The Regulator for Charities in England and Wales

CC61 (a) - Charity Accounts: The framework (2005)

(Version June 2006)

Contents

What is this guidance about?

1. This guidance outlines the accounting and reporting framework applying to Charities in England and Wales for accounting periods beginning on or after 1 April 2005. This framework incorporates developments in accounting standards and reporting practice contained within the Statement of Recommended Practice: Accounting and Reporting by Charities issued in March 2005 and The Charities (Accounts and Reports) Regulations 2005.

2. The framework covers:

  • Maintenance of accounting records;
  • Preparation of charity accounts and Trustees’ Annual Reports;
  • Audit or independent examination of accounts;
  • Submission of accounts, Trustees’ Annual Reports and Annual Returns to the Charity Commission, within appropriate time limits ; and
  • Availability of accounts to the public.

3. There are three major influences on charity accounting and financial reporting:

  • The minimum requirements for keeping accounting records applying to all charities (other than charitable companies) are set out in the Charities Act 1993.
  • Every charity must also comply with the legal requirements for the preparation of accounts and reports. In the case of some categories of charity (for example, charitable companies or those registered social landlords which are exempt charities) these requirements will be set out in legislation appropriate to that type of organisation. Charities which are not covered by specific legislation must comply with the requirements set out in Part VI of the Charities Act 1993 and, where appropriate, the related Charities (Accounts and Reports) Regulations issued in 2005 ("the Regulations").
  • The Statement of Recommended Practice: Accounting and Reporting by Charities (“SORP 2005”) explains how charities, whose accounts must show a true and fair view, should prepare their accounts and apply accounting standards. It applies to all charities in the UK unless a separate SORP exists for a particular class of charities, for example, the SORPs applicable to Registered Social Landlords and Further and Higher Education Institutions. Significant exemptions are given to charities below the audit threshold allowing them flexibility in the analysis provided in their Statement of Financial Activities and considerably reducing the level of disclosures in both their Trustees’ Annual Report and notes to the accounts. Concessions available to smaller charities are summarised in a new Appendix 5 of SORP 2005.

Aim of the framework

4. The framework is designed to meet the need for consistent and transparent public accountability for the resources held by charities without adding unnecessarily to the burden on trustees. That is why the requirements to be met by smaller charities are less than those for larger charities.

Meaning of words and expressions used

5. In this guidance:

The 1993 Act is the Charities Act 1993.

An audit exemption report or Accountant’s Report is a less onerous form of scrutiny than an audit for those charities which are established under the Companies Acts, where the charity is below the audit threshold (see paragraph 18). An Accountant’s Report can only be made by qualified persons in an approved format, set out in the ‘Accounts and Auditing Reference Dates’ guidance available from Companies House.

The Trustees’ Annual Report is a concise but comprehensive review of the activities of the charity prepared by the trustees for each accounting year. The Regulations set out the basic requirements and more detailed guidance is given in SORP 2005. A charity which is under the audit threshold may prepare a simplified Annual Report, the contents of which are set out in Appendix 5 of SORP 2005. The requirements of the Regulations, including simplifications for charities which do not have an audit requirement, are set out in Appendix 1 of this guidance.

The Annual Return must be completed and submitted to the Commission by trustees of registered charities with a gross income or total expenditure for the year of over £10,000. It helps us to monitor charities and maintain our register of charities. Further guidance is provided at our “Annual Return Homepage” on our website.

Audit, for the purposes of the requirements of Part VI of the 1993 Act, is the scrutiny of accounts by a registered auditor who must apply auditing standards and should apply the guidance contained within Audit Practice Note 11: The Audit of Charities produced by the Auditing Practices Board. A registered auditor is one registered with a recognised supervisory body in accordance with the Companies Act 1989. In some charities, e.g. those connected with the NHS or local authorities, alternative auditing arrangements may be possible.

