Charities financial reporting update

This page details relevant changes in the regulatory and financial reporting environment. Further details of many changes are set out on our charities sector page.

  • Regulatory issues and other matters
  • Charity commission (“CC”)
  • Financial reporting update
  • Scottish charities
  • Seminars and publications

Regulatory issues and other matters

Charities Act 2022

In March 2022, the new Charities Act 2022 was passed into law. The provisions amended by the updated Act have to be implemented by the Charity Commission before they come into force. In October 2022, the first set of changes was implemented by the Charity Commission as follows: 

  • It is now easier to amend charity governing documents or Royal Charters, with some circumstances still requiring the Commission or Privy Council's approval.
  • On the disposal of land, the list of appropriate advisors has been broadened (with no external advice being needed at all where the charity has a suitably qualified trustee on its board), and the requirements on what advice they must receive has been simplified, which will save time and money.
  • More flexibility is now afforded to charities on the use of a permanent endowment, including allowing trustees to borrow up to 25% of the value of the permanent endowment without the Charity Commission's approval.
  • Trustees will now be able to be paid for the supply of goods provided to the charity (as well as services which are currently allowed) where it is in the charity's best interests to do so, even where it is not explicitly stated in the charity's governing document, without needing consent from the Charity Commission.
  • Simpler rules for failed appeals have been introduced which allow for donations up to a specified value to be spent on similar charitable purposes without the need to contact the individual donors for permission.
  • Charities will now be able to make small ex-gratia payments without the need for the Commission's approval, where they are under a moral obligation to make the payment.

The Charity Commission has confirmed that implementing further legislative changes is one of their business priorities over the year ahead, with the aim that all provisions will be gradually implemented by Autumn 2023.

Charity commission 

Charity Commission News

Charity Commission News (“CC News”) is the Commission’s quarterly newsletter, which provides essential information for charity trustees and their advisers. The latest Charity Commission News: Issue 70, was published in February 2023. This edition includes information on a variety of issues including submitting your charity annual return, protecting your charity from the risk of cybercrime and guidance on tax implications of using contractors.

Charity Commission Publications

Set out below are a number of useful Charity Commission publications and guidance which have been recently published or updated:

A collection of the Charity Commission “CC” guidance publications can obtained from here.

Internal financial controls for charities

The Charity Commission has published guidance to remind trustees of the importance of robust internal financial controls, particularly in relation to helping charity trustees:

  • meet their legal duties to safeguard the charity’s assets;
  • administer the charity’s finances and assets in a way that identifies and manages risk; and
  • ensure the quality of financial reporting by keeping adequate accounting records and preparing timely and relevant financial information. 

Within the guidance, the Charity Commission has provided a checklist to be used by charity trustees and other senior management to check their charity’s internal financial controls against legal requirements and good practice recommendations, to assist in identifying areas where their charity may be exposed or where internal financial controls could otherwise be improved. 

Awareness of core trustee duties and available guidance

Recent research has identified a knowledge gap in trustees understanding of their basic role requirements that could lead to unintentional governance failings. To address this, the Charity Commission has launched a suite of “5 minute guides” to increase knowledge and understanding of essential trustee duties. 

The 5 minute guides cover the following subject areas: 

  • Delivering purpose
  • Managing finance
  • Conflicts of interest
  • Making decisions
  • Reporting information
  • Safeguarding people
  • Political activity and campaigning

Safeguarding and protecting people for charities and trustees 

The Charity Commission has published guidance on what to do to protect people who come into contact with your charity through its work from abuse or mistreatment of any kind. This includes:

  • people who benefit from your charity’s work;
  • staff; 
  • volunteers; and
  • other people who come into contact with your charity through its work.

This guidance can be obtained from here. Further information can also be obtained from Bond’s ‘Good governance for safeguarding'.

Alert for charities – cybercrime and how to report to the Charity Commission

The Charity Commission has revealed that one in 8 charities had experienced cybercrime in the last 12 months. This is particularly concerning given that a survey indicated that only 24% of charities have a formal policy to manage the risk. The National Cyber Security Centre (NCSC) has provided a guide of how to protect from cybercrimes which can be obtained from here.

