OG15 B1 Charity accounts and reports: Larger charities, company charities and accruals accounts & Endowed charities: Accounting for total return

Last reviewed:
Last updated:
27 November 2013

Policy Statement/Overview

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OG15 B1

OG15 B1 Larger charities, company charities and accruals accounts - 14 March 2012 

1. Introduction

This section covers the accounting and reporting requirements for the individual charity only for:

  • All charitable companies;
  • All non-company charities whose annual income is more than £250,000; and
  • Those smaller charities which either choose to prepare accruals accounts or which are required by their trusts to do so.

 

It also covers the main differences in the accounts for charitable companies and Common Investment Funds (CIFs) and Common Deposit Funds (CDFs). It should be noted that the Charities SORP is not the only SORP and where a more specialist SORP applies for a particular class of charity (registered social landlords, higher and further education or CIFs and CDFs) that SORP applies instead (refer to section 5.6).

 

The Accounting Standards Board requires the accounts to meet the needs of funders and financial supporters and so it should be possible for an informed reader to gain an understanding of the financial position and financial activities shown in the accounts and also be helpful to the informed reader in assessing the stewardship of a charity’s management. For a fuller understanding of the accounts, particularly if used to support decision making, then an understanding of accounting principles and standards will be necessary.

 

The reporting requirements for group accounts, where a charity has one or more subsidiaries, are different and have additional reporting and accounting requirements.

 

lawyer_referThe charity law requirement to prepare group accounts is in s.138 of the Charities Act. Section 399 of the Companies Act 2006 requires the preparation of group accounts where the relevant threshold is exceeded. For charities established under company law if group accounts are required by the Charities Act only, the trustees are recommended to exercise their option to prepare group accounts under section 398 of the Companies Act 2006. By so doing this will simplify the audit report for the parent company.

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2. Which charities should prepare accruals accounts?

Charitable companies established under company law and any charity preparing accounts on a “true and fair” basis including unincorporated charities with a gross income exceeding the receipts and payments threshold of £250,000 must prepare accruals accounts. Other smaller unincorporated charities whose trusts require them to do so may also have to prepare accruals accounts.

 

Smaller unincorporated charities may also choose to prepare accounts on this basis, even if their trusts don’t require them so to do.

 

Accruals accounts are prepared on a “true and fair” basis and so should comply with UK Generally Accepted Accounting Practice (GAAP), including the SORP. A preparer cannot simply make up their own formats or accounting rules where the result is accounts that do not conform with accounting standards and the SORP. Similarly preparers cannot select on a “pick and mix” basis those accounting standards they want to apply whilst ignoring other applicable standards.

 

Accruals accounts are more sophisticated than receipts and payments accounts and are more complex. The preparation and scrutiny of accruals accounts requires an understanding of accounting principles and standards.

 

Accounts prepared on the accrual basis requires non-cash effects of transactions and other events to be reflected, as far as possible, in accounts for the accounting period in which they occur and not simply in the period when cash is received or paid. Accounts prepared on an accruals basis identify any change in the carrying value of assets and liabilities in the accounting year and report the effect of these changes in the statement of performance and state the opening and closing balances of assets and liabilities by categories on the face of the balance sheet. The accompanying notes set out the accounting policies adopted and explain or analyse key transactions and assets and liabilities.

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3. Format of accruals accounts

lawyer_referThe form and content of accruals accounts prepared for charities are all governed by statements of recommended practice (SORPs). The Charities SORP applies to all charities except for some specialised classes of charities: eg Registered Social Landlords and Further and Higher Education Institutions, CIFs and CDFs. For these, a separate SORP applies; see section 5.6.

 

The key requirements and methods and principles of the SORP are also underpinned by regulations made under the Charities Act. For accounting periods commencing on or after 1 April 2008 these regulation are The Charities (Accounts and Reports) Regulations 2008 No.629.

 

Charitable companies must also meet the additional accounting and reporting requirements of company law. These additional requirements are explained more fully in the relevant sections of this OG dealing with company charities.  

