The reporting regime for charities is changing. This will bring challenges for board members, management and practitioners alike, writes Aisling Fitzgerald.
Charities Act 2009 came into effect on 16 October 2014, introducing a requirement for all charities to register with the Charities Regulatory Authority (CRA) and file governance, financial and other information – some of which will be available on the CRA’s website.
Companies Act 2014 commenced by statutory instrument on 1 June 2015 and charities incorporated under that Act must address the changes arising as a result. In tandem with these changes, Irish Generally Accepted Accounting Practice (Irish GAAP) has changed and Financial Reporting Standard (FRS) 102 came into effect on 1 January 2015.
Charities Act 2009
On 16 October 2014, the CRA was established by ministerial order. This resulted in the commencement of the Charities Act provisions required to establish the CRA and create the Register of Charities. On commencement of the Act, all charities that had a CHY number from the Revenue Commissioners were deemed to be registered charities with the CRA under Section 40 of the Charities Act, and were assigned a CRA number for each CHY. The CRA number is not the same as a CHY number, however.
Organisations that had one activity and one CHY number in the past, and where exemptions under Sections 48 and 50 of Charities Act 2009 do not apply, will be required to prepare and file one set of audited accounts with the Regulator. The exemptions under Section 48 provide that company charities, education bodies and very small charities are not required to file accounts with the CRA while Section 50 (13), exempts these bodies from the need to have their accounts audited under Charities Act 2009.
A potential issue may arise where a number of different entities operate with one CHY number. Some of these entities may have their own governance structures and may not be controlled by the charity holding the CHY number. CHY numbers are assigned one CRA number and if each activity is a separate charity, a separate CRA and CHY number may be required for each activity.
For those organisations that are not companies, financial statements may have been prepared in the past for internal management purposes. Such organisations may not have prepared a single set of financial statements incorporating all the activities that took place within the remit of their CHY number. Larger charities that operate in a branch structure with central control may have multiple CHY numbers for their activities. These charities should review their structure to ensure it is aligned with the manner in which they should report their activities to the CRA.
Many religious orders are structured so that a trust holds the legal title to their properties, while activities such as the management of the order’s own affairs and charitable activities run by the orders (care homes, for example) are operated as separate unincorporated organisations. In some cases, the same CHY number is used by the trust, the order and the charitable activity. In such cases, the religious order should review its reporting structures and consider whether separate CRA or
CHY numbers are required for each activity.
Where changes to the CRA registration or CHY numbers are required, charities must advise the CRA as soon as practicable and in advance of the extended deadline for registration and reporting, which is 16 April 2016.
All entities with a CRA number, except those entitled to the exemptions within Section 48 of the Charities Act, are obliged to file accounts 10 months after year-end. All charities are obliged to file an annual report with the CRA 10 months after year-end. The deadline for filing the annual report and annual accounts has been extended to 16 April 2016 for December 2014 year-ends.
What accounting regulations should charities follow?
Regulations from the CRA in relation to the form and content of charities’ financial statements and annual reports are with the Minister for consideration. The draft regulations are expected to require larger charities to prepare their financial statements in accordance with FRS 102 and methods and principles of the applicable Statement of Recommended Practice (Charity SORP (FRS 102)). For smaller charities, except those required to prepare accounts that give a true and fair view of the results and state of affairs of the charity, receipts and payments accounts and a statement of assets and liabilities will be required. The draft regulations will provide details of the information to be provided.
FRS 102
FRS 102 is effective for accounting periods beginning on or after 1 January 2015 for all entities preparing financial statements which are intended to give a true and fair view. Charities will need to review their financial statements and, where measurement differences arise as a result of the requirements of FRS 102, restate the prior year comparatives. FRS 102 also introduced some new disclosure requirements, one of which is the requirement to disclose key management remuneration in the notes to the financial statements.
Items that may give rise to measurement differences for charities include:
- Holiday pay accrual required;
- Prior year adjustments to be made for material errors in prior periods, not just fundamental errors; and
- Measure investment property and investments at fair value at each reporting date, with changes in fair value recognised in the income statement.
It should also be noted that Charity SORP (FRS 102) provides guidance to the charity sector on areas where FRS 102 is silent or where guidance is considered necessary.
Replicate the organisation’s structure
While the Charity Regulator has indicated that accounts in any format will be accepted for the first filing (i.e. for registration) and for filings due by 16 April 2016, accounts filed for later filings should accord with the structure of the charity and the activities registered under the relevant CRA number.
