual return; (c) Charity governance code updated; (d) Trust and confidence in the Charity Commission steady at 6 out of 10 and 88% of public think CC do a

good job; (e) Getting external scrutiny of charities right; (f) How to report serious incidents in your charity – updated guidance issued; (g) Making grants to an organisation that is not a charity – updated guidance

(i) Understand charity’s purposes – only make grants on projects or services that will help achieve the charity’s purposes;

(ii) Have in place appropriate systems to receive, assess and make decisions; (iii) Undertake risk assessment and due diligence



(iv) Understand limits of funding a non-charity, in particular when a charity can pay support costs, and when it cannot;

(v) Set written terms and conditions and appropriate systems for monitoring spending; (vi) What to do if things go wrong.

(h) Welcome to new Chief Executive – Helen Stephenson; (i) Updates to financial sanctions reporting requirements; (j) GDPR; (k) Cyber security in charities research published.

1.2.4 Charity Commission News 59 (9 January 2018)

Key contents:

(a) Submitting your 2017 annual returns; (b) Passwords for online services; (c) New Charity Commission safeguarding strategy clarifies trustees’ responsibilities; (d) Changes to automatic disqualification rules for trustees and senior managers; (e) GDPR – new helpline for charities; (f) Commission listens to charities in making changes to annual return for 2018; (g) Converting charitable companies to CIOs; (h) Fraud awareness, cyber-attacks and protecting your charity – updated guidance; (i) New and improved Cyber Security Essentials scheme for charities; (j) Charities will need a Legal Entity Identifier to trade in financial instruments e.g. hedging against foreign

currency risks or purchasing equities or bonds to generate an income stream; (k) New simplified financial sanctions guidance for charities operating overseas; (l) New research shows charities must do more to promote diversity on their boards.

1.2.5 Effective trustee management

Given the recent charity “scandals” concerning Big Kids etc., the Charity Commission issued a press release entitled “trustees must engage with finance guidance says charity regulator. Sarah Atkinson, Director of Policy and Communication, outlined three sets of updated guidance:

(a) Managing charity’s finances: planning, managing difficulties and insolvency (CC12); (b) Charity reserves: building resilience (CC19); and (c) Charity governance, finance and resilience: 15 questions trustees should ask.

Appendix 1 is a Word version of the 15 questions which you can use as a checklist for clients. Note that some of these questions give the accountant / auditor an opportunity to provide advice and possibly additional services. Care should be taken that you do not breach the Ethical Standards for Auditors in providing such advice or services. If you want an electronic copy, please e-mail [email protected]

1.2.6 Counter-terrorism legislation.

The CC is alert to the nature of fund-raising and areas where charities operate that are susceptible to contact with exposure to terrorist activities, including terrorist finance. The whistle blowing duties are wider than general money laundering reporting as they extend to employees as well as trustees. Auditors and independent examiners should also be alert to this, given their own whistle-blowing responsibilities.

The Charity Commission recently published details of two cases highlighting risks to charities from an individual associated with terrorism:

(a) In one case, a volunteer for a registered charity used humanitarian aid convoys as cover for his involvement in terrorism in Syria. The CC has been clear that it does not consider aid convoys as an effective means of delivering humanitarian aid and has cautioned charities organising and participating in them that they will be subject to additional regulatory scrutiny. The big issue in this case was the failure of the charity to conduct volunteer due diligence on an individual to whom it gave an open letter of credential.

(b) In the second case also involved aid convoys but related to a limited company purporting to be a charity which was not registered, nor had ever applied to be registered.

1.2.7 Fraud

CC News regularly features references to updated guidance for trustees in areas such as mandate fraud, cyber-fraud, running a fraud awareness week in October 2016 and launching a new website www.charitiesagainstfraud.org.uk

Auditors and independent examiners should consider cross referring their fraud risk assessment to this guidance in assessing trustees’ attitude to fraud prevention.

mailto:[email protected]

http://www.charitiesagainstfraud.org.uk/



1.2.8 Charity Governance Code

The latest edition of the Charity Governance Code was launched by Charity Governance Code Steering Group in July 2017.

The code is not mandatory. It lays out universal principles and outcomes. Although the Code’s broad proposed practices are common to all charities, two versions of the codes are published – one for larger charities and the other for smaller charities.

It is suggested that charities which adopt the code include an ‘apply or explain published statement’ in their annual report. Charities which adopt the code are also required to apply relevant sector-specific codes.

The codes begin with a foundation statement, followed by seven principles. The codes state what each principle is, provides a rationale for its inclusion, explains key outcomes and provides recommendations as to what practices a charity should adopt to ensure the principle is met.

The principles are:

Organisational purpose

Leadership

Integrity

Decision-making risk and control

Board effectiveness

Diversity

Openness and accountability

The code can be downloaded from: https://www.charitygovernancecode.org/en

1.3 Charitable Incorporated Organisations

The Charity Commission permits limited company charities to convert to CIO from January 2018. This is on a phased basis, starting with the smallest companies.

The phased dates are as follows:

Date Annual income

1 January 2018 Less than £12,500

1 March 2018 Between £12,500 and £25,000

1 May 2018 Between £25,000 and £100,000

1 June 2018 Between £100,000 and £250,000

1 July 2018 Between £250,000 and £500,000

1 August 2018 Greater than £500,000

1.4 Charity fundraising

1.4.1 Introduction

An updated version of CC 20 Charity fundraising – a guide to trustee duties has been issued, following the implementation of the Charities (Protection and Social Investment) Act 2016 (Charities Act 2016).

This imposes duties on trustees to take responsibility for the charity’s fundraising, under 6 principles:

(a) Planning effectively; (b) Supervising your fundraisers; (c) Protecting your charity’s reputation, money and other assets; (d) Identifying and ensuring compliance with the laws or regulations that apply specifically to your charity’s

fundraising; (e) Identifying and following any recognised standards that apply to your charity’s fundraising; (f) Being open and accountable.

1.4.2 Reporting requirements

Larger charities are required to disclose a statement for each of the following for accounting periods beginning on or after 1 November 2016:

(a) The fundraising approach taken by the charity, by anyone acting on its behalf, and whether a professional fundraiser or commercial participator carried out any fundraising activities;

(b) Details of any fundraising standards or scheme for fundraising regulation that the charity has voluntarily subscribed to;

https://www.charitygovernancecode.org/en



(c) Details of any fundraising standards or scheme for fundraising regulation that any person acting on behalf of the charity has voluntarily subscribed to;

(d) Details of any failure by the charity, or by any person acting on its behalf, to comply with fundraising standards or scheme for fundraising regulation that the charity or the person acting on its behalf has voluntarily subscribed to;

(e) Whether the charity monitored the fundraising activities of any person acting on its behalf and, if so, how it did so;

(f) The number of complaints received by the charity, or by a person acting on its behalf for the purposes of fundraising, about fundraising activity;

(g) What the charity has done to protect vulnerable people and other members of the public from behaviour which:

(i) Is an unreasonable intrusion on a person’s privacy; (ii) Is unreasonably persistent; and (iii) Places undue pressure on a person to give money or other property.

1.4.3 Smaller charities

Although there is no obligation for smaller charities to make the above disclosures, it is a general principle within the SORP that the trustees of “smaller charities are encouraged to include some, or all of the additional information required of larger charities if the charity trustees consider such additional information relevant to their charity’s stakeholders.” Given the current public concern about fundraising, the trustees of small charity’s may decide that it is relevant to a small charity’s stakeholders.

1.5 Discretionary power for Charity Commission to disqualify a trustee

1.5.1 Introduction

The CC has recently obtained power to disqualify an individual from acting as a trustee. This is in addition to the power it has had to remove a trustee, officer of agent under Section 79 of the Charities Act 2011. That power only applied in relation to:

(a) Individual currently holding office as a trustee; (b) Matters arising from misconduct or mismanagement;

In addition, a statutory enquiry has to be opened in relation to the charities concerned.

There are three statutory criteria for the CC to issue the order:

(a) At least one of the following six criteria must be met: (i) Condition A: – a person has been cautioned for an offence against a charity or in the

administration of a charity for which a conviction would bring automatic disqualification; (ii) Condition B: – a person has been convicted of an offence in another country that:

Is against, or involves the administration of, a charity or similar body, and

Is committed in the United Kingdom would bring automatic disqualification from acting as a trustee.

(iii) Condition C: - a person has been found by HMRC, not to be a ‘fit-and-proper person’ to be a manager of a body or trust.

(iv) Condition D: - a trustee, officer, agent or employer of a charity was responsible for, contributed to or facilitated misconduct or mismanagement in a charity or the person knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it.

(v) Condition E: - an officer or employee of a corporate trustee was responsible for, contributed to or facilitated misconduct or mismanagement in a charity or the person knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it.

(vi) Condition F: - other conduct, whether or not in relation to a charity that is, or is likely to be, damaging to public trust and confidence in a charity or charities.

(b) The commission is satisfied the person is unfit to be a trustee; and (c) The commission is satisfied it is desirable in the public interest to make the disqualification order to

protect public trust and confidence in charity or charities.

The effect of an order is that an individual may be disqualified for a period of up to fifteen years, depending on the seriousness of the conduct. The Commission may also disqualify the individual from being involved in senior management and as an employee. The individual may continue as a director.

1.5.2 Extension to senior managers

From 1 August 2018 the above will be applied to senior managers i.e. those of Chief Executive Officer or Chief Financial Officer or equivalent. A senior manager who is currently in post who would be disqualified under the new regime can apply for a waiver.



1.5.3 Practical impact

It is appropriate for charities to enquire of new trustees whether they are subject to disqualification orders. Trustees are advised when such a disqualification is being contemplated, and there are timelines designed to give trustees time to put their case, and to appeal. Once an order has been made the other trustees will be advised and they should seek to ensure that disqualified trustees cease to act.

Charities need to consider the implication of the extension to senior managers for their recruitment policies and practices

2 Charity Accounts -CC feedback

2.1 Introduction

CC published the results of two monitoring exercises on charity accounts, including one on small charities.

2.2 Do charity annual reports and accounts meet the reader’s needs?

2.2.1 Focus

The review focussed on the following areas:

(a) Have the trustees filed all the requested documents that make up a set of accounts (the annual report, independent scrutiny and accounts) and are they transparent and internally consistent in what is reported?

(b) Does the annual report explain what activities the charity had carried out during the year to achieve its purposes?

(c) Have the accounts been subject to the required level of independent scrutiny based on the charity’s gross income and assets, either an audit or independent examination?

(d) Have the accounts been prepared on the correct basis depending on the charity’s income and type, either receipts and payments or accruals accounts?

(e) Do the accounts contain both a SoFA that analyses expenditure and balance sheet and are they consistent with each other (or the equivalent if receipts and payments were prepared.)?

2.2.2 Findings

In 2016, 107 accounts for the period ending 31 March 2015 were selected. This sample excluded charities with income less than £25,000 (see 2.3 below).

75% of the accounts were of acceptable quality (2013/4 accounts – 77%.) However, 27 charities (25% did not meet the basic standard.

The issues which caused this conclusion were as follows:

(a) The accounts as a whole were inconsistent or not transparent (3 charities): (b) The accounts did not balance or were not complete (8 charities); (c) A proper independent examination had not been carried out (4 charities); (d) The annual report did not cover the charity’s objectives and / or its charitable activities (9 charities); (e) The annual report, independent scrutiny report and / or the accounts were missing (3 charities).

Follow up was limited to 20 charities which did not rectify the issues in subsequent reports and accounts. In 17 cases guidance was provided to trustees and in the other three cases action was required to correct the deficiencies.

2.3 Do small charity annual reports and accounts meet the reader’s needs?

2.3.1 Scope

Since charities with income less than £25,000 are not required to file their accounts with CC, the CC requested accounts from 109 charities. The focus was on the following criteria:

(a) Have the trustees provided both an annual report and accounts? (b) Does the annual report explain what the activities the charity had carried out during the year to achieve

its purposes? (c) Do the accounts include both an analysis of receipts and payments and a statement of net assets and

liabilities and are these consistent with each other (or the equivalent if accruals accounts are prepared)?



2.3.2 Findings

55% of the accounts were of acceptable quality, but 49 charities (45% of sample) did not meet the basic standard as follows:

(a) Neither the annual report nor the accounts were provided (10 charities); (b) Either the annual report or the accounts was provided (17 charities); (c) Both were provided but key information was missing (22 charities).

3 SORP Information Sheet 1

3.1 Introduction

New UK GAAP became effective for large and medium sized charities, including companies for periods commencing on or after 1 January 2015. In addition, such charities had to comply with the FRS 102 Charities SORP.

Small charities were permitted to carry on using FRSSE, and a FRSSE SORP was introduced.

Many commentators recommended early adoption of FRS 102, anticipating that FRSSE SORP would be withdrawn, and this a second transition could be avoided. Those charities which did not choose to early adopt were required to transition to FRS 102 SORP for periods commencing on or after 1 January 2016.

There were no changes where the charity prepares receipts and payments accounts.

Update Bulletin 1 announced the withdrawal of FRSSE SORP and all charities will be required to comply with the FRS 102 SORP which has been amended to reflect this fact. The Bulletin also made some changes to conform SORP with amendments made in the September 2015 version of FRS 102. It also confirmed the definition of a larger charity as one with income greater than £500,000.

As noted above, this was issued in April 2017 covering 14 different issues where a further guidance or clarification was identified as being necessary by users of the SORP or the SORP committee.

3.2 Exemption from preparing a cash flow statement in the individual accounts of a qualifying entity

FRS 102 allows entities which meet the definition of a ‘qualifying entity’ to take advantage of the exemption to prepare a cash flow statement.

A ‘qualifying entity’ is defined in the glossary of FRS 102 as:

A member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation

This definition includes both subsidiaries and parent entities with reference to their individual financial statements.

In line with paragraph 24 of the SORP, under the headings ‘Choice of accounts preparation methods’, a charity can only take advantage of this disclosure exemption if eligible to do so and where the disclosures required by Module 9 of the SORP (Disclosure of trustee and staff remuneration and related party and other transactions) are made.

A parent charity that prepares publicly available consolidated financial statements in accordance with FRS 102 meets the definition of a qualifying entity. Therefore, subject to making the disclosures above, the parent charity is exempt from preparing a cash flow statement in its individual financial statements that are presented alongside its consolidated financial statements. Similarly, a subsidiary charity is exempt from preparing a cash flow statement in its individual financial statements, where this statement is included in the consolidated financial statements of the parent.

1

Parent and subsidiary charities that wish to take advantage of the disclosure exemption must also ensure the relevant provisions in paragraph 1.11 of section 1 of FRS 102 are met. A ‘qualifying entity’ that wishes to take advantage of the disclosure exemptions must ensure:

(a) It otherwise applies the recognition, measurement and disclosure requirements of the FRS. (b) It discloses in the notes to its financial statements:

(i) a brief narrative summary of the disclosure exemptions adopted; and (ii) the name of the parent of the group in whose consolidated financial statement its financial

statements are consolidated and from where those financial statements may be obtained. (Only applicable to subsidiary entities)



3.3 Fundraising disclosures brought in by the Charities (Protection and Social Investment Act 2016

This has already been covered in chapter 2 above.

