Understanding accruals accounts
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A presentation on understanding charity accrued accounts given by Chris Smith from FCIE at NICVA's Charity Fiance Conference for Trustees.
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Understanding accruals accounts
- 1. 1 Understanding accruals accounts Chris Smith FCIE
- 2. 2 Types of Charity Accounts Receipts & payments – sometimes called cash accounts Accrued accounts
- 3. Who Must Prepare Accrued Accounts All Companies Non Company charities with income of £250,000 or more Non Company charities with income less than £250,000, but where Constitution Enactment Decision of trustees Requires accrued accounts
- 4. Accrued Accounts . Accrued accounts set out the true contractual position of the charity. They account for resources moving into and out of the charity as the charity become’s legally entitled to those resources or obliged to pay them out, This is not necessarily the date on which money is received or paid out from the bank.
- 5. Financial Statements Statement of Financial Activities or SoFA – Financial performance for the period – Income, expenditure and surplus or deficit – Reconciled to the opening and closing funds The Balance Sheet – Financial position at year end – Assets, liabilities and funds Total Funds on SoFA and Balance Sheet always equal
- 6. Preparing Accrued Accounts Start with R&P or cash account Adjust for: – True contractual position – Non-monetary resources
- 7. Exercise 1 Starting from the cash position what types of transactions or adjustments need to be made in preparing accrued accounts?
- 8. Exercise 1 – Suggested Solution Debtors - resources owed to the charity but not yet received Creditors - resources owed by the charity but not yet paid Prepayments - resources paid by out by the charity but relate to a future accounting period Accruals - are sums set aside for expenditure where there is no actual invoice at the year end Deferred income - resources received by a charity but relating to a future accounting period
- 9. Exercise 1 – Suggested Solution Capitalisation of tangible assets - records the value of an asset in the balance sheet rather than as an expense in the SOFA Depreciation - notional figure reflecting how much of a capitalised asset has been “used up” Gains or losses on assets or investments - recognising any increase or decrease in the value of assets or investments Donated goods, services or facilities – recognising the value of donated resources Loans and borrowings – no decrease or increase in resources as increase in cash is balanced by increase in9
- 10. 10 Main Differences Between Receipts & Payments and Accrued Accounts Receipts and Payments Accrued Income and expenditure accounted for when credited or debited from bank account or cash box. The timing of income and expenditure adjusted to be accounted for during the period of the activity to which they relate or when a contractual obligation arises. The purchase or sale of assets for cash included in statement of receipts and payments. The purchase or sale of capitalised assets are not included in the SOFA. They do not represent resources moving into or out of the charity. Assets listed as a note on the statement of assets and liabilities Value of assets shown in balance sheet Changes in value of assets are not included. Therefore depreciation also not included. Changes in value of assets are included in the balance sheet. Depreciation included in SOFA Debtors and creditors are not included in financial statements. They are listed as a note on the statement of assets and liabilities Debtors and creditors are included in the balance sheet.
- 11. 11 Any Questions on Accruals?
- 12. 12 Charity Accounting - Funds FUNDS Restricted Unrestricted Endowment Income Permanent Expendable Designated General
- 13. 13 The Charities SORP (Statement of Recommended Practice) Charities SORP 2005 - For accounting periods starting before 1 January 2015 Charities SORP (FRSSE) – For accounting periods starting in 2015. Only available to “smaller entities” Charities SORP (FRS 102) – For accounting periods starting on or after 1 January 2015
- 14. 14 Layout of Charity Accounts Must show surplus or deficit for the year Previous years figures Distinguish between restricted, unrestricted and endowment funds Show any transfers between funds Trustees Annual Report and Balance Sheet must be signed and dated by charity trustee Include charity name/s and number and make clear it is a charity
- 15. 15 Trustees Annual Report Independent examiners or auditors report Statement of Financial Activities Balance Sheet Statement of Cash Flows (larger charities - income over £500,000) Notes to the accounts The Content of Accrued Accounts
- 16. Trustees Annual Report (TAR) Objectives and activities Achievements and performance Financial review Reference and administrative details Structure governance and management Statement on public benefit Funds held on behalf of others as a custodian trustee or agent Additional reporting by larger charities (para 1.35 – 1.54)
