I was asked by a client to develop some guidance around reporting for charities, and I thought the material might be useful for any small charity out there wondering where to start. I was asked to explain the basics of financial reporting by charities – what has to be done, by which charities, and when.
My key source of course is the Charity Commission. (In Scotland it’s OSCR and in NI it’s CCNI, but the principles are all the same).
Every registered charity has to report to the Charity Commission each year. To comply, the charity needs to complete three things – an annual report, a set of accounts, and an annual return to the Charity Commission. Trustee should ensure that they know what must be included, and how these documents should be prepared. Also, what level of scrutiny is needed and what level of detail is needed for the annual report, dependent on income and asset levels. Charitable companies must also file a directors’ report and accounts with Companies House.
The very smallest, and certain types of special charities are excepted or exempt, but for the vast majority of charities – those that do have to send an annual report and accounts to the commission – they must do so within 10 months of the end of the financial year.
However, the commission encourages you to do so much sooner than this, and I would strongly agree. After all, serious potential donors will be looking at the Commission’s record of your charity, and an up-to-date fresh picture could make all the difference. Also, purely on a pragmatic basis, preparing and lodging the accounts for one financial year is not something you want to be doing 9 months into the next!
For many charities, the Annual Report and Accounts will also include up-to-date impact statements and project stories which are great tools for a charity’s fundraising and communications teams.
Working out what applies
All charities (whether registered or not) must prepare accounts and a trustees report and make them available to the public on request. For even the smallest charities, it is good practice to publish these online, which demonstrates professionalism and transparency. The current threshold for registering with the commission is an income of £5,000 in a year.
All charitable incorporated organisations (CIOs), whatever their income, and all other registered charities with a gross income over £25,000 must lodge their accounts and annual report with the commission. This is done online, and they are often submitted as one document.
All charitable incorporated organisations (CIOs), whatever their income, and all other registered charities with a gross income above £10,000 must also complete an annual return with the commission. Again this is done online. Registered charities with a gross income of less than £10,000 in the financial year are asked to complete an annual return for certain items – a scaled back version of the process.
The annual return is an affirmation of basic information about the charity and is intended to help the commission maintain an up to date record of all registered charities by ensuring that financial and other details are confirmed.
As noted above charity that is also a limited company must file a directors’ report and accruals accounts at Companies House too. Increasingly, charities are converting to or being set up as Charitable Incorporated Organisations (CIOs), but many remain registered with both regulators and those charities’ trustees need to remember that they are also directors of a company, with all the responsibilities that come with that.
Here is a useful PDF flowchart that shows the requirements for charities of different sizes; it’s worth following the flow for your own organisation or retaining the chart as a simple reference. Also, the commission’s document “Charity Reporting and Accounting: The Essentials”, is crucial reading for Trustees and charity finance professionals.
Types of accounting
A small, simple charity that is not also a company can prepare accounts on a cash (receipts and payment) basis. Generally, however, accounts need to be prepared on an accruals basis under charities SORP – Statement of Recommended Practice – to ensure that a true picture of viability, assets and liabilities is portrayed.
Cash accounting can only be used where a non-company charity is reporting a gross income of £250,000 or less during the financial year.
Non-company charities with gross income of over £250,000, and all charitable companies, must prepare accruals accounts. These include a balance sheet, statement of financial activities and explanatory notes and must show a ‘true and fair view’ of the finances.
Generally, only charities with a gross income of more than £25,000 in their financial year are required by the commission to have their accounts independently examined or audited. There are a few exceptions; for example, certain NHS charities and charities whose governing document demand external financial scrutiny whatever the level of income.
An independent examination – at least – must be completed if gross income is above £25,000 and up to £1 million. A full audit is mandatory where gross income exceeds £250,000 and total assets (i.e. before liabilities) exceed £3.26m, or by any charity where gross income exceeds £1 million, whatever the level of assets.
An audit is a higher level of scrutiny involving a critical review of the financial records of the charity and ensuring that they are consistent with the accounts. An audit will be carried out by a registered auditor. He or she – or it might be a team for larger charities – will also affirm good governance and due diligence is in place in respect of financial controls and activities.
Of course, trustees of a small charity can adopt a higher level of scrutiny if they wish, which can be reassuring to partners, funders and lenders.
This article is purely intended as an introduction and trustees at any charity should refer to the Charity Commission document linked to above. Article originally published in September 2020, reviewed and amended 01 Jan 2023.