Treasurers > Reporting and Accounting > Financial Statements

Financial Statements

Fuller guidance is available in the books "The Charities Act and the PCC" available from Church House Publishing. This page lists some of the principles for preparing Financial Statements on the Receipts and Payments basis. 

General Principles

Disclosure of accounting basis

The R & P account for the year is a factual summary of money received and paid during the financial year. A Statement of Assets and Liabilities is a list of significant possessions and outstanding financial obligations as at the end of the year. Because they both differ from other forms of annual financial statements in important ways (for example by not including 'prepayments' and 'accruals', and not recording the increase or decrease in total funds caused by valuations of assets), they should include a clear statement that they have been prepared on the 'R & P basis', but this could be included in the notes.

Accounting principles

The fundamental accounting principle that must be applied in the preparation of financial statements on the R & P basis concerns the issue of consistency.  This means that items of the same kind are shown in the same way and the year-to-year treatment is the same.

However, the materiality principle should also be considered in the preparation of such financial statements. Only items that are 'material' to the view given should be shown by the PCC separately in its financial statements or described in its annual report. An item is material if, taking all the circumstances into account, its inclusion (or exclusion) would be likely to influence the reader in relation to the report and financial statements as a whole or in relation to the context of which the item forms part. The PCC is responsible for deciding whether an item is or is not material. In cases of doubt an item should be treated as material. 

Accounting for different types of fund

Where a PCC holds different types of fund (restricted, unrestricted, endowment) they must be distinguished either by preparing a separate R & P account for each fund or by grouping the funds in a combined account and sub-analysing them by way of a note. Similarly the fund group to which each asset and liability belongs should be shown in the year-end Statement of Assets and Liabilities. 

Accounts may be prepared in a columnar format in order to disclose each fund group separately. (See the alternative option shown in the example financial statements.)  If this approach is adopted a comparative column for the previous year does not have to show the split of all funds and can just be the total of all restricted and unrestricted fund receipts and payments.

The Receipts & Payments account

The R & P Account is a simple statement, which summarises actual payments and receipts in the period. A receipt should be taken into account when cash or cheques are physically received by the PCC in the period (including any cash or cheques not cleared through the bank account until after period end). Payments should be taken into account when cash is physically handed over by the PCC or when a cheque is written and released (including cheques issued before the end of the period, which were not paid by the bank till after the end of the period). Transfers into and out of deposit accounts requiring notice for withdrawal and which are shown separately from cash and bank balances in the statement of assets and liabilities should also be accounted for.

Payments made after the end of the accounting period, that relate to the period should not be included but shown as liabilities on the Statement of Assets and Liabilities.  Similarly, funds received after the period end, which relate to the period should not be included but shown as other monetary assets on the Statement of Assets and Liabilities.

There are no regulations as to how receipts and payments should be analysed in the R & P account, but it is recommended that the headings required in Accrual accounts be adopted - see the detailed analysis of R & P headings at the end of this chapter.

The account should show the bank and cash balances brought forward at the beginning of the year, the amounts received during the year and the payments made during the year (as detailed above), and the resultant bank and cash balances carried forward at the end of the year. These balances should then be the same as those amounts shown as cash and bank balances in the Statement of Assets and Liabilities.

Receipts

All amounts received of the same type should be added together and the totals shown under appropriate headings in the financial statements. It is recommended that the corresponding figures for the previous financial year should be given for each item in the list of receipts, for comparison.

Planned giving, collections, donations, gifts, legacies and grants

All cash receipts from planned giving, collections, donations, gifts, legacies, grants and other voluntary sources should be included on the date the cash is actually received.

A donation, gift, legacy or other receipt which is received in the form of physical assets other than cash cannot be included until the PCC converts it into cash by selling it. In that event, the cash receipt should be entered in the accounts at the time the property is sold and the money received.

If the asset has not been sold by the end of the year and still belongs to the PCC, it should be included in the Statement of Assets and Liabilities with a note of the fund of which it forms part. If the asset is sold for cash in the following year, the cash receipt should be included in that following year's R & P account.

Sometimes a PCC receives a donation or gift in a form other than cash, which (rather than being sold) is distributed in the form in which it was received. Gifts of clothing, for example, may be immediately passed on to beneficiaries as a means of charitable provision. In these circumstances the PCC neither receives nor pays out cash, so nothing is able to be shown in the R & P account. If the gift is material, its receipt and subsequent distribution should be described in the annual report.

