As we enter the second year of Covid-19 restrictions, the impact on all organisations has become clear and leaves charities in particular with a number of key accounting considerations to assess in 2021.
There has been an amendment to FRS102 for accounting periods commencing on or after 1 January 2020 which applies to temporary rent concessions arising from the Covid-19 pandemic that affect payments that would have been due up to 30 June 2021. The rent concession is spread over the period(s) it is intended to compensate and does not apply to charitable waivers, rent deferrals, or non Covid-19 renegotiated lease terms.
Covid-19 grant recognition
Coronavirus job retention scheme or job support scheme grants (furlough monies) are recognised in the month to which the grant relates. So, for the January payroll the furlough grant would be recognised in January, under the current scheme grant monies are received in the month following payment of employees so remember to accrue if necessary at the month / year end. There is no “netting off” and the grant should be shown gross in income with employment costs shown gross under expenditure.
Other grants which are not time or performance related, such as the small business grant fund, should be recognised on point of entitlement to monies.
Expectations for reports and accounts in 2021
The Financial Reporting Council (FRC) has highlighted in its 2020 end of year letter the areas they intend to scrutinise in the coming year and recommendations on reporting the impact of Covid-19 in company and charity reports.
Key areas of focus are:
- Covid-19 and its impact on reporting – disclosures should quantify the impact of Covid-19 on the entity’s performance, position and prospects; and where judgements are made increased disclosure of sensitivities and outcomes should be made
- Impact of UK exit from the European Union – reports should explain entity-specific risks and uncertainties and the impact of the different activities including effects on the financial statements
- Cash flow and liquidity risk reporting – the FRC are expecting more robust reviews pre issuance of accounts to reduce the number of errors they are finding. Specific reference is made to:
- Clear explanation of matters considered in assessing going concern, viability and liquidity
- Disclosure of methods, assumptions and judgements made in assessing going concern and viability
- Consistency in the amounts and descriptions of items in the cash flow statement, and other areas of the annual report
- Disclosure of accounting policies and judgements in relation to the cash flow statement, particularly for large, one-off transactions
The current uncertainties, alongside updated auditing standards, requiring a more robust challenge of management’s assessment of going concern, may require entities to consider more formalised processes and a wider range of sensitivity analysis when undertaking their review of going concern.
Processes may also require a review of the charity’s current reserves policy, is the level of reserves held or required still reasonable in light of current circumstances?
The FRC have issued a Covid-19 Going Concern risk and viability “Lab report” which considers the impact of Covid-19 on current going concern reporting and includes examples of good reporting.