Financial Review

Financial and accounting policies

Basis of preparation

The accounts have been prepared for the first time following International Financial Reporting Standards (IFRS) in place of the UK charity Statement of Recommended Practice (SORP) which ActionAid has previously applied. As the governance of ActionAid International has become more international, the trustees have decided that the use of internationally recognised accounting practices is more appropriate to its stakeholders. Whilst the adoption of IFRS has resulted in a number of presentational amendments and changes in terminology, the overall amounts presented for prior periods are unaffected. Amounts for prior periods have been restated for consistency.

The financial statements have been prepared in accordance with IFRS and under the historical cost accounting rules, as modified for the revaluation of investments. Certain additional disclosures, including the analysis of income, expenditure and closing reserves by fund category, and the separation of liquid funds and treasury reserves and funds invested in property, plant and equipment, have been made in line with internationally accepted accounting practices for not-for-profit organisations.

The accounting policies adopted are consistent with those of the previous financial year and there are no differences between the opening balance sheet at the transition date of 1 January 2005 prepared under IFRS and that prepared under SORP. However, the following clarifications are made:

• As permitted by IFRS 1 paragraph 22, the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to IFRS.
• Investments at the transition date and subsequently are designated as “fair value through profit and loss”, as permitted by IAS 39.  All gains and losses, including those arising on revaluation, are recognised in the income statement.

Fund accounting

All funds raised by the group are used in the furtherance of its objects, including the net profits from trading activities.

Restricted funds are a significant proportion of the funds and are raised on the basis of an agreement or understanding with the donors that their use will be restricted to certain specified projects, activities or areas of operation. These restricted funds are accounted for separately.

The remainder of the funds raised, including any element of a restricted donation agreed by the donor to be available for use on administrative or other matters, is unrestricted and may be used for any of the group’s general purposes.

Designated funds comprise unrestricted funds that have been set aside by the trustees for specific future purposes. The group also identifies separately those funds invested in property, plant and equipment, representing the book value of the property, plant and equipment that have been purchased for use by the group out of restricted and unrestricted funds. Presentation of these funds separately enables the group to better assess the liquid resources available to support future expenditure.

Committed giving

The group’s income consists principally of donations from supporters of a fixed amount usually paid monthly.  The majority of supporters are linked directly to a particular country programme, or specifically to a child in that country. Supporters receive periodic communication detailing how their donations have been used in accordance with their wishes. Members of ActionAid International aim to make their income more flexible by encouraging supporters to transfer from child sponsorship to less restricted forms of giving over time.

The accounting for child sponsorship and other committed giving income is in each case in accordance with the information provided to supporters. The majority of the income is allocated according to the primary focus or purpose of the donation. A percentage, usually 20%, is treated as unrestricted funds, as is tax recovered from local revenue authorities. There are also arrangements for a small proportion of these donations to be used for broader charitable work, usually in the country or region for which the donation is principally intended and to support the generation of income within the country programmes.

Accounting for income

Income is shown gross, before any deduction of associated costs.

Income is accounted for when receivable. It is deemed to be receivable either when actually received, when there is a contract for its receipt, and the relevant entity considers that any outstanding conditions under the contract have been met, or when the entity has become entitled to a future payment and its amount can be ascertained with reasonable certainty. Funds received in one accounting period that are specifically restricted to work to be carried out in subsequent accounting periods are not accounted for as income but are carried forward in payables.

Donations in kind are credited to income at an estimate of the gross value of the gift to ActionAid, which will usually be a market price valuation.

Interest earned from the temporary investment of funds restricted to emergency work is credited to emergency funds. Interest and investment income earned on committed giving monies held in reserve are credited to unrestricted funds in accordance with the information provided to supporters. Interest earned on other restricted fund balances is also credited to unrestricted funds to recognise the fact that in many cases the costs of a project are incurred before the relevant restricted income is received.

Expenditure

Expenditure is accounted for on an accruals basis.

Programme activities: The long-term development and emergency relief and rehabilitation work in country programmes, and the policy influencing and campaigning work carried out there and internationally are managed either by the group’s own staff in the country concerned or in collaboration with independent organisations, usually locally registered, which are partly or wholly funded by the group. Grants made to such other organisations are separately identified in the income statement.

