The project

A charity (a church with an outreach programme) registered with the Charity Commission approached us as they needed an independent examination of their accounts. They also needed assistance in preparing their annual accounts in accordance with FRS 102 and the Charities SORP. The charity’s income in the year being reported had crossed the £250,000 threshold. Previously the charity had adopted the far simpler receipts and payments basis for their accounts preparation. The accounts are kept on QuickBooks Online.

The issues

A number of challenges presented themselves:

1.     Accruals basis of accounting & preparation under FRS 102

The change to the accruals basis along with first-time adoption of FRS 102 brought up some technical issues regarding re-stating the comparatives in accordance with FRS 102 from the beginning of the comparative period. A material amount of income in the current year under the receipts and payments basis had to re-allocated to the comparative year to comply with the accruals basis.

A number of accounting adjustments and journals were needed to reconcile QuickBooks to the financial statements. These included an adjustment of the prior year figures for which specific Charity Commission guidance was obtained.

2.     FRS 102 charity accounts software/templates

Accounts preparation commercial software for charity accounts is widely available. However much of it using the accruals basis does not permit expenditure to be allocated by charitable activities (which is mandatory when income is over £500k pa and recommended for income below that threshold). The Charity Commission provide their own pro forma accounts on Excel but they are unwieldly since they include every possible potential disclosure requirement.

For these reasons, a number of accounting practices prepare accounts for their charity clients using their own Excel templates. This allows the accounts to be presented in an appropriate and tailored way which both complies with FRS 102 and the Charities SORP. It also enables the accounts to be relatively easily understood by someone not trained in accounts. The accounts of the charity were prepared in this way using Excel templates supported by disclosure checklists.

3.     Analysis of expenditure by charitable activity and summary overview

The Trustees were particularly pleased to be able to disclose their expenditure by charitable activity as this enables readers to have a much clearer and quicker understanding of how their donations had been spent. It also makes for fundraising to be more targeted and specific.

The Trustees wished to prepare a brief summary financial overview report for distribution to its supporters. This had brief financial information directly drawn from the full accounts but enabled a supporter to see at a glance the overall position of the charity without getting bogged down in the detail.

4.     Valuation of freehold buildings

(a)     Church building and land on which it sits

The charity’s accounting policy had hitherto valued the church building itself in the accounts at its construction cost (some 30 years earlier) with no value attributed to the land. This was appropriate accounting treatment at the time.

FRS 102 requires freehold property to be included at an appropriate valuation which can be original cost but, under FRS 102, best practice is for freehold property to be shown at fair value. However each year its residual value is to be considered which includes selling costs. The value to be depreciated is calculated as the asset cost less residual value. The balance is then depreciated over the asset’s useful economic life. Whilst freehold property may in practice increase in value this does not mean that depreciation can be ignored.

The church building itself is currently held at its cost of construction. This cost should therefore under FRS 102 best practice be amortised over the economic useful life off the building. The cost of the land on which the building sits should be valued. Just because the land on which a building sits appreciates in value does not mean that the depreciation of the building itself can be ignored.

(b)     Other freehold buildings

The charity also owns two freehold properties that are physically adjacent to the church and used for the ministry of the church, These are intentionally kept in such a state that they could be sold off if as residential dwellings if that became necessary. These properties needed therefore under FRS 102 to be included at their fair value. The church also owned the manse occupied by the senior minister and this also needed to be included at fair value. All properties in the same class needing to be treated consistently. Professional valuations were obtained on the three properties and the excess of the fair value valuation over and above the historic book cost was taken to the revaluation reserve.

Major refurbishment and improvement work was done to one of the properties during the year – the improvement element was capitalised whilst the repairs element was expensed.

(See also useful guidance about fixed asset valuations from the Methodist church).

5.     Going concern basis

The charity was intending, within a few months of the accounts sign-off date, to convert from an unincorporated trust into a CIO (charitable incorporated organisation). This meant that the usual going concern basis of accounts preparation was not appropriate as the entity was unlikely to be in existence for twelve months from the date of approval of the accounts.

Instead, an alternative basis had to be used of which there are not many available. The only alternative basis was in fact the break-up basis. The charity’s assets are predominantly its freehold property and cash. The valuation of these assets on a break-up basis happens to be the same as that on a going concern basis. Other assets/liabilities do not have materially different valuations between the break-up basis and going concern basis of accounts preparation (the staff will be TUPE’d across to the new entity). However in order to comply with FRS 102 the break up basis had to be used.

6.     Reserves policy

The Trustees have a reserves policy which was reviewed to ensure that the necessary reserves for an emergency were free reserves held in easily realisable assets (eg cash on instant access or on deposit with inexpensive break clauses).

7.     Impact of Covid-19

The impact of Covid-19 on the charity’s income compared to budget was reviewed. This tied in with the review of the charity’s reserves policy.

Independent examination

  • As the accounts had previously been prepared on a receipts and payments basis, the planning of the examination had to be much more extensive and it followed the Directions of the Charity Commission. The examination planning was itself reviewed and checked. Considerable additional disclosure (and thus verification) of information in the financial statements would be needed.
  • Internal controls were reviewed with suggestions made to the charity for some strengthening of them.
  • The charity had significant cash deposits held with a number of financial institutions. Some of these were long-term deposits and audit certificates were obtained from the institutions to confirm the balances. Bank reconciliations were checked.
  • The revaluation of the freehold residential properties was undertaken by a professional agent.
  • Staff costs were verified by checking them back to contracts of employment.
  • As in nearly all independent examinations, the analytic review is especially important as this can highlight discrepancies. The analytic review can considerably assist a deep understanding of the financial operations of an entity.
  • Governance was reviewed to ensure the Trustees were discharging their oversight responsibilities appropriately and setting both policy and the charity’s strategic objectives.
  • The disclosures in the Trustees’ Report were checked for consistency with disclosures in the financial statements.
  • Regarding the accounts being prepared on a break-up basis and not a going concern basis, an emphasis of matter paragraph in the examiner’s report was considered. It was not deemed appropriate however since a reader of the accounts would not fundamentally misunderstand the accounts if they did not know of the change of basis of accounts preparation. A MURGC (Material Uncertainty Related to Going Concern) paragraph would not in any case be appropriate as the there is no uncertainty about the charity being a going concern – the charity is clearly not a going concern. See also

The outcome

The financial statements of the charity, prepared on the accruals basis, conforming to FRS 102 and the Charities SORP were completed and examined on time and within budget. Expenditure was disclosed by charitable activity which enables the reader of the accounts to get a good and easy grasp of where expenditure has been incurred. Certain internal controls were strengthened in relation to dependence on key members of staff and in respect of control over certain cash donations. Practical issues in planning for conversion to CIO status were identified and actioned accordingly.


“As a Charity Finance Manager, along with the Trustees, we have found that whilst working with David Eaton he has shown a strong grasp of the regulatory regime and reporting requirements and gave us very clear explanations of what our organisation needed and why. David was able to give both help and support with the more technical aspects of the in-house accounting system, which added an additional layer of reporting available to the Trustees.

The accounts were presented in plain English which could then be communicated easily to the charity supporters and donors. All of the agreed timelines were met which enabled submission to the Charity Commission unhurried and in good time, as well as a real confidence by the Trustees that the charity’s finances had been robustly inspected.

Into the future, the charity is converting to a CIO and a clear dialogue has taken place giving assistance with many of the practical implications of the process. We are very grateful to David and strongly recommend him to a charity needing an independent examination and some additional help.”

Charity Finance Manager, Suffolk

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