A charitable company means a company:

  • formed and registered under the Companies Act 1985; or
  • to which the provisions of the 1985 Act apply as they apply to a company so formed and registered; and
  • which is established for exclusively charitable purposes.

Exempt charities are charities that the 1993 Act exempts from a number of its provisions, including registration with the Commission. An exempt charity will normally follow specific accounting and reporting requirements directed by or under some statutory provision which specifically relates to it: if there is no such provision, it will follow the requirements of s.46 (1) of the 1993 Act.

Excepted charities fall into three main groups:

  • charities excepted by Order or Regulation;
  • very small charities (income of £1000 a year or less and having no permanent endowment and no use or occupation of land); and
  • registered places of worship (the place of worship only, not other charities in connection with them).

Excepted charities are subject to the accounting and reporting requirements of the 1993 Act where appropriate, but they are not required to register with the Commission.

Independent examination is a less onerous form of scrutiny than an audit. Examiners report whether specific matters which are identified in the 2005 Regulations have come to their attention. We have issued guidance to trustees on the selection of examiners and directions for examiners on carrying out an examination (Independent Examination of Charity Accounts: Directions & Guidance Notes - CC63).

Non-company charities are charities which are not charitable companies (see above). Examples include trusts, unincorporated associations, and also corporate bodies which have been incorporated by means other than under the Companies Act 1985 (e.g. by Royal Charter).

Permanent endowment is property of the charity (e.g. land, buildings, cash or investments) which the trustees may not spend as if it were income. It must be held permanently, sometimes to be used in furthering the charity's purposes, sometimes to produce an income for the charity. The trustees cannot normally spend permanent endowment without our authority. The terms of the endowment may permit assets to be sold and reinvested, or may provide that some or all of the assets are retained indefinitely (e.g. a particular building).

Must or need are used to refer to actions that trustees, or their agents or employees, are obliged to take by law.

Where we use terms such as the trustees should or we suggest, recommend or advise we are referring to actions which the trustees, their agents or employees could take and which we consider to be good practice, but which are not legal requirements.

Basis of preparation of accounts

6. There are two bases on which charity accounts may be prepared: the receipts and payments basis and the accruals basis. Briefly:

  • Accounts prepared on the receipts and payments basis consist of an account summarising all money received and paid out by the charity in the year in question, and a statement giving details of its assets and liabilities at the end of the year. This is the simpler of the two bases and may be adopted where a non-company charity has a gross income of £100,000 or less during the year.
  • Accounts prepared on the accruals basis contain a balance sheet showing the charity's financial position at the end of the year in question, a statement of financial activities (SoFA) during the year (and sometimes an income and expenditure account) and explanatory notes. Such accounts for charities are normally required, in accountancy terms, to show a "true and fair view" and are required to apply the methods and principles of SORP 2005 (unless a more specialist SORP applies) when preparing their accounts. Non-company charities with gross income over £100,000 during the year and all charitable companies must prepare their accounts on the accruals basis.

What is required?

7. There are some basic requirements that apply to all charities. These are set out in paragraph 10. There are also additional requirements depending on the income or expenditure of the charity - broadly, the bigger the charity the greater the requirements. The precise details depend on the type of charity. In addition there are special requirements for certain types of charity, especially:

8. If you are unsure which case applies to your charity, or if it is a special case not covered by this guidance please call Charity Commission Direct on 0845 3000218 and we will be happy to answer your question.

9. The charity's governing document may also contain specific rules on accounts, reports and auditing. Where these are more onerous than the requirements set out in this guidance, the trustees must follow the requirements set out in the governing document, or else amend the governing document first. Paragraphs 21-22 cover this in more detail.

