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PART ONE - PROPOSALS WE ARE MINDED TO TAKE FORWARD
47. Most of the proposals in this section are related to largely technical issues with the existing regulations, which need to be updated to allow charities to more readily meet their requirements. The amendments we are proposing are set out below in two groups. First are proposals for amendments where there is some potential for a policy impact - and we have thus asked for your views on each of these proposals individually. Second are a set of changes we consider to be either merely technical or largely administrative house-keeping so we have suggested you may want to consider these as a whole. Within each group, the proposals are set out in the same order as the regulations they would affect in the Charities Accounts (Scotland) Regulations 2006. These are the regulations referred to throughout this part.
Part 1A Proposed Amendments with potential Policy Impact
Regulation 7 Connected Charities
48. Regulation 7 allows connected charities to meet the requirements of the accounting regulations by submitting a single set of accounts as opposed to each of the connected charities sending their own individual accounts. Concerns have been expressed that the wording of the regulation requires each of the connected charities to prepare a full set of accounts, and that the only freedom the regulation allows is for these to be submitted within one cover. This is not the intent of the regulation, nor how it is generally understood. The intent is that a group of connected charities can meet the requirements set out in regulation 7 by providing a single Statement of Financial Activities , Balance Sheet, Annual Report and set of Notes to the Accounts containing the detail required for each of the connected charities.
49. To remove any uncertainty, we propose to amend Regulation 7 so that the phrase "accounts collated into a single document" (on each of its three occurrences) is replaced by "a single set of accounts".
Question 5 Do you agree that that replacing "accounts collated into a single document" with "a single set of accounts" would allow connected charities greater freedom to meet the requirements of the regulations in the most convenient fashion?
Regulation 10 Audit requirement for consolidated accounts
50. Regulation 6 provides that a charity should prepare consolidated accounts "where a charity with one or more subsidiary undertakings has a combined gross income after the removal of consolidated adjustments of £500,000 or more in a financial year." Regulation 8 sets out the accounting requirements for "a charity with a gross income of £100,000 or more in a financial year".
51. Under Regulation 10(1)(a), a charity "which has prepared a statement of account in accordance with regulation 8 and has a gross income in a financial year of £500,000 or more" must have its statement of account audited by "an auditor who is eligible to act as an auditor in terms of section 25 of the Companies Act 1989, or by an auditor appointed by the Accounts Commission for Scotland, or by the Auditor General for Scotland."
52. It is therefore possible to conceive circumstances in which consolidated accounts prepared under regulation 6 would not strictly be required by these regulations to be audited by a qualified auditor. This was not the intention of the original regulations - and indeed we are not aware of it having happened in practice. However, to remove any ambiguity, we propose to amend regulation 10 to insert a new sub-section 10(1a) after 10(1):
" (1A) This regulation also applies where regulation 6(1) requires a charity to prepare consolidated accounts."
Question 6 Do you agree that including a specific requirement for consolidated accounts to be audited will bring greater clarity?
Regulation 10 Definition of Asset Threshold
53. Regulation 10(1)(b) refers to a charity where "the aggregate value of its assets (before deduction of liabilities) in a financial year exceeds £2.8 million." This definition lacks clarity, in that read literally it could be taken to mean that the threshold could be broken at any single moment during the financial year, and might thus require charities to undertake additional work beyond that required for their annual accounts. Comparable and clearer definitions elsewhere are in the Companies Act 2006, which refers to "the aggregate of the amounts shown as assets in the company's balance sheet", and in the Charities Act 2006, which uses "at the end of the year the aggregate value of [the charity's] assets (before deduction of liabilities)."
We propose to amend Regulation 10(1)(b) to read: "prepared a statement of account in accordance with regulation 8 and the aggregate value of its assets (before deduction of liabilities) at the end of the financial year exceeds £2.8 million."
Question 7 Do you agree that clarifying the asset threshold relates to the assets at the end of the financial year will make the definition of the asset threshold easier to understand and assess?
Part 1B Proposed Technical and House-keeping Amendments
Regulation 1 The Definition of "gross income"
54. The definition of "gross income" in the existing regulations is "the total recorded income of the charity in all unrestricted and restricted funds but not including resources received as capital funds". The intent behind this definition seems both clear and correct - to catch all income except contributions to any permanent endowment. The definition, however, is regarded as unnecessarily complex to apply in practice, and as potentially requiring charities close to the threshold to prepare a figure not required for any other purpose. The equivalent regulations in England and Wales define gross income as "gross recorded income from all sources including special trusts". We understand that in assessing themselves against the thresholds, emerging practice for charities is to act as if the definition of gross income was simply "total receipts" (this is of course only a question for those charities who prepare receipts and payments accounts and wish to ensure they are still able to do so since they are close to the threshold).
55. The first question is whether or not the existing definition generates any real world problems. Our initial soundings suggest that it does. If so, one solution on which we would welcome views and that would preserve the intention behind the reference to capital funds (as we understand it) would be to count all "gross recorded income except that mandated by the donor to be for the purposes of forming all or part of a charity's permanent endowment". This may however not bring the clarity sought, since it brings with it the difficulty of defining "permanent endowment". Again, we would welcome any views on the ease of use of the definition of "permanent endowment funds" given in the current Regulations - "funds which the charity trustees are prohibited from spending as income."
