A presentation by Moore Stephens Chartered Accountants on the common issues for charities in preparing and managing their finances.

1. PRECISE. PROVEN. PERFORMANCE.
Charity Financial Management
– an accountant’s perspective
11th May 2016
Rosemary Peters Gallagher
Partner
 MS(NI) LLP 2016

2. MOORE STEPHENS (NI) LLP
Whilst every care has been taken to ensure the accuracy
of the content of this presentation, no responsibility for
loss occasioned to any person acting or refraining from
action as a result of the material in this presentation can
be accepted by Moore Stephens(NI) LLP
 MS(NI) LLP 2016

3. Contents
• Sound financial management in charities
- importance
- what does it look like / hallmarks of an effective charity
- key challenges facing charities
• Charity Accounting – New Accounting Framework
• New SORPS – impact of FRS 102
• Charities and trading
• Reserves
• Fraud
• Managing risk
 MS(NI) LLP 2016

4. Content (cont’d)
• Other matters of interest / “hot” topics
- payments to trustees
- Social Investment Tax Relief (SITR)
- new dividend rules / impact on gift aid
- apprenticeship levy
 MS(NI) LLP 2016

5. Sound Financial Management in
charities
Importance
 MS(NI) LLP 2016

6. Sound Financial Management in
charities
What does it look like
Hallmarks of an effective charity
 MS(NI) LLP 2016

7. Sound Financial Management in
charities
What does it look like
- Day to Day
- Regular management accounts
- Annual accounts
- Financial procedures in place
- Responsibilities
 MS(NI) LLP 2016

8. Sound Financial Management in
charities
Key challenges
- Funding
- Complexity of charity accounting
- Lack of resources
- Lack of financial capability
- Managing conflicts of interest
 MS(NI) LLP 2016

9. Sound Financial Management in
charities
 MS(NI) LLP 2016
What questions should trustees be asking?
- Is the charity solvent?
- Are our funds being spent in line with our charitable objectives?
- How does our income and expenditure compare to budget?
- What is our cash situation?
- What is our reserves policy?
- Are we doing all we can to maximise income/reduce expenditure?

10. Sound Financial Management in
charities
What areas do charities find most difficult
- Restricted / unrestricted / designated funds
- Donations / grants /contracts
- VAT
- Accruals based accounting
- Income recognition
 MS(NI) LLP 2016

11. Sound Financial Management in
charities
What areas do charities find most difficult …
Continued
- Budgeting / cashflow forecasting
- Tax efficient giving
- Properties
- Reserves
- Financial policies and controls
 MS(NI) LLP 2016

12. Charity SORPS 2015 update
 MS(NI) LLP 2016

13. New accounting framework
SORPs have been developed for:
• general charities
• special case charities
- charities which are registered housing associations, which will use the
SORP for registered social housing providers;
- charities which are further education or higher education institutions,
which will use the SORP for further and higher education;
• investment fund charities (common investment funds, there
is presently no provision for common deposit funds in
Northern Ireland), which will use the SORP for financial
statements of UK authorised funds.
 MS(NI) LLP 2016

14. New accounting framework
• Financial reporting standard 102 (FRS102)
• or
• Financial Reporting Standard for Smaller Entities (FRSSE)
• SORP applies to both frameworks
• Conditions for FRSSE are 2 of the following 3:
- Gross income, excluding endowments <=£6.5M
- Gross assets <=£3.26M
- Employee numbers below 50
 MS(NI) LLP 2016

15. FRS102 or FRSSE?
• FRSSE thresholds
• Key differences
• FRSSE withdrawn from 1st January 2016
• Section 1A of FRS 102 – consultation ended December
2015
 MS(NI) LLP 2016

16. Financial statements
• True and fair view accounts (accrued accounts) must include:
• Trustees’ annual report (TAR)
• Statement of financial activities (SOFA)
• [Income and expenditure account]
• Balance sheet
• Statement of cash flows if preparing under FRS102
 MS(NI) LLP 2016

17. Unrestricted
funds
Restricted
funds
Endowment
funds
Total
funds
Prior
period
total
funds
Further
details
Income and Endowments from:
Donations and legacies A1
Charitable activities A2
Other trading activities A3
Investments A4
Other A5
Total
Expenditure on:
Raising funds B1
Charitable activities B2
Other B3
Total
Net income / (expenditure)
Transfers between funds C
SOFA – New layout Continued………

