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Pool of resources NOT Pot of cash Watts Gregory LLP in association with WCVA WHAT IS A FUND?

Getting your accounts right

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From the Wales Charity Law and Governance Conference 2014.

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Page 1: Getting your accounts right

Watts Gregory LLP in association with WCVA

Pool of resources

NOT

Pot of cash

WHAT IS A FUND?

Page 2: Getting your accounts right

Watts Gregory LLP in association with WCVA

Property Fixed assets – IT kit, office equipment,

vehicles etc Debtors – sums due to the charity Cash Creditors – sums owed by the charity

WHAT DOES A FUND INCLUDE?

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Watts Gregory LLP in association with WCVA

Unrestricted Designated Restricted Endowment

WHAT TYPES OF FUND ARE THERE?

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Watts Gregory LLP in association with WCVA

This is often referred to as a “general fund” and represents funds that are available to the trustees to be applied for the general purposes of the charity.

In other words you are free to use these funds for ANY of the charity’s purposes.

WHAT IS AN UNRESTRICTED FUND?

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Watts Gregory LLP in association with WCVA

This is a type of unrestricted fund comprising of amounts of unrestricted funds set aside or earmarked by the charity for a specific purpose. It is NOT a restricted fund.

The designation is made by the trustees and can be altered or rescinded by the trustees.

WHAT IS A DESIGNATED FUND?

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Watts Gregory LLP in association with WCVA

To provide for future costs / issues To recognise that some components of

unrestricted funds cannot be spent – e.g. fixed assets

To reduce reserves that look “too healthy”

WHY SET UP DESIGNATED FUNDS?

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Watts Gregory LLP in association with WCVA

Fixed asset fund – representing NBV of fixed assets Stock fund – representing NBV of stock Project in deficit fund – to cover the likely future losses

on ongoing restricted fund projects. Future maintenance fund – to cover major cyclical type

costs such as re-roofing, replacement of windows etc. Project fund – to cover the costs needed to establish a

particular new project

DESIGNATED FUND EXAMPLES

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Watts Gregory LLP in association with WCVA

These are funds subject to specific trusts which may be declared by the donor. This means that the donor has specified how the funds are to be used. In other words they are gifts with “strings attached”.

Funds received as a result of a special appeal would also be restricted as the money is collected for a specific purpose.

e.g. Oxfam cannot run an appeal for a relief effort in Somalia and then spend the monies raised on a project in Brazil.

WHAT IS A RESTRICTED FUND?

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Watts Gregory LLP in association with WCVA

Funds received to be held as capital – e.g. a portfolio of investments

2 TYPES

Permanent – no power to convert to income Expendable – power to convert to spendable

income

WHAT IS AN ENDOWMENT FUND?

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Watts Gregory LLP in association with WCVA

The basic definition of what is commonly known as “free reserves” is “that part of the charity’s income funds that is freely available.” This definition used to exclude :

Permanent endowment funds Expendable endowment funds Restricted funds Designated funds Income funds that could only be realised by disposing of

fixed assets held for charity

RESERVES POLICIES

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Watts Gregory LLP in association with WCVA

SORP 2005 changed the above in that designated funds can (not must) be regarded as part of free reserves and charities may (not must) be able to view expendable endowment funds as part of reserves. The emphasis now is on flexibility and a consideration of the charity’s circumstances

FREE RESERVES

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Watts Gregory LLP in association with WCVA

To fund working capital To fund unexpected expenditure arising out

of e.g. project deficits, unplanned events, emergencies

To fund income shortfalls To develop new functions / projects To underpin long term commitments

WHY HAVE RESERVES?

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Watts Gregory LLP in association with WCVA

My grant is 3 months late in arriving The roof needs replacing I want to embark on a new project Project 1 has cost overruns Etc etc

THINK – WHAT IF!!

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The Status Quo approach

The Armageddon approach

2 APPROACHES

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Consider risks Analyse current position Look ahead at income streams Look ahead at expenditure expectations Consider future projects

A BETTER WAY

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Watts Gregory LLP in association with WCVA

Why the need

How much

How to get there

Review & Monitor

DRAFTING THE POLICY

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The Trustees report should clearly state the main activities of the charity within the section “objectives and activities”

The SOFA or the related SOFA notes should analyse income and expenditure by activity

ACTIVITY BASED REPORTING

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No clear link between TR and accounts

Analysis by “natural” classification NOT by activity

PROBLEMS ENCOUNTERED

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CORRECT

Watts Gregory LLP in association with WCVA

Correct analysis

Cost of charitable activities

Staff Other direct

Grants Support

Total

Activity 1

Activity 2

Activity 3

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INCORRECT

Watts Gregory LLP in association with WCVA

Incorrect analysis This year

Last year

Project salaries

Admin salaries

Rent

Rates

Travel

Etc

Etc

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Correct analysis This year

Last year

Incoming resources from charitable activities

Activity 1

Activity 2

Activity 3

CORRECT

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INCORRECT

Watts Gregory LLP in association with WCVA

Incorrect analysis This year

Last year

Welsh Assembly Government

Arts Council for Wales

Cardiff City Council

Lottery

Europe

Sales

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Watts Gregory LLP in association with WCVA

Confusing funds with activities

Confusing projects with activities

OTHER SIMILAR ISSUES

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2 SORPS

One for large charities

One for small

THE NEW SORP 2015

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If you satisfy 2 of the following 3 criterion you are SMALL

Annual income < £6.5mill Total assets < £3.26mill <50 employees

SMALL CHARITIES

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Thinking “small first” Core modules that apply to most charities Other modules that you use if applicable

SORP MODULES

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Periods starting post 1/1/15 For most that means the first year end is 31/3/16 Need comparatives to 31/3/15

EFFECTIVE DATE

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Fair and balanced – disclose successes and failures

Public benefit – cover activities and performance not just aims and objectives

Going concern – state nature of uncertainties

CHANGES TO TRUSTEES REPORT

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SORP 2005 NEW SORP

Incoming resources Income and endowments

Voluntary income Donations

Incoming resources from charitable activities Earned from charitable activities

Activities for generating funds Earned from other activities

Investment income Now combined with “other income” unless materialResources expended Expenditure

Costs of generating voluntary income – fundraising trading: cost of goods sold and other costs – investment management costs

Cost of raising funds

Charitable activities Expenditure on charitable activities

Governance costs No longer a separate heading - Now included in support costs

Other resources expended Other expenditure

CHANGES TO SOFA

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Income recognised when “probable” not “virtually certain”

Donated goods recognised on receipt if practicable Disclose remuneration of key personnel in total Extended definition of related parties

OTHER CHANGES

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Stock that is given away may still be included in stock at cost

Multi employer defined benefit schemes – recognise liability on balance sheet

Holiday pay accruals

OTHER CHANGES

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THE END