- 17. 17 Statement of Financial Activities (SOFA) Analysis of income and expenditure, reconciling surplus or deficit to opening & closing fund balances Analysis by activity or nature (if under audit threshold) Distinguish between different funds and show transfers Same format as previous year with corresponding figures Can omit lines with nothing in current and previous year Income & expenditure recognised when probable, measurable and legally entitled to income or obligation to make payment Format set out in Charities SORP (FRS102) – Table 2
- 18. Balance Sheet Adopt the same format as for previous period Signed and dated by a trustee Provide additional information in other headings or sub headings if necessary to give a true and fair view Provide a corresponding amount for the previous period, Can omit lines with nothing in current and previous year Value assets and liabilities at “fair value” Recognition at “Present value” for assets and liabilities receivable or payable over several years
- 19. Notes to the Accounts - Required Basis of preparation Accounting policies Changes to policies or prior year adjustments Uncertainty re going concern Departures from SORP and why Trustee remuneration and expenses Other notes and disclosures as required for particular circumstances of the charity - See the SORP
- 20. Exercise 2 Review the report and accounts for ACIE. Is there anything you do not understand or want clarified? 20
- 21. 21 Help and Support Guidance from CCNI – ARR01 Charity reporting and accounting overall summary – ARR02 Charity reporting and accounting the essentials guidance – ARR04 Accruals accounts guidance – ARR07 Guidance for independent examiners – Template examiners reports - supporting document for independent examiners Join Association of Charity Independent Examiners – Training – Regular information mailings & newsletters – Helpline – www.acie.org.uk
- 22. 22 ACIE - Membership Affiliate Associate - R&P to £100,00 - R&P to £250,000 - R&P to £250,000 and accruals to £100,000 - All accounts to £100,000 - All accounts to £250,000 Fellow - All accounts to the legal limit for IE
- 23. 23 ACIE – Applying for full membership Join as an affiliate Review your knowledge and experience against ACIE checklist Prepare two sets of accounts appropriate to the category of membership you wish to apply for If not able to carry out IE get someone else to do the IE Complete application form with questions on theory and practice of IE
Editor's Notes
- Aim - to give you a good understanding of accrued accounts, Look at accruals accounts to understand: What they are and how they differ from R&P accounts The key features of charity accruals accounts PowerPoint – couple of exercise and handouts. Also look at a set of accruals accounts prepared by a charity and give you an opportunity to identify anything you don’t understand and want explained. I’m a part time independent examiner in Scotland and Chair of the Association of Charity Independent examiners. I have also work for a grant funder so use charity accounts in my day job and did work for the Charity Regulator in Scotland when it was first established
- Charities accounts are prepared in one of two ways: R&P or fully accrued Receipts & payments accounts are a simple form of accounting that consists of a summary of all monies received and paid by the charity, via the bank or in cash, during its financial year, along with a statement of the bank account and cash balances at the beginning and end of the year. Sometimes called cash accounts – as they are an accounting of the cash received and paid out. The cash account is still important as they starting point for preparing accrued accounts.
- Accrued accounts must be prepared by: All Companies Non Company charities with income of £250,000 or more Non Company charities with income less than £250,000, but where Constitution Enactment Decision of trustees Requires accrued accounts
- Accrued accounts set out the true contractual position of the charity. They account for resources moving into and out of the charity as the charity become’s legally entitled to those resources or obliged to pay them out, irrespective of when, or even whether, cash actually changes hands. Example insurance paid for the coming year just before financial year end. An important point to note is that accrued charity accounts account for the “resources” utilised by a charity and therefore include non monetary items such as donated goods and services and gains or losses on assets or investments.
- The two key financial statements in charity accrued accounts are the: Statement of Financial Activities or SoFA The Balance Sheet SoFA records the financial performance of the organisation for the accounting period. It sets out the incoming resources and the resources expended and the resulting surplus or deficit. This is then reconciled with the opening funds brought forward from the previous year to arrive at the total funds being carried forward into the next financial year. The Balance Sheet is a snapshot of the financial position of the organisation at the financial year end. It sets out the various types of assets and liabilities the organisation has so a reader can see the total funds a charity has and how those funds are held. The total funds being carried forward into the next financial year on the SoFA must always be the same as the total funds or net assets (i.e. assets less liabilities) on the Balance Sheet. If not there is an error somewhere within the accounts.
