The Trustees’ Report: tips and key points when drafting, part two

My first blog on this subject covered general pointers on the drafting of the annual Trustees’ Report for the statutory financial statements. For this second instalment, I will go into some of the specific requirements of the Financial Review section of the Trustees’ Report for charities with more than £500,000 of income that are often overlooked, or treated with too light a touch.

(It is also worth noting that these requirements are “encouraged” (ie good practice) for smaller charities, where relevant.)

Financial effect of significant events

Where there has been a large impact on the financials – such as a big new source of grant income, loss of major funder, cessation of a large project, or significant unanticipated liability arising – it is important to set out how this fits into the context of the overall figures.

This contextualising can help to explain the charity’s financial performance, which helps particularly with prior year comparisons and understanding plans for the future.

Defined benefit pension schemes

As employers are only too well aware, fluctuations in valuations of assets and liabilities of such schemes can have major impacts on reserves. Where significant, you must explain the impacts with reference to defined benefit pensions schemes.

While the effect on net assets can appear severe, it is important that it is put into context. The timing of meeting financial commitments, if not immediate, should also be made clear.

Principal risks and uncertainties

This was one of the more controversial requirements when introduced by SORP FRS102, and some charities still struggle with it.

It is just the main risks the charity faces. I often suggest people note the ones most likely to keep the trustees awake at night. And don’t forget to briefly set out how these risks will be mitigated against; highlighting a problem and omitting how it is to be managed does not inspire confidence!

‘Free’ Reserves?

Partly because of recent high-profile failures, and ever more important as the effects of austerity feed through into the sector, there has been increasing focus on how charities report on their reserves.

While most readers of accounts are familiar with the concept of different types of reserves, and the importance of the ‘unrestricted’ form in terms of financial sustainability and going concern, the components of these reserves need to be understood clearly by readers of accounts and trustees alike. A high level of unrestricted funds may appear positive, but if it is mostly made up of fixed assets that cannot be readily liquidated (especially if the assets are vital to charitable activities) it raises questions about availability of ‘free’ reserves to carry out day-to-day core activity. For this reason, it is important to be clear about unrestricted reserves excluding fixed assets, and even designated funds and commitments where applicable.

There may even be benefits to more detailed disclosure in this area. Some funders are reluctant to make awards to charities with high levels of reserves, and may be more accommodating if they can see that, actually, the reserves are tied up in assets critical to meeting charitable objectives effectively.

The above points will hopefully provide some help when the year-end reporting cycle looms over the horizon, and also align with some of the financial and governance considerations already well understood by senior management and the trustees.

If you have a query about your Trustees’ Report, please contact Euan at euan.morrison@chiene.co.uk or call 0131 558 5800.

Some more specific guidance on Trustees’ Reports and reserves is at: