The Scottish Government

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4. Proposals

Duty to keep accounting records

For every charity, the charity trustees must ensure that accounting records are kept which are sufficient:

1. to show and explain the charity's transactions, including, but not limited to:

• For all sums of money received day to day, the source of the money and the purpose for which it was paid to the charity
• For all sums of money expended day to day, the person or body to which it was paid and the reason for the payment
• Records of the assets and liabilities of the charity

2. to disclose with reasonable accuracy at any time the financial position of the body and its various funds at that time, and
3. to enable the charity trustees to produce a statement of accounts for each accounting period in compliance with the regulations.

The records are to be kept for six years.

If a charity ceases to operate, the trustees must make arrangements for the safe storage of the records for six years after cessation, and inform OSCR where they are.

The charity must take all reasonable steps to protect its accounting records from risk of corruption by fire, flood etc., and from loss of access due to IT failure or obsolescence, loss of passwords etc.

Accounting periods

Charities should be required to fix for themselves an accounting year end date. A charity must disclose its accounting date to any enquirer. A charity should be able to change its year end date by decision of the trustees with the proviso that in the following situations they must seek permission from OSCR:

1. Any accounting period longer than 18 months plus one week
2. Three accounting periods greater or less than a week either side of twelve months, ending in any period of five years.

Permission would only be granted in unusual circumstances, a clear case having been made on grounds of practicality.

Charities which cease their activities must arrange for accounts to be prepared covering all transactions up to the cessation.

Trustees Annual Report and Accounts

The trustees must ensure that for every accounting period there is produced a Trustees' Annual Report and Accounts.

The annual report and the accounts should either be together in one document, or in separate documents which each refer to the other as being necessary to form the whole. If in two separate documents, both must be provided on request to any enquirer who requests a copy of the accounts, or the annual report and accounts.

Any summarised accounts which the charity may prepare and publish for its own purposes must include reference to the full accounts and where they may be obtained.

A charity which has one or more subsidiary undertakings (whether charitable or not) must produce group accounts, except where FRS2 provides for the exclusion of the subsidiaries, the gross income of the group is below £250,000, the results or assets or liabilities of the subsidiary are not material to the group. All according to the methods and principles of the SORP.

Each recognised charity must prepare its own set of compliant accounts and Trustees' Annual Report. The exceptions to this are:

1. Where more than one charity is managed and controlled by the same trustees the accounts and reports may be grouped in a single document, provided that document contains all the information required by the regulations and meets the requirements pertaining to the largest charity so grouped for all the charities.
2. Where a charity is the subsidiary of another charity which has prepared group accounts and is wholly owned and controlled by charities, it will not require a Trustees Annual Report, provided all the required information on the charity is given in the group accounts, and provided the accounts of the subsidiary charity indicate how a copy of the group report may be obtained.

Thresholds for accounting requirements and audit are to be pro-rated for the accounting period length if this differs from one year.

The accounts must comprise a Statement of Financial Activities, a balance sheet, and notes sufficient to provide, together with these main statements, a true and fair view, and the information required to be disclosed by virtue of these regulations. Where required by UK accounting standards that pertain for the time being a charity must also provide a cash flow statement formulated according to the guidance in the Charities SORP.

Where the charity is a company it must meet the needs of charity reporting, and also meet the requirements of company law, by way of the methods set out in the SORP.

The accounts must show the duration of the accounting period, and of the previous period.

Every item disclosed in charity accounts must include the corresponding amount for the previous period.

The accounts must be approved by the trustees and signed by a trustee at the foot of the balance sheet or statement of balances, giving the date of approval. The trustee's Annual Report must also be approved by the trustees and signed and dated by a trustee to signify this. All copies of both must show the name of the person who signed, and the date of approval.

Smaller Charities

If the charity's total incoming resources are less than £250,000 and group accounts are not required, the trustees may elect to produce accounts on one or both (if applicable) of the following simpler formats:

1. The accounts may be prepared on a "receipts and payments" basis, comprising a receipts and payments account, and a statement of balances which may in particular circumstances be integrated in the same statement. The sections below on the Statement of Financial Activities, the Balance Sheet and Other notes to the accounts do not apply if this option is taken. See the section headed "accounts prepared on a receipts and payments basis" below. Charities which are companies, limited liability industrial and provident societies or SCIOs may not select this option
2. The trustees may elect to produce fully accrued accounts (or be required to as companies, I&P societies or SCIOs), but not allocate costs by activity category, as explained further under "Statement of Financial Activities".

