In preparation for writing this blog on ‘going concern’, the findings from OSCR’s recent survey of Scottish charities about how they are managing during the COVID-19 pandemic made sobering reading.  See Louise Meikleham’s An unequal picture -the impact of COVID-19 on Scottish charities (7 August 2020).

5,000 charities responded – about 20% of all Scottish charity contacts.  Most researchers could only dream of such a response rate and having such a rich seam of data to mine.  For charities simply being asked in troubled times “How are you doing?” has enabled them to give voice, collectively, to the extent of the difficulties they face.

The accounting concept of ‘going concern’ seems esoteric relative to the very tangible concerns of one in five charities in Scotland facing a critical threat to their financial viability at some point in the next 12 months.  One in five also reported that they would be unable to do what they were set up to do at some point over the same period.

The ‘going concern’ concept, however, is relevant to charities preparing their trustees’ annual report and accounts in accordance with the Charities SORP (FRS 102)…. and with the pandemic as the backdrop,  the ICAS Charities Panel has published new Guidance for charity trustees on going concern.

Accounting standards are written almost entirely on the premise that organisations are going concerns and that their accounts will be prepared on that basis.  The survey results indicate that even now this will likely be the case.

How can this be true given the concerns charities have about their financial viability?

The going concern basis of accounting will only be inappropriate when the trustees have decided to cease operating or to wind up their charity, or have no alternative but to do so.

The trustees of charities have an obligation to undertake an assessment of their charity’s ability to continue as a going concern covering a period of at least 12 months from the date they sign off their trustees’ annual report and accounts.  Concluding their charity is a going concern is not a cast iron guarantee that it will continue to operate, it is a judgement based on what the trustees know and what they can reasonably assume about the future.

The Charities SORP (FRS 102) requires trustees to identify and disclose any material uncertainties about their charity’s ability to continue as a going concern.  Even where a material uncertainty is identified, the charity remains a going concern for the purposes of preparing its accounts.

What is a material uncertainty relating to going concern?

While not specifically defined, it is essentially a level of uncertainty about the charities ability to continue as a going concern created by circumstances, individually or collectively, that could influence the basis of decisions taken by users of the accounts on the basis of the content of those accounts.  For example, a funder or a potential funder will likely consider the content of a charity’s latest set of accounts, along with its trustees’ annual report, in making a decision about whether provide a grant or make a donation.

Where a material uncertainty has been identified, the going concern basis of accounting will remain appropriate and not all charities experiencing financial difficulties will meet the bar of having a material uncertainty.  For example, where a charity in financial difficulties can restructure its activities to remain financially viable there may not be a material uncertainty about its going concern status to report but there may be a requirement to disclose its restructuring plans depending on how far a decision to restructure has progressed.  Consideration would also need to be given as to whether the FRS 102 requirements on accounting for discontinued activities applied in the particular circumstances of the charity.

What happens when the trustees conclude the charity is not a going concern?

Where the trustees have concluded that the charity is not a going concern the accounts must not be prepared on a going concern basis.  This may be described in the charity’s accounting policies note, for example, as a basis ‘other than going concern’.  In addition to adequately disclosing the circumstances of the charity, the trustees will also need to review the charity’s accounting policies and update these where necessary.  This may also lead to the need to change the way some balance sheet items are presented and/ or measured, but this is not necessarily the case.

….and finally

It is really important that the information included in the financial review section of the trustees’ annual report is consistent with the numbers and the narrative disclosures in the accounts.  For charities facing financial difficulties including those whose trustees have identified a material uncertainty or have concluded their charity is not a going concern, it is a requirement for the trustees to explain the charity’s circumstances in the financial review.

A charity’s auditor or independent examiner will be asking to see evidence supporting the conclusions arising from the trustees’ going concern assessment and will expect both the trustees’ annual report and accounts to reflect those conclusions.

Trustees should think ahead about their charity’s going concern assessment even though it cannot be finalised until the point the trustees’ annual report and accounts are signed off.  Ask the charity’s advisers, they will be there to assist both trustees and charity finance staff with any questions they have about the going concern assessment and to explain what work they themselves will do on going concern to enable them to issue their own independent scrutiny report.