18. SOFA – New layout Continued………
Unrestricted
funds
Restricted
funds
Endowment
funds
Total
funds
Prior
period
total
funds
Further
details
Income and Endowments from: (Continued)
Other recognised gains/(losses)
Gains/(losses) on revaluation of
fixed assets
D1
Gains/(losses) on investment
assets
D2
Actuarial gains/(losses) on defined
benefit pension schemes
D3
Net movement in funds
Reconciliation of funds: E
Total funds brought forward
Total funds carried forward

19. Key changes
Key Changes SORP FRSSE SORP 2005
Income recognition Based on entitlement, measurement and “probable” “virtually certain”
Income from donated goods for sale
Now recognised at point of receipt at fair value unless
impractical or costs of recognition at receipt outweigh the
benefit to users, then can be recognised on disposal
Recognised once donated goods
sold
Comparative figures
Required for all SOFA fund columns ( can be in notes rather
than on face of SOFA)
Total funds only
Governance costs Now included as a separate component in support costs
Shown separately on face of
SOFA
Gains / losses on investment assets Must go below net income /expenditure line
Above net income / expenditure
line
Transfers between funds must always net
to nil
Yes No
 MS(NI) LLP 2016

20. Disclosures
• Goodwill
• Related parties
• Arrangements for setting pay and remuneration of key
management personnel
• Exemption for disclosure of intra-group related party
transactions
 MS(NI) LLP 2016

21. Additional Disclosures
Where statutory audit is required –
• Social investment policies
• Financial effect of significant events
• Material grants
• Public benefit considerations
 MS(NI) LLP 2016

22. Trustees’ annual report
Previously Now
Reference and administrative
details
Objectives and activities
Structure, governance and
management
Achievements and performance
Objectives and activities Financial review
Achievements and performance Plans for future periods
Financial review Structure, governance and
management
Future plans Reference and administrative
details
Funds held as custodian
 MS(NI) LLP 2016

23. Key aspects of FRS 102 SORP
• Materiality
• Fair value
• Use of language: “must”, “should” and “may”
• Time value of money
 MS(NI) LLP 2016

24. Statement of financial activities
• No change to column presentation:
- Unrestricted funds
- Restricted funds
- Endowment funds
• Income and expenditure analysis by:
- Activities, mandatory for larger charities, or
- Alternative, acceptable for smaller charities
 MS(NI) LLP 2016

25. Income classification
SORP 2005 FRS SORP 2015
Voluntary income Donations and legacies
Activities for generating funds Other trading activities
Investment income Income from investments
Incoming resources from
charitable activities
Income from charitable activities
Other incoming resources Other income
Total incoming resources Total income and endowments
 MS(NI) LLP 2016

26. Income recognition
Criteria for recognition:
• Entitlement
• Probability
• Measurement
Terms and conditions
 MS(NI) LLP 2016

27. Income recognition ……...Continued
Categories of income:
• Exchange transactions
• Non-exchange transactions
• Performance related grants
 MS(NI) LLP 2016

28. SORPs provide further guidance on income
recognition in relation to:
• Legacies
• Membership subscriptions
• Interest, royalties and dividends
• Insurance claims
• Donated goods, facilities and services
 MS(NI) LLP 2016
Income recognition ……...Continued

29. Expenditure classification
Reduced headings in the expenditure sections
SORP 2005 FRS SORP 2015
Costs of generating voluntary income
Expenditure on raising fundsFundraising trading: cost of goods
sold and other costs
Investment management costs
Resources expended on charitable
activities
Expenditure on charitable
activities
Governance costs
Other resources expended Other expenditure
 MS(NI) LLP 2016

30. Gains and losses
Gains and losses on investment assets now to be shown above the “net
incoming/outgoing resources” subtotal
SORP 2005 FRS SORP 2015
Net gains/(losses) on investments
Net incoming/outgoing resources before
transfers
Net income/(expenditure)
Gross transfers between funds Transfers between funds
Gains on revaluation of fixed assets for
charity’s own use
Gains/(losses) on revaluation of fixed
assets
Gains/losses on investment assets
Actuarial gains/losses on defined benefit
pension schemes
Actuarial gains/losses on defined
benefit pension schemes
Other gains/(losses)
Net movement in funds Net movement in funds
 MS(NI) LLP 2016

31. Charities as subsidiaries
Disclosures required in the charity’s accounts:
- Parent’s name
- Place of incorporation if outside UK or registered office
for unincorporated charities
- If it is a charity, the registration number
- Company registration number
- Parent’s purposes and activities
- How control is exercised
- Related party disclosures
 MS(NI) LLP 2016

32. Charities and Trading
• What does trading mean – primary purpose/ancillary
• Structures
• Trading subsidiaries
• Significant risks
• Some pitfalls
• VAT issues
 MS(NI) LLP 2016