For larger charities, detailed advice for trustees on improving cyber security is available through the NCSC’s toolkit.

Protect your charity from Fraud

In January 2023 the Commission issued updated guidance on its website. Charities of all sizes are challenged by a range of fraud that can impact on all areas of the organisation. Trustees need to implement a proactive and preventative approach to the issue, rather simply than identifying and reporting a fraud when it occurs. 

The guidance includes a range of templates for policies including an anti-fraud and corruption policy and a whistleblowing policy template. The guidance also provides useful information on the types of fraud as well as reporting serious incidences.

Charity money, tax and accounts

There is detailed guidance to assist trustees with the preparation of the annual report and financial statements available here, as well as some other essential reading.

Charity guidance on reporting relevant matters of interest

Reporting of relevant matters of interest to UK charity regulators issued by the Charity Commission for England and Wales, the Office of the Scottish Charities Regulator and the Charity Commission for Northern Ireland includes examples of relevant matters which may be reported by auditors and Independent Examiners, available here.

Trustees need to be aware of the list of matters of material significance and of the duty placed upon an auditor or independent examiner to report these matters to the regulator.

Trustees have a parallel duty to report serious incidents to the regulator. Where a charity’s auditor or independent examiner decides to report a matter of material significance, the trustees should consider whether they also have a duty to report a serious incident.

This guidance was updated April 2020 to include further clarifications on what should be reported, particularly during times of national emergency, in light of the coronavirus pandemic.

Regulatory alerts, inquiry and case reports

As it is in the public interest, the Charity Commission usually:

  • releases a public statement whenever it opens a statutory inquiry into a charity; and
  • publishes a report detailing the findings of the inquiry.

Published statements and reports are shown on the charity’s entry on the public register of charities.

The Commission may also publish reports of its non-inquiry work where:

  • there is significant public interest in the issues involved and the outcome; and
  • there are lessons that other charities can learn from them.

Further information can be found here.

Measuring impact

A website, funded by the National Lottery, has released a range of free guides and self-assessment tools to assist small and medium charities to understand, evaluate and increase their impact. 

Financial reporting update

The impact of energy and carbon reporting requirements on large unquoted companies, LLPs and quoted companies

The reporting of carbon emissions was extended to private companies (including incorporated charities) who qualify as large i.e. the entity or group meets two or more of the following criteria:

  • Over 250 employees.
  • Turnover more than £36m.
  • Balance sheet more than £18m.

These new regulations were effective for accounting periods commencing on or after 1 April 2019.

These regulations were updated by the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 which requires companies (including incorporated charities) with more than £500m turnover, to include an additional statement on non-financial and sustainability information in their annual report. These provisions are effective for accounting periods commencing on or after 6 April 2022.

Updates to FRS 102 and the Charities SORP

The FRC issued an exposure draft of changes to FRS 102 in December 2022 (FRED 82).  The proposed changes will affect all entities applying FRS 102 and not solely charities.  Highlights include:

  • Changes to the requirements around revenue arising from exchange transactions which are akin to those included in IFRS 15.
  • Adopting a version of IFRS 16 which will bring all leases except those of low value/short life onto the balance sheet.

The proposed effective date for the amendments is accounting periods beginning on or after 1 January 2025.  The next edition of the Charities Statement of Recommended Practice (SORP), taking account of the final changes to FRS 102, is also expected to be implemented from 1 January 2025.

International Non-Profit Accounting Guidance (“INPAG”)

IFR4NPO is a 5-year project to develop an internationally applicable financial reporting guidance for non-profit organisations, to be known as INPAG. Whilst it will be the decision of the regulatory bodies in each jurisdiction whether to mandate adoption of the standards, their adoption across the world aims to improve the clarity and consistency of financial reports, resulting in greater credibility and trust in the not-for-profit sector globally.

3 exposure drafts are being issued in 2022 and 2023 and will be open for consultation for preparers, auditors and users of financial statements of non-profit organisations.