Trading receipts and payments

Any receipts from trading should be shown gross in the R & P account. It is not acceptable simply to show the profit received from the trading. This means, for example, that the total proceeds of the sale of parish magazines must be shown as receipts, and the costs of printing the magazine should be shown as payments. In the case of a fund-raising event, the proceeds of the event should be shown as receipts, with the costs of organising the event shown as payments. If the event has been organised by a separately accountable body outside the PCC and the proceeds donated to the Church, they should be shown net as a donation.

This treatment applies to any form of trading, whether directly connected with the PCC's purposes (the sale of religious books on the church bookstall, for instance) or whether carried out purely in order to raise funds. It applies whether the trading is regular or permanent and where it is occasional. The only exception to this is where the event or activity concerned is small-scale and so the receipts and payments involved are not material in the context of the overall transactions of the PCC.

Examples of trading carried out by PCCs include fetes, bazaars, missionary lunches, garden parties and other fund raising events, Christmas card sales.

Recovery of tax

The PCC will receive Gift Aid donations where the tax is recovered from HMRC separately from the donations. Tax recovered in this way should be shown as a separate receipt from the income on which the tax was recovered. If a PCC receives interest or other income from investments net of tax (that is, tax has been deducted from the income before it was passed to the PCC), the PCC will have to recover the tax separately later.

If the PCC is entitled to recover tax and has not received it before its financial year-end, it cannot yet be shown as a receipt in the R & P account. Instead, the amount of tax reclaimable should be noted as an asset in the Statement of Assets and Liabilities with the explanation that it has not yet been received. When the tax refund is received it should then be shown in the R & P account.

Many PCCs make a single tax claim in relation to the tax year (April to March), but more frequent claims are encouraged by the Inland Revenue. If there are significant arrears in tax recovered, reference should be made to the future recovery of tax in the Statement of Assets and liabilities and in the PCC's annual report since the PCC has a responsibility to recover the tax on tax-efficient contributions.

Receipts from charitable activities

This should include any receipts that the PCC has generated from its work including PCC fees for services (weddings and funerals), letting of church property for church purposes, membership subscriptions from various groups (eg youth, mums and toddlers), bookstall and magazine receipts (but any advertising revenue may be best shown as donations).

Investment Receipts

This will include any interest and dividends received from investments and the letting of any investment property.

Other receipts

Other receipts will include any monies received from insurance claims made by the PCC. These should be included in the R & P account when received. If at 31 December insurers have agreed the claim and the amount to be paid, this should be shown in the Statement of Assets and Liabilities as a debtor under the monetary assets category. It also includes money from the sale of investment assets or fixed assets. Neither of these will normally count towards gross income

Payments

The most critical issue is to ensure that payments are properly classified into the recommended categories shown at the end of this chapter. It is, therefore, important that the PCC's accounting records are set up in a manner, which enables the easy analysis of payments in these classifications. The corresponding figures for the previous financial year should be given for each total, for comparison.

Where the PCC is aware of payments that are due to be paid at the year end, such as outstanding diocesan parish share or independent examiner's fees, these should not be recorded in the R & P account until they are paid. Instead they should be noted as monetary liabilities in the Statement of Assets and Liabilities.

The Statement of Assets and Liabilities

The Statement should provide sufficient detail to give the readers of the financial statements a broad understanding of the type of assets controlled by the PCC and any material liabilities that need to be met from the funds. There is no need to list all individual assets (e.g. each chair and table or each individual holding for listed investments) but the list should be sufficient to identify the categories of asset held by the PCC if they are material. No valuation of assets held is required, unless a valuation is essential to a meaningful description of the asset. For example, in the case of cash and other monetary assets such as building society deposits, the cash value would be given. The PCC may add values if they wish and if they do they should take a reasonable approach to valuation. Possible approaches could be assets' cost, insurance value or market value (e.g. for listed shares). No professional valuations are required but if one is available (perhaps as a result of an insurance survey) then this may be given.

A note should be added to each item to show the fund to which the item belongs.

Cash and bank balances and deposits

These are the cash resources of the PCC, which are immediately available to it, and they should be listed as the first item in the Statement of Assets and Liabilities. They should be analysed to show the type of fund to which they relate. The cash and bank balances total should be the same as the balances carried forward shown by the R & P Account. Deposits that must be left for a fixed period, should not be included here since the PCC does not have immediate access to the cash, but they should be included in the list of investments described in para 5.39 below.