56. If problems have been experienced with that definition, another way forward might be to amend the definition of "permanent endowment funds" - perhaps to read as follows:
"Permanent endowment funds are funds which the charity trustees are required permanently to maintain, whether or not the trustees can expend income generated from those funds."
57. We propose instead to change the definition of gross income to "total recorded income of the charity from all sources". We believe this will be simpler and easier for charities to understand and calculate. We accept that because the proposed new definition catches "resources received as capital funds" which are excluded from the current definition, there may be circumstances in which this change has the effect of lowering the thresholds. We also accept this would place a further burden on cross-border charities. Our initial conclusions lead us to believe the benefits outweigh these limited consequences. See also paragraph 71ff below for potential changes to the thresholds which would offset this and other effects.
Regulation 1 The Definition of "the SORP"
58. The existing regulations define "the SORP" as "the Statement of Recommended Practice for Accounting and Reporting by Charities, issued by the Charity Commissioners for England and Wales on 4 March 2005." Since the regulations were made in April 2006, a second edition of the statement has been issued, in summer 2008 - though this is still known as " SORP 2005" - that takes into account changes made by the Charities Act 2006, the Charities and Trustees Investment (Scotland) Act 2005 and applicable regulations. This new edition also includes a new introduction aimed at smaller charities, though the accounting requirements remain largely unchanged.
59. There are sound legal reasons why the regulations need to refer to specific documents, rather than simply to something like "the latest published SORP". In essence this is because the Parliament would not want to delegate its responsibility for determining the appropriate standards charities should follow to those responsible for producing future versions of the SORP, without itself having an opportunity to consider and reflect on any changes made in future issues. This principle, unfortunately, means the Regulations will need regular updating to reflect future SORP updates. Our current proposal is merely to amend the reference to the March 2005 SORP to refer to the 2008 edition.
Regulation 4 Requirement to keep accounting records
60. The current regulation requires charity trustees to ensure that accounting records are kept which are " sufficient to show and explain the transactions of the charity and …" Section 44(1)(a) of the Charities and Trustee Investment (Scotland) Act 2005 requires charities to "keep proper accounting records." Charitable companies are also bound by the requirements of company law - which requires them to maintain " reasonable" and " adequate" accounting records.
61. Legal advice is that there is no real difference between the meaning of the various terms, and we are not aware of this varied use of terminology causing significant real world problems for charities in meeting legislative requirements. That said, there are advantages to limiting the scope for any confusion, and it would be possible to introduce a limited degree of standardisation here. We would welcome any evidence that change here would be beneficial. We propose to replace "sufficient" with "adequate".
Regulation 6 "Consolidated Adjustments"
62. Regulation 6(1) refers to "the removal of consolidated adjustments" where what is meant is " consolidation adjustments" - a confusion arising from the correct use of "consolidated" in the rest of regulation 6. Whilst we are not aware of any practical difficulties from this error, this seems a good opportunity to correct it.
63. We propose to amend Regulation 6(1) to replace "consolidated adjustments" with "consolidation adjustments".
Regulation 12 Audit Exemption for Charities which are companies
64. Regulation 12 deals with charities which are both companies and have prepared an accountant's report in terms of sections 249A, 249B, 249C and 249D of the Companies Act 1985. The Companies Act 2006 repealed section 249 of the 1985 Act, and removed the special rules for the audit of the accounts of small charitable companies - with the intent of ensuring that small charitable companies would, for audit purposes, be required to follow the requirements of charity law rather than company law. There will be no Scottish charities to whom Regulation 12 applies by 31st December 2009. At this point Regulation 12 will become redundant, and should thus be removed as part of the regular maintenance of the statute book. We will include a "saving provision" to allow charitable companies to continue to rely on it for the preparation of accounts relating to periods before 1 April 2010.
65. We propose to revoke Regulation 12 with effect from 1 st April 2010.
Regulation 14 References to the SORP for special case charities
66. Regulation 14(3)(a) refers to the "Statement of Recommended Practice: Accounting for Further and Higher Education" issued by the Further and Higher Education SORP Board on the 24 July 2003. Regulation 14(3)(b) refers to the "Statement of Recommended Practice: Accounting by Registered Social Landlords" issued by the board of the National Housing Association, the Welsh Federation of Housing Associations and the Scottish Federation of Housing Associations on 12 May 2005.
67. In both cases, more recent versions of the respective SORPs have since been issued. We propose to amend Regulation 14 to refer to the current versions; that is, to "Statement of Recommended Practice: Accounting for Further and Higher Education" issued by Universities UK on 26 th October 2007, and "Statement of Recommended Practice ( SORP): Accounting for Registered Social Landlords 2008" issued on 22 January 2008 by the National Housing Federation, Community Housing Cymru and the Scottish Federation of Housing Associations.
Please consider all the proposed changes set out in the section when considering the following questions:
Question 8 Do you agree that the proposed amendments set out in part 1B above are both helpful in either clarifying or updating the existing regulations? Do you agree that they will have only limited real world effect?
Question 9 Are there other similar changes we should make, or are you aware of alternative approaches to tackling any of the issues raised in Part 1B?
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