Requirements for all charities

10. All charities must:

  • Prepare and maintain accounting records. These records (cash books, invoices, receipts etc) must be retained for at least six years (at least three years in the case of charitable companies).
  • Prepare accounts.
  • Make the accounts available to the public on request. This is vital underpinning to the principle of public accountability, and must be complied with in all cases. It is open to trustees to make a reasonable charge to cover the costs of complying with the request (e.g. photocopying and postage). As a matter of good practice we recommend that a copy of the Trustees' Annual Report should, wherever possible, be sent with the accounts.

11. The Annual Return is made up of three parts and charities will complete the relevant parts based on their income in the previous financial year. You will be sent the parts of the form that you need to complete. Smaller charities will simply receive an Annual Information Update form.

Requirements for registered charities that are not companies

Neither gross income nor total expenditure over £10,000 in the charity's relevant financial year

12. Within this band, the requirements are as follows:

  • Basis of preparation: accounts may be prepared on either the receipts and payments or the accruals basis - if the latter, they must be prepared in accordance the methods and principles of SORP 2005 and the Regulations.
  • External scrutiny: there is no requirement to have the accounts independently examined or audited, unless the charity's governing document stipulates it, but we have the power to require an audit in exceptional circumstances. The only other exceptions to this are for charities which:
    • have an income of less than £10,000 but whose total expenditure exceeding £250,000 in the same year; or
    • have an income of less than £10,000 in the year for which accounts are being prepared but which in either of the two previous financial years have had a gross income or total expenditure exceeding £250,000.

In these circumstances, an audit by a registered auditor must be carried out.

  • Trustees’ Annual Report: an Annual Report must be prepared but it may be simplified (see paragraph 5).
  • Information to be sent to the Commission: Charities with an income of up to £10,000 in their financial year receive an Annual Information Update form, which includes information forming part of the charity's entry on the Register, including trustee details. Although not legally obliged to complete an Annual Return, small charities are asked to complete the Annual Information Update as a good way of meeting their obligation to update their Register details. Charities with income of less than £10,000 should not send us a copy of their Annual Report and accounts unless we ask for them, although they should still be prepared.

Gross income or total expenditure over £10,000 (but gross income not over £100,000) in the relevant financial year

13. Within this band, the requirements are as follows:

  • Basis of preparation: accounts may be prepared on either the receipts and payments or the accruals basis - if the latter, they must be prepared in accordance with the methods and principles of SORP 2005 and the Regulations.
  • External scrutiny: accounts must be subject to outside scrutiny but trustees may choose either independent examination or audit by a registered auditor, unless the charity's governing document stipulates one or the other (also, we have the power to require an audit in exceptional circumstances). The exception mentioned in paragraph 12 also applies and an audit, by a registered auditor, is required where total expenditure in the year exceeds £250,000 or the income/expenditure thresholds have been exceeded in either of the two previous financial years.
  • Trustees’ Annual Report: an Annual Report must be prepared but it may be simplified (see paragraph 5).
  • Information to be sent to the Commission: Charities with an income between £10,000 and £100,000 are legally required to complete an Annual Return requesting essential information required to update the charity’s details. Those charities in this category but with a previous income above £100,000 will be invited to submit their details online. The charity's Annual Report and accounts must also be sent to us normally within 10 months of the end of the charity's financial year.

Gross income over £100,000 (but gross income not over £250,000) in the relevant financial year

14. For charities falling within this band:

  • Basis of preparation: accounts must be prepared on the accruals basis in accordance with the methods and principles of SORP 2005 and the Regulations.
  • External scrutiny: accounts must be subject to outside scrutiny but trustees may choose either independent examination or audit by a registered auditor, unless the charity's governing document stipulates one or the other - if an independent examination is chosen then the Commission recommends that the examiner is a qualified accountant (also, we have the power to require an audit in exceptional circumstances). The exception mentioned in paragraph 12 also applies and an audit, by a registered auditor, is required where total expenditure in the year exceeds £250,000 or the income/expenditure thresholds have been exceeded in either of the two previous financial years.
  • Trustees’ Annual Report: an Annual Report must be prepared but it may be simplified (see paragraph 5).
  • Information to be sent to the Commission: Charities with an income between £100,000 and £250,000 will receive an Annual Return which they are legally required to complete. This form will ask the trustees for essential information required to update the charity’s details. The Annual Report and accounts must also be sent to us normally within 10 months of the end of the charity's financial year.

