Author Archives: Martin Bailey - Partner

About Martin Bailey - Partner

T +44 (0)20 7874 8877

I have particular expertise in the charity and the social business sector, working with organisations in 'The Third Sector' since joining the profession and developing vast knowledge and extensive experience in this time.

Charities are unique and have specialised reporting, compliance, and governance requirements. They require someone with specialist skills and knowledge to support them, allowing them to focus on their important work.

I work with organisations rather than for them, providing support and advice to issues as they arise - whether that be core accounts and audit compliance, VAT and taxation planning, governance issues, risk management, strategic reviews and advice, or designing accounting systems.

New Charities SORP

Martin Bailey - Partner - mbailey@goodmanjones.com

Posted on 18th July 2013

Categories:

Charities & Social Businesses

Following the release of FRS 102 in March, the new charities SORP (Statement of Recommended Practice) has been released in draft form. A four month consultation will now take place before any amendments are incorporated and the new SORP is formally implemented.
For accounting periods commencing on or after 1 January 2015, charities will need to prepare their accounts either under the FRSSE (the Financial Reporting Standard for Smaller Entities) or FRS 102. The SORP provides guidance for charities on applying these standards. Therefore, it remains a technical document, although effort has been made to make this more accessible and practical.

Like its predecessor, the new SORP must be followed by charities when preparing their accounts and the Trustees’ Annual Report, unless a charity also falls under the requirements of other SORP, such as for Higher Education Institutions, in which case these other SORPs take priority.

The SORP applies to those charities preparing accounts on an accruals basis – it does not apply to those charities who prepare their annual accounts on a receipts and payments basis.

So what are the changes?

‘Think Small First’
The first thing to note is that the SORP has been prepared taking a ‘think small first’ approach. Given the fact that 82% of registered charities have incomes below £100,000, this is an appropriate and reasonable approach, and will hopefully provide clear guidance to smaller charities. However, it is worth pointing out at this stage that the SORP applies to those charities preparing accounts on an accruals basis – it does not apply to those charities who prepare their annual accounts on a receipts and payments basis.

Modular Approach
The structure of the SORP has been changed, with it now been presented in modular format. The SORP consists of different modules – fourteen are core modules that are applicable for all charities (such as the Trustees’ Report, fund accounting, allocating costs by activity, and the statement of cash flows), with the remaining fifteen modules providing guidance on particular matters, transactions, structures etc (for example heritage assets, disclosure of grant-making activities, and charity mergers).

This modular approach builds on the ‘think small first’ approach. It’s usually much easier to ‘add on than take away’. Therefore, the modular approach allows charities to pick and choose only those additional modules that are applicable to them, rather than as previously having to work through all the detailed guidance to determine what is applicable.

Another benefit of the modular approach is that the introduction to each section provides guidance on which sections of that module are applicable to those preparing accounts under FRSSE and those under FRS 102. Again, this is aimed at making the guidance within SORP more accessible.

Layout and SOFA Headings
The layout of the accounts and Trustees’ Annual Report, are largely unchanged. However, there have been changes to the categories on the Statement of Financial Activity (SOFA). These headings have been updated and appear more ‘user-friendly’, perhaps this has been influenced by research carried by Ipsos Mori for the Charity Commission whereby 96% of respondents said charities should provide the public with clear information on ‘how they spend their money’. It is hoped that these revised headings will help to improve the quality of financial reporting by charities.

A summary of the changes to the headings are as follows:

Existing SORP	New SORP
Income	Income
Income from generated funds	Donations
Income from charitable activities	Earned from charitable activities
	Earned from other activities
Other incoming resources	Investment and other income
Expenditure	Expenditure
Cost of generating funds	Cost of raising funds
Costs of charitable activities	Expenditure on charitable activities
Governance costs
Other resources expended	Other expenditure

The main point from the above is that governance costs are no longer split out on the face of the SOFA; instead these are to be included within ‘Expenditure on charitable activities’.

There are some interesting technical points that also require discussion, such as income recognition in light of FRS 102, and these will be the subject of future blogs.

