The Charity Commission has reissued its guidance on reserves. The overall requirement is much as before, but there are different emphases. It says trustees should develop a reserves policy that fully justifies and clearly explains keeping or not keeping reserves; identifies and plans for the maintenance of essential services for beneficiaries; reflects the risks of unplanned closure associated with the charity's business model, spending commitments, potential liabilities and financial forecasts; and helps to address the risks of unplanned closure for beneficiaries (vulnerable ones in particular), staff and volunteers.
Furthermore, trustees should publish the reserves policy (even if not required to by law) and it should not be a standard document - it should be used, monitored and reviewed regularly by trustees.
On designated funds, the guidance says these must be genuine and properly explained, including the expected time of use. The guidance says "designations which are never used, or the nature of which are frequently changed without funds being spent, risk bringing the charity into disrepute".
As the bill receives royal assent, trustees need to be alive to the financial implications. These will no doubt be explored in great detail over the coming months, but issues to keep on the radar seem to be:
- The need for trustees to consider not only their own charity, but also matters that might be "damaging or likely to be damaging to public trust and confidence in charities generally". The Charity Commission's fundraising consultation makes the same point, namely that it expects charities to fundraise in a way that "encourages public trust and confidence in charities generally".
- The impact of fundraising regulation, and extra disclosures in annual reports.
- The new powers and limitations on social investment.
For those preparing their year-end accounts, it might be distressing to be told that the Statements of Recommended Practice are changing again, with an "update bulletin" now available on the microsite. This changes the regime for year-ends from December 2016 onwards, although for many charities the changes will have no impact at all. The key changes are outlined here.
- The Financial Reporting Standard for Smaller Entities, FRSSE, is withdrawn. All charities have only the FRS 102 Sorp available.
- Donated goods for distribution held at the year-end have to be reported as the lower of deemed or replacement cost (as defined).
- The maximum assumed period over which goodwill and other intangible assets may be written off increases from five to 10 years. The reversal of impairment losses is prohibited.
- Only larger charities (incomes above £500,000) need to prepare a statement of cash flows. And merger accounting is banned for charities that are companies - although possibilities still exist under FRS 102 if charities invoke a "true and fair override".
It is worth noting that early adoption is permitted - this might avert more changes next year. But there is an interesting interaction with the Companies Act - next year, company law will require auditors to comment on the annual report more explicitly, and early implementation in effect accelerates this regime for company charities. Some might choose to have their audits conducted under the Charities Act to avoid this.
Some charities have been arguing that donated shop stock should be treated at cost (nothing, in other words). The principles applying to donated goods for distribution illustrate why this is not a robust position - "deemed cost" is what you would have to pay for stock, not what it actually cost.
The definition of a related or connected party now explicitly includes companies that provide key management personnel services - in other words, executives cannot hide disclosures behind personal service companies.
Don Bawtree is lead partner for charities at accountants BDO LLP