Gross income over £250,000 in the relevant financial year

15. For charities falling within this band:

  • Basis of preparation: accounts must be prepared on the accruals basis and in accordance with the methods and principles of SORP 2005 and the Regulations;
  • External scrutiny: accounts must be audited by a registered auditor;
  • Trustees’ Annual Report: a full Annual Report must be prepared (see paragraph 5); and
  • Information to be sent to the Commission: Charities with an income exceeding £250,000 but less than or equal to £1,000,000 must complete an Annual Return comprised of both essential information and a series of regulatory questions which are used to monitor charities' activities. The Annual Report and accounts must also be sent to us normally within 10 months of the end of the charity's financial year.

Gross income over £1,000,000 in the relevant financial year

16. Charities with an income exceeding £1,000,000 must meet all the requirements set out in the previous band relating to charities with income over £250,000. In addition, charities in this band are legally required to complete the new Summary Information Return (SIR) that forms the third part of the Annual Return. We are asking larger charities to complete these forms online.

Charitable companies

17. SORP 2005 applies to charitable companies as well as non-company charities.

  • A charitable company must prepare a directors' report and accounts under the Companies Acts and must file these with Companies House. The accounts must be prepared on an accruals basis.
  • The requirements for the Trustees’ Annual Report are the same as those for other charities and therefore the charity must comply with the Regulations. In practice charitable companies normally produce a directors' report and that report is expanded to contain all the information required by the Regulations and recommended by SORP 2005 to be included in the Trustees’ Annual Report.
  • If the charitable company's income or expenditure is over £10,000, the trustees must also send us a Trustees’ Annual Report (or and suitably modified directors' report), the accounts and its Annual Return. Our requirements for an Annual Return are the same as placed on non-company charities.

18. Charitable companies are required to have their accounts audited by a registered auditor if any of the following conditions apply:

  • gross income exceeds £90,000 and gross assets exceed £1.4m; or
  • gross income is over £250,000; or
  • gross assets exceed £2.8m.

However, if the gross assets are below £1.4m and gross income is the range £90,001 to £250,000, an accountant’s report (audit exemption report) may normally be prepared instead of a full audit report. If gross assets are less than £2.8m and gross income is £90,000 or less, no external scrutiny is normally required.

Excepted charities

19. If the trustees have chosen to register they will have to fulfil the same accounting and reporting requirements as any other registered charity. If they do not register they must still produce annual accounts in the same way as a registered charity of the same type (company or non-company). They must provide copies of their accounts to members of the public on request, but should not send them to us unless we ask for them.

Exempt charities

20. Exempt charities have to keep proper accounting records and prepare accounts. Where they are required to prepare accounts giving a true and fair view, they should follow SORP 2005 in the preparation of those accounts, unless a more specialised SORP applies. They must provide copies of their accounts to members of the public on request.

The need for an audit or other external scrutiny

21. The governing document of any charity may contain specific provisions about the external scrutiny of the charity's accounts. In such cases the charity must follow whichever of the statutory framework and the governing document requires the higher standard of scrutiny.

22. In governing documents the word "audit" might be intended to cover a range of different types of external scrutiny from full audit by a registered auditor to an independent check by a non-accountant. Trustees will need to interpret the precise wording of the governing document. For example "audit by a bank manager" would not normally mean a full statutory audit. On the other hand "audit by a qualified accountant" suggests that a statutory audit by a registered auditor is required, even if the charity is small and is not required to have an audit by legislation. We recommend that trustees make a record of how they interpret the charity's governing document and consult the Commission regarding their interpretation.