 

Church of England charities’ (currently excepted from registration where gross income is below £100,000) accounts are also subject to ecclesiastical law and so must also comply with the Church Accounting Regulations which are consistent with the SORP.

 

Where there is no specialist SORP, the form and content of charity accounts are laid down in the charities SORP, Accounting and Reporting by Charities. This was last revised in 2005 which is applicable to all accounting periods beginning on or after 1 April 2005.

 

The financial statements must include the following:

  • Trustees’ Annual Report (see section 5);
  • Statement of Financial Activities – the “SOFA” (see section 6);
  • Balance sheet (see section 7)
  • Cash Flow Statement (only required for reporting entities larger than the small companies limit) (see section 8); and
  • Notes to the accounts (see section 10).

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4. Simplified accounts for smaller charities

Charities which have a gross income below the statutory audit threshold (see CC15b for the audit threshold) can prepare a simpler annual report (refer to Section H of CC15b). The accounts do not have to contain quite as much detailed information in the notes to the accounts as accruals accounts and a more flexible approach to the income and expenditure categories of the Statement of Financial Activities can be adopted (see appendix 5 to the Charities SORP).

 

The purpose of simplified reporting is to lighten the reporting burden and give greater flexibility to smaller charities in how they present their activities. A more consistent format for the disclosure of income and the cost of activities is required of larger charities which manage the vast majority of the sector’s resources and assets. The higher standard of reporting required reflects the greater public interest in larger charities and the information needs of funders and other stakeholders.

 

The Accruals Accounts pack, CC17, is designed for the majority of small non-company charities which are under the statutory audit threshold and includes a pro-forma Trustees’ Report (TAR) and Independent Examiners' Report, pro-forma annual accounts (CC17(a)) along with completion notes for both. CC17 is not suitable for charities set up as companies under the Companies Acts because company law requires company charities to include an income and expenditure account and a director’s report. However, the pack may still be helpful to smaller charitable companies provided they understand that amendments may be necessary to meet company law requirements.

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5. Trustees’ annual report

5.1 The law

lawyer_referAll registered charities (including charitable companies) must prepare annual reports. Those exceeding the £25,000 threshold must submit them to us within 10 months of the end of their financial year.

 

Exempt charities are not required by the Charities Act to prepare annual reports, but may need to do so to comply with their own legislation, or the Charities SORP. See CC23 for more explanation of what is required of an exempt charity.

 

Excepted charities, unless they choose to register, are not required by law to prepare an Annual Report. The Commission has the right, using powers under s.168(3) of the Charities Act, to direct trustees to prepare and submit a report in exceptional circumstances.

 

We would exercise this power where appropriate when using our statutory inquiry powers where the provision of an annual report would assist in the resolution of our statutory inquiry.

 

5.2 Content

lawyer_referThe SORP provides for the recommended content of the annual report which should be followed and provides for simpler and less detailed reporting by charities below the audit threshold. The minimum content of annual reports required by law is set out in Regulations 37-41 of the Charities (Accounts and Reports) Regulations 2008. Refer to section H of CC15b for full details as to what has to be provided in both the simple and full trustees’ annual report.

 

The filing of annual reports is governed by sections 163-168 of the Act.

 

5.3 Format

Full details of the format and content of the trustees report, prescribed by the Regulations, is set out in CC15b Charity Reporting and Accounting, section H. The reporting recommendations which should be followed are set out in the SORP 2005 paragraphs 41 to 59.

 

Our Accruals Pack includes a simple template for a trustees’ annual report that may be used by any non-company charities below the audit threshold. Example trustee reports are also included in the example accounts provided on our website together with links to award winning charity accounts (the ICAEW / CAF Online Charity Accounts Awards).

 

5.4 Charitable companies

lawyer_referCharitable companies are governed both by charity law and company law. Like any other charity a registered company charity must produce an annual report and accounts. The form and content of the annual report must include all the requirements for the charity of its size (either a simple report if below the audit threshold or full report if above) and the accruals accounts must, to comply with UK accounting standards, follow the SORP in order to meet the legal requirement for the accounts to give a “true and fair view.”