33. Reserves
Reserves
• Need for reserves
• Determining the level of reserves
• Reporting in the accounts
 MS(NI) LLP 2016

34. Reserves – determining the level
• Minimum solvency requirement
• Requirement for innovation
 MS(NI) LLP 2016
Reserves

35. Reserves – reporting
• Identify the target level (range) in the context of activities
and future plans
 Especially if greater than one year
• Nature and purpose of designated funds
• Nature and purpose of restricted funds
 MS(NI) LLP 2016
Reserves

36. • Trustee responsibility
• Susceptibility
• Types of fraud
• Monitoring end use of funds
• Responsibility to seek recovery of lost funds
 MS(NI) LLP 2016
Fraud

37. Top 5 tips for preventing and defeating fraud and
corruption
• robust anti-fraud awareness
• denial of opportunity
• effective leadership
• robust auditing regime
• Pre-employment screening
 MS(NI) LLP 2016
Fraud Continued…..

38. RISK MANAGEMENT
 MS(NI) LLP 2016

39. Risk management
• What is it?
- The process by which you identify, evaluate and
mitigate/accept risks to ensure that the charity can
take appropriate risks to maximise its potential
 MS(NI) LLP 2016

40. • Risk management should:
– Be part of day-to-day management activities
– Be embedded across the organisation
– Help identify opportunities as well as threats (and cannot
completely avoid risk)
• Ensures risk is managed
and controlled in a well-defined
and structured way
Taking risk &
achieving
opportunities
Risk elimination &
entrepreneurialism
 MS(NI) LLP 2016
Risk management .....Continued

41. • Understand the importance of risk management
• Learn how to identify risks and mitigating actions
• Understand how project risks impact and feed into the
corporate risk register
 MS(NI) LLP 2016
Risk management .....Continued

42. SORP requirement:
Previously
A statement confirming that the major risks to which the
charity is exposed, as identified by the trustees, have
been reviewed and systems or procedures have been
established to manage those risks.
 MS(NI) LLP 2016
Risk management .....Continued

43. SORP requirement:
Now
“The principal risks and uncertainties facing the charity
and any subsidiary undertakings, together with a
summary of the plans and strategies for managing
those risks”.
 MS(NI) LLP 2016
Risk management .....Continued

44. Why is risk management important?
• Significant risks are known and monitored
• The organisation makes the most of opportunities
• Forward and strategic planning are improved
• Aims are achieved more successfully
 MS(NI) LLP 2016
Risk management .....Continued

45. Why types of risk do charities face?
• Reduction of funding from other bodies
• An unforeseen rise or fall in demand for services
• Fluctuations in investments
• Increased regulation
 MS(NI) LLP 2016
Risk management .....Continued

46. How can risks be managed?
• Transferring the financial consequences to third
parties (e.g. insurance, outsourcing)
• Avoiding the activity giving rise to the risk
completely
• Management or mitigation of risk
• Accepting or assessing as a risk that can’t be
avoided
• Business Continuity/Disaster recovery planning
 MS(NI) LLP 2016
Risk management .....Continued

47. Identification
Assessment Evaluation
Control
responses
Review
Reporting
Approach to Risk Management
 MS(NI) LLP 2016

48. • Guidance issued by CCNI in August 2015
- Reimbursement of expenses
- Payment for services
- Paying for trustees
- Written policy
- Conflicts of interests
- Disclosure
• Check governing document
• More explicit guidance on employee trustees will follow
 MS(NI) LLP 2016
Payments to trustees

49. • Similar to EIS
• Benefits to investors -income tax relief
- CGT hold over relief
- CGT disposal relief
• Benefits for social enterprises
 MS(NI) LLP 2016
Social Investment Tax Relief

50. New Dividend Rules
Impact on gift aid
 MS(NI) LLP 2016

51. And finally ………..
Apprenticeship levy
 MS(NI) LLP 2016

52. Useful Websites
 Moore Stephens
 NICVA
 NI Charities Commission
 Scottish Charity Regulator
 Charity Commission for England & Wales
www.moorestephens.com/ni
www.nicva.org
www.charitycommissionni.org.uk
www.oscr.org.uk
www.charity-commission.gov.uk
 MS(NI) LLP 2016

53. Rosemary Peters Gallagher OBE
BSc (Hons), FCA, D.CHA
• Partner
• Heads up firm’s Charity/Not for Profit Department
• Responsible for delivery of external and internal audit,
accounting, advisory and consultancy services including
corporate governance training
• Diploma in Charity Accounting
Contact details:
Telephone: 028 903 29481 (Belfast)
028 703 52171 (Coleraine)
Email: rpetersg@msca.co.uk
 MS(NI) LLP 2016