Publications providing further help with preparing accounts

23. The following publications relating to the accounting framework have been produced by the Charity Commission. All are available on our internet site (www.charitycommission.gov.uk) or by calling Charity Commission Direct on 0845 300 0218. All are free, except for copies of SORP 2005 which may be purchased direct from the publisher by contacting CCH customer services on 0870 777 2906.

24. In addition, our website pages “Help with preparing Charity Accounts and Reports” provide additional guidance, example accounts and reports and links to other useful websites providing information on accounting and external scrutiny issues.

Further advice

25. If you need any further advice or wish to speak to an Advisor to resolve your enquiry please call Charity Commission Direct on 0845 3000218. Staff are available to take your calls between 08.30 to 18.00 Monday to Friday (except national holidays). We also have a Minicom service on 0845 300 0219 for hearing impaired callers.

26. We also provide a dedicated telephone line for the 'Online Services' that the Commission provides on 0845 3000 197. Staff are available to take your calls on this line between 09:00 to 17:00, Monday to Friday except national holidays. We also have a Minicom service for hearing impaired callers on 0845 3000 219.

Appendix 1

Contents of Annual Reports of charities prepared for financial years beginning on or after 1 April 2005

This appendix set out the requirements contained in The Charities (Accounts and Reports) Regulations 2005 (SI 2005 No 572) together with a summary of the additional recommendations contained within SORP 2005.

Contents of all Trustees’ Annual Reports

Regulation Requirement
11(3) The financial year to which the report relates.
11(3)(a) A brief summary of the main activities and achievements of the charity during the year in relation to the charity’s objects.
11(4)(a) The name of the charity as it appears in the Register of Charities and any other name by which it makes itself known. Note: Excepted charities which are not registered should provide the name as set out in their governing document and any other name by which they are known.
11(4)(b) The number assigned to it in the Register and, in the case of a charitable company, the number with which it is registered as a company. Note: Excepted charities which are not registered do not have a charity registration number.
11(4)(c) The principal address of the charity and, in the case of a charitable company, the address of its registered office.
11(5) Note: The Charity Commissioners may dispense with the requirement to disclose the address of the charity if it could lead to any person being placed in any personal danger.
11(4)(h) Particulars, including the date if known, of any deed or other document containing provisions which regulate the purposes and administration of the charity.
11(4)(l) A summary of the objects of the charity.
11(4)(i) The name of any person or body of persons entitled by the trusts of the charity to appoint one or more new charity trustees, and a description of the method provided by those trusts for such appointment.
SORP 44(b) The methods adopted for the recruitment and appointment of new trustees, including details of any constitutional provisions relating to appointments, for example, election to post. Where any other person or body external is entitled to appoint one or more of the charity trustees this should be explained together with the name of that person.
11(4)(d) The name of any person who is a charity trustee of the charity on the date when the report is signed, and, where any charity trustee on the date is a body corporate, the name of any person who is a director of the body corporate on that date.
11(4)(e) The name of any other person who has, at any time during the financial year in question, been a charity trustee of the charity.
11(4)(f) The name of any person who is a trustee for the charity (that is those holding property on behalf of the charity) on the date the report is signed.
11(6) If the charity has more than 50 trustees then the names of not less than 50 trustees must be disclosed
11(4)(g) The name of any other person who has, at any time during the financial year in question, been a trustee for the charity (that is those holding property on behalf of the charity).
11(5) Note: The Charity Commissioners may dispense with the requirement to disclose the names of charity trustee(s) or those appointing trustees if it could lead to that person/(those people) being placed in any personal danger.
11(4)(p)

11(3)(c)(i)

A description of the policies (if any) which have been adopted by the charity trustees -

(i) for the purpose of determining the level of reserves which it is appropriate for the charity to maintain in order to meet effectively the needs designated by its trusts; and

(ii) details of the amount and purpose of any material commitments and planned expenditure not provided for in the balance sheet which have been deducted from the assets in the unrestricted fund of the charity in calculating the amount of reserves, and where no such policies have been adopted, a statement to this effect; and

(iii) where any fund is materially in deficit at the beginning of the financial year in question, and particulars of the steps taken by the charity trustees to eliminate the deficit.