 

However company law also requires a director’s report (Companies Act 2006 section 415) and for medium and large companies this will include a business review (Companies Act 2006 section 417).

 

For those charitable companies which are classed as small under section 382 of the Companies Act 2006, the additional reporting requirements of a directors’ report over and above a trustees’ annual report are minimal.

 

However for larger charities company law requires additional information in the business review.

 

Charities are recommended to produce a combined trustees’ and directors’ annual report for administrative convenience and we will accept a combined report provided it includes all the information required by a trustees’ report (as noted in paragraph 420 of SORP 2005) and the accounts include an Income and Expenditure account which is either prepared in addition to, or included within, the Statement of Financial Activities (SOFA).

 

5.5 Common Investment Funds (CIFs) and Common Deposit Funds (CDFs)

CIFs and CDFs are primarily investment vehicles constituted as charities that separately managed charities may invest in. The nature of such investment fund charities is reflected in special accounting and reporting arrangements applicable to such investment vehicles. 

 

A pooling scheme is a class of CIF that provides for the pooling of investments belonging to two or more charities which are administered by the same trustee body as the body managing the pooling scheme. The accounting for pooling schemes with common trustees follows the charities SORP.

 

5.6 If the Charities SORP does not apply

SORP also provides recommendations as to the content of annual reports. Whilst the Charities SORP will normally apply to all charities in the UK, the SORP recognises that for certain categories of charities a more specialised SORP reflecting the nature of the activities and transactions undertaken should apply instead. Where a charity is subject to a more specialised SORP charities follow their specialist SORP.  

 

These specialised SORPs are Accounting for Further and Higher Education (applies to universities and colleges) and Accounting by Registered Social Landlords (applies to housing associations). The IMA SORP applies to CIFs and CDFs but note the specific reporting requirements required by the 2008 Regulations.

 

Regulations that provide the legal basis for the content of the annual report do not apply to exempt charities.

 

Recognising the special nature of investment funds charities there are separate requirements for the content of the annual report of CIFs and CDFs that are not pooling scheme arrangements which are contained in Regulation 39 of the Charities (Accounts and Reports) Regulations.

 

accountant_referconsultAlways seek advice from a Commission Accountant if a charity is using one of these specialist SORPs.

 

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6. Statement of Financial Activities (SOFA)

6.1 Purpose and format

The purpose of the SOFA is to explain the incoming resources of the charity received or receivable in the period and to explain what resources were expended in the period analysed between restricted and unrestricted funds and endowment. From this analysis the reader should understand the nature of a charity’s income and the nature of the activities funded by expenditure. Taken with the explanations provided in the annual report this should give the reader a rounded view of what happened, in terms of financial activities, during the year.

 

accountant_referconsultWhere the accounts are complex or income exceeds £1m or you are unsure of what you have understood always seek advice from an accountant.

 

The format of the SOFA is set out in detail in SORP 2005. Table 3 on page 15 of the SORP shows the standard format for most charities and the table is cross referenced to the relevant paragraphs of the SORP where further explanation is provided.

 

The example accounts and links to examples award winning accounts on the website show how the requirements of SORP 2005 can be interpreted in practice.

 

Unincorporated charities with a gross income below the audit threshold can prepare simpler accruals accounts and should refer to appendix 5 of the SORP or section A of CC17a. In particular smaller charities may prepare a simpler SOFA based on their own classifications, such as type of expenditure (salaries and wages, office costs, repairs and maintenance etc), see CC39 for full details.

 

If a charity is below the audit threshold, whether or not it is incorporated, the standard headings for the classification of resources expended provided by the SORP are not mandatory.

 

6.2 Charitable companies

lawyer_referThe accounts must comply with either section 396 (or where group accounts are required by company law section 399) of the Companies Act 2006 and will include an income and expenditure account, section 474, where this is not provided as part of the Statement of Financial Activities.

