Key questions directors need to ask
When completing the year-end financials, below are key questions that need to be top-of-mind for directors and the person(s) responsible for the charity or not-for-profit.
- What impact does COVID-19 have on our requirement to disclose subsequent events?
- What needs to be in place to support the statement that the entity can pay its debts as and when they fall due? This will need to be regularly reviewed and considered on an ongoing basis.
- What will be the impact on the organisation if we cannot complete the audit?
- Will I still be able to hold an AGM? If so, are there additional requirements or certain precautions that must be taken?
Subsequent event reporting
The question, “how is COVID-19 currently impacting or will impact our organisation?” needs to be front and centre as COVID-19 will in most cases be a subsequent event that will be required to be disclosed in the financial report.
Generally speaking, COVID-19 will be considered a non-adjusting event for financial reports for the year ended 31 December 2019. This means that there is no adjustment to the financial numbers at year-end, but rather a description in words of the actual and or expected impact of COVID-19 on the charity or not-for-profit, including an estimate of the financial effect of COVID-19. For some, this impact may not yet be known, and for others the impact is obvious. Therefore, the length and depth of disclosure will be individual to each organisation. One financial statement area where the impact is likely to be known is financial investments.
There may be some circumstances where there will be an adjusting event. We expect that an adjusting event will only occur for COVID-19 when the responsible person(s) realise that they cannot prepare the organisation’s financial statements on a going concern basis. This means that there is the intention - or no alternative other than – to liquidate the entity or cease trading.
How to assess the financial impact and ability to be a going concern
This brings us to the important step of determining the key things that must be in place in order for the responsible person(s) to sign off on the declarations of solvency. In our other article here, we have highlighted some critical considerations concerning solvency and financial stability concerning COVID-19.
Some additional key activities organisations can undertake to support decision-making include:
- Reforecasting budgets and cashflows, including having a worst-case scenario forecast.
- Adopting a conservative approach. For charities that experienced the global financial crisis of 2008/9, historical references may be useful.
- Communicate with key donors and partners to better understand the organisations’ ability to maintain donations and support.
- Assess whether projects can be deferred or ceased and how this may impact funding.
- Determine if the organisation can reduce its activities ethically and sustainably, whilst maintaining vital services. The ability to effectively prioritise the most valuable services will be critical.
- Ensure the organisation can conduct its services in a safe manner that will not create health issues. A failure to do so may result in substantial legal claims and significant reputational damage.
We strongly recommend that management and responsible persons complete the detailed review and bring in appropriate expertise if they are not available inhouse.
If the 31 December 2019 financial report is being prepared on a going concern basis, consideration will need to be given to the disclosure required in the financial report explaining why the going concern basis of preparation is appropriate.
For most organisations, the impact of COVID-19 is likely to cause some users of the financial report to ask questions about the ability of the entity to continue as a going concern. It is arguable, therefore, that there are uncertainties that cast doubt on an entities ability to continue as a going concern. These uncertainties are required to be disclosed in the financial report, along with the reasons why the entity is considered to be a going concern.
What if the audit is unable to be completed?
There is a requirement for charities with revenue of over $250,000 to have a review or an audit. In the current circumstances, the audit or review may be required to be completed without on-site visits. Where possible the use of technology should be used to complete the work. Documents can be scanned electronically and shared with the auditors. Discussions can be held via telephone and video mediums. This will require adjustment but should allow the completion of audits and reviews. If your entity is not set up for remote work, we recommend that you contact our technology advisory team who can help you to transition onto online technology for accounting and management reporting.
The good news is that the ACNC has now advised that entities with an AIS due date between 12 March 2020 and 30 August 2020, will now have an extension until 31 August 2020.
Considerations for holding an Annual General Meeting (AGM)
As at 23 March 2020, the Australian Charities and Not-for-profits Commission (ACNC) recognises that the government has stated public meetings are unable to be held. They recommend that not-for-profits review their constitution to see if AGM’s can be held using technology. If technology is not permitted in the constitution, then discussions will need to be had with the ACNC, unless an extension is granted in future.
When planning to hold a meeting via the use of technology the ACNC has reminded charities to:
- Ensure that all attendees can easily connect to meetings and can properly communicate during discussions.
- Ensure that all attendees can easily access key documents, including meeting agendas and minutes.
Some additional considerations
Finally, while this article focuses on concerns regarding 31 December 2019 year-end reporting, it’s also important that charities and not-for-profits review and reflect on their activities when it comes to revenue generation.
While the Australian public is very generous – as shown by the overwhelming support during the bushfire crisis - there is only so much that people can donate. As COVID-19 continues to have a substantial economic impact on individuals, families and small and large businesses donations will likely decrease. Other streams of donation revenue such as grants, corporate sponsorships, charity stores and significant donors may also be affected.
Also, the current restrictions on gatherings and physical distancing requirements have not only resulted in the cancellation of important fundraising events (with charities left to bear the event costs) but also has significant impacts on charities and not-for-profits who are heavily dependent on volunteers to carry out their activities.
As such, charities and not-for-profits must consider all of these issues and the extent to which they will impact the organisation. It’s also important that they seek professional advice early, especially if there are concerns that the charity may experience financial difficulty as a result of COVID-19.
For more information, please contact BDO’s Anthony Whyte, National Leader, Not-For-Profit
Partner, Audit & Assurance or Leah Russell, Partner, Audit & Assurance.