As we move deeper into the reporting season, the Charities SORP Committee has published some measures relating to financial reporting which will impact all charity accounts that are still to be approved. Here we try to put the most relevant of those measures into a church reporting context.
Please note, these measures apply to churches compiling SORP (accruals) accounts and not to churches producing receipts and payments accounts, although all trustees might want to look at the measures and decide if some mention of the impact of COVID-19 is a necessary or useful addition to their Trustees’ Annual Report.
Trustees’ Annual Report
Government guidance means that all churches are impacted by measures designed to slow the spread of COVID-19. As such, it is difficult to imagine a Trustees’ Annual Report (TAR) that is free of any reference to COVID-19, and most certainly the SORP Committee is expecting trustees to consider the impact on the financial statements as each charity’s circumstances and activities change in light of their response to the virus.
Whilst we understand the need to reference the impacts of COVID-19, we would not want to see TARs dominated by it, and so would suggest that where required, references are kept brief and set in the context of the positive impacts your church is continuing to have, remembering that this crisis brings an opportunity for the church to step up and show God’s love in new ways.
The period which financial statements cover and the date on which they will be approved are important for the amount and depth of disclosure likely to be required. For accounts covering periods ended up to 29 February 2020, it is unlikely that churches would have introduced any COVID measures and would have been operating normally. However, because those accounts are still to be approved, current circumstances have changed and this should be reflected in the TAR.
For accounts being approved imminently (April/May), it is likely that a brief general comment (perhaps along the following lines) will suffice. “In March 2020 the charity took steps (in line with government advice) to help contain the outbreak of COVID-19. This included the temporary suspension of all physical gatherings and the charity has had to curtail, or change, how it operates; the charity has been able to continue some of its activities using online media. The trustees are monitoring income and expenditure and, if it becomes necessary, will take measures to mitigate the impact of COVID-19 on the charity’s free reserves.”
For accounts approved after May 2020, disclosure is likely to be more extensive as the impact of measures taken by churches becomes apparent.
Here are some specific measures highlighted by the SORP committee that trustees should consider including in their report:
- When speaking about the church’s activities, trustees should explain how the measures taken to slow the spread of the virus have affected the church’s activities e.g. the extent to which activities have continued ’online’; the impact on community activities, foodbanks etc.
- For some churches, going concern may become a real issue. Trustees must carefully consider whether the church is able continue as a going concern for a period of no less than 12 months from the date the accounts are approved. Trustees must consider all available information about the future at the date that they approve the accounts. This will include budgets, projections and cash flow statements.
Where there is significant going concern uncertainty, this should be explained in the TAR together with measures being taken to address the uncertainties, and where in extreme cases the trustees do not consider that the charity will be able to continue, the accounts should be drawn up on a different basis.
If the accounts cannot be prepared on a going concern basis then consideration must be given to the value of assets and liabilities resulting from any decision to wind up the charity. If there is any doubt regarding going concern, then we suggest that you talk with your auditors or independent examiners as soon as possible to determine the right approach to adopt.
At this stage, it is difficult to assess the full impact of the virus on the long-term future and activities of a church and is worth remembering that churches are resilient places. Income can be boosted by special offerings and gifts, and expenditure may be more flexible than in other organisations. Also, remember that going concern disclosures in the accounts are not about whether your church will continue to operate in the same way as it did before the virus struck.
Don’t forget that within what might seem like negative impacts, there is a place for positive sentiments about enhanced giving and other measures taken by the church, including any changes that might be adopted in the future.
- The TAR should explain the impact that any measures adopted by the church to control the spread of the virus have had on staff, volunteers and beneficiaries. It should also comment on the contribution of made by volunteers.
- The TAR should explain the impact that dealing with the virus might have on the church’s reserves policy. As the financial impact becomes clearer it may be that some churches are likely to be carrying levels of reserves lower than they might otherwise be used to. If this is the case, then briefly explain the situation and explain whether the trustees will seek to rebuild reserves over time or whether a lower level of reserves will form the basis of a new policy.
- The TAR should set out the implications for designated funds, particularly those where the designation has been removed and the funds have been absorbed back into general fund reserves.
We have left this one until last as it will not impact all churches.
- Where applicable, the TAR should set out the implications for any existing or potential defined benefit pension liability. Some churches (most notably some Baptist churches) are part of a multi-employer defined benefit pension scheme, and with investments falling significantly across the world as a result of the medium and longer-term impact on the world economy, there is potential for existing deficits to increase.
If your church is part of such a scheme, then we suggest that you seek guidance from your pension scheme administrator.
Events after the balance sheet data (PBSE)
In addition to comments made by the trustees, COVID-19 might require either disclosure or changes to the accounts by way of post balance sheet adjustments. There are two categories of events that can occur after the balance sheet date that have a bearing on the accounts:
- Adjusting events: Adjusting events are events that result in adjustments to the balance sheet because they shed light on conditions that existed at the balance sheet date by providing more information about the values of the charity’s assets and liabilities at the year-end, or by revealing the existence of previously unknown liabilities. Examples include:
o The abandonment of plans to purchase or develop property. It is likely that any costs incurred by the year-end will need to be expensed, not capitalised.
o The abandonment of a grant-funded project due to an outbreak of COVID-19 before the year-end. If grant funding received before the year-end is to be returned, this should be recognised as a creditor.
o The cancellation of a conference that was going to take place in the new financial year due to an outbreak of COVID-19 before the year-end. The charity may need to (a) charge any pre-paid conference costs to the SOFA and (b) include a provision for unavoidable conference expenses payable after the balance sheet date.
o The non-recovery of a debt due to the debtor’s financial circumstances at the year-end, which only became known to the charity after the year-end. The charity would need to include a bad debt provision in the year-end accounts.