 

The SORP indicates that the SOFA may include an income and expenditure account (SORP paragraph 423) required by company law. However due to certain format requirements of SORP 2005, particularly with regard to the treatment of movement on Endowment (Capital) Funds and unrealised gains and losses arising during the year, the SOFA may provide information in a way that is not fully consistent with that required in an income and expenditure account.

 

This means that in some cases company charities will have to prepare a separate Summary Income and Expenditure Account. This requirement is explained in more detail in paragraphs 423-425 of SORP 2005.

 

For most charitable companies a separate Summary Income and Expenditure Account will not be necessary. For them it will be sufficient to prepare the SOFA as described in SORP 2005 but to head it up ‘Statement of Financial Activities including an Income and Expenditure Account’ and to ensure that there is a prominent subheading ‘net income/ (expenditure) for the year which replaces or is in addition to the heading of ‘net incoming/ (outgoing) resources for the year’.

 

6.3 What if the Charities SORP does not apply?

lawyer_referSpecial case charities are defined in Regulation 2 of the Charities (Accounts and Reports) Regulations 2008 and include registered social landlords and most further and higher education institutions. The regulations only set minimal requirements for an income and expenditure account and balance sheet on the basis that such charities are subject to other regulatory regimes. However, particular provisions are made for investment fund charities (CIFs and CDFs) and these provisions are more fully explained in OG15 B5.

 

Where a charity is subject to a more specialised SORP it will not include a SOFA in its accounts as the SOFA is a form of primary accounting statement specific to charities applying the Charities SORP. The specialised SORPs that may be applicable to special case charities are Accounting for Further and Higher Education (applying to universities and colleges), the Financial Statements of Authorised Funds (applying in part by CIFs and CDFs), and Accounting by Registered Social Landlords (applying to housing associations).

 

accountant_referconsultIn all such circumstances take advice from a Commission Accountant.

 

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7. Balance sheet

7.1 Purpose and format

The purpose of the balance sheet is to provide a snapshot taken at the end of the year of a charity’s financial position and sets out the assets held, amounts due or owed to the charity together with amount of any liabilities owed by the charity.

 

The net total assets (the difference between total assets and all liabilities to the outside world) represents the funds of the charity which are then analysed between the various categories of fund that a charity may hold (unrestricted, restricted and endowment). From the balance sheet the reader should be able to understand the nature of the assets held e.g. whether any land or property is held, the nature of the liabilities and the carrying value of the net assets held in each category of funds held.

 

An understanding of the nature of a charity’s funds is particular important when considering the reserves available to a charity to expend. For example permanent endowment cannot usually be expended and restricted funds will limit the purposes for which a fund may be expended. This is further explained in CC19 Charities and Reserves.

 

The balance sheet is not a simple measure of wealth because different types of assets can be recognised or valued on different bases using different valuation techniques (e.g. historic cost and market value).

 

accountant_referconsultWhere the accounts are complex or income exceeds £1m or you are unsure that you have interpreted them correctly always seek advice from an accountant.

 

The format of the Balance Sheet set out in detail in SORP 2005. Table 7 on page 37 of the SORP shows the standard format of a charity balance sheet and this is cross referenced to the relevant paragraphs of the SORP.

 

The example accounts and links to examples of award winning accounts on the website show how the requirements of SORP 2005 can be applied in practice. Unincorporated charities with an income below the audit threshold can use section B of CC17a or CC39a to prepare their balance sheet.

 

7.2 Charitable companies

In general there is no difference between the balance sheet for incorporated and unincorporated charities except that on rare occasions a charitable company may have a share capital. It should be noted that where the fixed assets of a charity have been revalued, leading to a revaluation reserve, the Companies Act requires the disclosure of such a reserve on the face of the balance sheet (see SORP paragraphs 427 and 428 for further explanation).

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8. Cash Flow Statement

8.1 When is a cash flow statement required?

The preparation of a cash flow statement is not a statutory requirement, but is required by accounting standards (FRS 1) for larger charities and groups which exceed the small company threshold defined in the Companies Act 2006. Smaller charities may prepare a cash flow statement if they wish.