11(3)(c)(ii) The report shall be dated and be signed by one or more of the charity trustees, each of whom has been authorised to do so.

Additional requirements for charities subject to statutory audit.

Regulation Requirement
11(3)(b)(i)

Instead of a brief summary of achievements and activities there should be:

A review of all activities, including:

  • details of the aims and objectives which the charity trustees have set for the charity in the year, and details of the strategies adopted, and of significant activities undertaken, in order to achieve those aims and objectives;
  • details of the achievements of the charity during the year, measured by reference to the aims and objectives which have been set;
  • details of any significant contributions of volunteers to these activities;
  • details of the principal funding sources of the charity;
SORP 48
  • the details of significant activities provided should focus on those activities that the charity trustees consider to be significant in the circumstances of the charity as a whole and, as a minimum, explain the objectives, activities and projects or services identified within the analysis note accompanying charitable activities in the Statement of Financial Activities;
SORP 53
  • the achievements of its subsidiary undertakings in the year;
SORP 53(a)
  • where qualitative or quantitative information is used to assess the outcome of the charitable activities, a summary of the measures or indicators used to assess achievement should be included; and
SORP 53(c)
  • how expenditure in the year under review has supported the key objectives of the charity
SORP 44(e) Where the charity is part of a wider network then the relationship involved should be explained where this impacts on the operating policies adopted by the charity.
SORP 44(f) The relationship between the charity and related parties, including its subsidiaries and with any other charities and organisations with which it co-operates in the pursuit of its charitable objectives.
SORP 50 Where social or programme related investment activities are material in the context of charitable activities undertaken, the policies adopted in making such investments should be explained.
11(3)(b)(ii)

A statement as to whether the charity trustees have given consideration to:

  • the major risks to which the charity is exposed; and
  • systems or procedures designed to manage those risks.
11(4)(j) A description of the policies and procedures (if any) which have been adopted by the charity trustees for the induction and training of charity trustees, and where no such policies have been adopted a statement to this effect.
11(4)(k) A description of the organisational structure of the charity.
SORP 41(f) The name of any Chief Executive Officer or other senior staff member(s) to whom day to day management of the charity is delegated by the charity trustees.
SORP 41(g) The names and addresses of any other relevant organisations or persons. This should include the names and addresses of those acting as bankers, solicitors, auditor (or independent examiner or reporting accountant) and investment or other principal advisers.
11(4)(m) A description of the policies (if any) which have been adopted by the charity trustees for the selection of individuals and institutions who are to receive grants, or other forms of financial support, out of the assets of the charity.
SORP 53(b) Where fundraising activities are undertaken, details of performance achieved against fundraising objectives set, commenting on any material expenditure for future income generation and explaining the effect on the current period’s fundraising return and anticipated income generation in future periods.
SORP 53(d) Comment on those factors within and outside the charity’s control which are relevant to the achievement of its objectives.
11(4)(n) A statement regarding the performance during the financial year of the investments belonging to the charity (if any).
11(4)(o) Where material investments are held by a charity, a description of the policies (if any) which have been adopted by the charity trustees for the selection, retention and realisation of investments for the charity, including the extent (if any) to which social, environmental or ethical considerations are taken into account.
11(4)(q) A description of the aims and objectives which the charity trustees have set for the charity in the future, and of the activities contemplated in furtherance of those aims and objectives.
11(4)(r) A description of any assets held by the charity or by any charity trustee of, or trustee for, the charity, on behalf of another charity, and particulars of any special arrangements made with respect to the safe custody of such assets and their segregation from assets of the charity not so held and a description of the objects of the charity on whose behalf the assets are held.