- The staring point for preparing accrued accounts is the reconciled receipts and payments or cash accounts - what cash came into or left the bank accounts or cash tin during the year. The R&P accounts are then adjusted to reflect the true contractual position of the charity and account for non monetary resources available to or used by the charity.
- The adjustments that will need to be made are: Debtors – are resources owed to the charity but not yet received. For example, the unpaid fees, at the year end, owed by parents for their children attending an out of school club. Creditors – are resources owed by the charity but not yet paid. For example, an invoice received for work carried out or purchases during the year but not yet paid at the year end. Prepayments – are resources paid by out by the charity but relate to a future accounting period. For example, part annual insurance premium that relates to the next financial period. Demonstrate working out prepayments using flip chart and example of insurance premium of £500 paid ¾ of the why through the year. 3 months or £125 relate to year being reported on (500/12*3). 9 Months £375 (£500/12*9) are the prepayment and relate to the next financial year Accruals – are sums set aside for expenditure where there is no actual invoice at the year end but that it is known that there will be a liability and how much it will be. For example the electricity or gas that will used in the period from the last bill to the year end. Or an IE fee. Deferred income – are resources received by a charity but relating to a future accounting period. For example, a grant received before the year end but for use in the new financial year. So not legally entitled to the money until the start of the new financial year
- Capitalisation of tangible assets – records the value of an asset, that has a life of more than one year, in the balance sheet rather than as an expense in the SOFA. This reflects the concept that no resources have left or been received by the charity. Rather cash in the bank has been swapped for an asset of the same value. An example would be the purchase of a minibus - £30,000 of cash from the bank account has been replaced with a minibus worth £30,000. It is usual for an organisation to set a “capitalisation limit” below which assets are not capitalised, rather their whole cost is recognised or accounted for in the resources expended section of the SOFA. Above this limit assets are capitalised by adjusting the cash account by removing the cost of the asset from the resources expended section of the SOFA and adding its value or cost to the assets section of the Balance Sheet Depreciation – a notional figure that reflects how much of a capitalised asset has been “used up” during a financial period. For example an asset such as a minibus might be judged to have a useful life within the organisation of 5 years. As such its value is reduced by 20% each year until its cost is “written off”. The cash account is adjusted by: Calculating the depreciation amount for that year Reducing the value of the asset in the balance sheet by the depreciation amount Adding the depreciation amount to the resources expended section of the SOFA 2 ways of calculating depreciation – Straight line or reducing balance. Gains or losses on assets or investments – recognising in the accounts any increase or decrease in the value of assets or investments, including actuarial gains or losses on defined benefit pension schemes. left For example where the market value of stocks and shares held by a charity have gained or lost in value over the year. No cash has been received or paid out but charity has more resources available to it if investments are worth more. Donated good, services or facilities – can be an important source of support for a charity that help further its aims and objectives. These donated resources do have an economic impact on the charity and therefore are accounted for in the accounts even through no “money” has been received. Examples are goods donated to a charity shop for resale to raise income or rent free office space. Loans and borrowings - - no decrease or increase in resources as increase in cash is balanced by increase in debtors or liabilities For example if the charity borrows £10,000 the cash increase in the bank account is offset by a £10,000 liability to repay the loan so no increase in resources available to the charity.
- To understand charity accounts we need to understand the concept of charitable funds and fund accounting. The concept charitable funds is a key concept in charity accounting and is a major difference between charity and commercial accounting. A charity has to spend all its funds on its charitable purposes. Money or funds given to a charity to spend freely on its purposes is considered unrestricted – there are no restrictions on its use and the Trustees decide how to spend the funds, obviously furthering the charitable purposes. If the trustees decide to put some of their funds aside for a particular purpose then these are called designated funds. Trustees can change their mind about how there are to be used. If not designated then called general funds. Sometimes funds are given to a charity for a particular purpose that is narrower than the charitable purposes, that is there use is restricted to something specific. These are called restricted funds and must be spent on the purpose for which they were given. Explain types for restricted Funds must be accounted for separately.