The above points hopefully provide some guidance on the changes to the approach of the SORP and layout of charity accounts. If anyone has any queries regarding the new SORP and how it may affect them, please don’t hesitate to get in touch.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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FRS 102 – Impact on Charities and the New Charities SORP

Martin Bailey - Partner - mbailey@goodmanjones.com

Posted on 8th June 2013

Categories:

Charities & Social Businesses

Earlier this year, the Financial Reporting Council (the FRC) published Financial Reporting Standard 102 (FRS 102), the culmination of years of debate, consultation, draft versions, and delays. It replaces all previous FRSs, SSAPs, and UITFs (and at around 300 pages is considerably shorter than what it is replacing), and is based on the IFRS for SMEs. It also includes guidance specifically for public benefit entities.

So what is the impact for charities?
Currently, charities prepare their accounts under UK FRSs or, if they are smaller charities, the FRSSE, as well as following the requirements of the charities SORP (both the FRSSE and the SORP are currently being revised to reflect changes in FRS 102, with consultation on the new charities SORP expected to commence in summer 2013).

Larger charities, those exceeding the small companies’ thresholds, will prepare their accounts in accordance with FRS 102 and the new SORP. For smaller charities, they will have a choice of following FRS 102 or the FRSSE. The likelihood is that the new SORP will be tailored to smaller charities adopting the FRSSE (a reasonable approach given that only 1.2% of the 163,000 registered charities have incomes in excess of £5,000,000).

When do the changes came into force?
The new standard comes into effect for accounting periods commencing on or after 1 January 2015. This may seem a long way off. However, it’s not as easy as saying “let’s worry about this in 2015”.

For example, a charity preparing its accounts to 31 December will need to adopt the new standards for the year end 31 December 2015. This means that the comparative figures, for the year ended 31 December 2014, will need to be restated to reflect the new reporting requirements. And the opening balances for the 2014 accounts are the accounts for the year ended 31 December 2013 – which will also need to be restated.

In fact, FRS 102 allows early adoption for accounting periods ending on or after 31 December 2012, so long as it does not conflict with the requirements of the existing SORP. Recent guidance issued by the Charity Commission states that early adoption of FRS 102 would be in conflict with the current SORP and legal requirements – meaning that charities should continue to follow current reporting requirements, until the new SORP is released.

But not adopting early does not negate the fact that charities need to start planning for these changes now.

Key Changes
So if charities need to start thinking about the changes now, what needs to be considered? Below are some key highlights:

Cashflow statements – FRS 102 does not include an exemption for small charities to dispense with the need to prepare a cashflow statement, meaning charities will need to prepare a cashflow statement unless they follow FRSSE

Holiday pay accrual – under FRS 102, it is compulsory for charities to accrue for holiday pay earned but not yet taken, especially where carried over from one accounting period to the next; given such calculations are rare it is advisable for charities with December year-ends to undertake this calculation for 2013 as this form part of the restatement of opening reserves

Revaluation gains – this is a disclosure change rather than a new requirement, since revaluation gains, on equity investments and investment properties, will be recognised in income rather than in the other gains and losses section of the SoFA

Income recognition – FRS 102 focuses on recognition when income is probable as opposed to virtually certain; the most likely impact of this is in respect of legacies for those charities that adopt a prudent recognition approach

Intangible assets and amortisation – where the useful lives of intangible assets cannot be reliably calculated, the amortisation period is 5 years, compared to the current 20 years

Multi-employer defined benefit pension schemes – where there is an agreed scheme deficit reduction arrangement in place, a provision should be recognised in respect of contributions due

Prior year adjustments – FRS 102 requires for these material errors in the prior period, and not just fundamental errors as currently

The introduction of FRS 102 and the above issues may not seem, on the face of it, significant or applicable to your charity. But they will have an impact upon the development of the new SORP and may change under what standards a charity reports – changes are afoot. For any guidance on the new changes, please get in touch.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Charity Funding Shortages – The Survey Says……No?

Martin Bailey - Partner - mbailey@goodmanjones.com

Posted on 3rd May 2013

Categories:

Charities & Social Businesses

Over the last week or so, I have come across various instances of people commenting on how hard it is for charities in the current economic climate.

The first was a news article about how charities are turning to investment markets for new sources of funding during hard times, commenting that “with public donations…falling, one in six British charities have said they are concerned they might have to close this year.”