Exposure draft 1: Framing – released November 2022

  • Framework
  • Describing NPOs and reporting entities
  • Financial statement presentation
  • Narrative reporting

Exposure draft 2: Accounting – due for release Q2 2023

Exposure draft 3: Presentation – due for release Q4 2023

The new accounting standards are being developed based on the IFRS for SMEs, with specific guidance being incorporated to reflect NPO specific issues and stakeholder needs. The final standard is expected to be released by Q3 2025. There is currently no intention for the Charity Commission to mandate the adoption of INPAG in the UK.

Part year workers and holiday pay

A recent ruling from the Supreme Court (Harpur Trust V Brazel) regarding holiday pay will affect many sectors that use:

  • the ‘12.07%’ approach to calculating holiday pay; and
  • permanent contracts to employ workers who have no fixed hours.

The July 2022 decision found that annual leave entitlement cannot be pro-rated for a part-year (not to be confused with a part-year) worker employed under a permanent contract. The lawful method for calculating holiday entitlement and pay is set out in the Working Time Regulations (WTR) and the Employment Rights Act 1996 (ERA).

This means that employers who have continued using ACAS's holiday pay guidance setting out a 12.07 per cent calculation (prior to its amendment in 2019), or similar formula, instead of the WTR and ERA requirements will potentially have been underpaying holiday pay.

Workers can bring claims for historic underpaid holiday pay, subject to certain time limits.

Further information about the decision made and the potential implications can be found here. 

Scottish charities

This section details changes and current developments specifically impacting charities (including cross border charities) in Scotland.

Regulation – OSCR

OSCR has been working on achieving its objectives and its vision for a trusted and respected Scottish charity sector which positively contributes to society.

OSCR’s purpose is to hold charities in Scotland to account and help the charity sector to improve so that the public have trust and confidence in charities. To do this, OSCR undertakes regulatory work, including adding new charities to the Scottish Charity Register, dealing with concerns, enquiries, and questions from the public, media, and charities, reviewing charitable status and helping charities wind up.

Their recent work includes:

Submission of Accounts

There have been a number of recent cases where charitable companies have submitted the wrong format of accounts so OSCR has posted a reminder to charity trustees, and those working with charitable companies, of what the requirements are.

Review of annual report and accounts

To help OSCR understand how well charities are complying with accounting requirements, they recently undertook a review of the accounts submitted by 90 charities, which were selected at random from the 25,000 organisations on the Scottish Charity Register. This work has helped OSCR to identify areas where improvement is required and where they may want to provide additional support for charities.

They found four key issues in the accounts they examined. These were:

  1. Failing to include a Trustees’ Annual Report completely or providing inadequate information so this report does not meet the legal requirements.
  2. Failing to ensure that the accounts are subject to the appropriate external scrutiny and independent review of the financial information.
  3. Not providing comparative information as prior year information was missing, either completely or partially, in the accounts.
  4. Failing to provide the required notes to accompany the financial statements. Notes are important as they help to provide context and understanding by supplementing the information in the accounts.

The full findings of this research can be found in OSCR’s new report, Reviewing Charity Accounts: Random Sampling.

Charity Reserves

In November 2022 OSCR issued tips on why charities should have reserves and how much they may want to have in their charity reserves pot. There is no blanket rule, and the amount charities should have in reserves will vary depending on your charity’s needs.

Revitalising Trusts Project

In partnership with Foundation Scotland in May 2021 OSCR launched a two-year project to ensure that funds from underactive or dormant charitable trusts are ‘unlocked’ to support good causes across Scotland. OSCR has defined an underactive or dormant trust as one which has:

  • Not spent or received any money in the last five years; or
  • Spent less than 30% of its income in the last five years; or
  • Failed to send OSCR annual accounts during the last five years.

Many of these trusts are very small, however collectively they hold a significant amount which could make a huge difference to local communities if they can be revitalised.

Up to the end of March 2023, £2.3million, from over 300 dormant trusts, has been ‘unlocked’ from lost or forgotten charitable accounts. The amount unlocked so far is just the tip of the iceberg, and the project hopes to continue supporting trustees to maximise their funds and reach for public good.

