Charities - Sweet clarity

As you drop your cash into the collecting tin do you ever wonder what exactly the charities do with the money they collect? Can you even be sure the one getting your donation will make the best use of it?

Charitable companies have always had to prepare and file accounts under the Companies Acts but most of the 155,000 groups registered with the Charity Commissioners do not operate as companies and have therefore been let off the hook. The 115,000 registered charities classified as small (less than # 10,000 income and expenditure) only account for 2-3% of a sector expected to generate nearly # 16bn this year. In these days of good corporate governance and transparent financial accountability, it is no longer sensible to operate any large financial undertaking solely on the basis of good intentions and trust.

SORPs

The 1993 Charities Act set out to provide a regulatory framework for accounting in the form of the Statement of Recommended Practice (SORP).

The mechanics of the system vary according to the size of charity: accounting on a receipts and payments basis with simple annual reports and returns for those with neither income, or expenditure over # 10,000; for organisations boasting over # 250,000 the full panoply of new regulations comes into play.

Accounts must be prepared on the accruals basis and be audited by a qualified practitioner. Charities must prepare an annual report and submit the whole to the Charity Commissioners. They are also required to keep accounting records for at least six years and make their accounts available to the public on request.

At the heart of the new regulations is the Statement of Financial Activities (SOFA) which addresses the unique nature of non-profit making bodies by ensuring that money from any source can be channelled into and tracked through the various purposes to which it will be applied.

The system blends traditional philanthropic definitions with new disciplines.

Charities must now recognise all incoming resources as soon as there is a legal entitlement to any assets or funds. Willed gifts, for example, must go into the accounts as soon as the donor dies rather than waiting for probate which could take some time. The old method of only including such gifts when finally transferred meant a charity might understate its true financial strength by excluding value clearly committed to it.

All funds coming into the charity must be designated ‘restricted’ or ‘unrestricted’. Restricted funds are donations to support a particular project or aspect of a charity’s work: a scanner for a cancer unit, say, or a post-earthquake relief effort. They can be further broken down into capital and revenue depending on the wishes of the donor or the nature of the purpose.

Capital could be used either as an investment asset, the returns from which will meet the need for which the donation was intended, or may purchase functional assets for the charity. Functional assets are those which serve the charity as a whole – the buildings which house a school or the head office of a charity, where the charity owned that building.

Restricted funds may also be designated as revenue and applied towards the work of the charity in particular cases. This might be where donations are for the relief of suffering arising from a particular disaster. Normally, charities must demonstrate that money given for restricted purposes has been used as originally intended. However, they can apply to the Charity Commissioners to lift a restriction that has become impractical – for example, where the aims have been largely achieved but the money remains.

Unrestricted funds

Unrestricted funds are those which the trustees or directors of the charity have discretion to spend on whatever they deem will advance the work of the charity, providing that can be seen and accounted for. Unrestricted revenue is handled in much the same way as for restricted purposes except that the charity determines the most effective use of the funds – either applied directly for the good of beneficiaries or to pay operating costs and support fund-raising efforts.

The application of unrestricted capital is more closely defined than for restricted. Funds may be used to buy functional assets but not investment assets. This is to prevent charities from building up substantial investment portfolios instead of allocating funds to the purposes which attracted the donations. Charities may not retain income surpluses into capital.

Those whose donation levels fluctuate or who can see their needs changing in the future should set aside a proportion of current unrestricted funds to cover that. Such programmes must be authorised by the Charity Commissioners.

One other change, which will be familiar to accountants working in other spheres, is the changes to trustees’ reports making them more like operations and financial reviews with much more information than was always the case previously.

John Hancock is a freelance journalist

The Charities Act addresses a number of issues in addition to those outlined above and copies of the relevant guide books from the Charity Commissioners may be obtained by calling 0171-210 441

How to sign on The Trustee Register

Recruiting to the board is a tough job for the voluntary sector.

Since it was set up in 1989 The Trustee Register has helped place 180 people into charities as trustees. There’s a wealth of untapped skills in business and the professions and the purpose of the register is to bring the two sides together.

Accountants and people with a financial background are particularly in demand as both trustees and for the role of honorary treasurer, and especially in London and the south east.

‘This has certainly increased since the Charities Act came into force,’ says registrar Adrianne Reed. ‘Before the demand was for marketing people, but they’re all looking for financial experience now. That’s why we’re desperate to recruit honorary treasurers.’

The amount of time a trustee is expected to give varies according to the needs of the charity involved, but is generally somewhere between one-day-a-month and one-a-quarter.

All registrations are computer-classified according to an individual’s discipline, geographical location and preferred field of charitable interest.

On request from established charities, the register compiles a shortlist of candidates for them to contact direct. It can take quite a while to find the right match and in the interim the register can offer advice on other sources of help.

It has proved very difficult to recruit trustees for both new and very small charities so certain restrictions have had to be imposed – the organisation must be at least 12-months old and turn over more than # 75,000 a year. The Register has around 250 that make the grade on its books.

The National Council for Voluntary Organisations and the Charities Aid Foundation have welcomed the service which is provided free to both the voluntary organisations and would-be trustees. The Trustee Register gets its funding from Reed Charity, itself supported by Reed Executive which is the holding company for one of the UK’s largest employment agencies.

Contact The Trustee Register, Bedford House, Madeira Walk, Windsor, Berkshire SL4 1EU, Tel: 01753 868277.