Fundraising: The costs of generating funds represent expenditure incurred on raising funds from committed giving supporters, other members of the public, companies, trusts, official bodies and other donors. They include the costs of maintaining child sponsorship and other supporter links and of reporting to supporters and other donors on the projects to which they contribute. They also include investment management costs.

Support: The costs represent expenditure incurred on providing internal services which enable the group to fulfil its accountability requirements and which enhance the efficiency and effectiveness of the group and its programme activities as a whole. 

Governance: The costs included in this category include the costs of board meetings and other governance processes for each entity, and the costs of internal and external audit.

All costs include irrecoverable taxes.

Property, plant and equipment and depreciation

Property, plant and equipment costing more than the equivalent of £5,000, including any incidental expenses of acquisition, are initially capitalised at cost.

Depreciation is calculated on a straight line basis and taken to the income statement over the life of the asset.  Depreciation is calculated for the following categories of fixed assets as follows:

Depreciation on motor vehicles held in Europe is calculated at 25% on the reducing balance method. Depreciation on motor vehicles held outside Europe is calculated at 33.3% on the straight line method. No depreciation is charged on freehold land.

Within the group’s restricted and unrestricted funds, separate reserves are identified which represent the net book value of its property, plant and equipment. This enables the group better to assess the liquid resources available to support future expenditure.

Leases

Instalments on operating lease contracts, where substantially all of the benefits and risks of ownership remain with the lessor, are charged to the income statement on a straight line basis over the lease term.

Investments

Investments are classified according to the purpose for which they were acquired. The group designated its investments as “fair value through profit and loss” on IFRS adoption and will continue to do so.  Under this method of accounting, investments are recorded at fair value in the balance sheet and all changes in value are recognised in the income statement.  This designation has been made in accordance with paragraph 9 (b) (ii) of IAS 39 on the basis that the investments are held with a view to generating a total return over an extended period and that management measures this total return based upon total changes in fair value, in line with ActionAid’s established investment policies.  As proceeds from disposals are generally reinvested, the distinction between changes in value crystallised by sale and those arising through adjustment to fair value is not considered meaningful.

Short term bank deposits

Short term bank deposits are funds not instantly accessible at the balance sheet date, where the deposits mature within three months of the balance sheet date.

Pensions

The group operates a variety of pension schemes, the costs of which are charged in the income statement. None of these schemes is a defined benefit scheme.

Foreign currencies

Items included in the accounting records of ActionAid’s country programmes and affiliates are measured using ‘the functional currency’, which is the currency of the primary economic environment in which each aggregated entity operates. The aggregated financial statements of the group are presented in Euros. This is ‘the presentation currency’. Foreign currency transactions are translated into the functional currency using the rate of exchange ruling at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of assets and liabilities denominated in foreign currencies are recognised in the income statement.

On aggregation, income and expenditure denominated in currencies other than Euros are translated into Euros at an average rate for the year; assets and liabilities are translated using the rate of exchange ruling at the balance sheet date. Gains and losses on translation from functional to presentation currency are not recognised in the income statement; instead they are taken directly to the statement of movement in funds.

Critical accounting estimates and judgements

Preparation of financial statements inherently involves a degree of estimation and the exercise of judgement.  Estimates and judgements made are based upon past experience, expectations of future events and are believed reasonable under the circumstances.  The nature of ActionAid’s activities is such that there are no significant matters of estimation or judgement which are thought likely to give rise to actual results materially different from those included in the financial statements.  The following accounting treatment is subject to a significant degree of judgement:

Allocation of programme expenditure to thematic areas of strategy

Many of the group’s activities cannot be clearly identified with a single thematic area.  In deciding how best to present cost information regarding expenditure by theme, management evaluates which theme expenditure principally relates to, or whether it should be categorised under ‘cross-cutting policy and campaigns’ or ‘other’ themes.  Rather than seek to apportion expenditure over themes in a way which would inevitably be highly subjective the whole costs of an activity identified in this way are allocated to the principal theme identified.