The Regulator for Charities in England and Wales

OPERATIONAL GUIDANCE

CHARITY ACCOUNTS AND REPORTS

GLOSSARY TO THE OG 15 SERIES

OG 15 G1 – 14 April 2008

Index to further related information

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Accounting concepts

  Also called the accounting conventions, accounting methods and accounting principles, these are the basic concepts by which sets of accounts are made up. The four generally accepted principles are:
 
  • The accruals concept.
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  • The consistency concept.
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  • The going concern concept.
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  • The prudence concept.
    •   These concepts were listed in SSAP 2: Disclosures of Accounting Policies which was superseded by FRS 18: Accounting Policies in December 2000 which modified the approach somewhat describing "consistency" as "comparability" and replacing prudence by a set of objectives that should be met in setting accounting policies. The appropriateness of an accounting policy is now judged by its:
     
  • relevance;
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  • reliability;
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  • comparability; and
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  • understandability.
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    Accounting standards

      Accounts which are intended to show a true and fair view must conform to certain standards issued by the Accounting Standards Board or its predecessor, the Accounting Standards Committee. These standards, with which professional accountants are expected to be familiar, comprise a number of "Statements of Standard Accounting Practice" (SSAP) and "Financial Reporting Standards" (FRS) and are supplemented by Urgent Issues Taskforce Abstracts" (UITF abstracts) where conflicting interpretations of standards has developed.
      Accounting Standards Board
      The ASB is a board of the Financial Reporting Council and makes, amends and withdraws accounting standards. There is an increasingly important international dimension to their work. It is assisted by its six committees -the Urgent Issues Task Force, the Financial Sector and Other Special Industries Committee, the Public Sector and Not-for-profit Committee, the Committee on Accounting for Smaller Entities, the Advisory committee on the OFR and the Advisory Panel on Life Assurance.
     

    Accruals accounts

      The accruals concept requires the effects of transactions and other events to be reflected, as far as possible, in the accounts for the period in which they occur, and not, for example, in the period in which any cash settlement is made. This concept is central to the recognition of balance sheet assets and liabilities.
      This phrase has been used to describe accounts prepared in accordance with the requirements of section 42(1) of the 1993 Act. Such accounts should be prepared by the trustees to show a "true and fair view". The accounts comprise:
     
  • a statement of financial activities;
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  • a balance sheet; and
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  • notes to the accounts.
    •   Such accounts should be prepared on a basis of accounting policies that enable the accounts to give a true and fair view and are consistent with accounting standards and the accounting concepts of going concern and accruals.

    Audit threshold / independent examination threshold

      These are the thresholds defining the level of external scrutiny a charity will need on its accounts for accounting period starting on or after 1 April 2008.
    Income Less than £10,000 £10,000 - £100,000 £100,000 - £250,000 £250,000 - £500,000 Over £500,000
    Non-company none Independent Examination Independent examination unless aggregate assets greater than £2.8 million and income greater than £100,000, then audit Independent examination by qualified examiner unless assets greater than £2.8 million, then audit Audit
    Company none Independent Examination Independent examination unless assets greater than £2.8 million and income greater than £100,000, then audit Independent examination by qualified examiner unless assets greater than £2.8 million, then audit Audit
      Auditing Practices Board
      The APB is a board of the Financial Reporting Council. It plays a key part in the development of auditing and assurance services standards and their effective application. Its responsibilities have also been extended to the development of ethical standards relating to the independence, objectivity and integrity of auditors.  As in the case of the ASB, there is a strong growing international dimension to this work.
     

    Auditing Standards

      International Standards on Auditing (ISAs) (UK and Ireland) and the International Standard on Quality Control (ISQC) (UK and Ireland) contain basic principles and essential procedures together with related guidance in the form of explanatory and other material, including appendices. ISAs (UK and Ireland) apply to all audits of financial statements for periods commencing on or after 15 December 2004. Systems of quality control in compliance with the ISQC (UK and Ireland) are required to be established by firms in the UK and the Republic of Ireland by 15 June 2005.
     

