For Trustees' Week 2024, one of our charity specialists, Director Rory McCall, is supporting the theme of recruitment and retention by sharing knowledge with trustees.
Here Rory looks at going concern.
As many charities continue to face financial challenges in the aftermath of the pandemic, as well as ever-increasing competition for the limited funding available from funding bodies and the public, the importance of a robust going concern assessment has never been more important.
Going concern is a term for a company or charity that is financially stable enough to meet its obligations and continue its business for the foreseeable future, and the trustees have a duty to make a formal assessment on this.
Whilst they have a continuing duty to have regular oversight of the financial position of the charity, for the purposes of its annual accounts the going concern assessment should be made formally for a period of 12 months from the date on which it approves the accounts.
The approach to assessing going concern is likely to vary depending on the size of the charity and the nature of its operations. There’s no exact science to how the assessment should be approached either and it’s likely that the trustees will have to make some assumptions regarding future activity throughout the process.
The ideal starting point for the assessment is likely to be financial projections, including budgets, forecasts and cash flows. Trustees should consider whether the budgets presented to them are a realistic representation of income and expenditure and whether they’re likely to be achievable.
The interaction between budgets and cash flows is always likely to be important, as a budget surplus may not always necessarily lead to a cash surplus, so the timing of cash receipts will play an important role in the assessment. Any potential cash shortfalls should be considered in detail, and realistic mitigating actions may need to be considered if the cash flow forecast indicates there is not enough headroom.
Scenario planning and sensitivity analysis are always likely to be valuable tools too. A range of financial scenarios from most to least optimistic should be developed, which will allow the charity to understand the risks it may be facing and may aid in developing mitigative actions.
The Trustees may want to consider other factors which could directly impact on budgets, such as a reduction in demand for services, legal or regulatory non-compliance, relationships with bankers and funders, and political & monetary policy changes.
Information presented to the Trustees should be robustly challenged with management where necessary to ensure a reliable assessment can be made.
Following the assessment, if the trustees consider that there is uncertainty regarding the appropriateness of the going concern basis then they should make relevant disclosures in the accounts to explain the situation and the nature of the uncertainties. These can be included in the notes to the accounts as well as in the Trustees Report.
The auditor then has their own responsibility to assess going concern and may ask some challenging questions. If all necessary steps have already been taken by the trustees then the auditor just needs to review their assessment, including how they have challenged the projections, and will conclude on whether they believe the trustees’ assessment is correct in the audit report.
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