3.4 Comparative figures for fund disclosures

Under new GAAP, FRS 102 comparatives are required unless otherwise stated in the standard. Paragraph 3.14 of FRS 102 provides that: ‘except when this FRS permits or requires otherwise, an entity shall present comparative information in respect of the preceding period for all amounts presented in the current period’s financial statements’.

Therefore, comparative figures should be provided when making the disclosures required by paragraph 2.29 of the SORP for the summary of assets and liabilities of each category of fund of the charity and for the detail in the movements in material individual funds.

The analysis of charitable funds will include fund movements from the beginning of the prior reporting period to the end of the prior period; and from the beginning of the current reporting period to the end of the current period. Where the current and prior periods have been 12 months long, the charity will provide an analysis over a period of 24 months.

3.5 Inclusion of governance costs within expenditure on raising funds

For charities reporting on an activity basis, expenditure on raising funds, paragraph 4.44, should include any apportioned support costs. This includes those costs relating to the governance of the charity.

Module 8 requires support costs to be analysed across all relevant activities and is illustrated in Table 4. Paragraph 8.8 sets out the principles which must be applied when attributing costs to activities. Governance costs can therefore be allocated to all relevant activities, including expenditure on raising funds.

3.6 Treatment of funding ‘clawed back’ by funders

3.6.1 The issue

Funders may request a charity returns funding received or promised in previous years. This may be ‘clawed back’ as a result of the funding being unspent or ineligibly spent by the charity.

In those instances where the charity has not created a provision in respect of this repayment and has fully recognised the funding as income in previous years, the charity will need to consider whether a provision or a liability for the amount repayable is created.

3.6.2 Accounting approach

Charities must first determine whether the income was correctly or incorrectly recognised in the original period. Where the income was recognised incorrectly, this would give rise to a prior period error. In such cases where the income has been incorrectly recognised, charities should refer to Section 10 of FRS 102.

In line with paragraph 10.19 of FRS 102, where the amount repayable relates to funding which has been ineligibly spent, whether this gives rise to a prior period error will depend on the information which was available and could reasonably be expected to have been obtained and taken into account by the charity in those periods when the income was recognised.

Where the income was correctly recognised, there is no prior period error and the accounting approach will depend on the timing of the request from the funder.

If the request from the funder occurs after the end of the reporting period, but before the accounts are authorised for issue, the charity will need to consider whether the post balance sheet event is an adjusting or non-adjusting event. A post balance sheet event should only be adjusted where it provides evidence of conditions that existed at the balance sheet date. There is further guidance on this within Section 32 of FRS 102.

Where the request occurs after the accounts are authorised for issue, the charity should account for the ‘claw back’ in the subsequent accounting period.

When the provision or liability for the ‘claw back’ is recognised, the debit side entry will be a downward adjustment to total income in order to reduce the level of income over-recognised in previous years. The amount should be debited to the fund where the income was initially recognised, where possible.



3.6.3 Disclosure

A charity should separately disclosure material amounts ‘clawed back’ by funders which relate to funding received or promised in previous years.

3.7 Exemption from the disclosure of the names of related parties

Where the trustees, chief executive officer or senior staff members have elected to withhold their names due to personal danger, and have made the disclosures required by paragraph 1.29 of the SORP, then the disclosure of related party transactions involving that individual or those individuals may be modified to disclose their role, e.g. chair, treasurer, or an alternative identifier in place of their full name as required by paragraphs 9.7 and 9.20 of the SORP.

The disclosure of the name(s) of the transacting related party, as required by paragraph 9.20, may also be withheld where doing so could lead to the trustees or the party themselves being placed in personal danger. The reason for the omissions of the name of the party should be disclosed, in line with the paragraph 1.29.

3.8 Aggregate disclosure of the total amount of donations received without conditions

Paragraph 9.18 of the SORP requires all charities to ‘provide an aggregate disclosure of the total amount of donations received without conditions’. This should be interpreted in the context of those transactions with trustees or other related parties only. Disclosure is only necessary if the total amount of donations received without conditions is judged to be material in the context of the total income from donations and legacies.

Donations which have attached conditions should be disclosed as noted in paragraph 9.20.

3.9 Inclusion of Employers National Insurance Contributions (NIC) as part of employee benefits

When calculating employee benefits for the disclosure of remuneration and benefits received by key management personnel, per paragraph 9.32 of the SORP, the definition of employee benefits should be in accordance with paragraph 28.1 of FRS 102. As a result, Employers National Insurance Contributions (NIC) should be included, in accordance with paragraph 28.4(a) of FRS 102.

However, when identifying numbers of employees to disclose who received employee benefits of more than £60,000 (or 70,000 euros if in the Republic of Ireland), per paragraph 9.30, Employers NIC should be excluded.

3.10 Treatment of loss on disposal of fixed assets

Losses on disposal of a tangible fixed asset should be treated as additional depreciation. Therefore, any realised loss on disposal of a tangible fixed asset is treated as expenditure in the Statement of Financial Activities. Losses should be allocated between cost categories in accordance with the same principles as depreciation, amortisation and impairments, and against the activity or activities that made use of that tangible fixed asset in the current and previous reporting periods leading up to its disposal.

3.11 Requirement for a fair value reserve

As noted in paragraph 15.23 of the SORP, UK charitable companies must set up a fair value reserve for certain types of financial instruments as detailed in Companies Act regulation.

The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 and The Large and Medium-sized Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (‘the regulation’) require a fair value reserve to be maintained for financial instruments that are used in hedge accounting in the following situations:

Where:

(a) the financial instrument accounted for is a hedging instrument under a hedge accounting system that allows some or all of the change in value not to be shown in the profit and loss account, or

(b) the change in value relates to an exchange difference arising on a monetary item that forms part of the company’s net investment in a foreign entity,

the amount of the change in value must be credited to or (as the case may be) debited from a separate reserve (“the fair value reserve)”. The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008, Sch. 1. Pt 2, s D (40) (3)

Paragraph 40(4) of the regulation also gives companies the option to set up a fair value reserve for available for sale financial assets which are not derivatives.



The requirement and option to set up a fair value reserve as detailed in the regulation is only applicable to UK charitable companies.

However, it is recommended that UK charitable companies do not account for movements in the fair value of financial instruments and assets in a separate reserve, except for in relation to those financial instruments required by the regulation as noted above. UK charitable companies should recognise all other fair value movements in financial instruments and assets through the SoFA, in line with the treatment detailed in the SORP.

3.12 Disclosure of government grants

The glossary definition of government contained in the SORP refers to ‘government, government agencies and similar bodies whether local, national or international’.

On a national level, the definition of government includes government departments, local authorities and Non-Departmental Public Bodies (NDPBs). NDPBs are classified by the Office for National Statistics (ONS) as part of central government and include bodies like the National museums and galleries, Arts Councils, lottery funds, research councils, funding councils and many others. For the UK, these bodies are included in the whole of government accounts (WGA).

Preparers may wish to refer to the following websites when identifying which grants are paid by ‘government’ and fall to be disclosed under paragraph 5.58 of the SORP:

The definition of government published on the .gov website: https://www.gov.uk/government/organisations

The list of entities included in the WGA:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/539960/2015-16_WGA_CPID_List.xlsx

The list of Welsh Government Sponsored Bodies (WGSBs):

http://wales.gov.uk/docs/caecd/publications/140312sponsoredbodiesen.doc?lan g=en

The National Public Bodies Directory for Scotland:

http://www.gov.scot/Topics/Government/public-bodies/about/Bodies

The list of Public Service bodies in the Republic of Ireland:

https://www.lobbying.ie/help-resources/information-for-public-bodies/list-of-public-service-bodies/

3.13 Definition of a larger charity

Update Bulletin 1 amended the glossary definition of a larger charity used by the SORP to identify those charities with a gross income exceeding £500,000 (UK) or 500,000 euros (Republic of Ireland) in the reporting period. At issue the income criterion for audit in July 2014 for Scotland and England and Wales was £500,000 and the drafting intention has always been to have a common definition within the SORP regarding disclosure whether in the trustees’ annual report or the accounts. Consequently, the preparer, when applying Update Bulletin 1, should substitute the new definition of ‘larger charity’ in place of a reference to statutory audit throughout the SORP.

3.14 Irish only topics

There are two topics of relevance only to Northern Ireland and Republic of Ireland charities which are not covered in these notes:

(a) Reporting requirements for charitable companies reporting in the Republic of Ireland under the Companies Act 2014 (Republic of Ireland only): and

(b) Thresholds for charities reporting in Northern Ireland (Northern Ireland only.

4 Gift aid and trading subsidiaries

4.1 Introduction

There are two issues relevant here, the guidance in ICAEW TECH 16/14BL and followed up in TECH 02/17BL relating to distributable profits and the new paragraphs in FRS 102 following the inclusion of the provisions of FRED 68.

https://www.gov.uk/government/organisations




http://wales.gov.uk/docs/caecd/publications/140312sponsoredbodiesen.doc?lan

http://www.gov.scot/Topics/Government/public-bodies/about/Bodies

https://www.lobbying.ie/help-resources/information-for-public-bodies/list-of-public-service-bodies/



4.2 The gift aid payment is a distribution

4.2.1 Introduction

Initial guidance from the Charity Commission was that such a payment was not a distribution. This was challenged by ICAEW in TECH 16/14BL (and confirmed in TECH 02/17BL) who obtained counsel’s opinion that the payment is a distribution. This has two important implications:

(a) As a distribution, the gift-aid payment can only be made if there are sufficient distributable profits. This was the principal focus of TECH 16/14BL (see 11.2.2 below.);

(b) A distribution is not recognised within profit and loss in accordance with FRS 102, but is included within the Statement of changes in equity, although where the only changes in equity are profit or loss, dividends and prior year adjustments, a Statement of income and retained earnings can be prepared.

4.2.2 Restriction on ability to pay gift aid

Illustration 1

A trading subsidiary has a profit before tax of £120,000. It has disallowable expenses of £20,000 and tax is 20%. What is the maximum amount of gift aid that it can pay in respect of its first year of trading?

Comments on illustration 1

Taxable profit is £140,000. To eliminate the tax payable for the period it needs to have distributable profits of £140,000 but has only £120,000 at its first reporting date. It can claim tax relief on payments made within nine months after the end of the reporting period and the directors can prepare interim accounts to confirm that additional distributable profits are available to support making the full payment.

4.3 FRS 102 paragraph 29.14A

There has been considerable inconsistency in the way that payments from subsidiary undertakings to parent charities have been accounted for in the light of the fact that, from an accounting point of view, they are treated as distributions (per ICAEW Technical Release 16/14BL), albeit from a tax point of view they are treated as donations.

This inconsistency has been dealt with by amending the taxation section 29 by including a new paragraph 14A and footnote which apply where:

(a) an entity is wholly owned by one or more charitable entities; (b) it is probable that a gift aid payment will be made to a member of the same group, or a charitable

venturer within nine months of the reporting date; and (c) that payment will qualify to be set against profits for tax purposes.

In such circumstances:

(a) The tax effects of the gift aid payment should be recognised in profit or loss at the reporting date; (b) The income tax effects shall be measured consistently with the tax treatment planned to be used in the

income tax filings; (c) A deferred tax liability shall not be recognised in relation to such a gift aid payment; and (d) The gift aid payment, as a distribution to owners, should not be accrued at the reporting date (unless a

deed of covenant is in place) and should be recognised in equity.

The prohibition on the recognition of a liability in the absence of a legal obligation such as a deed of covenant was the most controversial proposal in FRED 67. In the feedback statement, it is clear that there was considerable support for recognition based on board approval or as a constructive obligation. The FRC response states “after considering all the comments made, the FRC continues to believe that FRS 102 requires gift aid payments to be accounted for consistently with dividends. Therefore, a liability shall not be recognised at the reporting date unless there is a legal obligation.” In the basis for conclusions section there is further discussion and linkage with accounting for dividends and specific confirmation that a board resolution does not create a legal obligation.

FRC considers that there are no additional disclosure requirements, although an entity may wish to make relevant disclosures, for example within the post balance sheet events note.

Illustration 2

The following extracts are taken from the accounts of a trading subsidiary of a college for the year ended 31 August 2016.

Statement of comprehensive income Turnover 676,502



Cost of sales (385,230)

Gross profit 311,272 Administrative expenses (4,232)

Operating profit 307,040 Other interest receivable and similar income 150

Profit before taxation 307,190 Tax (61,438)

Profit after taxation 245,752

The gift aid payment had not been made at the end of the year, and is included in creditors due within one year in the balance sheet. The taxable profit for 2015 was £293,526.

Statement of changes in equity Share capital Profit and loss account

Total equity

At 1 September 2015 100 Nil 100 Comprehensive income for the year Profit for the year 245,752 245,752 Donation payable to parent under the gift aid scheme (307,190) (307,190) Tax relief obtained on the gift aid payment 61,438 61,438

At 31 August 2016 100 Nil 100

Note to the tax charge

The company has adopted a policy of paying all its taxable profits to its parent charity under Gift Aid. The tax charge was therefore reversed back into the profit and loss reserve.

You are required to redraft them in line with FRS 102 revised on the following alternative assumptions:

(a) There is no deed of covenant in place, but the directors intend to pay the taxable profit to the parent charity;

(b) There is a deed of covenant in place under which the directors have agreed to pay the taxable profit to the parent charity.


Part (a)

Under FRS 102 29.14A, the tax effects of the gift aid should be reflected in profit and loss and thus there is no tax charge for the year.

As there is no deed of covenant in place, the gift should not be accrued and included in creditors. The revised profit and loss account and statement of changes in equity will therefore be as follows:

Statement of comprehensive income Turnover 676,502 Cost of sales (385,230)

Gross profit 311,272 Administrative expenses (4,232)

Operating profit 307,040 Other interest receivable and similar income 150

Profit before taxation 307,190 Tax -

Profit after taxation 307,190

There is no requirement to have the nil tax line in the profit and loss account.


Total equity

At 1 September 2015 100 293,526 293,626 Comprehensive income for the year Profit for the year 307,190 307,190 Donation payable to parent under the gift aid scheme (293.526) (293,526)

At 31 August 2016 100 307,190 307,290

Note that the requirement to apply the new policy retrospectively means that the opening balance previously shown as nil has to be restated. Since the gift aid payment made this year is not accrued under the new policy,



the balance brought forward will be the profit for 2015. The balance carried forward is, of course, the as yet ungifted taxable profit.

Part (b)

There is no difference in the profit and loss account from that in part (a).

The difference is in the balance sheet and Statement of changes in equity since the gift aid payment is accrued as there is an obligation to pay it. The SOCE is therefore:


Total equity

At 1 September 2015 100 Nil 100 Comprehensive income for the year Profit for the year 307,190 307,190 Donation payable to parent under the gift aid scheme (307,190) (307,190)

At 31 August 2016 100 Nil 100

5 Revisions to FRS 102 and charities

5.1 Introduction

FRS 102 has been updated for the results of the triennial review 2017 and incorporating some incremental improvements and clarifications which relate to charities in the same way as to other entities. These are:

(a) The removal of all undue cost or effort exemptions; (b) The introduction of a definition of a basic financial instrument permitting more financial instruments to

be carried at amortised cost; (c) The introduction of an option to allow entities renting investment property to another group entity to

measure such properties at cost less depreciation and impairments; (d) Revised requirements in relation to the separate recognition of intangible assets acquired in a

business combination.