- In understanding accrued accounts we need to be aware of the Charities SORP or Statement of Recommended Practice The SORP is your bible for preparing accrued accounts. All accrued accounts must comply with reporting standards that apply to all organisations commercial and charitable. SORPS are industry standards for how organisations in that particular industry can comply with the underlying reporting standards that they must follow when preparing accruals accounts. But also how to cope with particular industry requirements i.e. charities that have “Funds” and need a higher level of transparency and accountability than commercial companies. Currently 3 SORPS go thu slide SORP 2005 and SORP (FRSSE) not a legal requirement in NI SORP (FRS102) is a legal requirement. Smaller entities are where any two of the following are met: Turnover not more than £6.5m BS total not more than £3.26m Not more than 50 employees
- All charity accounts have to be laid out in a certain way and follow the same format: Must show surplus or deficit for the year Previous years figures Distinguish between restricted, unrestricted and endowment funds Show any transfers between funds Trustees Annual Report and Balance Sheet must be signed and dated by charity trustee Include charity name/s and number and make clear it is a charity
- Go through slide Not going to discuss cash flow statements beyond they are required by charities with an income over £500,000 and they provide information about the ways in which a charity uses the cash generated by its activities and about changes in the cash held by a charity. It also provides information that is helpful in assessing a charity’s liquidity and underlying solvency. ‘Liquidity’ refers to the ability of a charity to meet its immediate and short-term obligations as they fall due. ‘Solvency’ refers to the capability of the charity to meet its longer-term obligations as they fall due. they show the increase or decrease in cash held by the charity and what caused the increase or decrease.
- TAR tells the story of the charity – makes the link between the purposes of the charity and the activities carried out. The headings used in the TAR can be amended to suit the charity as long as the information required, set out below, is clearly presented. Objectives and activities The report should allow a reader to understand how the charity fulfils its charitable purposes so must provide a summary of the purposes as set out in the governing document and the main activities in relation to those purposes. Achievements and performance The report must contain a summary of the main achievements of the charity including the difference it make to the lives of its beneficiaries and society as a whole. Financial review The report must contain a review of the financial position of the charity at the end of the period. It must also explain any policy for holding reserves, stating the amount of reserves held and why they are held. If the trustees have decided a reserves policy is unnecessary the report should state this and the reasons why. If at the date of the report there are uncertainties about the charities ability to continue as a going concern this should be explained. The report must also identify if any fund or subsidiary is materially in deficit and explain why and the steps being taken to eliminate the deficit. Reference and administrative details The following information must be provided: Registered name of charity and other names used Registration number/s –charity and company if appropriate Principal office address and registered address if a charitable company Names of charity trustees at date of report or who served during period of report. Myth that only the trustees during the period should be listed Structure governance and management The report must provide details about the nature of the governing document and how the charity is constituted. The method for the appointment or recruitment of trustees must be reported along with the name of any external person or body entitled to appoint trustees. Public benefit statement The report must contain a statement that the trustees have had regard to the Commission’s statutory guidance on the public benefit requirement Funds held as a custodian trustee on behalf of others Funds received by a charity that are held on behalf of another body either as an agent or custodian trustee are not the property of the charity and must not be included in the accounts of the charity. However, if a charity has held such funds or property this must be disclosed in the notes to the accounts. If the charity has acted as an agent the notes must disclose: The funds received and paid by the charity Details of any balances or held at the reporting date Details of outstanding balances with the parties for which the funds are held If the funds are held for a related party and make the required discloses for related parties The charity must make sure that acting as an agent is consistent with its own purposes. If the charity has acted as a custodian trustee the trustee’s annual report or notes to the account must: Describe the assets held Provide the name and objects of the charity on whose behalf the assets are held and how this activity falls within the custodian charity’s objects Detail the arrangements for the safe custody and segregation of the assets from the charity’s own assets. In addition to the above minimum requirements larger charities (income over £500,000) should also provide additional information as a greater degree of public accountability and stewardship is expected of them. The detail of this additional information can be found in the SORP paragraphs 1.35 to 1.54.