The second instance was a conversation between two men talking about how hard it is for charities to find finding, with them commenting that “it’s really hard for charities, there’s no money out there at present – people can’t afford to donate, government funding and grant funding is being cut to next to nothing, investment returns are low…”

The final instance was during a charity audit course where the presenter, herself a trustee of a charity, was commenting that going concern is a key area at present given how much charities are struggling to find the resources to carry out their activities, at the very time when their services are required more than ever.

I do not know these specific circumstances of the organisations referred to above; the comments may reflect these. However, the comments seem very broad and generalised.

Now we all know that the British love to moan (queues and the weather spring to mind as two frequent complaints). But as the above are the common comments of charity funding, and two of the three specific examples above come from people involved in charities, surely this isn’t just a moan. Charities are finding it tough; there’s very little funding around.

But is that true? Evidence suggests otherwise. Looking at the data published by the Charity Commission for gross income levels recorded by charities for each year since 1999, income has increased every year. In the same period, the number of registered charities has fallen. Therefore, across the same period, average income per charity has actually increased year-on-year.

Income reported by large charities (in excess of £10million per annum) accounts for around half of the total income received by charities (ranging from 43% in 1999 to 57% in 2012). Therefore, one might argue that income for smaller charities is being squeezed – events such as Comic Relief, Sports Relief and Children In Need are massive events that energise the general public at large, and so people carry out events for these charities, perhaps to the detriment of smaller charities.

But again, this argument is not supported by the numbers. In the period 1999 – 2012, the number of large charities has increased year-on-year, as has the average income of these large charities. For ‘smaller’ charities, the number of charities has fluctuated from year to year over this period, whilst average income for such charities has increased every year.

Looking at the split of income, voluntary income has continued to increase. Investment income has continued to increase. Trading income has increased. Income from charitable activities, has fluctuated slightly, but is relatively constant.

So, the numbers do not appear to support the view that there is very little funding around.

Income may be increasing, but I know from my own work with charity clients there are certain types of funding that are being cut or are harder to obtain. Therefore, charities are having to review income streams, be innovative, be efficient. And the statistics above indicate that charities are doing this and doing this well.

Are times hard? Yes they are. But you know what? Perhaps it’s good that they are hard. If it was easy to attract income, there is a risk complacency sets in, income is taken for granted, and services/performance suffers.

Therefore, the age old adage that for every problem there’s an opportunity seems more appropriate than ever. The current climate is allowing charities to strive constantly to review their aims, provide efficient services and ensure the money received is meeting their public benefit objectives. So let’s take the opportunity to build upon the fine work charities are doing, continue to be innovative and forward thinking, and support the sector.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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CIOs – worth the wait?

Martin Bailey - Partner - mbailey@goodmanjones.com

Posted on 12th December 2012

Categories:

Charities & Social Businesses

The reporting requirements for charities can be burdensome, especially if the charity is incorporated as it must adhere to the requirements and reporting standards of both company and charity law. However, operating as an unincorporated charity is not without risk, since such a charity is not a separate legal entity. This leaves trustees with possible liabilities should things go wrong – something which can deter people from becoming trustees. So is it possible to have the best of both worlds? Well now, at long last, there could be an answer. The Charities Act 2006 created a new legal structure, the Charitable Incorporated Organisation (“CIO”) that seeks to combine benefits of both incorporation and being unincorporated.

Having been talked about for years, and despite being initially scheduled for 2009, the launch of the CIO has frequently been delayed. These delays have caused much frustration amongst the charity sector – as noted at the Charity Commission’s public meeting in May 2012 and by Lord Hodgson in his review of the Charities Act 2006 (which was published in July 2012).

In their response to Lord Hodgson’s review, the Office for Civil Society set out their intention to lay the necessary legislation before Parliament with a view to CIOs being available before the end of 2012. And this week, the Charity Commission started to accept the first applications with a view to registration from 2 January 2013.

So what is a CIO? It is a new a new legal structure combining the benefits of both incorporation and being unincorporated. Charitable companies and unincorporated charities will have the option to convert to being a CIO. There are several key features and benefits from being a CIO:

Limited liability – members of a CIO will have no or limited liability for debts of the CIO;
One law – CIOs will be governed by charity law only and will not also need to comply with company law;
One regulator – CIOs will be regulated by the Charity Commission only, with no requirement to also deal with Companies House;
One entity – as a separate legal entity, a CIO will be able to enter into contracts and hold property in its own name;
One set of reporting requirements – reporting requirements will be those as for charities, without the need to also review company reporting requirements, with the option to prepare receipts and payments accounts available for smaller CIOs.