Reporting to OSCR

The Trustees Annual Report and accounts which comply with these regulations must be submitted with original trustees' and auditors'/ independent examiner's signatures to OSCR within seven months after the charity's accounting date.

If a charity fails to provide these within seven months, OSCR may:

1. Make the default public by indicating on its website charities which have not submitted compliant accounts
2. Launch an inquiry into that charity
3. Give notice for completion, after which OSCR may appoint a person or firm to complete the charity's accounts at the charity's own expense and with a statutory right of access, information and explanations. The person will report to OSCR on the charity's accounting records and any other findings of regulatory interest.

The accounts must comprise the whole assets, liabilities and transactions of the charitable body, wherever situated.

The accounts must be denominated in pounds sterling if the charity is domiciled in the UK, otherwise the currency of the state where the charity is domiciled, or pounds sterling or Euros.

The trustees' annual report and accounts must be available, and submitted to OSCR, in the English language. The trustees may also produce a duplicate version of the charity's report and accounts in Gaelic for issue to members or enquirers who express a preference for that language. The Gaelic version must include a statement by the auditor or independent examiner that it is a faithful translation of the accounts submitted to OSCR.

Dormant Charities

The trustees of a charity which becomes dormant (ie has no activities and no transactions in an accounting period other than receipt of interest on bank or building society deposits) must submit to OSCR each year a statement of its assets.

Trustees' Annual Report Contents

The Trustees Annual Report must include:

Mandatory for all charities

1. All names used by the charity, making clear the name by which it is registered with OSCR
2. The Scottish charity registration number
3. The address of the principal office or contact point
4. The names of all the trustees on the date the report was approved up to 50, including those who are office bearers (by permission of OSCR names may be omitted to protect personal safety, with the reason for non disclosure being given in the report. Company law prevents such an omission in respect of directors)
5. All other trustees who served during the accounting period
6. The person in charge of day to day management where this is delegated by the trustees
7. The nature of the governing document
8. Relationships and transactions with related organisations
9. A summary of the charity's purpose and objectives
10. The activities of the charity in the accounting period
11. A review of the financial results and position shown by the accounts
12. Explanation of salient items in the accounts

13. Optional for charities below £250,000

13. The names and addresses of the principal bank, and the auditor/independent examiner
14. The method of appointment of trustees
15. The charity's organisational structure
16. Explanation of policies which pertain to the charity's main activities, for example grant making, use of volunteers, risk management, employee relations, equal opportunities
17. Policies on reserves, designation of funds, investment
18. Plans for future periods, including developments since the accounting date
19. Other relevant matters as recommended in the SORP.
20. For group accounts the disclosures above for the group as a whole indicating clearly where activities pertain to individual organisations in the group, plus a note of the activities of each group organisation.

Statement of Financial Activities

The Statement of Financial Activities ( SOFA) must show all incoming resources and resources expended in the accounting period on all the charity's funds. The statement must show in columns the movements on the charity's different types of funds, distinguishing at a minimum between unrestricted income and funds, restricted income and funds, and endowment funds. There must be a column showing total funds, and a prior year comparative total funds against each line.

All items must be measured, calculated and categorised according to the definitions, methods and principles in the Charities SORP.

The following categories of transaction must be shown in total for each type of fund in the SOFA, and analysed further as appropriate in the notes to the accounts:

1. Voluntary income, including gifts, donations, legacies, membership subscriptions, sponsorships and grants which are not tied to the performance of a service
2. Income from activities for generating funds, including fundraising events, sponsorships with an element of exchange, shop income, providing services other than for the benefit of the charity's beneficiaries, trading income (particularly for group accounts), and rents from surplus property
3. Investment income, excluding gains and losses in the value of investments, and income from subsidiaries (except in a group SOFA)
4. Incoming resources from charitable activities, including any incoming resources which are a payment for goods and services provided for the benefit of the charity's beneficiaries. This includes trading activities undertaken in furtherance of the charity's objects ("primary purpose trading"), the sale of goods or services made or provided by beneficiaries, rents from property let for an activity that furthers the charity's objects, contractual payments from government or public authorities and grants which are tied to the performance of a service.
5. Other incoming resources, including gains on the disposal of fixed assets that were held for the charity's own use.
6. Total incoming resources
7. Costs of generating voluntary income, including related administrative costs
8. Fundraising trading costs (all costs related to the trading activity) , including related administrative costs
9. Investment management costs including related administrative costs
10. Other costs of generating funds, (not including the negotiation of contract or performance related grant funding) , including related administrative costs
11. Total cost of generating funds (vii to x)
12. Resources expended on charitable activities, including the cost of administrative support for the carrying out of activities, which must itself be disclosed either in the notes or in the SOFA. The SOFA or notes must distinguish between
13. • the cost of its own activities, and
    • the amount and support cost of grants or donations made in furtherance of the charity's objects.