- Hand out Example SoFA and Balance Sheet The SoFA presents in a single accounting statement all the incomes, gains, expenditure and losses recognised for the period of the accounts. It provides the reader with: an analysis of the income and endowment funds received and the expenditure by the charity on its activities, and reconciles the surplus or deficit for the period with the opening and closing fund balances. The analysis of income and expenditure by activity us encouraged by all charities preparing accrued accounts. However, charities below the audit threshold can choose a different analysis of income and expenditure that best suits their stakeholders, for example by the nature of the income or expenditure (grant income, staff costs, rent etc). If a charity is reporting income and expenditure by activity the analysis categories chosen should allow the relationship between income and expenditure to be understood. For example, a performing arts charity could have an activity analysis for income “income from performances”. And a related expenditure category “Cost of performances”. Use the columns to distinguish between the 3 different class of funds - unrestricted, restricted and endowment. Where no class of funds is held that column can be omitted. If a class of funds is not material it can be combined with another class. If this is the case the title of the combined column must reflect this eg “total of all unrestricted and restricted funds”. And the summary of fund movements in the notes must contain an analysis of the various funds with a total that corresponds with the totals in the SoFA Transfers between funds must be shown on the transfers line. The SoFA must: Adopt the same format in subsequent reporting periods unless there are special reason reasons for a change that are explained in the notes to the accounts Provide a corresponding amount for the previous period. The comparator for the total must be on the face of the SoFA. Comparators for the other figures for the different classes of funds can be on the SoFA or in the notes. Can omit any line of the SoFA where there is nothing to report in both current and the previous period Income & expenditure recognised when probable, measurable and legally entitled to income or legal obligation to make payment
- All charities preparing accrued accounts must a balance sheet at the end of the reporting period that gives a true and fair view of the financial position of the charity at the end of the reporting period. Review example balance sheet – not required to show split of funds on BS but if not then disclose this in the notes to the accounts. Adopt the same format as for previous period unless there are special reasons for the change explained in the notes Signed and dated by a trustee Provide additional information in other headings or sub headings if necessary to give a true and fair view Provide a corresponding amount for the previous period, if not comparable due to a change in accounting policy it must be adjusted if material and the adjustment explained in the notes. Any line where there is nothing to report in both current and the previous period can be omitted. The starting point for the valuation of assets and liabilities is that they should be valued at “fair value” – that is what they would be worth on the open market. Assets and liabilities that are receivable or payable over more than one year, i.e. loans and borrowings, must be accounted for in the accounts at their “present value” rather than their nominal monetary value. That is, they must be discounted (reduced) by the cost of money to the charity.
- The basis on which the accounts have been prepared: Historic Cost In accordance with the reporting standard and charities SORP In accordance with applicable charity and/or company law A description of each material accounting policy e.g. - Recognition of income - Recognition of expenditure - Definition of the types of funds Details of any changes to accounting policies from previous years; why and the effect of the changes in the current period Details of any prior year adjustments Description of any change to estimation techniques and the results in the current period If trustees are aware of any material uncertainties as to the charity being a going concern this must be disclosed If the charity has departed from the SORP in preparing the accounts this must be disclosed along with the reasons why Details of any remuneration or benefits received by individual trustees, or if none state that none were paid. Details of expenses paid to trustees, or none where paid state that none were paid Other notes and disclosures as required for particular circumstances of the charity for example if staff emaplyed analaysis of staff costs by gross salaries, Employers NI contributions and Employers pension contributions. See the SORP
- Hand out ACIE accounts. Review ACIE accounts. Any questions or things they don’t understand.
- CCNI have a range guidance around understanding the accounting requirments. Join ACIE If you are new to IE membership of ACIE can be a useful way to increase your understanding and practice of IE. As a member you will have access to regular information briefings, conferences and training courses, the resources section on our website and a helpline with access to experts in IE for any issues or problems you come across. You also have access to the ACIE professional indemnity insurance scheme
- Full membership can also be as way of demonstrating to clients and potential clients that you do have the required skills and experience to prepare and carry out an independent examination of their charity’s accounts. 3 membership categories Affiliate - not a full member but have access to all our services Associate – a full member but only licensed to carry out examinations on certain types of accounts. 5 licenses, looks very complicated but allows someone who is not a practicing accountant to start on small charities and over time as they develop their skills and experience move up to bigger charities. Fellow – a full member able to carry out examinations on all accounts up to the legal limit for IE. A Fellow of ACIE is also recognized as one of the professional qualifications to be able to examine accounts with an income over £250,000.
- If you are interested in becoming a member Join as an affiliate Review your knowledge and experience against ACIE checklist Prepare two sets of accounts appropriate to the category of membership you wish to apply for If not able to carry out IE get someone else to do the IE Complete application form with questions on theory and practice of IE