You can view a video on this from OSCR's Revitalisers of the lost trusts at The Gathering 2022.

Sector Overview

OSCR published a new Sector Overview Report on 2 May 2023 with key facts and figures about the charity sector in Scotland. 

This followed the publication of a report by OSCR in June 2022 following the results of the bi-annual Scottish Charity Survey which found that 80% of charities have reported that financial issues surrounding funding and running costs were among their top 3 challenges.  This new survey represented the first opportunity for observers to understand how the relationship between the Scottish public and the charity sector has evolved since the beginning of the COVID-19 pandemic in early 2020 and shines a light on how people in Scotland view the charity sector, as well as highlighting the key issues and challenges that Scotland’s 25,000 charities have faced over the past two years.

Learning points for charity trustees webinar

During Trustees' Week 2022 OSCR held an online event called 'Learning points for charity trustees' covering:

  • The basics of charity trusteeship
  • The trustee experience in practice
  • Common problems – what, why and how
  • How to avoid issues in running a charity

You can view a recording on this link.

On-line services

There is also a real focus on encouraging all charities to sign up for OSCR’s on-line services which were upgraded in July 2022. Earlier this year, OSCR held a webinar explaining how to use OSCR Online to submit your annual return. There is a recording of the event on OSCR’s YouTube channel. The webinar covers why annual information is requested, the recent changes to OSCR Online, and how to use the system to submit your annual return.

OSCR retains a plethora useful guidance and publications on their website, and we have highlighted some of these below:

Charity investments: guidance and good practice

This guidance sets out the key points to consider if your charity has investments or is thinking about investing and how your duties as charity trustees apply. The guidance can be obtained from here.

Guidance and good practice on fraud

On 6 June 2018 OSCR produced new guidance on how to reduce the risk of fraud in your charity. The guidance tells trustees:

  • what their legal duties are.
  • how they can reduce the risk of fraud; and
  • how OSCR will consider instances of fraud in charities.

This guidance can be obtained from here.

On 15 December 2017 OSCR updated its April 2016 Guidance and good practice for charity trustees. The guidance has been updated to provide a clear and practical guide to what charity trustees must consider to ensure they meet legal requirements, ensure that their charities are well-run and avoid some of the common problems that can arise.

Guidance on safeguarding

OSCR have published interim safeguarding guidance to promote the welfare of children and vulnerable adults to protect them from harm. The guidance looks at the key steps trustees should take to make sure this is considered appropriately and charity trustee duties in respect of safeguarding. The guidance can be obtained from here. 

How to raise a notifiable event

Guidance has been published on how trustees should notify OSCR when a notifiable event occurs in a charity. Notifiable events could include:

  • fraud and theft;
  • significant financial loss;
  • incidents of abuse or mistreatment of vulnerable beneficiaries;
  • a lack of charity trustees required to make a legal decision;
  • when a charity has been subject to a criminal investigation or an investigation by another regulator or agency; sanctions have been imposed, or concerns raised by another regulator or agency;
  • when significant sums of money or other property have been donated to the charity from an unknown or unverified source;
    suspicions that the charity and/or its assets are being used to fund criminal activity (including terrorism); and
  • charity trustees acting improperly or whilst disqualified.

OSCR does not want to know about every event, only those that threaten to have a significant impact on the charity or its assets. One of the most important assets of a charity is its reputation, so it is also important to consider what impact any event might have on that.

The notifiable event form and guidance can be obtained from here. 

In addition to this OSCR are currently reviewing their notifiable events system of reporting to inform improvements to the current system.

Legislation Updates

The New Charities Bill

A new Charities Bill was published in November 2022 and the proposed legislation passed its first parliamentary stage in May 2023, which means that the general principles have been accepted, and so is now at Stage 2 of the process. If enacted, the new Charities (Regulation and Administration) (Scotland) Bill would enhance OSCR’s regulatory powers and help to increase accountability and transparency in Scotland’s 25,000 charities.