However, the structure of a CIO will not be appropriate for all organisations. For example, there is no requirement for either the Charity Commission or the CIO itself to maintain a Register of Charges. Therefore, the CIO structure may not be appropriate for any charities looking to borrow, as banks and other funders may be more reluctant to lend.

Another point to consider is that whilst there is a mechanism for incorporated charities to convert to a CIO, existing unincorporated charities must register a new CIO with the Charity Commission, and then transfer its assets and undertakings from the unincorporated charity to the new CIO. This process is very similar to that followed by charities wishing to incorporate, but it may be put off some smaller charities, since the organisation will be operating under a new name and registration number, which will need to be notified to the everyone dealing with the organisation, not least its bankers, funders, suppliers, and HMRC.

So are CIOs worth the wait? Well for new charities looking to register, then undoubtedly it is a structure that should be considered. For existing charities, the administration in registering a new entity or undergoing the transformation process may put some organisations off – I have worked with unincorporated charities who have decided against incorporation due to the administration involved in changing bank accounts, contracts, notifying suppliers, funders, regulatory bodies etc (and in fact, remaining unincorporated may focus trustees’ minds even more on ensuring they are fully compliant and risk aware). However, there are benefits and, in a world where compliance seems to be forever increasing and organisations looking to reduce costs where possible, it is a structure that merits serious consideration.

The Charity Commission expect CIOs to be popular, with applications being phased over several years. Talk amongst sector professionals and advisors suggests the uptake may not be quite so large –at least initially, many perhaps waiting to see the impact of those keen to try the new type of organisation before fully committing themselves. Having waited so long, there will be interest in the sector and many organisations are likely to take this approach, given the benefits. After all, good things come to those who wait.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The Fine-l Countdown – Are Late Filing Penalties For Charities Imminent?

Martin Bailey - Partner - mbailey@goodmanjones.com

Posted on 23rd October 2012

Categories:

Charities & Social Businesses

Companies House, HMRC, the FSA – all impose fines for the late submission of returns and documents. The Charity Commission do not. But are they about to? And should they?

Whilst attending the recent annual public meeting of the Charity Commission, I was intrigued to hear Sam Younger, chief executive of the Commission, revealing that 35% of charities that filed their accounts late with the Commission had actually completed and signed the accounts within the filing deadlines.

Furthermore, of the late filers who are incorporated charities, 39% had submitted their accounts to Companies House on time. In fact, only 5% of the charities examined had filed their accounts with the Commission before filing with Companies House. It is worth remembering at this point that charities have a longer filing deadline with the Charity Commission – 10 months, as opposed to 9 months with Companies House.

These statistics indicate that charities are more aware of their requirements with Companies House, and perhaps feel under more pressure to ensure these deadlines are met. The Charity Commission research further revealed that 23% of charities examined (with incomes over £250,000) had filed late for all off the previous 5 years.

The obvious conclusion for this is that the late filing penalty regime imposed by Companies House acts as the driving force behind prompt filing.

So is it time to start fining charities for late submission? Trustees have a legal responsibility to meet the requirements to file their charity’s accounts with the Commission and the threat of late filing penalties may be the prompt needed to ensure charities approach governance and their legal responsibilities with more urgency.

The Charity Commission now seem keen to explore the idea of introducing some form of late filing penalty, and in his recent review of the Charities Act 2006, Lord Hodgson suggested that small penalties should be introduced to encourage charities to take their statutory and regulatory requirements more seriously. Lord Hodgson further suggested that such charities be barred from claiming gift aid.

But to me this seems unfair on charities that are reliant upon donations from individuals, and would not provide any discouragement for those charities reliant on other forms of income, on which gift aid cannot be reclaimed. Therefore, a fines’ system similar to that imposed by Companies House would seem fairer – with consideration to smaller fines for smaller charities (such as those with incomes below £250,000), so as to be slightly more proportional to their income levels.