 

8.2 Format

Paragraphs 351 to 355 of SORP 2005 detail the requirements for a cash flow statement for charities and outline areas where a standard cash flow statement might need to be modified to take account of specific transactions in charity accounts.

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9. Accounting policies

9.1 The law

lawyer_referThe Regulations made under the Charities Act and (for charitable companies the Companies Act 2006) require accounting policies to be disclosed in the notes to the accounts.

 

The policies must be appropriate to the charity, and unless stated otherwise in the notes, will be presumed to be consistent with UK Accounting Standards and SORP.

 

9.2 The basis of preparation of accounts and specific policies

Full details of the basis of preparation of the accounts are given in paragraphs 356 to 360 of SORP 2005 and details of specific policies are given in paragraphs 361 to 370.

 

accountant_referconsultIn the event of a query concerning the appropriate accounting policies always seek advice from an accountant.

 

More detailed policies for the treatment of items in the accounts that should be provided where relevant are given in the following paragraphs: [This table and the ones in the subsequent paragraphs are intended to be advisory only setting out the notes that might generally be expected and are not designed as an accounts preparation checklist as the circumstances of each charity will vary. Full details of the required disclosure are given in SORP 2005].

Paragraph Details
120 Methods of apportionment where incoming resources have been apportioned between activities
131/136 The basis of valuation of gifts in kind, and donated facilities and services.
175/176 The policy adopted for the apportionment of costs between activities, and for the identification and basis of allocation of costs of multi-purpose activities.
212 An explanation of the nature of costs allocated to governance.
275 Rates and methods of depreciation of fixed assets.
358 Basis of accounts preparation including compliance with the SORP.
361 Accounting policies that detail with material items including:
362 Basis for recognition of incoming resources;
363 Basis for recognition of resources expended;
364 Basis for recognition of assets (including measurement bases); and
368 Description of the different types funds held
  

 The example accounts and the link to award winning accounts on the website show how the requirements of SORP 2005 and other relevant legislation can be applied in practice. Unincorporated charities which have an income below the audit threshold can use notes 1 and 2 in section C of CC17 (a) or CC39 (a), adapted to suit the policies adopted by the charity.

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10. Notes to the accounts

10.1 Notes to the Statement of Financial Activities

The notes to the accounts should provide additional detail of the most significant incoming and outgoing resources which have been summarised on the face of the SOFA. The notes are important in providing additional information or explanations about amounts included in the accounts or other matters that need to be disclosed and will include those mandatory notes required by schedule 1 to the Charities (Accounts and Reports) Regulations 2008.

 

accountant_referconsultWhere the accounts are complex or income exceeds £1m or you are unsure that you have interpreted them correctly always seek advice from an accountant.

 

The following notes are detailed in the SORP and should be shown where the activity is material:

Paragraph Details
114 Where any incoming resources have been deferred, an explanation of the reason for the deferral and an analysis of movements on the deferred account between amounts deferred in the current year and amounts released from previous years.
115 Details of, and movements on resources held for third parties.
122 Details of types of activities undertaken to generate voluntary income, where possible analysed in categories to match the analysis for the costs of generating funds.
128 Details of legacies not included in the SOFA.
136 An analysis of donated services or facilities included in the SOFA.
142 Gross investment income arising from each class of investment.
146 An analysis of incoming resources from charitable activities to supplement the analysis on the face of the SOFA, sufficiently detailed so that the reader of the accounts understands the main activities carried out by the charity and the main components of gross incoming resources receivable from each material charitable activity.
166/167/ table 4 Details of total support costs and an explanation of how these have been allocated to each of the activity cost categories.
183 Details of the types of activity on which costs of generating funds were expended.
186 Details of costs of fundraising trading activities.
191/192 An analysis of resources expended on charitable activities sufficient to provide an understanding of the nature of activities undertaken and the resources expended on their provision, including the appropriate allocation of support costs.
193/ Table 5 Where activities are carried out through a combination of direct service and grant funding, details of grantmaking expenditure.
201-207/ Table 6 An explanation of how grants made relate to the objects of the charity and the amount of support costs associated with grantmaking activities. An analysis of grants between grants to individuals and grants to institutions, by type of activity or project. This should be sufficient to give the reader an understanding of the nature of activities or projects being funded. Disclosure of Institutional grants should give the name of the institution and the total value of grants made to that institution in the year except in exceptional circumstances as set out in paragraph 208.
(However in certain circumstances no disclosure is required, under s.131(4) of the Charities Act, trustees of a charitable trust where the settlor or their spouse or civil partner is still alive is not required to disclose the identities of recipients of grants made out of funds of the charity, or the amounts of individual grants so made.)
216 An explanation of the nature of each material transfer between funds.

