Introduction
Charities and companies have different reporting requirements. The reporting requirements for charities depend on whether they are registered as companies or not and the annual earnings of the organisation. Companies have more legal requirements on the preparation of the financial statements especially the companies that are trading in the stock exchange. There are guidelines and principles that have to be adhered to in the preparation of the financial statements. There are differences between the reporting requirements of companies and charities when it comes to the format of the income statements and the auditing requirements.
Mitigating Risk in Advance Payments
The charity organization is concerned about the purchase and payment decision as the amount involved in the transaction is quite high. Suppliers require advance payments in order to help them to start the production process. It also shows that the client is serious about the transaction. It is a sign of commitment from the client. The organization should take certain steps to protect their money and avoid or mitigate the risk of financial risk. The trustees do not know much about the supplier, Vital Office Furniture Limited.
The charity management should contact other companies that have been in business contact with the company to find out whether they deliver on their promise. Thorough investigations should be carried out to ascertain the reputation of the company in the organization. If everything is in order, the company should try and negotiate to pay lesser deposit for the purchase in order to mitigate its risk. Whether the supplier agrees or not, the charity should enter into a contract with the supplier where the obligations, duties and rights of each part are stated.
This is a legally binding document that is enforceable in a court of law. If the goods are substandard and the charity is displeased, it can ensure that the situation is corrected. If things prove to be difficult, matters can be settled in a court of law. Most companies require a deposit before they supply their goods therefore the charity should establish partnerships with different suppliers so as to create a long-term relationship. The charity may also get a guarantee from the supplier’s bank that the supplier will provide the stated goods as agreed. If the supplier fails, the bank will compensate the charity the total amount that had been advanced.
Charity Reporting Guidelines
All charities are expected to keep financial records at all times. There are two types of charities: the charitable companies and the non-company charities. The charitable companies are expected to comply with both the charity and the company law. The type of financial statements to prepare is dependent on several factors such as the incomes of the charity, gross assets and the constitution of the charity. The financial records such as the cash books and the invoices should be kept for a period of six years. For the charitable companies they should keep the records for at least three years. The charities that have an income of over 10,000 pounds should prepare the annual accounts.
The annual records should be available to the public at all times for accountability and transparency purposes. Charity accounts are prepared on the basis of accruals or the receipts and payments methods.
In the accrual basis or method, only charities that earn over 100,000 pounds are allowed to prepare their accounts using this method. The large charity organizations that use the accrual
method are also required to prepare a cash flow statement and notes to the financial statements where the organization provides additional explanations to the items in the financial statements ( CIPFA, 2010).
In the accrual basis method, the receipts and payments are adjusted by such items as debtors, creditors and the depreciation. “The accounts contain a balance sheet, a statement of financial activities and explanatory notes” (Charity Commission, 2007). The charities that earn less than 100,000 pounds prepare their statements using the receipts and payments which is a simpler method. The charity will show the money that the charity has received during the year and the money that has been paid out.
There should also be a statement of the assets and liabilities at the end of the year. The company does not show the debtors and the creditors of the company, it simply shows the money that the company has at the end of the year. If the charity’s activities are complicated, it is advisable for the charity to use the accruals basis method. When the charity has to shift to the accrual basis, it should ensure the transition is done smoothly.
In the annual reports, the charity details out the structure of the organization. The management of the charities that earn over 250,000 pounds are required to give several key types of information. The charity is expected to disclose the trustees of the organization whether they are individuals or corporates. The organizational structure should be disclosed and the methodology used to choose the trustees and the training they receive (Charity Commission, 2011). They are expected to give the aims and objectives and strategies of the organization.
“The activities undertaken to meet the objectives and the achievement in relation to the objectives set are also given” (Barking and Dagenham CVS, 2011). The charity also gives its future plans and how they are related to the accounts. The Donors require want to understand how the money they have donated is being used in the organization.
The Regeneration Through Education Limited is a charity that has an annual turnover of 2.5 million pounds. It will have to prepare its accounts on the accrual basis. In charities, there are
two kinds of examination of the financial records that can be undertaken. There is the independent examination of accounts and the audit. In an independent examination, the accounts are examined by the charity treasurer of a finance worker in the public sector. It is scrutiny below the level of an audit. The treasurer or accountant should get an understanding of the charity objectives, aims and the accountants and compile a report that will be circulated with the company accounts. The treasurer may also help the company prepare the financial accounts and the trustees report.
The Charity Commission guides the company in choosing an independent accountant who can scrutinise the company accounts. If a charity is interested, it can get in touch with the Association of Charity independent examiners and get an examiner who is registered to scrutinise the accounts. Charitable companies and charities with incomes of over 250,000 pounds must have an auditor to look at their accounts. The smaller charitable companies do not have to be audited; instead their accounts can be subjected to an accountant’s review rather than a full audit. Charities that have annual incomes of less than 10,000 pounds are not required to have their accounts examined or audited unless the constitution of the charity organisation requires it to be so.
For the charities that earn over 250,000 pounds the accounts have to be audited by a registered auditor or a chartered accountant. The auditor checks the accounts to ensure that they show a true and fair value of the records in the company.
Funding organizations usually ask the donors to provide audited accountants. The charities that earn less than 250,000 pounds are not legally required to have their accountants audited. Charities with incomes above 250,000 pounds are also required to give a statement on how they are managing their risk management and their reserves. The charity should have a robust risk management process to ensure the assets of the company are protected appropriately (Charity Commission, 2010).
