Recognizing constructive obligations - are you?

A charity which has promised an ongoing grant should account for it - are you doing this?

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The Charities SORP is clear that if a charity has communicated a specific promise of future funding, (and its established practice is to go through with its commitments), then the commitment should be recognised in the accounts.  That could look pretty shocking, when you show a multi-year commitment (and of course without the corresponding expected income).  My question is, what are people doing in practice?  Avoiding communicating specific commitments?  Recognising them even though the accounting looks grim?

(Charities SORP for FRS102, paras 7.7, 7.14, 7.16, 7.22, 7.24)

Replies (12)

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RLI
By lionofludesch
23rd Oct 2018 11:45

Would this hypothetical charity be committing to providing more than the hypothetical funds it currently has in its hypothetical reserves ?

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Replying to lionofludesch:
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By cartebien
23rd Oct 2018 12:26

I'm not sure. I haven't seen their calculation, but I'm guessing it could be borderline.
Needless to say, there's no practical issue whatsoever. They have plenty of ongoing regular donors. And even if they ran out of money, they'd just stop the grant (- however 7.22 of the SORP says to recognise the liability now and de-recognise is later if the money runs out).
I'm not yet sure whether the hypothetical charity did communicate a specific commitment, so the trustees need to check that out.
A (non-charity) accountant shrugged and said he'd have expected the matching principle to apply, so I'm wondering if I'm just being overly pedantic, and nobody is following the letter of this bit of the SORP.

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Replying to cartebien:
RLI
By lionofludesch
23rd Oct 2018 16:01

cartebien wrote:

I'm not sure. I haven't seen their calculation, but I'm guessing it could be borderline.
Needless to say, there's no practical issue whatsoever. They have plenty of ongoing regular donors. And even if they ran out of money, they'd just stop the grant (- however 7.22 of the SORP says to recognise the liability now and de-recognise is later if the money runs out).
I'm not yet sure whether the hypothetical charity did communicate a specific commitment, so the trustees need to check that out.
A (non-charity) accountant shrugged and said he'd have expected the matching principle to apply, so I'm wondering if I'm just being overly pedantic, and nobody is following the letter of this bit of the SORP.

It's less hypothetical than I thought, then.

Charities aren't normal businesses. They're not expected to build up huge pots of wealth. Indeed, the CC frown upon it. If I give £5 to the local cat's home, I expect it to be spent on catsnap and generally be spent on cats, not amassed in a Piggy bank.

However, equally, imho, they shouldn't be committing to making grants from funds they don't yet have. If they expect money to come in later, that's the time to be committing it.

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By Bobbo
23rd Oct 2018 13:23

If the hypothetical charity has communicated a specific commitment, has it stated that this condition is subject to anything in SORP para 7.20?

Where I come across multi-year commitments, yes these are being recognised in full if appropriate.

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RLI
By lionofludesch
23rd Oct 2018 13:34

Bottom line is that, if you're a charity with £100000 of funds and you've committed £90000 to a project - albeit over several years ahead, you've only got £10000 left to spend.

You shouldn't be assuming that money's going to come in in the future to fund your commitment.

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By cartebien
23rd Oct 2018 16:21

Thank you - the treasurer will need to quiz the trustees on the details of whether and what they communicated.
(It does seem a bit of a pain that "a term in a grant offer that seeks to relieve the donor charity from a future obligation in the event of a lack of funds at a future settlement date would not normally prevent the recognition of a liability if payment is probable" - so if you're sure next year's money will come in, don't tell the beneficiary they're getting next year's grant!)

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Replying to cartebien:
RLI
By lionofludesch
23rd Oct 2018 16:35

cartebien wrote:
..........so if you're sure next year's money will come in, don't tell the beneficiary they're getting next year's grant!)

Sure - I think it's prudent not to think too far ahead with your charitable grants.

Who knows what the future may bring ?

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Flag of the Soviet Union
By thevaliant
23rd Oct 2018 16:28

We are. In fact, the charity in question provides for the next five years of funding as a liability.

It has nothing to do with not wanting to show a high net asset figure otherwise. No siree. We're skint. We NEED YOUR donations. Cos we're skint. See? The accounts say we're skint. So DONATE. Or else.

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By jpcc1
24th Oct 2018 12:26

There are charities who want to support medium to long term projects with funding. This funding allows other charities to undertake medium to long term projects (for example, a medical research programme might take years).
Charities like, say The Big Lottery or Comic Relief, might not have guaranteed funding but still have realistic expectations of future income. They may decide to fund, say, a five year programme and rather than hand over five years cash in advance hold on to 80% of it.
Smaller charities may operate in a similar way.
This should be recognised in the accounts and this may need explaining in the Trustees’ Annual Report. But that is what the TAR is for. It is much more comprehensive that a commercial directors’ Report.
Let the charity explain what it has done, why it is in the interest of both charities. People who are interested enough to read the accounts are generally intelligent enough to understand that in the right circumstances it is an acceptable working model for some charities. Transparency and accountability work in the interests of individual charities, the sector and the public at large.
What is wrong is trying to ‘window dress’.

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By WhichTyler
24th Oct 2018 13:19

Comply or Explain

This is from Arts Council Englands accounting policies in their 2017-18 annual report

Grant commitments
made in the year relating to future years’ activity
as disclosed in note 14 of the accounts are not
charged to the statement of financial activities,
as we cannot recognise Grant-in-Aid income
to match against these commitments before
we have received it. In this respect, we have
not been able to comply with paragraph 7.19 of
the SORP issued by the Charity Commission
in 2014. The Trustees do not believe this would
provide a true and fair view of Arts Council
England’s resources

so they disclose the commitments, but do not account for them on the b/s

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Replying to WhichTyler:
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By cartebien
24th Oct 2018 14:59

WhichTyler wrote:

Comply or Explain

... we have
not been able to comply with paragraph 7.19 of
the SORP issued by the Charity Commission
in 2014. The Trustees do not believe this would
provide a true and fair view of Arts Council
England’s resources

so they disclose the commitments, but do not account for them on the b/s

That's very interesting! I see the Arts Council and the British Film Institute have both done this, and each time the National Audit Office signs off the audit without comment (though without referring to the SORP). I'm surprised, because the Charities (Accounts and Reports) Regulations 2008 says "8.(5) The statement of accounts must be prepared in accordance with the methods and principles set out in the SORP."

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Replying to cartebien:
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By Bobbo
25th Oct 2018 10:58

Arts Council Note 14 does say this however:
"continued funding is dependent on Grant-in-Aid
being available to Arts Council England in those
future years and that the organisation continues
to deliver its agreed programme of activity as
set out in the funding agreement."

Which may be a nod towards para 7.20

The 2008 Regulations actually define 'SORP' as the 2005 SORP which has not been amended to the 2015 SORP but that's a whole another matter...

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