In addition, and of more significance to charitable groups, the standard now includes guidance on payments by subsidiaries to their charitable parents that qualify for gift aid (see chapter 11 below.)

On 20 February 2018, a draft Update Bulletin 2 was published proposing the necessary changes to the SORP to implement these changes. This draft Bulletin has been subjected to a limited scope review by FRC and it is intended that charities, their auditors and others should follow the Update Bulletin. There is no current intention to issue an updated SORP, awaiting further amendments to UK GAAP from the implementation of changes in IFRS.

5.2 Structure of update bulletin 2

5.2.1 Introduction

Update bulletin 2 is structured as follows:

(a) Chapter 1 – Introduction (b) Chapter 2 – FRC statement (c) Chapter 3 – Clarifying amendments (d) Chapter 4 – Significant amendments (e) Chapter 5 – Other amendments

5.3 Clarifying amendments

5.3.1 Comparative amounts

A new paragraph (3.49) has been added requiring comparative information for all amounts presented in the financial statement which includes the notes. These comparatives are required whether the information is required by FRS 102 or the SORP. Although not mentioned in 3.49, presumably those specific sections of the SORP which currently exclude the disclosure of comparative information (e.g. the movement on fixed assets) will continue to apply!

5.3.2 Assets with two or more major components.

One of the implications of removing the undue cost or effort exemptions within FRS 102 which has not received much attention, is the removal of the undue cost or effort exemption relating to the separate depreciation of major components of assets with useful lives. Paragraph 10.31 has been amended to remove the words



‘unless impractical or involving undue cost or effort’ and now reads ‘each component must be depreciated separately over its useful life.’

5.3.3 Events after the end of the reporting period.

As discussed in more detail below, a trading subsidiary is only permitted to recognise a gift aid payment made after the year end as a liability if there is a legal obligation such as under a deed of covenant. Paragraph 13.5 previously included the determination of a gift aid payment under a constructive obligation as an example of an adjusting event. This has now been removed.

5.4 Chapter 4 Significant amendments

5.4.1 Scope and application module.

New paragraph included to identify changes and effective dates.

5.4.2 Investment properties

There are changes in relation to the treatment of investment property let to another group member and mixed-use property. These changes are dealt with in chapter below.

5.4.3 Cash flow statements

Although FRS 102 exempts small entities from the requirement to prepare a cash flow statement based on the small company size criteria, the SORP requires larger charities to include a statement prepared in accordance with FRS 102 section 7. As noted above a larger charity is one with income exceeding £500,000 in the period.

There are two potentially significant changes:

(a) FRS 102 initially required the reconciliation of profit or loss for the year to cash from operations. In the case of a charity this would be net incoming resources. FRS 102 revised permits the use of a measure of profit or loss as included in the statement of comprehensive income. This would permit an entity to revert to the reconciliation required by FRS 102 of operating profit to net cash from operations. This may not be significant for charities for which the term operating profit has little relevance, and where there are few, if any, simplifications in the reconciliation.

(b) FRS 1 included a requirement for a reconciliation of net debt, FRS 102 did not. The Triennial review reintroduces such a disclosure.

Update Bulletin 2 includes additional paragraphs and a new table showing an example of an analysis of changes in net debt.

Net debt consists of the borrowings of a charity, together with any related derivatives and obligations under finance leases, less any cash and cash equivalents. When several balances have been combined to form the components of opening and closing net debt, paragraph 14.17A requires sufficient detail to be shown to enable users to identify such balances. This analysis is not required in future periods.

The table below is based on the new table 10A adapted for a charity which has no foreign exchange denominated balances and no acquisition or disposal of subsidiaries.

Analysis of changes in net debt

At start of year

Cash flows New finance leases

Fair value movements

Other non-cash

changes

At end of year

£ £ £ £ £ £ Cash 540 180 720 Cash equivalents 230 40 270 Overdraft repayable on demand

(50)

(10)

(60)

720 210 930 Bank loans falling due within one year

(900)

150

(450)

(1,200)

Bank loans falling due after more than one year

(1,100)

450

(650) Finance lease obligations

(650)

100

(350)

(900)

Current asset



investments 400 200 100 700

TOTAL (1,530) 660 (350) 100 - (1,120)

5.4.4 Charity mergers

The transfer of activities to a subsidiary is now included as an example of a charity reconstruction that may be accounted for as a merger. A common example is the transfer of non-charitable trading activities to a trading subsidiary when small scale exemptions cease to apply.

5.4.5 Glossary of terms – Service potential

A new definition has been included for service potential as follows ‘service potential is the capacity to provide services that contribute to achieving a charity’s objectives. Service potential enables a charity to achieve its objectives without necessarily generating net cash inflow.’

This is relevant in assessing

5.5 Chapter 5 Other amendments

5.5.1 Financial institutions

FRS 102 revises the definition of a financial institution. The SORP has been amended to require that charities with a principal activity similar to those listed in the FRS 102 definition of a financial institution must include the additional disclosures required by section 34.

The SORP confirms that this:

(a) Includes (i) Charitable incorporated friendly societies; and (ii) Charities that undertake lending at a market rate or to achieve an element of market return

(mixed motive investments); but (b) Excludes

(i) Charities which provide concessionary rate finance in the form of programme related investments, unless such lending is the charity’s only principal or sole charitable activity.

5.5.2 Module 11 accounting for financial assets and financial liabilities

Terminology – FRS 102 now refers to ‘non-derivative instruments that are equity of the issuer’ rather than ‘non-convertible preference shares and non-puttable ordinary or preference shares’ throughout and the SORP follows suit. This is particularly relevant in the table of common financial instruments.

The initial measurement of financial instruments clarifies that this is adjusted for transactions costs, the effect of which is to require that such costs are taken into account in determining the effective interest rate, and not written off as incurred. However, where the financial instrument is measured at fair value such costs are written off as incurred.

The revisions to the SORP do not make explicit references to the new definition of a basic financial instrument in new paragraph 11.9 A, but the effect may well be to allow a charity to treat some loans as basic which were not previously. Remember also that public benefit concessionary loans do not have to be recorded at the present value of the future payments. Section 34 allows an accounting policy choice to record at transaction value, recognise interest as receivable and impair as necessary.

Entities are no longer required to disclose:

(a) The carrying value of financial assets measured at amortised cost; (b) The carrying value of financial liabilities measured at amortised cost; or (c) The carrying value of financial liabilities measured ay cost less impairment.

Therefore, the only remaining disclosures are:

(a) Measurement bases and accounting policies; (b) The carrying value of financial assets measured at fair value through income and expenditure e.g.

investments in shares; (c) The carrying value of financial liabilities measured at fair value through income and expenditure. In the

absence of derivatives most charities will have no such liabilities.

5.5.3 Module 18: Heritage assets

Fair value may now be assessed by reference to a binding sales agreement, identical or substantially similar assets, provided that the agreement is between knowledgeable willing parties in an arm’s length transaction.



5.5.4 Module 21: Accounting for social investments

Additional guidance that recent transactions providing evidence of fair value must be between knowledgeable, willing parties in an arm’s length transaction.

5.5.5 Module 24: Group accounts

A subsidiary may be excluded from consolidation when its inclusion is not material for the purpose of giving a true and fair view. However, two or more subsidiaries may be excuded only if they are not material when taken together.

Module 24 is changed to incorporate the revised treatment of intangibles in a business combination. An intangible must be recognised separately from goodwill where it meets the recognition criteria, is separable and relates to legal or contractual rights. Additionally, it may choose to recognise assets which are identifiable and separable, or identifiable and related to legal or contractual rights. Disclosure is required of the qualitative nature of intangible assets included in goodwill.

Finally, the SORP adds a disclosure in relation to the nature and extent of risks associated with any interests in unconsolidated entities.

5.6 Effective date

These changes are effective for periods beginning on or after 1 January 2019 with early application permitted provided all amendments are applied at the same time. However, the amendments relating to directors’ loans and tax on gift aid can be implemented separately.

There are three situations you will come across:

(a) New charities will wish to adopt the updated standard immediately; (b) Entities which have yet to transition to new UK GAP will probably wish to early adopt revised FRS 102,

especially as it will allow some existing treatments under old GAAP to be retained; (c) Those charities which have already transitioned can wait until their first accounting periods beginning

on or after 1 January 2019, but as the changes, if any, simplify things, why would they?

5.7 Transition to updated FRS 102

5.7.1 Introduction

The usual rules apply when adopting a new accounting policy as required by FRS 102. The accounts for the current year are prepared under the new policy and those for preceding years restated as if the new policy had been applied.

This is subject to the transitional adjustments introduced by the updated standard as follows.

When an entity first applies the Triennial review 2017 amendments, as an exception to retrospective application, it:

(a) may elect to measure an investment property rented to another group entity, that is measured on an ongoing basis at cost less accumulated depreciation and accumulated impairment losses, at its fair value and use that fair value as its deemed cost at the date of transition for the Triennial review 2017 amendments; and

(b) shall only apply any change to an accounting policy arising from the Triennial review 2017 amendments to paragraph 18.8 prospectively (i.e. it shall not restate comparative information), and therefore shall not subsume intangible assets that previously have been separately recognised within goodwill.

5.7.2 Charity which has not yet transitioned to FRS 102

The full provisions of chapter 35 apply in addition to the changes referred to above.

5.7.3 Charity which has already transitioned to FRS 102

It is important to remember that for a charity with a 31 December year end which has already transitioned to FRS 102, say in December 2015, choosing to wait until the last minute to adopt the revised policies in updated FRS 102, the first accounting period under the revised policies will be for the year ended 31 December 2019. This means that the balance sheets at 31 December 2017 and 2018 need to be restated under the new policies, and the SoFA for the year ended 31 December 2018 similarly restated, subject to the transitional provisions.

The transitional disclosures in Section 35 do not apply. However, the required disclosures of section 10 apply. Paragraph 10.13 applies when a change in accounting policy is required by a change in the FRS whereas



10.14 applies to a voluntary change in accounting policy. Since the only mandatory change which might apply on the adoption of the updated FRS 102 relates to the treatment of gift aid (see chapter 11), 10.14 will usually apply.

The required disclosures are similar and are as follows:

Mandatory policy change Voluntary policy change

(a) the nature of the change in accounting policy;

(b) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected;

(c) the amount of the adjustment relating to periods before those presented, to the extent practicable; and

(d) an explanation if it is impracticable to determine the amounts to be disclosed in (b) or (c) above.

(a) the nature of the change in accounting policy; (b) the reasons why applying the new accounting

policy provides reliable and more relevant information;

(c) to the extent practicable, the amount of the adjustment for each financial statement line item affected, shown separately:

(i) for the current period;

(ii) for each prior period presented; and

(iii) in the aggregate for periods before those presented; and

(d) an explanation if it is impracticable to determine the amounts to be disclosed in (c) above.

Financial statements of subsequent periods need not repeat these disclosures.

6 Investment property

6.1 FRS 102 September 2015

FRS 102 did not include the exemption in SSAP 19 and FRSSE under which an investment property let to another group member could be treated as tangible fixed assets and carried at depreciated cost.

All investment properties were to be carried at fair value with changes recognised in profit or loss, unless fair value could not be measured without undue cost or effort.

Some entities used the undue cost or effort argument and retained the property in tangible fixed assets. Others used the definition to argue that, since the property was held by one group member and let to another for administrative purposes, it was not investment property at all! Others complied with the standard!! This treatment was then reversed in the group accounts.

6.2 Investment property let to another group member

A number of undue cost or effort exemptions have been replaced by the introduction of accounting policy choices options. In particular, an accounting policy choice has been introduced for entities that rent investment property to another group entity, whereby they can choose to measure the investment property either at cost (less depreciation and impairment) or at fair value.

The SORP will be amended to give an accounting policy choice of:

(a) Measure at fair value with gain recognised in the SoFA; or (b) Transfer tangible fixed assets using the cost model. (10.48 A).

An entity can use the fair value of investment property rented to another group entity at the date of transition for the 2017 triennial review amendments if it moves to an accounting policy of cost.

Illustration 3

V Ltd has an investment property occupied by W Limited a subsidiary which cost £250,000. The company has a 31 December year end and transitioned to FRS 102 1A for the year ended 31 December 2016. V Ltd had previously taken advantage of the exemption in SSAP 19 to treat the property as tangible fixed assets, and not investment property, but incorporated fair values on transition as follows:

31 December 2014 350,000

31 December 2015 380,000

31 December 2016 420,000

Advise the directors on the implications of the changes introduced by the triennial review.


Having now started to obtain fair values and incorporate deferred tax, V can continue doing so, as treating such properties as tangible fixed assets (property, plant and equipment) rather than as investment property, is an



accounting policy choice. If the company wishes to revert to including the property at cost less depreciation it will be able to do so from date of transition to the updated FRS.

If it chooses to early adopt the changes, and has a 31 December year end, it can adopt the changes for the year ended 31 December 2017.

It can revert to original cost or can use the fair value at 31 December 2015 (£380,000), the date of transition to the new version of the standard as deemed cost. It can of course wait until 31 December 2019 but why would it, if it likes the simplicity of the change.

If it is happy to keep the property at fair value, in practice it never adopts the change!

6.3 Mixed use property

Under SSAP 19, mixed use property could be classified as tangible fixed assets if the preponderance of use was own use. Or the entity could split the property and account for that portion which was investment property under SSAP 19, and the own use property as tangible fixed assets under FRS 15.

When FRS 102 was introduced there was an undue cost or effort exemption, which has now been removed, in line with the other undue cost or effort exemptions. In FRED 67 there were no exemptions and it appeared that all mixed-use property would have to be included at fair value.

The triennial review has changed the requirement for mixed use property to be treated as investment property only if it can be sold or let on a finance lease. Update Bulletin 2 contains an appropriate amendment. Note that although the words ‘without undue cost or effort’ have been removed, there is still the ability to include investment property within tangible fixed assets under the cost model if the property cannot be measured reliably.

Illustration 4

A charity owns the freehold of a four-storey office block. The ground floor is sublet to its trading subsidiary which operates a retail outlet. A separate subsidiary has an agreement to rent two offices on the top floor, sharing toilet and kitchen facilities. There is no separate access or egress.

The charity qualifies as a small company, has a 31 December year end and transitioned to FRS 102 for the year ended 31 December 2016.

It had previously taken advantage of the exemption in SSAP 19 to treat the property as tangible fixed assets, and not investment property. On transition it incorporated fair values on transition for the ground and first floors but used the undue cost or effort exemption for the top floor. The cost for each of the ground and first floors was assessed as £250,000 and the fair values incorporated in the 2016 accounts were as follows:

31 December 2014 350,000

31 December 2015 380,000

31 December 2016 420,000

Advise the directors on the implications of the changes introduced by the triennial review.


