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Article:

Impact of COVID-19 on the Charitable Sector

15 May 2020

Charities operate in a broad spectrum of areas, including health, education, social services, religious activities, culture and the arts, and more. According to the 2019 Charities Services Annual Report, New Zealand has 27,146 registered charities. This means we have one of the highest per capita number of charities in the world, with one charity for every 190 people. Charities, therefore, are a significant part of the everyday lives of New Zealanders.  

While charities operate differently and have unique revenue streams, charities are fundamentally businesses. As with most businesses, the charitable sector has been significantly impacted by the COVID-19 pandemic and its effects on the economy. We explore those impacts below and discuss the future of the charitable sector post-pandemic.  

 

Impacts on Revenue and Expenses

The impact of COVID-19 on charities is not different from other sectors of the New Zealand economy. Those impacted include employees, volunteers, recipients of the charities’ good work, and many other stakeholders. Operationally, there are some charities that are considered an essential service, and these have continued to operate in their core service area. However, many have had to shut down all or parts of their activities and operations during Alert Levels 4 & 3. Hospices, for example, have no trading revenue from their shops.  

The reduction in revenues is marked. Charities have always had an interesting conundrum regarding the maintenance of reserves. The question of how much is enough, but not too much, has been hotly debated. Have too much and the public will think the charity doesn’t need support; have too little and in tough times, as now, the charity faces the very real danger of going out of business.  

For the most part, the majority of charities do not have huge reserves to fall back on when times do get tough. Most charities are reliant on their ongoing revenue streams, and this is likely to be increasingly difficult due to the pandemic and its effects on the economy and consumer behaviour. As with any other business, cash is king and maintaining positive cashflows will be a challenge. 

Affected revenue sources for charities include: 

  • Donations, grants and other fundraising 
  • Fees and subscriptions 
  • Trading revenue from sale of goods and services 
  • Interest and dividends 

These are impacted given: 

  • Gaming trust proceeds have diminished as pubs and bars are closed. 
  • Philanthropic organisations have had reductions in their revenues and have less to pass on to charities. 
  • The public may tighten their belts and donations are likely to reduce. 
  • Fundraising events cannot happen. 
  • Trading operations such as op shops and cultural and artistic events are closed down. 
  • Returns on investment have taken a hit, albeit that this may be temporary. Interest revenues are at all-time lows and other equity-type investments have been rocked with volatile share market fluctuations.  

So far, we are seeing that central and local government and related agencies are providing commitments that their funding will continue at existing levels, which is a huge relief to those charities reliant on them. The Government also introduced the Employer Wage Subsidy which charities could apply for, and this has certainly helped to alleviate some of the pain, at least temporarily. Further help, if any, for the charitable sector from the government may be required, but what this will look like is not clear yet.  

As with any other business, charities will need to look very carefully at their cost structures and eliminate non-essential and discretionary expenditure, rent reductions may be negotiated, and as salaries are a significant cost for many, a cold hard look at ways to reduce employment costs will be needed. This will be an area of particular angst for this sector due to the nature of the way they are staffed, and given that many people work in this sector not only for pecuniary advantage.  

 

Financial Reporting Impact

In addition to the significant operational challenges facing management and Boards as mentioned above, there are some financial reporting implications to be considered: 

  • Considerations regarding the valuation of investment portfolios. 
  • Is the entity a going concern? 
  • Will charities be able to meet their reporting deadlines? 

Equity, bond and forex markets are volatile, and interest rates are at all-time lows. In addition, putting a value on real estate investments is a particularly onerous task in the current environment. Charities with asset classes such as these will need to enlist the help of independent experts to help them land on the value of these assets. But no matter what the value attributed at a point in time, there may still be issues realising the assets for the amount valued if such assets need to be off-loaded at a particular point in time when markets are at a low point, or at fire-sale prices if cash is required urgently in order for the entity to meet current obligations.  

The impact of much of the above from an accounting perspective is determining if a charity is a “going concern” (that is, able to meet its obligations for a period of 12 months from the date of signing its financial statement). An example is a charity with a 31 December 2019 balance date. If they plan to approve and sign their financial statements on 15 May 2020, they need to be able to confirm that they will be able to meet their obligations for the period to 15 May 2021.  

This provides an interesting challenge for financial forecasting on revenues (which may be reducing) and expenses (many of which may be relatively fixed) over that period, especially given the uncertainty we have regarding what life post-lockdown at the various alert levels will look like. Judgement will be required by management and Boards.  

As auditors, we will need to get our heads around these forecasts and estimates and obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements. This is going to be harder than some people may imagine. 

The financial reporting deadline for charities with Charities Services is 6 months after balance date. There is some good news here. Charities Services (as has the Companies Office) indicated they will be flexible in relation to reporting deadlines. Charities Services has stated that they will not take compliance action if there are delays in reporting as a result of COVID-19. Charities should request an extension if required. The flexible approach related to deadlines is welcome, especially for the majority of entities that cannot access their premises and/or accounting systems and records during the lockdown.  

 

The post-pandemic outlook

Each charity is different and will have a different road to recovery. There will be new opportunities arising for those that are nimble and adaptive, and making every dollar count. Collaboration, rationalisation and restructuring within the sector could provide very real opportunities for efficiencies in operations, processes and the use of assets. Nevertheless, many charities will struggle and may not come through these times. The negative impact on the lives of New Zealanders from this cannot currently be determined. But charities have been resilient in the past and the great majority will survive, dust themselves off and carry on performing their fantastic work. 

We talked to Barbara Williams, Chief Executive Officer for Hospice West Auckland, to gain insight as to how their organisation is coping with the changes. According to Williams, a key challenge moving forward lies in “adapting to a new way of thinking, being and delivering services.” The organisation is currently focusing on “bringing people on the new journey ensuring excellent change management initiatives are in place and utilised to help people learn and grow, [and making] sure our services are relevant and inclusive moving forward.” 

When asked how the charity will manage to maintain or at least minimise the likely downturn in grants, donations and fundraising and trading (shop) income in the foreseeable future, Williams said, “[This] all begins with a mindset that needs to be open, responsive and adaptable to what might be now, the opportunities for us now, our organisation’s new normal. How can we as an organisation adapt to this significant change, what might that mean for us as a service, an employer, and as a custodian of community and government funding?  

“It begins for me with looking internally to cost efficiencies, i.e. are we over/underspending in some areas, what might be holding us back from being able to do more with less? How can we remain true to our values and deliver services in a way that might look and feel different? What are the true collaborations that we can reach out and work through to improve services and find efficiencies?  

“Asking lots and lots of questions of ourselves, our donors, our community and our funders [is key]. [There is plenty of] talking and relationship building in new and uncharted arenas.” 

Williams also believes that the pandemic has presented a silver lining, all things considered. 

“[There is now] greater insight into what holds or prevents new initiatives, how when people have to change, they can, [and] new and exciting opportunities to be a more relevant and a much-needed service provider. Our strong belief in community services continues to be reinforced and needed.” 

 

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