Disclose your position but prove you will survive for the next 12 months, says Helena Wilkinson from accountancy firm Chantrey Vellacott DFK
Q. The majority of our funding, some 80%, will be retendered by the local authority and we will only know the outcome by December. Our accounts are due to be signed in September. How do we deal with this?
Helena says: With regard to the accounts themselves, the issue here relates to the going concern concept and a useful guide is available from the Financial Reporting Council on going concern and liquidity risk – written for directors of UK companies but equally useful to all types of entities.
For accounts to be prepared on a going concern basis, it means that from the date of signing the accounts (being September) that the charity will continue to exist or operate on a similar basis for at least a further 12 months. In this situation the charity will have difficulty demonstrating that it can continue at a similar level due to the uncertainty over its future funding position.
Therefore its position will need to be disclosed in the accounts with regard to this uncertainty and how the charity intends to overcome this and still continue in its existence – albeit perhaps in a reduced capacity.
So some of the considerations mentioned above and plans being pursued by the trustees and actions taken may need to be disclosed in the accounts. The disclosure needs to be about the assurance that while the charity is restructuring, in merger talks, reducing in scale or other planned action that it can survive in this new form for 12 months from signing the accounts. The trustees need to be able to demonstrate that they remain a going concern regardless of the uncertainty.
For the auditors to agree with this going concern statement, they will need to see evidence that can support this position. Such evidence will include cashflows, forecasts and budgets spanning at least one year from the date of signing the accounts which underpin the assumptions that are being taken with regard the going concern concept. This may, for example, be on the assumption that the charity downscales and ceases 80% of its activity while other funding options are pursued.
If the auditors believe that significant uncertainty remains in relation to the charity’s ability to continue as a going concern, they will draw attention to this uncertainty in their audit report (without qualifying it). If in the worse case scenario the auditor believes the going concern basis is not appropriate or that the relevant disclosure given in the accounts is not adequate, then a qualified audit report will be issued. This is likely to create problems in dealing with potential funders who read the accounts and who may have second thoughts about funding a charity with perceived financial issues.
Trustees would be well advised to consult their auditors at the earliest possible stage if they have any doubts so as to consider what steps need taking.
But the issue of signing the accounts is only one of the problems! The Charity Commission guidance in CC12: Managing Financial Difficulties and Insolvency in Charities would be a useful place to start with regard to the future of the charity.
There are all sorts of issues facing the trustees in these uncertain times in how to deal with this situation which could include considering:
· Collaborative working or mergers may be a distinct possibility, especially to reduce overheads and become more competitive in the re-tendering situation.
· Whether to cease some of its activities in the future and how to cover redundancy and any other closure costs arising or any potential to restructure.
· Budgets and management accounts need to be reviewed actively and continuously to monitor and control the charity’s funds and the major costs (which for many must be payroll) need to be kept in check.
· Potential for fundraising activities and how these can be applied or rethought or in some cases re-engineered to maximise their effectiveness and potentially bring in other income sources.
· Other short term measures such as the possibility of using the charity reserves or of realising some of the charity’s assets – such as its fixed assets and investments, if this was deemed appropriate.
· Consider the trustees’ own personal position if the charity is an unincorporated entity.
Helena Wilkinson is a partner at accountancy firm Chantrey Vellacott DFK specialising in the audit of charities and not-for-profit organisations. She is a committee member of the Institute of Chartered Accountants in England and Wales (ICAEW) Charity and Voluntary Sector Special Interest Group