Ground floor

This property is both property let to another group member and mixed-use property.

As mixed-use property, the ground floor would have to be included at fair value as, given the nature of the building, it could be sold separately or leased under a finance lease.

However, as an investment property let to another group member, the charity has an accounting policy choice.

Having now started to obtain fair values and incorporate deferred tax, the charity can continue doing so, as treating such properties as tangible fixed assets (property, plant and equipment) rather than as investment property, is an accounting policy choice.

If the charity wishes to transfer the property to tangible fixed assets and use the cost model, it may do so from date of transition to the updated FRS. If it chooses to early adopt the changes, and has a 31 December year end, it can adopt the changes for the year ended 31 December 2017.

It can revert to original cost or can use the fair value at 31 December 2015 (£380,000), the date of transition to the new version of the standard as deemed cost. It can of course wait until 31 December 2019 but why would it, if it likes the simplicity of the change?

If it is happy to keep the property at fair value, in practice it never adopts the change!



First floor

The accounting policy choice only applies to the component of property rented out to another group entity. The question is whether the first floor could be sold or let on a finance lease, and as it probably could, it must be included at fair value with gains recognised in the SoFA.

Top floor

The charity can no longer use the undue cost or effort from the date of transition to updated FRS 102 and SORP, but it is probable that in the circumstances outlined the property used be the tenant could not be sold or let on a finance lease and therefore may be included in tangible fixed assets under the cost model. Note that if the first floor could be sold or leased, and a fair value measured reliably, could choose not to early adopt the revised standard, but to wait until the December 2019 year end before incorporating fair values. However, since early adoption is only permitted if all the changes are adopted at the same time (apart from those relating to gift aid) it would not be able to adopt the accounting policy choice for the ground floor as outlined above and would need fair values for the 2017 and 2018 accounts.

6.4 Disclosures

Disclosure is required of the carrying amount of investment property rented to another group entity included under the cost model at the end of the reporting period.

6.5 Transfers to and from investment property

6.5.1 Introduction

The triennial review has included detailed guidance on transfers to and from investment property.

6.5.2 Transfer from investment property to tangible fixed assets or inventory

The fair value at the date of the transfer becomes the deemed cost for the tangible fixed asset or inventory. This means that:

(a) The fair value is reassessed immediately before the transfer, and any gain or loss recognised in profit or loss;

(b) The total recognised fair value gains are retained. However, since the charity is no longer using the fair value rules under company law, but is using the alternative accounting rules, the difference between cost and fair value must be included in revaluation reserve and transferred from retained earnings.

6.5.3 Transfer to investment property from tangible fixed assets

FRS 102 16.9 B requires the property to be accounted for under the entity’s normal accounting policy until the date of change of use. This will either be at depreciated cost or using the revaluation model, with gains recognised in revaluation reserve.

When the property is transferred, it is transferred at fair value, with gains being recognised in other comprehensive income. Note that where the entity has been using the revaluation model, there may be an adjustment.

6.5.4 Transfer to investment property from inventory

As with transfers from tangible fixed assets, FRS 102 16.9 C requires the asset to be measured at fair value. However, when the asset is transferred to inventory the gain is recognised in profit and loss.

7 Revised ISAS and charities (periods commencing on or after 17 June 2016)

7.1 Introduction

FRC has issued updated Ethical Standards and ISAs applicable for periods commencing on or after 17 June 2016. These were primarily driven by the revised Audit Directive and Regulation,

It is generally accepted that there should be little change in the work done under ISAs except for public interest entities. Charities are not included within the definition of public interest entities.

There may be some additional requirements for large international groups because of changes in ISA 600. There are unlikely to be many charities affected by these changes.

The key emphasis in the revised Ethical Standards is whether transactions, conditions or events would give rise to a perceived threat to integrity or objectivity in the mind of an informed third party.



The big changes relate to audit reports, as when ISAS were initially introduced in the UK, APB issued a UK and Ireland based reporting standard ISA 700, and not the IAASB version. FRC have now adopted the IAASB version with some UK pluses. Before looking at the general requirements in ISA 700, we need to consider a new ISA (ISA 701).

7.2 Practice Note 11

Practice Note 11 has been revised and issued by FRC. In keeping with the general FRC approach, the PN is shorter than the previous one and does not include material which interprets FRC or CC requirements. Accordingly, it does not include example audit reports. Nor does it reproduce CC material, simply including relevant cross references. Additionally, the PN concentrates on matters relevant to charities and therefore if there are no special considerations arising from a particular ISA, that ISA does not appear in the PN.

As with ISAs above, it is not expected that there will be any significant changes in the audit work undertaken as a result of the changes in PN 11.

7.3 ISA 701 Communicating key audit matters in the independent audit report

7.3.1 Introduction

Having already implemented extended auditor reporting requirements, the FRC has adopted the IAASB version of ISA 701 “Communicating key audit matters in the independent audit report” whilst retaining some specific FRC requirements as UK pluses:

(a) The auditor’s report should “describe those assessed risks of material misstatement that were identified by the auditor and which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team;” and

(b) The requirement in the Regulation for auditors of PIEs to include in support of the audit opinion “a description of the most significant assessed risks of material misstatement, including assessed risks of material misstatement due to fraud”.

7.3.2 Application

In addition to listed entities the following are required to apply ISA 701:

(a) Entities that are required, and those that choose voluntarily, to report on how they have applied the UK Corporate Governance Code; and

(b) Other public interest entities; and (c) Entities where the auditor otherwise chooses to communicate key audit matters in the auditor’s report.

It is conceivable that a large charity might choose to adopt the UK Corporate Governance Code, and this may bring additional reporting issues for the auditor. Where a charity chooses to adopt the Charity Governance Code (see above) this does, not of itself, trigger compliance with ISA 701. However, the auditor is free to choose to communicate such matters in the audit report in which case ISA 701 does apply.

7.4 ISA (UK) 700 (Revised June 2016)

7.4.1 Introduction

A new audit report will be required to comply with ISA 700 as FRC have adopted the International version. Unfortunately, the bulletin of reports does not include example reports for charities ( the old Bulletin included the following examples:

(a) Charitable company in England and Wales; (i) Example 29 – Audit under Charities Act 2011; (ii) Example 30 – Audit under Companies Act 2006; (iii) Example 31 – Charitable group audited under Charities Act 2011 and Companies Act 2006; (iv) Example 34 – Large charitable group whose consolidated accounts require audit under

Companies Act 2006. (b) Charitable company in Scotland or in Scotland and England and Wales;

(i) Example 32 – Charity where election has been made for audit exemption under CA 20006 (ii) Example 33 – Audit under the Charities and Trustee Investment (Scotland) Act 2005 and the

Companies Act 2006 (c) Unincorporated charity

(i) Example 35 – Unincorporated charity registered in England and Wales; (ii) Example 36 – Unincorporated charity registered in Scotland.

As noted above, revised Practice Note 11 does not include specimen reports.



ICAEW has issued guidance on drafting audit reports for a charity, but not a full version.

7.5 Issues arising in applying ISA 700

7.5.1 Introduction Pervasive changes

One of the key problems in drafting audit reports is identifying the nature of the charity and the source of reporting requirements. In particular:

(a) is it a company or a non-company charity? (b) Is it registered in England and Wales, Scotland or Northern Ireland, or more than one of these? (c) Is it a stand-alone charity or a charitable group?

The guidance is based around the reports included in the FRC Compendium of audit reports.

7.5.2 Pervasive changes

The guidance includes:

(a) References to “company” may be amended to “charity” or “charitable company” as appropriate to the legal status;

(b) References to “directors” normally need to be amended to mirror the charity’s own governance structure and the usual term to use is “trustees”;

(c) References to CA 2006 may need to be amended.

7.5.3 Addressee

A company audit report should be addressed to the “directors”. In all other cases it is “trustees.” In a company charity registered in Scotland, however, the report is addressed to the “members and trustees”.

7.5.4 Opinion

The opinion section includes two paragraphs:

(a) The introductory “we have audited …” paragraph; and (b) The opinion itself.

Note that the introductory paragraph must specify the titles of the financial statements and not reference to page numbers.

The opinion in the FRC example needs to be amended to reflect the opinion required by charity law.

7.5.5 Respective responsibilities of directors and auditors and scope of the audit of the financial statements

Under the previous ISA 700, the introductory paragraph was followed by, and the opinion paragraph preceded by, two separate paragraphs:

(a) Respective responsibilities of directors and auditors; and (b) Scope of the audit of financial statements.

The revised ISA effectively splits paragraphs (a) and (b) above into two separate paragraphs:

(a) Basis of opinion paragraph which picks up the some of the auditor’s responsibilities e.g. the requirement to audit under ISAs and Ethical Standards previously covered in the scope of the audit paragraph (see 8.4.5 below);

(b) Responsibilities of directors (see 6.9 below); (c) Auditors’ responsibilities for the audit of financial statements (see 6.10 below).

7.5.6 Basis of opinion

References to ‘company’ may be changed to ‘charity’ or ‘charitable company’ as appropriate.

Where the auditor has taken advantage of an exemption provided in paragraphs 6.11, 6.12 or 6.13 of the FRC’s Ethical Standard for the audits of “small entities in relation to non-audit services or partners/statutory auditors joining the entity, the auditor is required to disclose this in the “basis for opinion” section of the audit report.

7.5.7 Going concern

No changes are needed apart from the pervasive changes referred to above.



7.5.8 Other information

FRC has now adopted the IAASB version and the previous two-part ISA 720 has been dropped.

For entities that are required to prepare other information, as described in ISA (UK) 720 (Revised June 2016) the auditor is required to report in the auditor’s report on that other information in accordance with the ISA (UK). Appendices 1 to 7B of ISA 720 include illustrative examples of Other Information sections. However, these are not tailored to UK circumstances. All charities are required to include a trustees’ report, and in addition, charitable companies are required to prepare a directors’ report, and where not small a strategic report. The trustees’ report may include the statutory information, but is should be clear within that report what is statutory and covered by the additional reporting requirements under CA 2006, and what is required by the SORP.

The auditor’s opinion on the financial statements does not cover the other information, nor is the auditor required to obtain audit evidence beyond that required to form an opinion on the financial statements, except in the circumstances:

(a) where the auditor is required to express an opinion, based on the work undertaken in the course of the audit, on the statutory other information and state the nature of the work performed by the auditor; or

(b) otherwise in accordance with law or regulation.

Other information

The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon

2. The [directors / trustees] are responsible for

the other information.

Our opinion on the financial statements does not cover the other information and [companies audited under Companies Act 2006 only, except to the extent otherwise explicitly stated in our report,] we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

7.5.9 Opinions on other matters prescribed by the Companies Act 2006

This section clearly applies only to charitable companies. There is no change in the opinions required, which now incorporate the additional requirements discussed in the previous chapter, but as discussed above, the FRC illustrative reports include the opinion relating to the identification of material misstatements in the strategic or directors’ report not under “other matters prescribed by CA 2006” but in the next section “matters on which the auditor is required to report by exception”.

Note the difference in wording for small companies which refer only to the directors’ report.

As noted above this now includes the identification of material misstatements in the directors and strategic reports. This section also differs between small and non-small companies.

7.5.10 Matters on which the auditor is required to report by exception

Exception reporting for a charity should reflect the exception reporting required by the applicable law. Charity law differs slightly from company law and charity law in each jurisdiction has some subtle nuances in the precise form of wording.

Note that for audit reports of charitable companies referring to “certain disclosures of trustees’ remuneration specified by law are not made”, the only such disclosures that the auditor is explicitly required to report on by exception are those required by the Companies Act 2006.

The ICAEW guidance gives example wording for English and Welsh non-company charities (see below) and for Scottish charitable companies, Scottish non-company charities (including companies not audited under CA 2006), Northern Irish non-company charities (including companies not audited under CA 2006) and non-company charities registered in more than one jurisdiction.



There is no change for a charitable company in England and Wales audited under CA 2006 from the standard wording in the FRC compendium of reports.

7.5.11 Responsibilities of directors / trustees

The only changes arise from the pervasive changes, although it may be appropriate to make clear that trustees of charitable companies are also directors for company law purposes. Note the inclusion of the expression “trustees” rather than “directors”.

Responsibilities of trustees directors

As explained more fully in the trustees’ directors’ responsibilities statement [set out on page ...], the trustees directors (who are also the directors of the charitable company for the purposes of company law) are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors trustees determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors trustees are responsible for assessing the [charity / charitable company’s] ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

7.5.12 Auditors’ responsibilities for the audit of the financial statements

The authority under which an auditor is appointed has to be specified in the audit reports of non-company charities, audits not carried out under CA 2006 and Scottish charitable companies.

The standard FRC wording is applicable to English and Wels charitable companies. FRC gives three options for the more detailed responsibilities:

(a) Include in the audit report directly; (b) Include within an appendix to the audit report; (c) Include a reference to the more detailed description on the FRC’s website.

The examples below follow option (c), which is the recommended route as, in the unlikely event that there are any changes, the FRC website should always be up to date.

For charities not audited under CA 206, the following (adapted as appropriate) should be included before the above paragraph.

[We have been appointed as auditor under section 144 {* -see note below) of the Charities Act 2011 and report in accordance with the Act and relevant regulations made or having effect thereunder.]

Section 144 applies where the charity requires an audit under the Charities Act

Section 145 applies where a charity which is entitled to have an independent examination opts for an audit

Section 151 applies where a group audit is required under the Charities Act,

7.5.13 Bannerman paragraph

ICAEW recommends that the Bannerman paragraph is included just after the section of the auditor’s report on auditor’s responsibilities, with the use of a suitable heading such as “use of our report.”

Company charity audited under CA 2006

Use of our report

This report is made solely to the charitable company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the charitable company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the charitable company and the charitable company’s members as a body, for our audit work, for this report, or for the opinions we have formed.



Non- company charity and charitable companies not audited under CA 2006

Use of our audit report

This report is made solely to the charity’s trustees, as a body, in accordance with [ Part 4 of the Charities (Accounts and Reports) Regulations 2008] [, / and] [ Regulation 10 of the Charities Accounts (Scotland) Regulations 2006] [and] [Part 4 of the Charities Accounts and Reports Regulations (Northern Ireland) 2015]. Our audit work has been undertaken so that we might state to the charity’s trustees those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the charity and the charity’s trustees as a body, for our audit work, for this report, or for the opinions we have formed.

7.5.14 Signature of the audit report

The requirements for charitable companies audited under the Companies Act 2006 are the same as for other companies and the audit report is required to be signed by the senior statutory auditor, for and on behalf of the audit firm. Auditors of non-company charities and companies not audited under CA 2006, sign in the name of the firm (unless their practice is to sign in the name of the individual.) In addition, charity law requires the auditor to specify that they are eligible for appointment as statutory auditor. This is usually achieved by a statement at the end of the audit report to that effect. This statement is not required if the audit is conducted under CA 2006 itself.

ABC & Co is eligible for appointment as auditor of the charity by virtue of its eligibility for appointment as auditor of a company under section 121 of the Companies Act 2006.