226-228/

231/233

Trustee remuneration and expenses and material transactions with related parties
234-238 Details of staff costs and numbers.
239 Amounts payable to the auditor or independent examiner.
240 Ex gratia payments.
243 A summary of movements in funds.

 

10.2 Notes to the Balance Sheet

The notes on the balance sheet must provide further details of certain of the material assets and liabilities summarised on the balance sheet and an analysis of the structure of the charity’s funds (if not already provided by the form of the balance sheet).

 

accountant_referconsultWhere the accounts are complex or income exceeds £1m or you are unsure that you have interpreted them correctly, always seek advice from an accountant.

 

The following notes are detailed in the SORP and should be shown where amounts are material:

Paragraph Details
273/274/ table 8 An analysis of fixed assets, a summary of material changes in value and a reconciliation of opening and closing balances.
276 Details of any material difference between carrying value and market value of interests in land and buildings.
277/278 Details of any revaluations or impairments of fixed assets.
294 Details of any heritage assets.
299/301-307 and 311-312 Details of investments including programme related investments.
314 Analysis of debtors and prepayments.
318 Analysis of creditors and accruals.
319 Details of any assets and associated liabilities held for other organisations not included in the balance sheet.
326-328 Particulars of all material provisions for liabilities and charges accrued in the balance sheet and details of all material commitments in respect of particular charitable projects if they have not been charged in the accounts.
329 Details of designated funds not included as liabilities
339 Details of derivative products in use by the charity.
345-348 Contingent assets and liabilities.
75  Information on the structure of the charity’s funds.
444-448 Details of pension schemes.

 

10.3 Worked examples and sources of help

Example accounts and the link to award winning accounts on the website show how the requirements of SORP 2005 and other relevant legislation can be applied in practice. Unincorporated charities whose income is below the audit threshold can use notes 3 to 15 in section C of CC17 (a) or 3 to 14 of CC39 (a), adapted to suit the policies adopted by the charity.

 

There are a number of sources of guidance to help in the preparation of charity accruals accounts including:

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11. Accounting for Total Return - 14 March 2012

We have issued The Charities (Total Return) Regulations 2013 and accompanying  guidance on total return investment for permanently endowed charities. This can be seen in the detailed guidance on Money and Accounts  on our website. This accounting treatment is for use by permanently endowed charities which have the power to use the total return approach to investment conferred by an Order of the Charity Commission and wish to continue using the powers set out in that Order.

 

11.1 Accounting responsibilities and the total return approach to investment

Trustees will need to account for both the investment return and the allocation to the trust for application income in a manner consistent with the methods and principles of the Statement of Recommended Practice – Accounting and Reporting by Charities (SORP 2005). In addition trustees will need to make the specific disclosures required by the consent Order in their annual report and notes to the accounts.

11.2 Accounting recognition of the investment return under the total return approach to investment

Under the total return approach the investment return initially accrues to the permanent endowment. Whilst the investment return forms part of the unapplied total return it remains permanent endowment until such time as the trustees determine to allocate to the trust for application (income). The investment return should therefore be credited to the permanent endowment column of the statement of financial activity (SOFA).