The Charities Act requires charities with income in excess of €100,000 (threshold to be determined by the regulations) to file “audited” financial statements giving a true and fair view of the results and state of affairs of the charity. Many charities may not have prepared ‘true and fair’ accounts in the past, and those that have may not have had them audited. Issues may arise for existing charities in the preparation of ‘opening’ balance sheets, such as determining the ownership and cost of fixed assets. This information may not be readily available.
Difficulties may also arise if a charity reports all of its activities against one CRA number. One set of accounts incorporating all relevant activities will be required by the CRA. To consolidate a number of activities, the structure of the charity must be consistent with that of a group, where one parent controls other entities in the group. If the relationship between parties in the group is not one of control, the accounting criteria for consolidation will not be satisfied.
The draft regulations will require consolidated financial statements where the aggregate gross income of a charity or its subsidiaries is over €500,000. Charitable subsidiaries will be required to prepare their own accounts under the draft regulations unless exempt.
Definition of control
A number of factors should be considered by a charity when considering if the parent organisation controls the other activities.
FRS 102 is prescriptive on consolidation. Paragraph 9.4 defines a subsidiary as “an entity (which includes both partnerships and unincorporated associations) that is controlled by another entity”. FRS 102 references partnerships, trusts, government bodies/agencies, universities or any other organisation or body of persons.
The definition of control is not based solely on legal ownership; it is the “power to govern the financial and operating policies of an entity so as to obtain benefit from its activities” according to FRS 102, paragraph 9.3.
For organisations considering whether control exists, a number of questions should be considered:
- Who has the power to initiate, approve or veto significant decisions made in the ordinary course of business?
- Who has the power to select, terminate and set compensation for key management, the principal (in the case of a school) or the CEO (in the case of an organisation)?
- Who approves the annual business plan and budget?
- Who controls the assets used by the organisation?
- Who approves major capital projects including the acquisition and disposal of major assets?
- Who makes decisions concerning financing?
- Who has more than half the voting power at meetings of the board or governing body?
- Who has the power to appoint the majority of the board of directors or equivalent governing body?
- In the event of a wind-up, where will any remaining assets be distributed?
If ‘the parent entity’ is the answer to the majority of the questions above, it would appear that a relationship of control exists and it is therefore appropriate to file one set of consolidated financial statements with the Charity Regulator.
If, based on the above, control does not exist, it is not appropriate to consolidate. Charities must instead review their structure and consider the number of CRA registrations and CHY numbers required to correctly reflect the separate nature and governing structure of its activities.
Key dates and points of information for charities are as follows:
- The registration process must be complete by 16 April 2016;
- Where a reorganisation of CRA/CHY numbers is required, advise the CRA prior to 16 April 2016;
- 31 December 2014 financial statements must be filed with CRA by 16 April 2016;
- Draft regulations relating to annual statement of accounts (Section 48), annual audit or examination of accounts (Section 50), regulations in relation to audits and examinations (Section 51) and annual reports (Section 52) are with the Minister for consideration;
- Regulations, once approved, will apply from 1 January 2017;
- Regulations on accounts and audit will not apply to company charities, education charities and very small charities; and
- Regulations on annual reports will apply to all charities regardless of form or size.
Companies Act 2014
Companies Act 2014 was commenced by statutory instrument from 1 June 2014. The Act is primarily a consolidation of previous companies acts, but it also introduced reforms of legislation which resulted in some new obligations on companies and directors. The Companies Act provides for an 18-month transition period, which expires on 30 November 2016.
Charities that operate within legal structures formed under the Companies Act are affected by changes in Company Law and may need to take action as a result. Many charities operate as companies limited by guarantee without a share capital.
However, some charity companies are limited by shares. All charities operating within company structures will have to take some action as a result of the commencement of Companies Act 2014.
Companies Act 2014 defines the law applicable to companies by type of company, and created a new type of private company – a designated activity company. Changes were also made to the private limited company.
One of the significant changes to private limited companies affecting charities is that they cannot have an objects clause. The Revenue Commissioners will not agree to a company with charitable tax-exempt status becoming a private limited company as it requires that charity companies must have an objects clause to obtain charitable tax exemption.
Charities that operate as private companies will need to review their structure and decide whether the appropriate legal vehicle for their activities is a company limited by guarantee or a designated activity company. Changes to the memorandum and articles of association must be approved by the Revenue Commissioners as part of the conditions attached to charitable tax exemption granted to charities.
All existing private companies will become private limited companies by default on 30 November 2016 unless they have re-registered as a designated activity company or other type of company.
Companies limited by guarantee do not need to re-register, but should update their memorandum and articles of association and seek exemption from including ‘company limited by guarantee’ in their name if they do not already have such permission.
Aisling Fitzgerald FCA is Director, Not-for-Profit Services Group, PwC.