The Charity Commission has issued a warning that some charities fail to explain adequately how they are dealing with financial risks, after research showed that nearly half of the charities with net current liabilities omitted to discuss the issue in their financial reports
A Charity Commission accounts monitoring review identified 1,348 charities whose accounts reported a net current liability position and then randomly selected 98 of those for a more detailed follow up.
Of the 98 accounts reviewed, 42 charities did not discuss the net current liabilities issue in the Trustees’ Annual Report (TAR). The Charity Commission says as a result ‘they missed the opportunity to explain to funders and stakeholders how they were managing the risk’. Another accounts monitoring review, of charities with pension scheme deficits, produced a similar finding.
The report found that most of the charities reviewed were funding their liabilities either through deferred income - payments received ahead of the service being provided - or through bank loans and overdrafts. These funding models were each adopted by 28 charities.
The Charity Commission says that whilst many of the charities reviewed have found operating with net current liabilities to be sustainable, others are in financial difficulty.
In particular, the report finds that, of the accounts reviewed, ten included a qualification or an emphasis of matter by the charity's auditors relating to the charities' ability to continue as going concerns. Five of these charities are now in liquidation or no longer operating.
The Commission says it is assessing concerns about two of the remaining five charities that do not appear to be dealing adequately with the risks associated with their liabilities.
Nick Allaway, head of business services at the Charity Commission whose team carried out the review, said: ‘A net current liability doesn't necessarily mean that a charity is facing financial difficulties, but if this situation continues for a sustained period then the charity's long term survival must be questionable.
'Trustees should use their TAR and accounts as an opportunity to reassure their funders, supporters and beneficiaries that they are actively managing the situation.’
For more information about the changes to the Charity SORP in light of the new FRS 102 replacement for UK GAAP, click here