Whilst investments are managed so as to optimise the investment return, the distinction between investment income and capital gains and losses should be preserved in the SOFA analysis:

  • investment income should be credited to the endowment funds column, as an incoming resource, at line A of the table in paragraph 89 of the SORP 2005;
  • capital gains and losses should be disclosed in the endowment column as gains and losses on revaluations and disposals of investment assets at line D of the table in paragraph 89 of the SORP 2000.

Investment income should be analysed by note to the accounts in accordance with paragraph 142 of SORP 2005.  Trustees may choose to expand this note by giving details of capital gains and losses so that the user of the accounts has a better appreciation of the overall investment return generated.

11.3 Accounting for the allocation of the unapplied total return to the trust for application (income)

Where the trustees have exercised their power under the order to allocate part of the unapplied total return to the trust for application (income), the amount so allocated in respect of the financial year should be disclosed by way of a transfer from the endowment funds column to the relevant income funds column of the SOFA. This transfer should be disclosed at line C of the table in paragraph 89 of SORP 2005.

The notes to the accounts should provide details of the nature of the transfer, explaining that it represents the allocation of the unapplied total return to income funds. (See SORP paragraph 75 (d)).

11.4 Accounting treatment where the allocation exceeds investment return of the financial year

The allocation to the trust for application (income) is made from the unallocated total return and is therefore not necessarily limited to the investment return obtained in a particular year. Circumstances may arise where the allocation made exceeds the investment return obtained in the year, for example, the investment return for a particular year is insufficient to discharge the duty of even-handedness to current beneficiaries.

Such situations should also be dealt with by a transfer in the current financial year and not by prior year adjustment of funds brought forward.  The transfer reflects the exercise of trustee discretion in a particular financial year, and the transfer between endowment and income funds reflects the exercise of that discretion.  Where the allocation exceeds the investment return for the year trustees may wish to explain the circumstances in their annual report (see section 1.6).

11.5 Accounting disclosure of the unapplied total return

The accounts for each financial year are required by the consent Order (the model wording can be found in Annex C of the Order Manual) to give particulars of the movements in the value of the unapplied total return for the financial year by way of notes to the accounts.  The particulars required are:

  • the aggregate value of the assets representing the unapplied total return at the beginning of the financial year;
  • any increase or decrease during the year in the value of the assets representing the unapplied total return;
  • the part of the unapplied total return which the trustees have, in the financial year, allocated to the trust for application (income) for the purposes of the charity; and
  • the aggregate value of the assets representing the unapplied total return at the balance sheet date.

The aggregate value of the unapplied total return at the end of a financial year continues to form part of the permanent endowment and does not constitute a separate fund for accounts purposes.

11.6 Trustees’ annual report disclosure

The consent Order (which can be found in Annex C of the Order Manual) also requires specific disclosures by the trustees in their annual report (or by notes to the accounts if no trustees’ annual report is required) to explain the policies adopted by them in identifying and allocating the unapplied total return. The disclosures required are:

  • to state the policy adopted by the trustees for making the initial identification of which part of the existing assets of the charity represents its unapplied total return, and state the date from which the analysis was performed if different from the date when the charity was established;
  • to give an explanation of the consideration and policies relevant to the trustees’ determination of the part of the unapplied total return that is allocated to the trust for application (income) in that financial year; and
  • to identify the person(s) who provided advice as to the use of the power so as not to prejudice the ability of the charity to meet the present and future needs which are designated by its trusts.

11.7 Accounting thresholds

The amount of any unapplied total return allocated (ie transferred) to the trust for application (income), in respect of a financial year, forms part of gross income for statutory threshold purposes.  The investment return initially accruing to the endowment fund does not form part of gross income.

Where it appears that allocations may have been manipulated to avoid the purpose of a statutory threshold of the Charities Act, legal or accountancy advice should be sought.  Examples may include deflating the allocation so that audit or examination requirements under sections 144-145 are artificially avoided or to bring the charity within the ambit of section 281, thereby artificially creating the scope to expend capital (endowment).

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