Whilst the issue of fines is being discussed, there do seem to be other options that could be introduced to try to encourage prompt filing.

Aligning the filing deadlines at Companies House and the Charity Commission would be a good starting place, and would help to get trustees and advisors in the mindset of filing within 9 months.

Highlighting the filing options available to charities may also help. The Charity Commission actively encourages online filing. The vast majority of accounts filed at Companies House are still submitted through the post – and usually by an organisation’s accountants and advisors. Perhaps encouraging advisors to be more aware of the filing options (such as the option to file accounts separately, rather than together with the Annual Return which is the common method of submitting accounts to the Charity Commission) and making it easy for them to submit on behalf of the charity, would also help.

But is it wrong to fine charities that file late? With funding scarcer now, or at least more highly sought after, reducing the resources a charity to fund its charitable activities would seem unfair. However, incorporated charities are already subject to the penalties imposed by Companies House and so some charities are already paying fines. So perhaps the unfairness of fines isn’t an issue to consider.

Furthermore, a recent Ipsos Mori poll revealed that 96% of the public believe charities should provide the public with information on how they spend their money. Charities have a duty to demonstrate their public benefit. In addition, maintaining trust is vital in attracting donations. Therefore, it could be argued that charities not fulfilling their reporting requirements and providing the public with the information they want, are not deserving of support.

The negative connotations surrounding fining charities seem to be diminishing. Charities should be aware of their governance requirements – and should want to ensure they are compliant. Public trust and reputation is vital – without it, charities would lack the funding to carry out their important work.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Charity Funding – Join The In-Crowd

Martin Bailey - Partner - mbailey@goodmanjones.com

Posted on 30th August 2012

Categories:

Charities & Social Businesses

The charity and not-for-profit sector is not immune to the effects of the economic downturn. If fact, it is widely argued that the “Third Sector” is the hardest hit sector and will take the longest to recover. With government spending cut back, businesses reducing expenditure (and suffering from funding shortages themselves), and many individuals suffering from reduced disposable income, charities and not-for-profit organisations are fighting for every penny available. So what can be done?

There are several sources of finance available to businesses other than traditional high street bank lending, and individuals have benefited from the emergence of pay-day lenders to provide short-term sources of finance.

But what about charities and not-for-profit organisations? There is a temptation to push ever harder at getting donations, whether through the use of “chuggers” to attract new donors or aggressively targeting increased donations from existing donors.

High net worth individuals are an ever more attractive option, given the gift aid relief available to individuals and charities and the recent scrapping of the government’s proposed cap on tax reliefs to individuals, as well as a reduction in the Inheritance Tax rate to 36% for individuals leaving at least 10% of their estate to charity.

Organisations may also look at more frequent fundraising events, or try to generate additional trading profits, such as through price increases.

However, push too hard and there is a risk that goodwill towards a charity fades and people become more reluctant to donate. This loss of goodwill can be just as detrimental to a charity, and can impact upon longer term funding.

Given the reduced availability of funding, the not-for-profit sector needs to be just as flexible as commercial organisations in finding alternative sources of funding to those traditionally available, whilst maintaining goodwill and encouraging people to want to get involved. So, is there an option that ticks both boxes?

Well one such option is crowdfunding. This is an ever growing and increasingly popular way for charities to seek funding for their charitable activities. In fact, the popularity and success of crowdfunding for charities has led to the model being adapted for use by commercial entities.

Crowdfunding is the concept of many individuals contributing usually small amounts of money to a project or cause they believe in. It allows charities and not-for-profit organisations to seek both financial and non-financial resources from individuals and is designed to attract people to contribute because of the project or cause rather than any tax or other benefits available.

There are various crowdfunding websites (such as peoplefund.it, startsomegood.com, kickstart.org and pleasefund.us) where organisations list a project they are running. They detail the purpose of the project, the level of funding required and what the funding will be used for. The individuals then make a donation towards this project.

The increased use of social media and awareness of social responsibility has led to crowdfunding being an ever more popular option for charities, and in particular smaller charities, to attract funding. But it can bring other benefits – it provides an opportunity for charities to engage with individuals and the local community, and provide information regarding its activities. This helps to promote the charity and its objectives, and may attract other benefits in addition to funding, such as publicity and attracting new volunteers – both as important to a charity as finance.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...