Illustration 5

Your charity client has refused to include certain information required by charity law and the SORP. What are

the implications for your report in the following alternative scenarios:

(a) The charity is a limited company?

(b) The charity is unincorporated?


Part (a)

Since the charity is a company, the additional requirements for reporting on strategic and directors’ reports introduced for periods commencing on or after 1 January 2016 kicks in. The auditor needs to report expressly on:

(a) Consistency of the directors’ report, and where applicable, the strategic report with the financial statements;

(b) Whether the reports comply with applicable legal requirements; and (c) Whether the auditor has identified material misstatements.

It is important to note that in the Glossary of terms, ISAS (UK) define misstatement as follows – “A difference between the reported amount, classification, presentation, or disclosure of a financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. Where the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.”

Additionally, a misstatement of the other information is defined as — “A misstatement of the other information exists when the other information is incorrectly stated or otherwise misleading (including because it omits or obscures information necessary for a proper understanding of a matter disclosed in the other information).

In the UK, a misstatement of the other information also exists when the statutory other information has not been prepared in accordance with the legal and regulatory requirements applicable to the statutory other information”.

Therefore, failure to include information required by company law is likely to result in a qualified opinion on compliance with legal requirements, and material misstatements. Whether omission of information required by the SORP, but not company law, has the same result is more questionable but since company law requires accounts to be true and fair, and true and fair requires compliance with accounting standards, which includes



FRS 100 which requires compliance with the relevant SORP, or disclosure of non-compliance, it would appear to do so.

When a qualified report is required, ISA 705 requires the inclusion of a Qualified Basis of Opinion paragraph, explaining the basis for the qualification. As noted above, the opinion on material misstatements has been moved to the matters on which the auditor is required to report by exception. The report would be on the following lines:

Other information

The other information comprises the information included in the annual report, other than the financial

statements and our auditor’s report thereon. The directors are responsible for the other information. Our

opinion on the financial statements does not cover the other information and, except to the extent otherwise

explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and,

in doing so, consider whether the other information is materially inconsistent with the financial statements or

our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such

material inconsistencies or apparent material misstatements, we are required to determine whether there is a

material misstatement in the financial statements or a material misstatement of the other information.

If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

As described in the Basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report we have concluded that a material misstatement of the other information exists.

Basis for Qualified Opinion on other matters prescribed by the Companies Act 2006

Based on the work undertaken in the course of the audit, the information given in the trustees’ report including the strategic report has not been prepared in accordance with applicable legal requirements because of the omission of the following information [provide details].

Qualified opinion on other matters prescribed by the Companies Act 2006

Except for the matter described in the Basis for Qualified Opinion on other matters prescribed by the Companies Act 2006 section of our report, in our opinion, based on the work undertaken in the course of the audit:

the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

Except for the material misstatement described in the Basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.

Part (b)

There is no requirement to report on the Trustees’ Report, other than an implied term that the Trustees’

Report is consistent with the financial statements. However, given the requirements of ISA 720 the auditor

cannot include the statement “We have nothing to report in this regard.”

As noted above the omission of information is, potentially, a material misstatement and when the auditor

concludes that there is a material misstatement he is required to “report that fact.” Since there is no opinion,

there is no requirement for a basis of qualified opinion!

The report should be prepared on the following lines:

Other information

The other information comprises the information included in the annual report, other than the financial

statements and our auditor’s report thereon. The directors are responsible for the other information. Our

opinion on the financial statements does not cover the other information and we do not express any form of

assurance conclusion thereon.



In connection with our audit of the financial statements, our responsibility is to read the other information and,

in doing so, consider whether the other information is materially inconsistent with the financial statements or

our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such

material inconsistencies or apparent material misstatements, we are required to determine whether there is a

material misstatement in the financial statements or a material misstatement of the other information.

If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have concluded that a material misstatement of the other information exists because the trustees’ report including the strategic report has not been prepared in accordance with applicable legal requirements because of the omission of the following information [provide details].

8 Directions and guidance for independent examiners

8.1 Overview

An updated CC 32 being Directions and guidance for independent examiners has been issued. This updated guidance:

(a) includes revisions in the Directions, and the guidance on applying those directions, and therefore, the work which needs to be carried out.

(i) New direction 2 – Check for any conflict of interest that prevents the examiner from carrying out their independent examination;

(ii) New direction 7 – If the accounts are prepared on an accruals basis and one or more related party transactions took place the examiner must check if these were properly disclosed in the notes to the accounts. The examiner must check that the trustees have considered if there were any related party transactions in the reporting periods and check whether the trustees have made the disclosures required by the applicable SORP in the notes to the accounts. Note that this was changed from the proposal in the consultation draft under which the onus was on the examiner to identify conflicts of interest.

(iii) New direction 9 – The examiner must check whether the trustees have considered the financial circumstances of the charity as at the end of the reporting period and, if the accounts are prepared on an accruals basis, check whether the trustees have made an assessment of the charity’s position as a going concern when approving the accounts. Where accruals accounts are prepared, the examiner must ensure that the disclosures about going concern required by the applicable Statement of Recommended Practice (SORP) are made and that the trustees’ assessment of going concern is reasonable given the available information. In particular the examiner must check if any material uncertainties related to events or conditions that cast significant doubt on the charity’s ability to continue as a going concern are disclosed in the notes to the accounts. Where either receipts and payments or accruals accounts are prepared, the examiner must consider whether the trustees have assessed what invoices, bills and commitments remain outstanding at the end of the reporting period and whether the trustees have identified if they can settle these as and when they fall due.

(b) In addition to changes in the Directions there are minor changes in eligibility to carry out an independent examination where income is greater than £250,000.

(c) It is now possible for an independent examination to be carried out on consolidated accounts, although there is no requirement to prepare such accounts.

(d) Finally, there is a revised independent examiner’s report (see Appendix 3).

The updated guidance and Directions must be followed by independent examiners when carrying out their independent examination. For independent examiner’s reports signed by the examiner and dated on or after 1 December 2017 the new Directions and guidance must have been followed for the independent examination to have been done correctly. The date from which the new Directions are mandatory is 1 December 2017.

Examiners are encouraged to follow the new Directions and guidance straight away and not wait for the mandatory date of 1 December, but the Commission will accept independent examiner’s reports based on the old Directions and guidance if these are signed on or before 30 November 2017. From 1 December if an



examiner has not followed the new Directions and guidance then they have not carried out their independent examination properly.

8.2 Application of directions

8.2.1 Accruals accounts and receipts and payments accounts

All 13 directions apply to accruals accounts. Direction 7 does not apply to receipts and payments accounts, and part only of directions 8 and 9 apply to such accounts.

8.2.2 ‘Must’, ‘should’ and ‘may’

Consistent with other guidance for charities, CC32 emphasises the relative importance of the three terms:

(a) ‘must’ means something is a legal or regulatory requirement or duty that the independent examiner must comply with or must follow in the conduct of their examination

(b) ‘should’ means guidance that is good practice which the Commission expects the independent examiner to follow when carrying out their examination

(c) ‘recommended’ or ‘may’ means a recommendation or practice that the Commission believes that independent examiners may find helpful in carrying out their independent examination.

The examiner has discretion to exercise their own judgment and follow different practices that where they consider that they are more suitable for the charity’s circumstances.

This is a significant change from the consultation document where everything was should and respondents considered this increased the regulatory burden.

8.3 Checklist

The revised guidance includes a very useful checklist plus some useful guidance on areas such as fund accounting which were not included previously. The checklist is included as Appendix 3.

8.4 Reporting

Appendix 3 includes 3 unqualified reports:

(a) Non-company charity preparing accruals accounts with a gross income of less than £250,000; (b) Non-company charity preparing receipts and payments accounts with gross income of less than

£250,000; and (c) Company charity with gross income greater than £250,000.

Illustration 6

You are the independent examiner of EFG CIO which is preparing receipts and payments accounts. You have identified a lapse in the keeping of accounting records recording of restricted income. At the end of one church service a special appeal was held for a mission to Samarkand, but the money was banked together with the routine collections for that month and no separate record kept of the amount received for the specific purpose of the mission to Samarkand.

You raised the matter with the trustees who pointed out that the deposits for that service was noted £1,978 against an average weekly banking of £1,275. They also confirmed that this was a one-off lapse in following the established protocol that ensures that specific appeals are counted and deposited separately. They reminded all who are involved in collecting and counting the collections at services of the correct procedures.

The accounts did show the expenditure on the mission to Samarkand was separately identified and amounted to £2,837.

What are the implications for your report?


The independent examiner’s report is unqualified in relation to the keeping of accounting records and the agreement between the records and the accounts, as the one-off lapse is not considered to be material.

The examiner cannot state that no material matter has come to his attention to which attention should be drawn in order to enable a proper understanding of the accounts to be reached. The report will be on the following lines.

Independent examiner’s report to the trustees of EFG Charitable Incorporated Organisation (‘the CIO’)

I report to the charity trustees on my examination of the accounts of the CIO for the year ended 30 April 2018.

Responsibilities and basis of report



As the charity trustees of the CIO you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 (‘the Act’).

I report in respect of my examination of the CIO’s accounts carried out under section 145 of the Act. In carrying out my examination I have followed all applicable Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act.

Independent examiner’s statement- matter of concern identified

I have completed my examination. I confirm that no material matters have come to my attention in connection with the examination giving me cause to believe that in any material respect:

1. accounting records were not kept as required by section 130 of the Act; or 2. the accounts do not accord with those records.

In carrying out my examination I noted a lapse in the keeping of accounting records recording of restricted income. At the end of one church service a special appeal was held for a mission to Samarkand, but the money was banked together with the routine collections for that month and no separate record kept of the amount received for the specific purpose of the mission to Samarkand. The accounts did show the expenditure on the mission to Samarkand was separately identified and amounted to £2,837. In response you, the trustees, pointed out that the deposits for that service was noted £1,978 against an average weekly banking of £1,275. You confirmed that this was a one-off lapse in following the established protocol that ensures that specific appeals are counted and deposited separately and that you had reminded all who are involved in collecting and counting the collections at services.

I confirm that there are no other matters to which your attention should be drawn to enable a proper understanding of the accounts to be reached.

Signed: Name: Relevant professional qualification(s) or membership of professional bodies (if any): Address: Date:

Illustration 7

You are the independent examiner of the DEF Trust and have identified that the receipts and payments accounts prepared for the Trust show cash received in the year of £36,873, but that no records have been kept to match the record of the donations received to the deposits made and cash balances were retained and not deposited at the Trust’s bank. The only written record retained is a letter advising a grant award of £10,000. The majority of the expenditure was made in cash from retained unbanked cash or via cash withdrawals using a charity debit card, but few receipts were kept. Aside from invoices for utilities and rent and play equipment, there are no records of volunteer or other expenses. Total cash spent amounted to £86,000 with receipts for only £41,732 leaving £44,268 of payments without any supporting records.

What is the impact on your independent examiner’s report?


The report has to be qualified in respect of accounting records not being kept and the accounts according with those records. There are matters to be raised to which attention should be drawn. The examiner’s report should be qualified as follows:

Independent examiner’s report to the trustees of DEF Trust (‘the Trust’)

I report to the charity trustees on examination of the accounts of the Trust for the year ended 30 April 2018.


As the charity’s trustees you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 (‘the Act’).

I report in respect of my examination of the Trust’s accounts carried out under section 145 of the Act. In carrying out my examination I have followed all applicable Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act.


I have completed my examination. I have identified matters of concern that give me reasonable cause to believe that:

1. accounting records were not kept in respect of the Trust as required by section 130 of the Act; and



2. the accounts do not accord with those records.

The receipts and payments accounts prepared for the Trust show cash received in the year of £36,873 however no records have been kept to match the record of the donations received to the deposits made and cash balances were retained and not deposited at the Trust’s bank. The only written record retained is a letter advising a grant award of £10,000. The majority of the expenditure was made in cash from retained unbanked cash or via cash withdrawals using a charity debit card, but few receipts were kept. Aside from invoices for utilities and rent and play equipment, there are no records of volunteer or other expenses. Total cash spent amounted to £86,000 with receipts for only £41,732 leaving £44,268 of payments without any supporting records.



Illustration 8

You are the independent examiner of the WXY charitable company preparing accounts for the year ended 30 April 2018. The trustees have refused to prepare a SoFA and have prepared a profit and loss account. There are restricted funds relating to a public collection, but this is not reflected anywhere in the financial statements.

What are the implications for your examiner’s report?


A qualified report is required in the following terms.

Independent examiner’s report to the trustees of WXY Charitable Company (‘the Company’)

I report to the charity trustees on my examination of the accounts of the Company for the year ended 30 April 2018.


As the trustees of the Company (and its directors for the purposes of company law) you are responsible for the preparation of the accounts in accordance with the requirements of the Companies Act 2006 (‘the 2006 Act’).

Having satisfied myself that the accounts of the Company are required to be audited under Part 16 of the 2006 Act and are eligible for independent examination, I report in respect of my examination of the Company’s accounts carried out under section 145 of the Charities Act 2011 (‘the 2011 Act’). In carrying out my examination I have followed the Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act.


I have completed my examination. I have identified matters of concern that give me reasonable cause to believe that the accounts prepared for the Company are not fully compliant with the accounting requirements of section 396 of the 2006 Act and have not been prepared fully in accordance with the methods and principles of the Statement of Recommended Practice for accounting and reporting by charities. Instead of a Statement of Financial Activities incorporating an income and expenditure account, only a profit and loss account has been prepared. In neither the profit and loss account nor the balance sheet are the funds analysed between unrestricted and restricted funds, yet the amount of restricted funds held is detailed in the notes to the accounts and relates to a public collection with balance of £x remaining at the year end.

I confirm that I have no other matters have come to my attention in connection with the examination giving me reasonable cause to believe that in any material respect:

1. accounting records were not kept in respect of the Company as required by section 386 of the 2006 Act; or

2. the accounts do not accord with those records; or 3. except for the matter of concern noted above the accounts do not comply with the accounting

requirements of section 396 of the 2006 Act other than any requirement that the accounts give a ‘true and fair view which is not a matter considered as part of an independent examination; and

4. except for the matter of concern noted above the accounts have not been prepared in accordance with the methods and principles of the Statement of Recommended Practice for accounting and reporting by



charities [applicable to charities preparing their accounts in accordance with the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102).]



9 Whistle blowing

9.1 Introduction

The Charity Commission has recently updated and clarified the reporting of matters of material significance to the charity regulators by auditors and independent examiners. This guidance applies to the Charity Commission in England and Wales, OSCR and the newly created charity regulator in Northern Ireland.

The Commission has also issued guidance on reporting relevant matters under the statutory right.

Within C 32 (see above) there are some useful examples of the practical application of this right and duty.

9.2 Duty to blow the whistle

9.2.1 Introduction

The duty to report arises where the auditor or independent examiner, in the course of their work, identifies a matter, which relates to the activities or affairs of the charity or of any connected institution or body, and which they have reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the regulator of its functions.

Auditors and independent examiners are only required to communicate matters described as being of material significance in the context of the regulator’s functions.

