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trustee requirement to consider going concern

By Stephen Mathews | 12 December 2014


Going concern is a fundamental assumption underpinning financial reporting.  When applied to charities, it means in general terms that the trustees expect the charity to continue operating as normal for the foreseeable future, able to meet its obligations as they fall due, and that they have no plans to close the charity or to significantly curtail its operations.  For most trustees, for most of the time, this assessment should be almost routine but there are times and situations where this might not be the case.


Whether a particular situation or set of circumstances brings into doubt the continuance of the charity is a matter of judgement for the trustees.  In accounting speak this judgement is known as “going concern” and where there are doubts, these create immediate implications when completing the charity’s financial accounts and are likely to have wide ranging ramifications for the charity in the medium-term.


Any assessment that trustees make, must be based solely on the charity’s unrestricted funds.  Restricted funds must, by law, only be used for the purposes for which they were given, and as such cannot be considered by the trustees for covering general financial shortfalls.


What might bring about this doubt?


The sorts of situations that may bring going concern doubts into the minds of trustees of churches and Christian charities include:


  • Running a persistent cash flow deficit;
  • The imminent retirement or relocation of one or more significant donors or customers;
  • Serious litigation which might require the charity to incur significant legal costs to defend or may result in a financial penalty that it is unable to meet;
  • The financial impact associated with a change of pastor or minister.


But surely God will provide


As is often the case with churches and Christian charities, there can be a perceived conflict between the faith element “God will provide” and the legal regulations that must be applied to all charities regardless of their background.  Although this tension is real, and indeed often helpful, it must be held properly in balance.


Trustees that do not pay due regard to the regulations in this area are not acting in the best interests of the charity and are breaking the law.  Also, by ignoring genuine concerns, the financial wellbeing of the charity may deteriorate further and trustees may even oversee financial collapse with all of the reputational, legal and financial consequences which that brings to the individual trustees, the organisation, and to the Kingdom of God.


Going concern and accounting regulations


In module 3 of both the new FRS 102 and the FRSSE Charity SORP, the matter of going concern is addressed.  Although not identical, the sentiment in both SORPs is the same.  The trustees must make an assessment as to the going concern assumption after taking into account all available information about the future, looking ahead for a period of at least 12 months from the date that the current accounts are approved.


Trustee considerations


As there will be significant consequences arising from a trustee assessment that the charity is not a going concern, the trustees should not reach this decision lightly and without due regard to the surrounding circumstances and the options that are open to them.


For example, where a charity is running a regular monthly cash deficit, the trustees should include in their considerations;


  • Whether, by continuing its current operations, the deficit is likely to be temporary or whether it is embedded, repeating month after month;
  • How large are the charity’s reserves and how quickly the deficit is eroding them;
  • What actions might the charity be able to take to increase its income?  The outcome of these actions does not have to be certain, but must be more than just wishful thinking;
  • What actions might the charity be able to take to reduce its costs?  Often the reduction of costs can be achieved quicker than increasing income.


As soon as it becomes apparent that there is a realistic going concern danger, professional advice should be sought immediately


Financial planning


It is at times like this, when the financial disciplines of preparing budgets and forecasts come into their own as early warning systems of what the future might hold.  This financial information will help the trustees plot a future course that will hopefully avoid the need to bring the going concern of the charity into doubt, even if that course of action results in an orderly closure of the charity.


In times where many Christian charities are not immune from financial difficulties, more trustees are likely to have to make a more serious assessment of going concern than they may have done in the past.  However, recognising any potential difficulty early and putting in place plans to deal with it should enable most trustees to form a positive going concern judgement without too many sleepless nights.

Posted by Stephen Mathews
Stephen is a Senior Consultant at Stewardship and has spent over 25 years in the accountancy profession. Stephen is a trustee for a number of small Christian charities and has been involved in various church leadership roles for over 20 years.


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