Under the proposals in the Bill, OSCR would have wider powers to investigate charities and charity trustees. Rules around who can be a charity trustee or senior officeholder in a charity would also be tightened. In addition to this the proposed changes increase the information that OSCR holds about charity trustees. Trustee names would be published in a publicly searchable register alongside the accounts and annual return of the charity. Finally, the new legislation will allow OSCR to maintain a register of mergers in order to ensure legacies left to charities that no longer exists due to a merger can still benefit from legacies left in wills.

Trusts and Succession (Scotland) Bill

The Scottish Parliament’s Delegated Powers and Law Reform Committee has launched a consultation on the Scottish Government’s Trusts and Succession (Scotland) Bill.

The Bill aims to change the law in relation to two areas:

  • Trusts - how they are administered and managed; and
  • Succession - who has the right to inherit, and in what order.

A trust is a legal device which allows assets to be owned by one person or organisation, while a different individual, organisation, or section of the general public, benefits from those assets in practice. The Scottish Government's Policy Memorandum notes that the Bill aims to modernise the law in relation to trusts, a way of managing assets which has been in use since the 17th century. Trusts are used for a wide range of legal purposes, affecting families, businesses, charities, and financial institutions.

The Bill aims to clarify:

  • what kind of investments can be made by a trustee;
  • a trustee’s duty of care in relation to their role;
  • whether a person can be a trustee or not;
  • how someone would stop being a trustee by resigning or being removed;
  • what type of information a trustee must provide to other people (including to beneficiaries – the people who will benefit from the trust) and how often; and
  • the management of private purpose trusts.

The Policy Memorandum also notes that the Bill would amend the order of succession in intestate estates (where someone dies without a will) to reflect contemporary perception of the role of spouses and civil partners in the family of the deceased.

Visit the Scottish Parliament website to find more information about the Bill.

Other Useful Guidance

The Scottish Governance Code for the Third Sector

This was first published in November 2018 having been developed as a good practice guide by the Scottish Third Sector Governance Forum. It has five core principles with a recognition that equality and diversity is an integral part of good governance which underpins all these principles, which are:

  • Organisational purpose.
  • Leadership.
  • Board behaviour.
  • Control.
  • Effectiveness.

It is available online here.

SCVO have created a Good Governance Check-up document to be used in conjunction with the Code to help trustees regularly review their governance. Your board can use the check-up to identify areas for improvement and monitor and record your journey to good governance.

You can view the Good Governance Check-up document here.

The Code was reviewed by Scotland’s Third Sector Governance Forum in 2022 and the recommendations that were made can be read here. Work has begun in 2023 on implementing the suggested changes, both in the Code and the Good Governance Check-up.

Charity Reserves

In addition to OSCR’s own tips on charity reserves a new report from IVAR and the Scotland Funders’ Forum (OSCR | New report on Charity Reserves Management) finds that strategic management of charity reserves could enhance the stability and agility of the voluntary sector. As charities, funders and regulators consider how to respond to the cost-of-living crisis – could reserves management unlock money to support change and development while also providing a protective financial buffer?

Seminars and publications

RSM Charity events

RSM hold regular seminars, training and events at our offices around the UK. More information on our latest events can be found here.

Charity Governance 2020

Good governance has always been key in all sectors, but nowhere is governance more important than in the charity sector. Those with ultimate responsibility in not for profit organisations are giving their time voluntarily, but this does not absolve them from blame if things go wrong. Therefore the systems and structures within which they operate have to be especially clear and robust. Charity Governance 2020 is about being as effective as possible. Raising average to good and good to outstanding, to enable a rise in the standards of delivery and outcomes.

Our best practice guide will help you embed good governance in your charity. The guide uses our wealth of knowledge to not just provide a handy overview of the main issues and areas of debate, but frames them both individually and as a cohesive whole. It draws on that experience to highlight common problems and suggest practical solutions, remembering all the time that good governance is not set in stone once reviewed, and improved, but is a fluid process, that evolves within a robust structure. For more information, read our guide here.