    Balance sheet

      A balance sheet provides a snapshot of an entity’s assets and liabilities at a specific date. For annual accounts this date would be the year end date. The assets and liabilities existing at that date are balanced by the funds that financed them. These may be endowment funds, restricted and unrestricted income funds or share capital.
     

    Cash flow statement

      The objective of the cash flow statement is to show cash received and applied in the year. A cash flow statement is required by Financial Reporting Standard 1 (FRS 1) in the financial statements of very large charities. Smaller charities that would meet the threshold criteria of a small company under company law are exempt.
     

    The Financial Reporting Council

      The Financial Reporting Council (FRC) is the UK's independent regulator for corporate reporting and governance. Its aim is to promote confidence in corporate reporting and governance. In pursuit of this aim its six objectives are to promote:
     

    1. high quality corporate reporting;

     

    2. high quality auditing;

     

    3. high quality actuarial practice;

     

    4. high standards of corporate governance;

     

    5. the integrity, competence and transparency of the accountancy and actuarial professions; and

     

    6. its effectiveness as a unified independent regulator.

      The FRC acts through six operating bodies:
     

    1. the Accounting Standards Board;

     

    2. the Auditing Practices Board;

     

    3. e Board for Actuarial Standards;

     

    4. the Professional Oversight Board;

     

    5. the Financial Reporting Review Panel; and

     

    6. the Accountancy Investigation and discipline board.

     

    Financial Statements

      The accounts of an organisation, including the notes to the accounts and any other statements which are required by law.
     

    Four Fundamental Accounting Concepts

      See accounting concepts.
     

    Going concern

      This concept requires the charity to prepare accounts on the basis that it will continue in operational existence for the foreseeable future. The going concern basis applies to accounts prepared unless the charity has ceased operational activities, is being wound-up or liquidated or the trustees have no realistic alternative but to wind-up, liquidate or cease its operational activities.
     

    Gross Income

      The Charities Act 1993 section 97 defines gross income as ‘in relation to charity, means its gross recorded income from all sources including special trusts.
      This broad definition is silent about the trust law distinction between endowment and income funds and is silent about the distinction between income received on a cash basis and income on an accruals basis. To assist charities comply with their regulatory requirements the Commission defines gross income for the purposes of the Annual Return required under section 48 of the Charities Act 1993.
      The definitions of gross income for Annual Return 2008 are:
      Where accounts are prepared on an accruals basis gross income should be calculated as:
     
  • The total incoming resources as shown in the Statement of Financial Activities (prepared in accordance with the SORP) for all funds but excluding the receipt of endowment; and
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  • including any amount transferred to income funds during the year from endowment funds in order to be available for expenditure.
    •   (Note that the SORP excludes from total incoming resources gains on revaluation of fixed assets and gains on investments which do not form part of gross income for these purposes).
      Where accounts are prepared on a receipts and payments basis gross income is simply the total receipts recorded in the statement from all sources excluding the receipt of endowment.
     

    Income and Expenditure Account

     

    A summary of the income and expenditure incurred for a financial year, showing revenue transactions only.

     

    Independent Examination threshold

     

    See audit threshold

     

    International Auditing Standards (IAS)

     

    International Auditing standards are drawn up by the International Audit and Assurance Standards Board (IAASB). UK auditors have had to carry out their work in compliance with International Auditing Standards (UK and Ireland) issued by the APB since 2005.

     

    International Financial Reporting Standards (IFRS)

      International Accounting Standards are being drawn up to harmonise financial reporting standards worldwide. UK financial standards are gradually being harmonised with International standards. ASB are expected to issue their plans during 2008 for convergence by entities that are not currently required to adopt these standards.
     

    Materiality

     

    Materiality is the final test of what information should be given in a particular set of accounts. An item of information is material to the accounts if its misstatement or omission might reasonably be expected to influence the economic decisions of users of those accounts, including their assessments of stewardship.

