Consider a charity which delivers services that are funded through a blend of contracts and grant income. To comply with the Charity Statement of Recommended Practice (SORP), the year end accounts need to recognise income from service contracts to the extent that the service had been delivered, whereas grant income would generally be recognised at the point that the grant was receivable. Producing internal management accounts which followed those contrasting rules could well be confusing to readers and it is therefore not surprising that a charity’s management accounts may be produced on a different basis from the year end accounts.
One area for improvement is frequent monitoring of restricted fund balances. A charity may have a strong balance sheet and be creating surpluses, but if those surpluses are restricted for a narrow purpose, the charity could easily find itself with an inability to pay for core running costs and find itself technically insolvent. Understanding the fund position often requires additional work and sometimes involves making high level judgements.
Charities often use their statutory accounts as a fundraising tool, or send them to existing funders as part of a monitoring process. Knowledge of where the statutory accounts will differ significantly from the management accounts will allow proactive communication to funders, helping to avoid the potential for “surprises” when year end accounts are published.
What action should you take?
- Speak to your auditor: They will have a unique perspective and they may be able to advise pragmatic ways of bringing the systems in line.
- Understand the differences: If internal information will deviate from SORP policies, the decisions should be recorded and confirmed by trustees. Consider reporting reconciliations.
- Understand the work involved: Although it may be attractive to have fully SORP compliant reporting throughout the year, it may not be practical with the resources available. Some numbers may require third party input, which could incur additional cost.
- Consider if other stakeholders need to be informed: Consider proactively discussing differences with them.
- Regularly review the position: Consider revisiting the position in regular intervals (perhaps annually). This will keep new trustees abreast and ensure that the internal information adapts to the changing governance needs of the organisation.