Comparison of Company and Charity Reporting Guidelines
A company reporting requirements are different. There are different kinds of companies, the quoted and un-quoted companies. There are more regulations for the companies that deal with securities. There are accounting principles or guidelines in the preparation of the financial statements of quoted companies. Companies are expected to keep accounting records and prepare individual financial statements that present a true and fair picture of the profit and loss and the financial status of the company. It is expected to prepare group accounts where the company has subsidiaries or associates (Deloitte, 2011). The company should disclose details on the businesses acquired by the company. There should be an auditor’s report and a director’s report to accompany the financial statements (Deloitte, 2002)
The company can prepare the accounts using the Generally Accepted Accounting Standards or the IFRS standards that are issued by the IASB. The company has to state which accounting principles have been used in the preparation of the financial statements for the investors and creditors to clearly understand the financial information. A company is required to prepare the profit and loss account and the balance sheet. The profit and loss account shows the incomes and the expenses of the company. The balance sheet shows the financial position of the company at the end of the year. There is no prescribed format of presenting the financial statements under IFRS; the company can present the expenses by either the function or the nature. There are however minimum items that have to be disclosed in the financial statements.
The company may use a single-step format under GAAP where all expenses are deducted at once from the sales figure. The company may also use the multi-step method where the difference of the sales and cost of sales is shown as the gross profit. Income and expenses are then shown to arrive at the income before tax. There are items that the company has to disclose
so that the management can explain the financial performance of the company due to their impact on the items in the financial statements.
Under IFRS, the items are disclosed in the financial statements or the notes. “The company is required to reveal the director’s remuneration and any transaction with related parties” (Department for Business Enterprise and Regulatory Reform, 2008). In the income statements under IFRS, there are items recognized directly in equity such as fair value gains on fixed assets, intangible assets, certain financial instruments and investments and foreign exchange translation differences.
The company presents current and non-current assets and current and non-current liabilities. They are separate classifications disclosed in the balance sheet. The assets and liabilities are presented in the order of liquidity. The management has the liberty to prepare the balance sheet in whichever format they want to use. The total assets and liabilities and shareholder’s equity figures are reflected and they should tally. Under GAAP, the items are also shown in terms of decreasing liability. The management can choose whether to classify or not classify the items in the balance sheet.
For companies, the financial statements have to be audited in order to ensure that a true and fair picture is presented. There is no option where the financial statements may not be examined or they are examined by a financial accountant. It has to be done by an independent auditor. All the companies prepare the financial statements on an accrual basis. There is no company that prepares its statements using the receipts and payments basis. In the notes to the financial
statements, the company is required to give more disclosures on the off-balance sheet items.
They are also required to report material events in the company that will occur in the future that may have a significant impact on the accounts of the company. Company accounts are prone to earnings management or creative accounting so management is required to give detailed information in the notes to the financial statements. The assets of the company can be reported at fair value or the historical value. In the fair value accounting, the company shows the value of the assets at the market value.
The accounts of the public companies should also be kept in an accessible place where the members of the public can easily access them. “Every company should send its annual accounts and reports to each member of the company, holder of the company debenture and any person who needs to receive notice of general meetings”(Business Link, 2011).
While the donors are the main interested parties in the financial accounts of the charity organization, the creditors and the investors are interested in the financial health of the company. A charitable organisation does not have any loans however companies have entered into debt obligations and the creditors need to ensure that the company’s liquidity and operating profit is sufficient to pay the debt instalments.
A company is a profit organization and the shareholders are interested in the profit generated and the increase in their share value. To get facilities in banks, companies have to give the audited financial statements.
The companies have flexibility in the use of accounting policy however there should be no false representation of the company’s financial performance in order to entice the investors to choose courses of action that they would not have taken. It is an offense to file false returns or information and the company management will be liable for fines or imprisonment.
References
Barking and Dagenham CVS (2011). Charity Reports and Accounts. (Online). Available at:
http://www.bdcvs.org.uk/documents/governance%20toolkit/charity%20reports%20%26%20accounts.pdf (Accessed 10th January, 2011)
Business Link (2011). Accounting and Reporting Requirement under Company Act 2006.
(Online). Available at: http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1082184412&type=RESOURCES (Accessed 10th January, 2011)
Charity Commission (2011). CC15a: Charity Reporting and Accounting: The Essentials.
(Online). Available at:
http://www.charitycommission.gov.uk/publications/cc15a.aspx#h (Accessed 10th January, 2011)
Charity Commission (2010). Managing Charity Assets and Resources: An Overview for
Trustees. Available at: http://www.charity commission.gov.uk/Library/guidance/cc25text.pdf
(Accessed 13th January, 2011)
Charity Commission (2007). Charity Reporting and Accounting: The Essentials.
(Online). Available at: http://www.charitycommission.gov.uk/Library/guidance/cc15text.pdf (Accessed 10th January, 2011)
CIPFA (2010). Understanding Reports on Charity Financial Statements. Available at:
http://www.cipfa.org.uk/panels/charity/download/CIPFA_CPG_Understanding_Reports_Charity2010.pdf (Accessed 13th January, 2011)
Deloitte (2011). Background in Accounting in the United Kingdom (Online). Available at:
http://www.iasplus.com/country/ukbkgrnd.htm
(Accessed 10th January, 2011)
Deloitte (2002). Accounting Standards Update by Jurisdiction (Online). Available at:
http://www.iasplus.com/country/uk.htm (Accessed 10th January, 2011)
Department for Business Enterprise and Regulatory Reform (2008). Guidance for UK
Companies on Accounting and Reporting. (Online). Available at:
http://www.bis.gov.uk/files/file46791.pdf (Accessed 10th January, 2011)