Determining whether a matter is reportable involves consideration both of whether the auditor has a ‘reasonable cause to believe’ and that the matter in question ‘is, or is likely to be of material significance’ to the regulator. The regulations do not require auditors or independent examiners to perform any additional audit work as a result of the statutory duty nor are they required specifically to seek out breaches of the requirements applicable to a particular charity. However, in circumstances where they identify that a reportable matter may exist, they carry out such extra work, as considered necessary, to determine whether the facts and circumstances give them ‘reasonable cause to believe’ that the matter does in fact exist. It should be noted that the work done does not need to prove that the reportable matter exists.

The CC guidance has been updated to take account of various statutory changes.

9.2.2 Material significance

There is no change in the definition of ‘Material significance’ which is defined as follows:

“The term material significance requires interpretation in the context of the specific legislation applicable to the regulated entity. A matter or group of matters is normally of material significance to a regulator’s function when, due either to its nature or its potential financial impact, it is likely of itself to require investigation by the regulator.”

The determination of whether a matter is, or is likely to be, of material significance to the regulator inevitably requires auditors to exercise their judgement. In forming such judgements, they need to consider not simply the facts of the matter but also their implications. In addition, it is possible that a matter, which is not materially significant in isolation, may become so when other possible breaches are considered.

9.2.3 Matters at a glance

The table below shows the old wording and the revised wording with a summary of the reasons for the change as outlined in the consultation document:

Title Previous wording Revised wording Comments

1. Dishonesty & Fraud

Matters suggesting dishonesty or fraud involving a significant loss of, or a major risk

Matters suggesting dishonesty or fraud involving a significant loss of, or a material

‘Significant’ is changed to ‘material’ to align with the terminology in the SORP



to, charitable funds or assets

risk to, charitable funds or assets

2. Internal controls & Governance

Failure(s) of internal controls, including failure(s) in charity governance, that resulted in a significant loss or misappropriation of charitable funds, or which leads to significant charitable funds being put at major risk

Failure(s) of internal controls, including failure(s) in charity governance, that resulted in or could give rise to a material loss or misappropriation of charitable funds, or which leads to material charitable funds being put at major risk

To align terminology to that used in the SORP

3. Money Laundering & Criminal Activity

Matters leading to the knowledge or suspicion that the charity or charitable funds have been used for money laundering or such funds are the proceeds of serious organised crime or that the charity is a conduit for criminal activity

Knowledge or suspicion that the charity or charitable funds including the charity’s bank accounts have been used for money laundering or such funds are the proceeds of serious organised crime or that the charity is a conduit for criminal activity

Adding in section about bank account as there have been instances of charities allowing others to use their bank account to move money. proposal to include “during the audit / independent examination” at beginning not followed through.

4. Support of Terrorism

Matters leading to the belief or suspicion that the charity, its trustees, employees or assets, have been involved in or used to support terrorism or proscribed organisations in the UK or outside the UK;

Matters leading to the knowledge or suspicion that the charity, its trustees, employees or assets, have been involved in or used to support terrorism or proscribed organisations in the UK or outside the UK, with the exception of matters related to a qualifying offence as defined by Section 3(7) of the Northern Ireland (Sentences) Act 1998

Small update to change the word ‘belief’ to ’knowledge’. Update to include specific references in respect of Northern Ireland. This change is intended to negate the need to report qualifying offences that occurred prior to 1998 in relation to the Northern Ireland conflict

5. Risk to charity’s beneficiaries

Evidence suggesting that in the way the charity carries out its work relating to the care and welfare of beneficiaries, the charity’s beneficiaries have been or were put at significant risk of abuse or mistreatment

Evidence suggesting that in the way the charity carries out its work relating to the care and welfare of beneficiaries, the charity’s beneficiaries have been or were put at significant risk of abuse or mistreatment

No change – proposal to include “during the audit / independent examination” at beginning not followed through.

6. Breaches of law or the charity’s trusts

Significant or recurring breach(es) of either a legislative requirement or of the charity’s trusts

Single or recurring breach(es) of either a legislative requirement or of the charity’s trusts leading to material charitable

Text amended to clarify that it is material breaches which must be reported, and this may be in the form of a single or recurring



funds being misapplied

breach.

7. Breach of an order or direction made by a charity regulator

A deliberate or significant breach of an order or direction made by a charity regulator under statutory powers including suspending a charity trustee, prohibiting a particular transaction or activity or granting consent on particular terms involving significant charitable assets or liabilities

Evidence suggesting a deliberate or significant breach of an order or direction made by a charity regulator under statutory powers including suspending a charity trustee, prohibiting a particular transaction or activity or granting consent on particular terms involving significant charitable assets or liabilities

Proposal to include “during the audit / independent examination” at beginning not followed through. However, inclusion of words evidence suggesting implies will have come through audit / independent examination.

Any notification or matter reported to the trustees on resigning as independent examiner or matter that the examiner is aware of on resignation or ceasing to act that falls within the categories of the previously reportable matters, or for examiners the notification on ceasing to hold office or resigning from office, of those matters reported to trustees.

This has been removed as it was misinterpreted leading to auditors and independent examiners simply notifying the Regulator when they had ceased to hold office due to a change in appointment.

8. Modified audit opinion or qualified independent examiner’s report

On making a modified audit opinion, emphasis of matter, material uncertainty related to going concern, or issuing of a qualified independent examiner’s report identifying matters of concern to which attention is drawn, notification of the nature of the modification / qualification / emphasis of matter or concern with supporting reasons including notification of the action taken, if any, by the trustees subsequent to the audit opinion, emphasis of matter or material uncertainty identified

This is introduced to ensure that issues identified during the audit / examiner’s report are separately highlighted to the Regulators so that timely regulatory action can be taken if appropriate. This ensures that Regulators can respond to these issues as soon as notification is received and also that Auditors / Examiners are fully aware that this is a separate duty.



/ examiner’s report.

Evidence that, without reasonable cause, trustees have not taken action on matters identified by the auditor / examiner in their scrutiny of accounts for a previous year.

This was included in the consultation paper but not followed up in the final version

9. Conflicts of interest and related party transactions

Evidence that conflicts of interest have not been managed by the trustees and / or related party transactions have not been fully disclosed in all the respects required by the applicable SORP, or applicable Regulations.

Unauthorised private benefit or incomplete disclosure of related party transactions damages public trust and confidence and leaves charity assets open to the risk of misappropriation.

9.3 The right to report

9.3.1 Introduction

A separate statutory right (as opposed to a duty) to report to the appropriate regulator also exists and may be used by auditors / examiners. Auditors / examiners become aware of circumstances which in their opinion does not give rise to a duty to report to the regulator, but which should nonetheless be brought to their attention. Such matters should be considered in conjunction with ISA 250 'Consideration of law and regulations', and where any report is made auditors / examiners rely on the protection afforded by general law.

The CC, OSCR and CCNI have issued Reporting of relevant matters of interest to charity regulators in November 2017.

9.3.2 Overview

Relevant matters are those matters that auditors and independent examiners consider are significant but are not listed as matters of material significance. The charity regulators will still be interested in such significant matters and so encourage auditors and independent examiners to report them.

Where an examiner or auditor is in doubt about whether they should report a matter, the preference of the UK charity regulators is that it should be reported, and the regulators can then determine what action, if any, is required.

9.3.3 What does not need to be reported

Minor issues to do with honest mistakes in the governance of a charity do not need to be reported to a charity regulator. Minor issues include those that are immaterial to the accounts and matters that have no bearing on the use of charitable funds or assets. For example:

(a) the Chair forgetting to sign the file copy of the minutes of trustee meetings where the accuracy of those minutes is not disputed.

(b) a procedural error in calling or conducting a trustee meeting where the oversight was a genuine error, the meeting was quorate, other trustees were not deliberately excluded and action has been taken to mitigate the impact and avoid a future recurrence.

(c) a genuine oversight in approving a valid invoice, expenses claim or similar item where the amount involved is small and the validity of the item is not disputed.

(d) minor errors in the keeping of accounting records where one or more items were not fully recorded in terms of description, date and amount and the accounting records have now been corrected and the validity of the item(s) is not disputed.



9.3.4 What may be reported

The guidance includes some useful examples and conforms that it is unnecessary to undertake any additional audit or examination work to identify matters for reporting and matters will be restricted to those identified during the course of an audit or independent examination.

Illustration 9

An examiner identifies that money within a restricted fund has been spent on an activity that is not compatible with the restriction on the use of those funds. The amount was less than £1,000 and the balance on the restricted fund at the end of the reporting period was over £100,000 so it is not considered material to the accounts.

(a) What are the implications for the auditor / independent examiner? (b) What difference would it make if the amount involved had been material


Part (a)

Even though this is a breach of trust, it is not a matter of material significance to the regulator because the amount involved is not considered to be material.

If the trustees are already aware of the breach of trust, or if made aware, plan to reinstate the restricted fund from future unrestricted income, then the matter need not be reported as a relevant matter as it would be viewed as minor.

However, if there are no plans to make good and the trustees are not going to inform the respective charity regulator about it, then the auditor or examiner is advised to report it as a relevant matter.

Part (b)

If the expenditure from the restricted fund had been material to the accounts, this would have been considered to be a matter of material significance which the examiner is required to report as a legal duty.

The auditor or examiner must apply their own judgment as to the seriousness of the situation. A good guideline for auditors and examiners is that where a situation or circumstance arises that would fall within the listed matters of material significance, but it is not judged serious enough to require reporting as a legal duty, the issue will still remain relevant to the respective charity regulator.

Any matter uncovered by an auditor or independent examiner during the course of their work which is considered to be potentially fraudulent, should be always reported to the relevant charity regulator as a matter of material significance.

Illustration 10

A charity established to care for vulnerable adults and children is reliant on a single contract for 90% of its income in the reporting period and the trustees are uncertain whether they will be able to secure future funding at the current level when the contract is renewed the following year.

What are the reporting implications for auditors / independent examiners?


In these circumstances although there is no immediate concern, it is a relevant matter to the respective regulator as they will be concerned as to whether the trustees have appropriate contingency plans in place in case the contract is not renewed, or funding is significantly reduced.

Whilst there may be no immediate uncertainties about going concern, continuing deficits with an excess of expenditure over income, adverse longer-term trends in reserves, over-reliance on uncertain sources of income or reliance on unusual business models are matters relevant to the respective charity regulator and are usefully reported.

The charity regulators do not expect auditors or independent examiners to make a formal assessment of the charity’s future financial prospects. They anticipate that auditors and independent exam iners will use their knowledge and experience of other charities when considering the ability of a charity to meet its obligations and manage its resources effectively.

Those charities reporting under the SORP must either prepare their accounts on a going concern basis, in which case the trustees will have evidence to support that approach or they will be preparing their accounts on some other basis and disclosing that approach in their accounting policies.



Some guidelines are provided here about situations where the auditor or independent examiner is encouraged to report concerns about financial stability and/or reserves as a relevant matter:

(a) for the current and preceding two or more years the charity has suffered a significant excess of expenditure over income;

(b) the charity is reliant on a single source of income and the continued receipt of that income is subject to a high degree of uncertainty. This is either about its ongoing payment or because there is a significant risk that it is about to be reduced by a significant amount and the trustees do not appear to have contingency plans in place to replace this income;

(c) the charity’s reserves are significantly below target in the reporting period and there is a history of reserves being significantly below target in one or more previous reporting periods;

(d) the charity has an unusual business model whereby it relies on a third party’s goodwill to obtain funds, on a few key donors for funds, or on a key individual whether trustee or staff member to obtain funds;

(e) the charity has significant net current liabilities and owes significant money to HMRC for more than three months on employer national insurance or similar obligations or has persistently incurred fines;

(f) the charity is behind on meeting pension payments to a pension scheme or has a defined pension liability/ obligation, that is or should be recognised on the balance sheet of the scheme, that exceeds both its net assets, at the end of the reporting period and the equivalent of its annual income; or

(g) the charity has been consistently late in meeting its payroll or in paying creditors and the level of relevant creditor balances is rising year on year.

9.4 How to make a report

Separate guidance is given for each regulator. The guidance for England and Wales is as follows: “until such time as the digital notification using an on-line form is established, a report is made by e-mail to [email protected] . The e-mail should be headed ‘Reporting of relevant matters of interest to the Commission’ and should provide the following information:

(a) the auditor/ examiner’s name and contact address, telephone number and/or e-mail address (b) the charity’s name and registration number (if applicable) (c) a statement that the report is made in accordance with section 156 of the 2011 Act (d) describe the matter giving rise to concern and the information available on the matter reported and,

where possible, provide an estimate of the financial implications (e) where the trustees are attempting to deal with the situation, a brief description of any steps being taken

by trustees of which the auditor/ examiner has been made aware.”

Illustration 11

Reverting to the illustration above, relating to the qualified audit report arising from the inadequate accounting records, what are the reporting implications to the Charity Commission?


This is a matter of material significance and CC 32 suggests the report should be on the following lines:

Whitetree White Town Lane White Whitterington Well County WW1 3ZZ July 17

th, 2018

Dear Sir,

Independent examiner reporting a matter of material significance concerning DEF Trust, charity number 1XXX905

I am making a report to you in accordance with section 156 of the Charities Act 2011 to advise you of a matter which I believe is of material significance to you in the exercise of your functions under sections 46, 47 and 50 of the Charities Act 2011. The matter relates to a failure to maintain accounting records that caused my report on the accounts to be a qualified report because my concern related to a matter covered by the statements the Regulations require me to report upon.

Whilst carrying out the independent examination of DEF Trust I noted that the trustees had not retained sufficient records to support £44,268 of payments made in the year. The charity has grown very rapidly with a grant made in the previous year providing funds to support a major expansion in the activities for children. The trustees explained that they hadn’t appreciated the extra work involved and in their haste to recruit additional volunteers had not put in place the book-keeping processes to ensure money is promptly banked and that volunteers sign a

mailto:[email protected]



receipt book for their expense claims. The charity also provides toys, tea and refreshments, lunches for the children, and buys presents and cakes for the children, all of which were paid for in cash. Volunteers were also reimbursed in cash for out of pocket expenses and the travel costs and admission fees for several supervised day trips for the children were also paid in cash. I was assured that at least one of the trustees was on hand at all times when money was received or spent, and they oversaw all the payments made. Neither the trustees nor their family members have benefitted in any way from the charity’s funds or were paid expenses.

A further difficulty was that the volunteer treasurer had been ill for much of the year and so the discipline of obtaining receipts and using cheques had not been maintained and settlement by way of cash used for convenience. I was given full co-operation in conducting my examination and the circumstances and information provided to me gave full answers to all my questions and whilst, I am not required to look for fraud, I came across no evidence that led me to believe that fraud had taken place, so I report this as relevant matter rather than as a matter of material significance to you.

I understand that the trustees recognise that there has been a major lapse in record keeping and have now hired a book-keeper and put in place proper controls by adopting the Charity Commission’s guidance Internal financial controls for charities (CC8).

Having completed my examination of the accounts, I have noted this as a matter of concern in my independent examiner’s report highlighting that sufficient accounting records had not been fully maintained.