     

    Medium-sized companies

     

    The Companies Act 2006, section 465, establishes the thresholds which define what a medium-sized company is. Medium-sized charitable companies established under company law in common with all medium companies must provide additional information in their Directors' Report and are subject to audit under the Companies Act.

     

    Part 6

     

    Refers to Part 6 of the Charities Act 1993 which sets out the accounting, reporting and external scrutiny requirements for charities which are subject to the Charities Act.

     

    Primary Statements

    The Statement of Financial Activities, the income and expenditure account (or summary), the balance sheet and the cash flow statement (where required), are all considered to be "primary statements", and should therefore be given equal prominence in the accounts and should not be relegated to the notes to the accounts.
     

    The Regulations

      References to the Charities (Accounts and Reports) Regulations 2008 SI No 629.
     

    Small Companies

      The Companies Act 2006, section 382, establishes the thresholds which define a small company. Small charitable companies established under company law in common with all small companies must provide particular information in their Directors' Report and are not normally subject to audit under the Companies Act. Small charitable companies with gross income over £10,000 will for accounting periods commencing on or after 1 April 2008 be subject to audit or independent
     

    Small Company Limit

      A company is a small company if it meets two of three criteria:
     
  • turnover is not more than £5.6 million;
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  • balance sheet total is not more than £2.8 million;
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  • has not more than 50 employees.
    •   These criteria must be met in both the current and preceding financial year. For accounting periods commencing on or after 6 April 2008 these thresholds are increased to £6.5m and £3.26m.
     

    SOFA

      The Statement of Financial Activities is a single accounting statement with the objective of showing all incoming resources and resources expended by the charity in the year on all its funds. It is designed to show how the charity has used its resources in furtherance of its objects for the provision of benefit to its beneficiaries. It shows whether there has been a net inflow or outflow of resources, including capital gains and losses on assets, and provides a reconciliation of all movements in the charity’s funds.
     

    SORP

      SORPs are Statements of Recommended Practice that provide recommendations on accounting practices for specialised industries or sectors. SORPs supplement accounting standards and other legal and regulatory requirements in the light of special factors prevailing or transaction undertaken in a particular industry or sector. SORPs are developed in conformity with the ASB’s code of practice..
      The Charities SORP offers a single reference point to the charity sector summarising and interpreting accounting standards and Urgent Issue Task Force Abstracts and thereby assisting the sector in their implementation:
      There are currently SORPs for the following sectors:
     
  • Authorised Funds including Unit Trusts and Authorised Open-Ended Investment Companies
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  • Banking
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  • Charities
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  • Further and Higher Education
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  • Insurance
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  • Investment Trusts
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  • Leasing Companies
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  • Limited Liability Partnerships
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  • Local Authorities
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  • Oil and Gas Activities
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  • Pension Schemes
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  • Registered Social Landlords
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    SORP 2005

      The most recent SORP issued by the Commission as the sole SORP making body was Accounting and Reporting by Charities: Statement of Recommended Practice (March 2005) and was effective from 1 April 2005. The SORP was underpinned by The Charities (Accounts and Reports) Regulations 2005 which came into force on 31 March 2005 and for accounting periods commencing on or after 1 April 2008 by The Charities (Accounts and Reports) Regulations 2008.
     

    Threshold

      This term refers to the relevant threshold under the Charities Act 1993 or where appropriate to relevant thresholds of the Companies Act 2006.
     

    UITF

      The Urgent Issues Task Force is a specialist Committee of the Accounting Standards Board which advises the ASB on urgent accounting matters where standards need to be clarified or codified.
     

    UK GAAP

      UK Generally Accepted Accounting Practice (UK GAAP) is the body of accountancy standards and principles developed by the Accounting Standards Board for general financial reporting in the UK. UK GAAP is primarily a Companies Act reporting framework of commercial accounting standards but the ASB approve sector SORPs where a particular sector, for example charities, is sufficiently different as to require its own interpretation of the body of accounting standards and principles.
     

    Unincorporated Charities

      Means those charities not incorporated under the Companies Act. Unincorporated charities include trusts and associations.

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