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Charity annual reports and accounts – reading them through the right lens

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The impact of the COVID-19 pandemic is being felt in every walk of life and charities are no different.  How charities explain what it has been like for them is going to be an important feature of narrative and financial reporting for some time. 

For those reading the annual reports and accounts of charities that have been signed off during the pandemic or where the financial year included the pandemic, it will be vital to think about what that charity has been through and how the COVID-19 measures have affected it.  Users of the report and accounts may have some expectations of what has happened and these may or may not match up to the reality.

As a reader of the annual report accounts, if you take a moment to consider what has happened and how that may have impacted the operations of the charity, this will help you understand the information presented in the right context and avoid misunderstanding what some of the information might mean.  It is important to realise that given the impact of the pandemic the charity’s finances are unlikely to look similar or comparable to the previous years.

The best place to start is with the Trustees’ Annual Report.  This is where the charity tells their story of what’s happened during the financial year.  When unusual or unexpected events occur, the charity trustees should explain how these have affected the charity.  For example, you might expect to find explanations about:

  • how the pandemic has affected the operations and activities of the charity
  • the impact on the beneficiaries
  • how the finances of the charity have been affected
  • how governance arrangements were adapted to cope with the control measures
  • what happened to the charity’s staff and volunteers.

During the pandemic, many charities will experience financial challenges while coping with a surge in demand for their activities and services.  Other charities may not have been able to carry out their usual activities but will still have incurred costs.  Financial challenges may have occurred because the charity was not able to carry on its normal fundraising activities, or it was coming to the end of grant funding which couldn’t be renewed or because it did not have any reserves to draw on to help deliver activities.  It may be reasonable to expect to see:

  • a significant decrease in the income received by the charity, which may or may not have a corresponding decrease in the amount spent by the charity
  • a large increase in the amount spent on charitable activities
  • reserves of the charity decreasing a lot as they are used to fund the charitable activities (meaning the net assets figure on the balance sheet for example would decrease)
  • changes in the value of any investments that the charity has as a result of changes in financial markets

More substantial changes to the accounts could also be needed due to the COVID-19 situation.  For example, where there is significant uncertainty about whether the charity will be able to continue, it may not be possible for the accounts to be prepared on a ‘going concern’ basis.  Instead, the accounts may have to be prepared on the basis that the charity will be winding up.  This may affect the valuation and treatment of some of the assets and liabilities the charity has.   

The accounts should explain the basis used to prepare them – usually in the accounting policies notes for accrued accounts.  For receipts and payments accounts, the impact would potentially be on the statement of balances where assets and liabilities are detailed and the values of these explained. 

The Trustees’ Annual Report may also explain any change to the basis on which the accounts have been prepared.   

So to summarise, when reading charity annual reports and accounts:

  • be aware of the challenges that the charity has experienced
  • do not expect the finances to look similar to the previous year
  • make sure to read the Trustees’ Annual Report to understand what has happened.

The impact of the pandemic on the finances and operations of many charities will not be confined to just one year and will be seen in annual reports and accounts for some time.  Good narrative explanations from charity trustees are key to helping readers understand the impact on the charity both now and in the future.