Because COVID-19 only developed in the UK during 2020, it will not be a cause of an adjusting event for accounts with periods ending on or before 31 December 2019.
- Non-adjusting events – these are events and decisions that do not affect the year-end balance sheet but, because they are significant, still need be disclosed in the notes to the accounts to provide relevant and useful information to readers. Examples include:
o The non-recovery of a significant debt due to changes in the debtor’s financial circumstances since the year-end.
o Significant changes to the charity’s activities, levels of income and expenditure due to circumstances that have occurred since the year-end.
o Significant changes to the value of the charity’s investments, or the charity’s liabilities, due to events that have occurred since the year-end.
For charities with accounting periods ending on (or before) 31 December 2019, the outbreak of COVID-19 will not be an adjusting event, however for accounts still to be approved it is highly likely to be a significant non-adjusting event and so the impact of COVID-19 on the charity in the new financial year will need to be disclosed.
For charities with accounting periods ending on (or after) 31 March 2020, the outbreak of COVID-19 could be an adjusting event (the circumstances were known at the balance sheet date). It will also probably be a significant non-adjusting event and so its impact on the charity in the new financial year will need to be disclosed.
Accounts for periods ending 31 March 2020 and later may require COVID-related adjusting and non-adjusting events. From March, COVID become a circumstance that was known at the balance sheet date and which may subsequently cause of a change in the balance sheet value of assets or liabilities.
Disclosing a non-adjusting event
In the notes to the accounts the trustees should disclose the impact of COVID-19 (and any other non-adjusting events) on the charity’s activities and, where possible, estimate the financial impact. If the trustees are unable to estimate the financial impact, the charity should state this fact.
We recommend that trustees provide estimates for the financial impact when the overall financial impact has been, or is expected to be, significant. This can be accompanied by explanations to help readers understand the information given. For instance, trustees might comment on:
- How COVID-19 has affected the charity’s results in the period since the year-end and up to the approval of the accounts
- The current monthly operating deficit and on when the trustees think the charity will return to break even
- Measures being taken to mitigate the financial impact
- The year to date impact on free reserves and the forecasted impact on free reserves;
- Any uncertainties and explain how the trustees plan to respond if the impact turns out to be more long lasting or severe.
Trustees should use their discretion to determine the information that they believe would be helpful to users of the accounts.
Example 1 – A church with a year ended 30 September 2019 has a debt owed to them. Subsequent to the year-end, it becomes apparent that the debt will not be recovered in full due to circumstances that existed at the year-end but were unknown to the church. This is an adjusting event, most likely leading to a bad debt provision being included in the accounts.
If the circumstances leading to the doubt did not exist at the year-end, the possible non-recovery of the debt (if significant) will be a non-adjusting event requiring disclosure. An example would be a debtor, who was solvent at the year-end, goes on to suffer a large financial loss in the new financial year and now finds themselves unable to settle the debt.
Example 2 – A church with a year ended 31 December 2019 earns 50% (say £100,000) of its annual income from letting its buildings to external organisations. These are generally in the form of short-term rental agreements. Due to COVID-19, none of the organisations renting the church premises are able to meet and so rental income will be lost for an indeterminable period.
Scenario 1. If the church signs its accounts on 31 March 2020, then we would expect the Trustees’ Annual Report to include mention of the anticipated loss of income (not necessarily quantified) and the steps that the trustees are considering or putting into place to mitigate the impact.
Scenario 2. If the church signs those same accounts on 30 June 2020, in addition to the note in the Trustees’ Annual Report we would anticipate a post balance sheet event note including a best estimate of the anticipated loss of income. This additional disclosure is expected because the church has already suffered a significant loss of income and will be in a better position to assess the developing situation and estimate its full impact.
In neither scenario would the accounts be adjusted with a speculative provision for future loss.
Other general matters
Audit/independent examination – The Committee recognises that carrying out audits and independent examinations will not be as straightforward and reminds trustees to allow more time for verifying matters and providing evidence.
COVID-19 has impacted churches in ways that we would never have imagined only a few weeks ago and to an extent that is currently unknown. In the annual accounts trustees need to convey:
- The impact that measures already taken have had on the operation and activities of the church
- The actions that the church has taken to mitigate that impact and the positive ways it has been able to respond
- The short and medium-term financial landscape that the church finds itself in.
Whilst this may be unfamiliar territory, it does not have to be a wholly negative story. Look for those positive ways in which your church has been able to respond; ways that it has engaged with its congregation and its community; ways that it has supported and encouraged others; and ways that it has pronounced the good news story that is Jesus.
COVID-19 may for a while shape what we do, but it does not define who we are.