Other monetary assets

All money owed to the PCC should be listed under this heading. This includes sums owed to the PCC as repayments (capital and interest) for loans made by it and tax recovery claims not yet received (see paras 5.26 to 5.28). Small sums of the same sort (for instance, parish magazine receipts due but not received) should be added together as one item.

Occasionally PCCs are told that they have been left something in a Will, but that it will be some time before they actually receive the cash or property comprising the legacy. If, at the end of the financial year, the PCC has not yet received the legacy but formal notification of the entitlement and amount has been received, particulars of it should be noted in the Statement of Assets and Liabilities.

Investment assets

Occasionally a PCC may hold an asset as an investment either to produce income or for capital growth or both. If so, it should be shown as an investment asset. This includes stocks and shares, cash deposits which must be left for a fixed term, common investment fund holdings, land with or without buildings, and interests in land such as a rent charge. If the PCC has set up a non-charitable trading company, any shares, which the PCC owns in that company should also be included.

The list should show to which of the PCC's restricted or unrestricted funds the asset belongs. Its value (particularly market value of quoted securities) if known at the year-end might be shown as a means of identifying the materiality of the asset, but there is no need to provide valuations in a Statement of Assets and Liabilities, although it should be adequately described. The PCC needs to be aware of the approximate market value of any substantial investment assets to ensure it discharges its trustee responsibilities.

Where the investment asset is land (with or without buildings) the note should include the address and a brief description of the property (for example, 'subject to tenancy and currently used for short term letting'). It would also be helpful briefly to describe the age and condition of any buildings (for example, 'a three storey terraced house built around 1880 and in good structural and decorative repair').

Fixed assets used by the PCC

Assets held by the PCC mainly for its own use (rather than as investments) should be listed. Apart from church furnishings, which can be listed simply as 'inventory assets vested in the churchwardens on special trust', the most common assets of this sort will be land and buildings, but the category may also include motor vehicles and office equipment (such as a computer) used for parish administration.

Assets of this sort should be included in the list whether they are owned outright or on hire-purchase terms (the loan should be noted in liabilities).

Consecrated property is excluded completely from all accountability under the Charities Act 1993 by virtue of Section 96(2)(a) of the Act. Similarly, as benefice property, the parsonage house is excluded from accountability by section 96(2)(a), and none of these assets needs to be mentioned in the financial statements.

Liabilities

A liability is a debt or obligation owed by the PCC, or a sum of money, which the PCC is committed to paying at some time after the end of the present financial year. However, a commitment to pay a sum of money in future in return for a future benefit should not be treated as a liability. For example, the obligation to pay for goods already supplied to the PCC is a liability until the obligation is settled. But the obligation to make future payments (for example rental payments under the terms of a lease of the PCC's photocopier) should not be included as present liabilities, since full value in return for the future payments will be received in the same future accounting periods. Instead, the extent of the obligation should be noted (e.g. 'the PCC is committed to paying rent of £500 p.a. for a further twelve months under the existing hire agreement for the photocopier in the parish office').

Liabilities of different types should be listed separately, though several liabilities of the same type (for instance, small amounts owing to various suppliers) may be added together and shown as a single figure. An example of this is where bills may be outstanding for the gas and electrical supplies to the PCC.

Examples of liabilities include any loans or overdrafts advanced to the PCC, any arrears of diocesan quota or parish share, monies held on behalf of third parties (for example, where a collection has been made for a missionary society) and creditors for goods and services. 

Notes to the Financial Statements

Notes to the financial statements should be used to add further explanation or analysis where required. It is preferable to summarise items in the R & P Account and the Statements of Assets and Liabilities in order that they may show the overall position of the PCC more clearly and easily. If too much detail is included they become cluttered and difficult to read; such detail should be dealt with in the notes.

As detailed above the accounting basis and policies must be detailed and it is usual to do this in the first notes to the financial statements.

Notes to receipts and payments accounts are seldom necessary, although if notes would help the reader to understand the accounts better, they should be added. Examples of notes that may be included are:

• information about significant non-monetary resources, for example donated goods and services;
• a brief note on transactions with related parties and trustees;
• details of any remuneration or expenses paid to any trustee or related party; and § details of the movement on particular restricted funds (where this may be useful to donors who stipulated how money was to be spent).

These matters may alternatively be included in the Trustees' Annual Report if separate notes to the accounts are not prepared.