    If grants and donations made total over 5% of total resources expended an analysis is required, distinguishing between grants to individuals and to institutions, by purpose giving numbers of grants as well as amounts as further described in the Charities SORP. All significant grants to institutions should be listed.

13. Governance costs, comprising the costs which relate to the general running of the charity as opposed to the management of the functions of generating funds and carrying out charitable activities. This includes strategic planning, audit, accounts and trustee meetings.
14. Total resources expended
15. Transfers between funds, shown gross
16. Gains and losses on investment assets
17. Net movement in funds
18. Funds brought forward and carried forward, to equal the Balance Sheet

Charities with total incoming resources below £250,000 who choose or have to produce fully accrued accounts, may elect not to apportion or allocate their administration, property, depreciation and other shared costs between the SOFA categories, and instead analyse such costs according to natural classifications.

For all charities, further disclosure must be given in the notes to the accounts as stipulated in the Charities SORP. In particular, the following must be disclosed:

1. Details of the types of activities undertaken to generate voluntary funds and fundraising and trading income, giving corresponding analysis of the incomes and costs.
2. Analysis of the costs and related incomes of charitable activities sufficient to enable understanding of the financial scale and effect of each major category of activity
3. Analysis and explanation of costs, transfers and other items, sufficient to enable understanding
4. Disclosure of transactions with related parties, as prescribed in the Charities SORP
5. Disclosure of any remuneration of trustees, and expenses, as prescribed in the charities SORP
6. Any use of the charity's funds for the purchase of trustees' indemnity insurance
7. Gross wages and salaries, employer's national insurance costs and pension costs, and an estimate of the average number of full time equivalent employees, providing subcategories consistent with the analyses of costs and incomes. Also the emoluments of any higher paid employees in bands of £10,000 above £50,000 as prescribed by the SORP.
8. The costs of audit or independent examination, and of services provided by the auditor or independent examiner
9. Any ex gratia payment that is not an application of funds for a charitable purpose

Balance Sheet

The balance sheet must provide an analysis of the charity's assets and liabilities, and the balances of all its categories of funds (at a minimum between unrestricted, restricted and endowment funds), at the end of the accounting period.

All items must be measured, calculated and categorised according to the definitions, methods and principles in the Charities SORP.

The charity's assets and liabilities must be categorised, where present, as follows:

1. Intangible assets
2. Tangible assets
3. Heritage assets
4. Investments which are fixed assets
5. Total fixed assets
6. Stocks and work in progress
7. Debtors
8. Investments which are current assets
9. Cash at bank and in hand
10. Total current assets
11. Creditors: amounts falling due within one year
12. Net current assets or liabilities
13. Total assets less current liabilities
14. Creditors: amounts falling due after more than one year
15. Provisions for liabilities and charges
16. Net assets or liabilities excluding pension asset or liability
17. Defined benefit pension scheme asset or liability
18. Net assets or liabilities including pension asset or liability
19. Endowment funds
20. Restricted income funds
21. Share capital
22. Unrestricted income funds
23. Revaluation reserve
24. Unrestricted income funds excluding pension asset or liability
25. Pension reserve
26. Total unrestricted funds
27. Total charity funds

Further disclosure must be given in the notes to the accounts as stipulated in the Charities SORP. In particular, the following must be disclosed:

1. Tangible fixed assets must be categorised between

• Freehold land and buildings
• Leasehold and other interests in land and buildings
• Plant and machinery including motor vehicles
• Fixtures fittings and equipment
• Payments on account and assets in the course of construction.

2. A note summarising all the material changes in fixed assets and accumulated depreciation
3. Both fixed asset investments and current asset investments divided between UK and outside the UK, and between

• investment properties, investments listed on a recognised stock exchange
• Investments in subsidiary or associated undertakings, or in companies which are connected persons
• Other unlisted securities
• Cash and settlements pending
• Any other investments

4. Debtors analysed between long term and short term, and between:

• Trade debtors
• Amounts due from subsidiary and associated undertakings
• Other debtors
• Prepayments and accrued income

5. Current and long term liabilities analysed between:

• Loans and overdrafts
• Trade creditors
• Amounts due to subsidiary and associated undertakings
• Other creditors
• Accruals and deferred income
• income

6. Particulars of any material provisions
7. A list of all material fund balances, indicating the purpose of each fund and the nature of its restriction or designation, as appropriate
8. All material guarantees given by the charity, and the conditions under which a liability might result
9. Any financial derivative products
10. Contingent liabilities and assets
11. Particulars of loans, and of assets which may be subject to mortgages or charges.
12. Details of any expenditure commitments not accrued in the accounts

Other notes to the accounts

Accounts must include notes on the material accounting policies applied in their preparation. These must include:

1. A statement of compliance with these regulations, and, if applicable, with the appropriate Companies or Industrial and Provident Societies Act
2. A statement of compliance with the Charities SORP and any other relevant SORP
3. Historic cost basis has been used, except for investments
4. Description of any departure from the above, including the reasons and the effect on figures in the accounts, where this is needed in order to give a true and fair view.
5. Policies on incoming resources, including:

• When a legacy is regarded as receivable
• Basis of recognition of gifts and intangible income, grants receivable, and subscriptions
• The basis of any deferral of incoming resources

6. Policies on resources expended, including:

• Policies for recognition of liabilities
• Policy for including items within the categories on the SOFA (cost of generating funds, charitable activities and governance costs) and methods and principles of allocation and apportionment

7. Policies on fixed assets, including:

• Valuation method for each class of asset
• The value below which assets are not capitalised
• Policies on heritage assets
• Depreciation policies
• Policies on impairment review

8. Policies on the valuation of investments
9. Basis for inclusion of realised and unrealised gains and losses on investments
10. Basis for inclusion of stocks and work in progress
11. A description of the different types of fund, and the policy for determining designated funds

Requirements for accounts prepared on a Receipts and Payments basis

The Receipts and payments account must group the charity's receipts and payments in the accounting period in the same way as the incoming resources and resources expended are required to be categorised in a Statement of Financial Activities (see above), but staff and administrative costs may be stated separately as a natural classification.

The Receipts and Payments Account must show total receipts, total payments, and the excess of receipts over payments (or converse) for each fund and in total. There must be comparative figures from the previous period for the total of each category on the account.

There must be a statement of balances that indicates the opening and closing cash and bank balance. This may be at the foot of the receipts and payments accounts, forming effectively a single statement.

If there are material debtors or creditors, these must be estimated and disclosed in notes.

If the charity owns assets, these must be described in the notes with an estimate of their value. Any investments must be analysed in the same way as is required in the notes to a balance sheet.

Grants and donations made must be analysed in the same way as is required in the notes to a Statement of Financial Activities.

All matters required to be disclosed in the notes to a statement of financial activities must be disclosed in the notes to the receipts and payments account, if there is anything to disclose.

If there is more than one fund, the nature of the different funds, including their purposes and any restrictions on their use must be described.

Requirements for audit

An audit by a registered auditor (in accordance with auditing standards set by the Auditing Practices Board, or equivalent international standards) is required where total incoming resources exceed £250,000, or where either the charity's founding document or other statutory provision requires an audit.

The auditor shall report as to whether in his/her opinion the accounts have been properly prepared, and whether they give a true and fair view of the financial activities and the state of affairs at the end of the financial year, comply with these regulations, with any other relevant statute, with appropriate accounting standards, and with the appropriate statement of recommended practice.

The auditor should report as to whether the information in the Trustees Annual Report is consistent with the financial statements, and with any other information of which he/she has become aware in the performance of his/her functions.

The regulations will continue the detailed requirements regarding auditors contained in the current regulations.

In all cases where an audit is not required, there should be an independent examiner, all as per section 8 of the existing 1992 regulations. At present the 1985 Companies Act does not require accounts to be audited if income is below £90,000. However the regulations will require charitable companies to have their accounts independently examined if their annual income is below £250,000. The Charities Bill for England and Wales proposes that the audit threshold for charitable companies is raised from £250,000 to £500,000 we propose that for charitable companies registered with OSCR the limit of £250,000 set by the regulations applies.

Where a charity is dormant (as referred to above) there should be no need for an independent examination or audit unless the founding document requires it or it has assets of over £25,000.

Exemptions

In addition to the reduced requirements for small charities there are other charitable bodies that are required to follow another specialist SORP (eg RSLs Higher and Further education institutions). To avoid these bodies having to produce two different sets of accounts containing similar information we propose that RSLs and the Higher and Further education Institutions are exempted from the regulations in so far as they conflict with their specialist SORP. This would mean they would prepare an income and expenditure account instead of the statement of financial activities and allow them to file the same accounts with OSCR as they produce for other supervisory bodies. OSCR will have the power to authorise specific variations from the regulations where there is a conflicting requirement placed by statutory authority.

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