Yours faithfully,

Mr A Doubt

Illustration 12

Reverting to the illustration above, relating to the failure to prepare a SoFA, what are the implications for reporting to CC?


Again, this is a matter of significance which must be reported. CC suggests the following wording in CC32.

Whitetree White Town Lane White Whitterington Well County WW1 3ZZ

July 17th, 2018

Dear Sir,

Independent examiner reporting a matter of material significance concerning WXY Charitable Company, charity number 1XXX780

I am making a report to you in accordance with section 156 of the Charities Act 2011 to advise you of a matter which I believe is of material significance to you in the exercise of your functions under sections 46, 47 and 50 of the Charities Act 2011. The matter relates to a failure of the directors to compile their accounts in compliance with the applicable Statement of Recommended Practice (SORP).

Although I have advised the directors that a charity must follow the SORP when preparing accounts on an accruals basis they were unwilling to incur the cost of reformatting the accounts of the charity.

Because the directors have not followed the SORP, the accounts do not distinguish the material restricted funds separately from the unrestricted funds and my concern is that the directors may subsequently spend restricted funds in error leading to a breach of trust.

Having completed my examination of the accounts I stated these matters of concern in my independent examiner’s report to the trustees.

Yours faithfully,

Mr A Doubt

10 Reporting and public benefit

https://www.gov.uk/government/publications/internal-financial-controls-for-charities-cc8

https://www.gov.uk/government/publications/internal-financial-controls-for-charities-cc8



10.1 SORP requirements

The SORP requires all charities to:

(a) Explain the main activities undertaken to further the charity’s purposes for the public benefit; and (b) Include in their report, a statement confirming whether the trustees have had regard to the Charity

Commission’s guidance on public benefit. (FRS 102 SORP 1.18, FRSSE SORP 1.19)

10.2 Charity Commission Guidance

The Charity Commission issued guidance for trustees entitled “How to write charitable purposes.

This guidance suggested that trustees should make the following clear:

(a) What outcome the charity is set up to achieve; (b) How it will achieve these outcomes; (c) Who will benefit from these outcomes; and (d) Where the benefits extend to.

The guidance gives clear recommendations on the use of words, the need for clarity, precision and completeness.

10.3 The public benefit framework

For many years the prevention of poverty, the advancement of education and the advancement of religion were deemed to be in the public interest. The Charities Act 2006 required the Charity Commission to introduce guidance on providing public benefit.

The Commission initially set out two key principles of public benefit and, within each principle, there are some important factors that must be considered in all cases. This has now been superseded by the following framework.

There are 3 relevant documents on the CC website as follows which form a public benefit framework as follows:

There are two aspects of public benefit:

(a) the ‘benefit aspect’ (b) the ‘public aspect’

A charity must satisfy both, although there are different rules if the purpose is to relieve or prevent poverty. These tests will be applied to each charitable purpose.

To satisfy the benefit aspect a purpose must be beneficial and any detriment or harm that results from the purpose must not outweigh the benefit.



10.4 Some cases

10.4.1 U Turn UK CIC (formerly Uturn UK Ltd) and the Charity Commission

The First Tier Tribunal reported on 27th February 2012 in relation to an appeal by Uturn UK CIC against a

refusal by the charity commission to register the company. The case is interesting as it relates to a decision by the Commission that there was insufficient evidence to support the view that the proposed object which concerned the promotion of “street associations” was an exclusively charitable nature.

The Tribunal supported the Commission.

10.4.2 Preston Down

This Exclusive Brethren meeting hall was originally refused registration as charity on the grounds that it failed to meet the public benefit test. Compare this with the original decision in the church of Scientology where the CC considered that Scientology was not a religion. The CC has now agreed to accept an application after a change in the trusts by a deed of variation. The latest from the CC is that they still have concerns and are now reviewing nearly 100 similar Exclusive Brethren meeting halls.

10.4.3 Cambridgeshire Target Shooting Association

On 2 February 2015, the Charity Commission refused to register the CTSA on the grounds that it “is not established for exclusively charitable purposes for the public benefit”.

The Commission published a very detailed analysis of the reasons behind the rejection which trustees and other might find illuminating and helpful in framing their own charitable objects and making the link with public benefit!

10.4.4 Living out

A very recent case involved a Christian charity working with homosexuals which was initially refused registration because the CC was unable to conclude whether its activities were in the public interest, notwithstanding that the wider promotion of the Christian religion was. After an appeal, the objectives were restructured, and the CC has now approved the registration. This case demonstrates the need to write charitable objectives carefully, and the degree of detailed scrutiny to which they are subjected.

10.4.5 The Countryside Alliance

The Charity Commission has recently turned down an application from the Countryside Alliance for registration as a charity, on the grounds that it was unable to determine whether its activities are for charitable purposes. The report makes interesting reading into the rationale and approach adopted by the Commission.



11 Appendix 1 - Charity governance, finance and resilience: 15 questions trustees should ask

Strategy - a charity’s plan of action designed to achieve a long-term overall aim 1. What effect is the current economic climate having on

our charity and its activities?

1.1. Are we focusing on the right things, or have we drifted into activities that are over and above our core charitable aims? If we have, should we stop those activities?

1.2. How stable and reliable is our funding to support our plans? If we are relying on a single source of income (such as grant funding or investment income), should we look at other sources of funding?

1.3. How do we think the political, economic, social and technological environment in which we work is going to change? How can we best reflect this in any forward planning that we do? Does it present us with any immediate opportunities? For example:

(a) recruiting volunteers including those with different skills (b) collaborating with others to provide skills, accommodation,

equipment or increased buying power (c) re-negotiating contracts (d) bidding for public service delivery contracts

1.4. Are there particular risks we should consider? For example: (a) increased (or reduced) demand for services, or changes in

the type of services needed (b) reduced income from investments and savings (c) funding uncertainty

1.5. Should we think about whether we want to, or are able to, continue operating? Could closing the charity and passing its resources to a similar charity be a better use of scarce funding and resources?

Financial health

2. Are we financially strong enough to continue to provide services for our beneficiaries?

2.1. Do we have up to date information about our charity’s finances, cash flow and debts/obligations? The financial information provided at each trustee meeting should typically include:

(a) the latest management accounts (b) a comparison of budget to actual figures (c) an explanation for variances between forecasts and what

actually happened (d) details of cash flow and closing bank balances

2.2. Do we have access to the right type of financial/professional advice?

2.3. Based on the information we have, can we: (a) tell what might happen to our future income? (b) protect (or increase) our current income? (c) continue our programme of activities for the foreseeable

future? (d) make our money go further, for example by identifying

costs we can cut? (e) fulfil our contractual obligations? (f) meet our financial commitments as they fall due? (g) tell if the charity is facing potential insolvency?

2.4. Are we clear about the core activities we want to sustain under any circumstances?

2.5. Are we clear about the charity’s financial prospects for the longer term?

2.6. Are we confident that we will be able to identify and address



potential insolvency in good time?

2.7. ` Have we planned for an orderly wind up of the charity’s affairs if the charity is no longer viable?

3. Do we know what impact the social and/or economic climate is having on our donors and support for our charity?

3.1. How secure is our existing funding, for example contracts from other bodies for service delivery, statutory funding or grants, for the foreseeable future?

3.2. Is it possible to diversify or broaden our sources of income? For example, there are new opportunities for funding such as organisations, charities and investors that can provide loans and other support to charities as a social investment.

3.3. Do we need to rethink our fundraising strategy?

3.4. Have we considered other factors that might influence our supporters? Reputational issues and any of a charity’s policies can affect the support of its donors, for example the way the charity invests its money or the way it fundraises.

4. What is our policy on reserves?

4.1. What will the consequences be for our charity’s beneficiaries (in particular vulnerable beneficiaries) if the charity has no financial reserves to enable it to continue in the event of loss of regular income?

4.2. Do we have a clear, published reserves policy that meets the needs of our charity? If not, we need to show why we do, or do not.

4.3. Does our policy: (a) fully justify and clearly explain keeping or not keeping

reserves? (b) identify and plan for the maintenance of essential services

for beneficiaries? (c) reflect the risks of unplanned closure associated with the

charity’s business model, spending commitments, potential liabilities and financial forecasts?

(d) help to address the risks of unplanned closure on their beneficiaries, staff and volunteers?

4.4. Do we know what the level of our reserves is now? We need to assess what assets are freely available and not already set aside or designated for particular purposes.

4.5. Have we considered: (a) new priorities or needs (for example an increased demand

for our services or a change in our activities) which have arisen because of changes in our financial and social environment?

(b) the level of reserves needed to meet new priorities and needs, a longer-term strategy to replenish reserves, or spending them in their entirety?

(c) using reserves to restructure our work?

5. Are we satisfied with our banking arrangements and our current and future investment policy?

5.1. How often do we review our banking arrangements?

5.2. Does our bank offer the range of services that we need? For example:

(a) online banking with suitable security measures (b) appropriate access to cash on deposit (c) a loan facility

5.3. Have we considered the costs and benefits of our current and deposit accounts to ensure competitive interest rates?

5.4. Are our deposits protected by the Financial Services Compensation Scheme?

5.5. Have we considered the services offered by other banks with a view to switching our provider?



5.6. Have we recently reviewed our investment policy to ensure that it is appropriate for current and future needs?

5.7. Have we arranged for regular investment policy reviews, taking into account the fact that sudden changes in the economic climate might mean they should take place more regularly?

5.8. Have we reviewed the diversity, suitability and risks associated with our spread of investments?

6. Have we reviewed our contractual commitments?

6.1. Do we know what our contractual commitments are - they might include office leases, rental agreements, equipment hire?

6.2. Could we collaborate with other organisations to save costs on essential support or back office expenses?

6.3. Do we understand the obligations of any existing or new contracts?

6.4. Are these obligations manageable for our charity now and for the remainder of the contract?

6.5. How do we terminate our contracts in an emergency?

6.6. Should we review any contracts we have with fundraisers for value for money and reputational risks?

6.7. If we cannot meet the terms of a contract, are we aware of the financial and reputational risks we could face?

7. Have we reviewed any contracts to deliver public services?

7.1. Do we understand the obligations of our existing contracts?

7.2. Are these obligations manageable in light of the charity’s current and probable future situation?

7.3. Can we terminate any contracts we are party to if necessary?

7.4. If we cannot meet the terms of a contract are we aware of the financial and reputational risks we could face?

7.5. Are we fully aware of the risks and obligations attached to taking on new public service delivery contracts?

7.6. Have we explored the different ways in which we can achieve our charity’s aims as an alternative to entering into a new contract?

8. If we have a pension scheme, have we reviewed it recently?

8.1. Do we know the risks and liabilities attached to our charity’s pension scheme?

8.2. What plans do we have to manage those risks and liabilities?

8.3. Does our financial reporting make it clear what our pension liabilities are and what we are doing to manage any risk to our charity?

8.4. Do we need to take specialist advice?

9. How can we make best use of any permanent endowment investments we hold?

9.1. Do we know whether any of our funds represent permanent endowment and can only be invested to produce income for our charity?

9.2. Do we think that the interests of our charity and its beneficiaries would be better served by making use of the greater flexibility to spend permanent endowment offered by the charities act?

9.3. Can we take advantage of the power to use a total return approach to investment (this is usually only appropriate for larger permanently endowed charities)?

Governance

10. Are we an effective trustee body?

10.1. Do we understand: (a) the charity’s purposes as set out in its governing

document? (b) what our charity will do, and what we want it to achieve? (c) how all of the charity’s activities are intended to further or

support its purposes? (d) how the charity benefits the public by carrying out its



purposes?

10.2. Have we read and understood The Essential Trustee (CC3)?

10.3. Have we recently reviewed our performance as a trustee body?

10.4. Are we using our time together as a Board efficiently and effectively? Have we read the accounts, reports and other background material before the meeting?

10.5. Have we recently reviewed the skills, knowledge and experience we have as a trustee body? Have our needs changed?

10.6. Are we aware of the importance of effective communication and negotiation with those with an interest in our charity, including our staff?

10.7. Do we have sufficient oversight and knowledge of the activities of external people and organisations acting on our behalf?

10.8. Do we have the guidance we need to ensure that our decisions are made in the best interests of our charity and its beneficiaries?

10.9. Do we know what, if any, conflicts of interests might affect our decision making?

10.10. Do we need to monitor the charity’s affairs more closely, for example by meeting more frequently?

10.11. Do we feel able to take difficult or unpopular decisions if needed, for example about:

(a) ending or changing some activities? (b) changing staffing levels? (c) changing staff benefits? (d) merging with another charity? (e) winding up the charity?

11. Do we have adequate safeguards in place to prevent fraud?

11.1. Do we have proper financial controls and procedures in place to prevent fraud?

11.2. Do they need reviewing and updating, to take account of any increased risk of fraud as a result of changes in the economic and social environment the charity operates in? An example might be the greater prevalence of computer fraud.

11.3. Are there controls and procedures in place to reduce the risk of misuse of personal data?

Making best use of resources

12. Are we making the best use of the financial benefits we have as a charity?

12.1. Do we understand how to make the most of Gift Aid?

12.2. Are we making the most of our potential tax relief as a charity?

12.3. Are we aware of any government financial help available for charities? If yes, have we considered whether it is appropriate for our charity, and whether to apply for it?

12.4. Have we looked into other types of financial help only available to charities? For example, loans and grants from other organisations and charities.

12.5. Do we know where to go for information on how to take advantage of the growing interest in social investment into charities?

12.6. Have we considered whether any trading activities should be hived off to a subsidiary trading company in order to avoid tax liabilities?

13. Are we making the best use of our staff and volunteers?

13.1. Are we aware of our obligations as employers and do we know where to go for further information?

13.2. Do we have a safeguarding policy?

13.3. Do our staff have the right mix of skills and experience that our charity needs to be effective?

13.4. Could we introduce more flexible patterns of working in order to focus our resources where most needed?

13.5. Do we still need the same type and number of staff? Are there better opportunities to recruit in a more competitive job market?



13.6. Are we making the best use of any interest in volunteering for charities?

13.7. Are we proactive in attracting potential volunteers and have we reviewed the way we support and use them?

14. Have we considered collaborating with other charities?

14.1. Are there activities that we think could be run more effectively by working with others, such as sharing equipment, sharing staff, running joint training sessions, purchasing or sharing back office services?

14.2. Do we know how to identify other charities with similar purposes operating in our area that we could contact to discuss possible collaboration or joint working?

14.3. Should we consider the possibility of a formal merger with another charity or charities in the interests of our beneficiaries?

15. Are we making the best use we can of our property?

15.1. Have we thought about how we can use any assets, such as buildings or equipment we own or rent? Could we use them differently, share them with others, re-negotiate terms or sell them?

15.2. Have we reviewed the costs and benefits of how we hold property? For example, buying, selling, renting or leasing?

15.3. Have we reviewed any insurance policies we hold - can we get a better deal?

15.4. What will any change in use of our property mean in terms of insurance?



12 Appendix 2 - Example audit report limited company charity

Independent Auditor’s Report to the Members of XYZ Charity Ltd

Opinion

We have audited the financial statements of XYZ Charity Ltd (the ‘charitable company’) for the year ended [date] which comprise statement of financial activities, balance sheet, cash flow statement and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

In our opinion the financial statements:

give a true and fair view of the state of the charitable company’s affairs as at [date], and of its incoming resources and application of resources, including its income and expenditure, for the year then ended;

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the charitable company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

the trustees’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

the trustees have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the charitable company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

Other information

The trustees are responsible for the other information. The other information comprises the information included in the trustees’ annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.



Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

the information given in the trustees’ report (incorporating the [strategic report and the] directors’ report) for the financial year for which the financial statements are prepared is consistent with the financial statements; and

the [strategic report and the] directors’ report [has / have] been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of our knowledge and understanding of the charitable company and its environment obtained in the course of the audit, we have not identified material misstatements in the [strategic report and the]

4 directors’

report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

the financial statements are not in agreement with the accounting records and returns; or

certain disclosures of directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit. [; or

the trustees were not entitled to [prepare the financial statements in accordance with the small companies’ regime] [[and] take advantage of the small companies’ exemption[s] [in preparing the directors’ report] [[and] from the requirement to prepare a strategic report]].]

Responsibilities of trustees

As explained more fully in the trustees’ responsibilities statement [set out on page …], the trustees (who are also the directors of the charitable company for the purposes of company law) are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the trustees determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the trustees are responsible for assessing the charitable company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the trustees either intend to liquidate the charitable company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Use of our report

This report is made solely to the charitable company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the charitable company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the charitable company and the charitable company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

[Signature] Address [Name] (Senior Statutory Auditor) Date For and on behalf of ABC LLP, Statutory Auditor



13 Appendix 3 – Example independent examiner reports

13.1 Current report (charitable company in England and Wales)

Independent Examiner's Report to the Trustees of XYZ Charity Ltd I report on the accounts of the company for the year ended (date) which are set out on pages … to … Respective responsibilities of trustees and examiner The trustees (who are also the directors of the company for the purposes of company law) are responsible for the preparation of the accounts. The trustees consider that an audit is not required for this year under section 144(2) of the Charities Act 2011 (the 2011 Act) and that an independent examination is needed. [The charity’s gross income exceeded £250,000 and I am qualified to undertake the examination by being a qualified member of (named body).] Having satisfied myself that the charity is not subject to audit under company law and is eligible for independent examination, it is my responsibility to:

examine the accounts under section 145 of the 2011 Act;

follow the procedures laid down in the general Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act; and

state whether particular matters have come to my attention. Basis of independent examiner's report My examination was carried out in accordance with the general Directions given by the Charity Commission. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit and consequently no opinion is given as to whether the accounts present a “true and fair view” and the report is limited to those matters set out in the statement below. Independent examiner's statement In connection with my examination, no matter has come to my attention: 1 which gives me reasonable cause to believe that, in any material respect, the requirements:

to keep accounting records in accordance with section 386 of the Companies Act 2006; and

to prepare accounts which accord with the accounting records, comply with the accounting requirements of section 396 of the Companies Act 2006

and with the methods and principles of the

Statement of Recommended Practice: Accounting and Reporting by Charities have not been met; or

2 to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name Relevant professional qualification or body Address Date



13.2 Independent examiner’s report as per proposed revised CC32

Independent examiner’s report to the trustees of XYZ Charitable company

I report on the accounts of the company for the year ended 30 April 2017 which are set out on pages xx to xx.


As the charity’s trustees (and also as directors of the company for the purposes of company law) you are responsible for the preparation of the accounts in accordance with the requirements of the Companies Act 2006.

Having satisfied myself that the charity is not subject to the requirement for an audit under company law and is eligible for independent examination, I have examined your charity’s accounts as required by section 145 of the Charities Act 2011 (‘the Act’). In carrying out my examination I have followed the Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act.

My role is to state whether any material matters have come to my attention giving me cause to believe:

1. that accounting records were not kept as required by section 386 of the Companies Act 2006; or 2. that the accounts do not accord with those records; or 3. that the accounts do not comply with the accounting requirements of section 396 of the Companies Act

2006 and the methods and principles of the Charities Statement of Recommended Practice applicable to charities preparing their accounts in accordance with the Financial Reporting Standard applicable in The United Kingdom and Republic of Ireland; or

4. that there is further information needed for a proper understanding of the accounts.

Independent examiner’s statement

Since your charity’s gross income exceeded £250,000 your examiner must be a member of a listed body. I conform that I am qualified to undertake the examination because I am a registered member of [named body e.g. ICAEW] which is one of the listed bodies.

I have completed my examination and I have no concerns in respect of any of the matters listed in (1) to (4) above and in connection with following the Directions of the Charity Commission I have found no matters that require drawing to your attention.

Name Relevant professional qualification stated, and name of listed body given Address Date

13.3 Revised independent examiner’s report

13.3.1 Example 1: Examiner’s unqualified report (for a non-company charity preparing accruals accounts) with a gross income of £250,000 or less in the relevant financial year

Independent examiner’s report to the trustees of ABZ Trust

I report to the trustees on my examination of the accounts of the ABZ Trust (the Trust) for the year ended 30 November 2017.


As the charity trustees of the Trust you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 (‘the Act’).

I report in respect of my examination of the Trust’s accounts carried out under section 145 of the 2011 Act and in carrying out my examination I have followed all the applicable Directions given by the Charity Commission under section 145(5)(b) of the Act.



1. accounting records were not kept in respect of the Trust as required by section 130 of the Act; or 2. the accounts do not accord with those records; or 3. the accounts do not comply with the applicable requirements concerning the form and content of

accounts set out in the Charities (Accounts and Reports) Regulations 2008 other than any requirement



that the accounts give a ‘true and fair view which is not a matter considered as part of an independent examination.

I have no concerns and have come across no other matters in connection with the examination to which attention should be drawn in this report in order to enable a proper understanding of the accounts to be reached.

Signed: Name: Relevant professional qualification or membership of professional bodies (if any): Address: Date:

13.3.2 Example 2: examiner’s unqualified report (for a non-company charity preparing receipts and payments accounts) with a gross income of £250,000 or less in the relevant financial year

Independent examiner’s report to the trustees of ABY Trust

I report to the trustees on my examination of the accounts of the ABY Trust (the Trust) for the year ended 30 November 2017.


As the charity trustees of the Trust you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 (‘the Act’).

I report in respect of my examination of the Trust’s accounts carried out under section 145 of the 2011 Act and in carrying out my examination I have followed all the applicable Directions given by the Charity Commission under section 145(5)(b) of the Act.



1. accounting records were not kept in respect of the Trust as required by section 130 of the Act; or 2. the accounts do not accord with those records.


Signed: Name: Relevant professional qualification or membership of professional bodies (if any): Address: Date:

13.3.3 Example 3: examiner’s unqualified report (for a company charity)- gross income exceeded £250,000

Independent examiner’s report to the trustees of WXY Charitable Company (‘the Company’)

I report on the charity trustees on my examination of the accounts of the Company for the year ended 30 November 2017.


As the charity’s trustees of the Company (and also its directors for the purposes of company law) you are responsible for the preparation of the accounts in accordance with the requirements of the Companies Act 2006 (‘the 2006 Act’).

Having satisfied myself that the accounts of the Company are not required to be audited under Part 16 of the 2006 Act and are eligible for independent examination, I report in respect of my examination of your charity’s accounts as carried out under section 145 of the Charities Act 2011 (‘the 2011 Act’). In carrying out my examination I have followed the Directions given by the Charity Commission under section 145(5) (b) of the 2011 Act.




Since the Company’s gross income exceeded £250,000 your examiner must be a member of a body listed in section 145 of the 2011 Act. I confirm that I am qualified to undertake the examination because I a member of [insert named of applicable listed body], which is one of the listed bodies.

I have completed my examination. I confirm that no matters have come to my attention in connection with the examination giving me cause to believe:

1. accounting records were not kept in respect of the Company as required by section 386 of the 2006 Act; or

2. the accounts do not accord with those records; or 3. the accounts do not comply with the accounting requirements of section 396 of the 2006 Act other than

any requirement that the accounts give a ‘true and fair view which is not a matter considered as part of an independent examination; or

4. the accounts have not been prepared in accordance with the methods and principles of the Statement of Recommended Practice for accounting and reporting by charities [applicable to charities preparing their accounts in accordance with the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102)].


Signed: Name: [insert name of applicable listed body]: Other relevant professional qualification(s) or membership of professional bodies (if any): Address: Date:



14 Appendix 4 - Independent examiner’s checklist

The Directions and documentation Step done?

Working paper

reference Direction 1: Check whether the charity is eligible to have an independent examination

Checked the charity audit threshold applying to the accounts to be reviewed

Checked an audit is not required for any other reason

Confirmed the charity is eligible for independent examination

Confirmed the amount of the charity’s income to figure shown the accounts (including any branches) and confirmed that income and assets are below the audit threshold or, if applicable, obtained a copy of the letter from the Commission approving an audit dispensation

If the charity has one or more subsidiaries confirmed that group accounts are not required by law

If a charitable company checked that the audit exemption statement has been made

If applicable, rechecked the threshold calculation during the examination

If the charity’s income is more than £250,000 confirmed that the examiner is a member of one of the listed bodies

If applicable, informed the trustees that the charity is not eligible for an independent examination

If receipts and payments accounts have been prepared, checked that the charity’s gross income is less than £250,000 and that it is not a company

If receipts and payments accounts have been prepared, check that there is no requirement to prepare accruals accounts in the charity’s governing document or for any other reason

If applicable, informed the trustees that the charity is not eligible to prepare receipts and payments accounts

Direction 2: Check for any conflict of interest that prevents the examiner from carrying out their independent examination

Confirmed that there are no close personal relationships with the trustees that compromise independence

Confirmed as having no the day to day involvement in the administration of the charity

If providing other services to the charity, then confirmed that all the criteria in Direction 2 necessary for independence are met

Identified that there are no circumstances in the examiner’s judgment that would reasonably lead to the perception that the examiner is not independent

Considered whether sufficiently skilled to carry out the examination and, where required, confirmed membership of a listed body

If applicable, informed the trustees that you are not eligible to carry out the independent examination

Direction 3: Record your independent examination

File of working papers prepared to document the work undertaken (see the Direction for guidance on key working papers)

Evidence of appointment on file

If issued, letter of engagement signed by the trustees on file

Documentation of steps required by Direction 1 are all done

Documentation that steps required by Direction 2 are all done

Analytical review documented



Areas of concern identified and noted whether these were resolved or if unresolved and significant have included them in the examiner’s report

Verification and vouching procedures undertaken, and any checks made are on file

Copy of approved accounts on file

Copy of trustees’ annual report on file

Copies of information relied upon as part of the examination are on file

If applicable, copies of written assurances given

Recorded the conclusions drawn as an outcome of the independent examination that support the examiner’s report are on file

Recorded any matters of material significance about which a report must be made direct to the Commission

Recorded whether to exercise discretion and report on relevant matters direct to the Commission

Direction 4: Plan your independent examination

Obtained an understanding of the charity’s constitution, objectives, organisational structure, the funds managed, its activities and accounting records and systems

Planned specific examination procedures appropriate to the circumstances of the charity

Reviewed whether any areas for improvement were advised to the trustees in the previous year’s independent examiner’s report (or audit report and management letter) and looked to see if any action taken

Considered the financial risks identified and, where accruals accounts prepared, considered whether the trustees have evidence that shows that the charity is a going concern

Noted any implications for the examiner’s report and for separate reporting to the Commission

Direction 5: Check that accounting records are kept to the required standard

Checked that accounting records have been kept are complete and considered if they have been kept to the required standard

Asked the trustees about how they ensure the accounting records are complete

If corrections made or records created during the examination, the trustee approval for these has been sought and obtained

Asked the trustees if they carried out a review of the charity’s internal financial controls in the year reported


Direction 6: Check that the accounts are consistent with the accounting records

Compared the accounts with the underlying accounting records

Checked some entries from the listing of transactions of income and expenditure to vouchers such as invoices, bank statements, and receipts.

If applicable, confirmed that the trustees have taken the necessary steps to ensure that restricted or endowed funds are correctly reported in the accounts

If additional checks were necessary, the evidence was found that showed the accounting record was complete, voucher present, and both supported the entry in the accounts

Direction 7: If the accounts are prepared on an accruals basis and one or more related party transactions took place the examiner must check if these were properly disclosed in the notes to the accounts



Checked that the disclosures required by the SORP have been made and are complete

Considered whether there are any implications for the examiner’s report and reporting to the Commission

If receipts and payments accounts prepared and a related party transaction note was provided, then checked the note for any implications for the examiner’s report

Direction 8: Check the reasonableness of the significant estimates and judgments and accounting policies used in accounting for the types of fund held and in the preparation of the accounts

Checked with the trustees that the separate funds of the charity have been correctly accounted for and reported correctly in the accounts

Checked the reasonableness of any significant estimates or judgments that have been made in preparing the accounts

Where accruals accounts are prepared, checked that the accounting policies adopted are consistent with the SORP and are appropriate to the activities of the charity

Where accruals accounts are prepared, checked that the accounts were prepared on a going concern basis


Direction 9: The examiner must check whether the trustees have considered the financial circumstances of the charity at the end of the reporting period and, if the accounts are prepared on an accruals basis, check whether the trustees have made an assessment of the charity’s position as a going concern when approving the accounts

Asked the trustees whether they expect the charity to be able to settle outstanding invoices, bills and commitments as and when they fall due

Asked the trustees about the reserves policy and the adequacy of the level of reserves held

Where accruals accounts are prepared, checked that the trustees’ have made an assessment of going concern and that their assessment is reasonable given the information available

Where accruals accounts are prepared, checked that the SORP’s disclosures about going concern have been made


Direction 10: Check the form and content of the accounts

Where receipts and payments accounts have been prepared, checked that the charity can lawfully prepare such accounts, that all the accounting statements are present and that the funds of the charity are correctly identified

Where accruals accounts are prepared, checked that they comply with the SORP and applicable accounting standard

If the charity is a company, checked that the accounts also comply with the applicable company law requirements


Direction 11: Identify items from the analytical review of the accounts that need to be followed up for further explanation or evidence

Carried out an analytical review



Following the analytical review, selected material items in the accounts for further explanation or supporting evidence

If the accounts could be materially misstated, additional checks were undertaken and the examiner is satisfied that the item(s) identified were satisfactorily explained and correctly included in the accounts


Direction 12: Compare the trustees’ annual report with the accounts

Checked that any figure for reserves quoted in the trustees’ annual report is not materially inconsistent with the accounts

Compared the trustees’ annual report with the accounts for any material inconsistency


Direction 13: Write and sign the independent examination report

Reviewed the conclusions from the independent examination

Considered whether the examination has identified a matter of concern that should be reported in the examiner’s report

Checked that the examiner’s report covers all of the matters required

If relying on the work of others in undertaking the independent examination, the examiner is fully satisfied with their work and that work has been fully documented

Signed and dated the examiner’s report

Reported matters of material significance direct to the Commission

Exercised discretion and reported relevant matters direct to the Commission

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