Eight scenarios and the accounting for those scenarios are outlined in more detail below.
1a As a result of an NHS reorganisation, a new trustee is established to administer funds previously administered by two or more preceding NHS trustees which are wound up once the merger has taken place
Where the former trustee body or bodies dissolve upon the merger taking place or if one assumes the role of administering the funds and the other NHS trustee bodies are dissolved, then a merger has taken place to create a new trustee going forward. The dissolving bodes do not produce closing accounts and instead the new body reports for the whole period irrespective as to the timing in-year of the merger. This will require the co-operation of the discontinuing bodies if the merger is not timed for the first day of the new financial year.
Merger accounting provides a continuity of explanation to the donors and funders that the new administering trustee is taking forward a number of NHS charitable funds in a single administrative envelope and ensures that whether the merger took effect on 1 April or part way through the year, the whole of the income and expenditure in the year the merger took place is explained. Merger accounting presents the prior year figures as though the funds had always been administered by one trustee so facilitates ease of comparison. The trustees’ annual report and the notes should fully explain what has happened. This approach will require the co-operation of the previous NHS trustees and it is recommended that early contact is made to obtain the requisite information on the funds, fund balances and prior year income and expenditure.
2a As a result of a major NHS reorganisation there is a complete discontinuation of the existing charity with successor bodies established to receive the charitable funds
In this scenario the NHS charity is to be dissolved with its registered component charities and/ or particular funds, distributed to two or more recipient NHS charities, which may be newly created or may be existing NHS charities. Normally when a charity dissolves it gifts its assets in furtherance of its objects because the charity is ceasing its activities and is distributing its residual net assets in furtherance of its objects meaning the dissolution is treated as a payment in the SoFA and the recipient charities treat the funds as incoming resources.
In the NHS context, this is an internal reorganisation with the NHS, and for clarity it is recommended that the dissolving Trustee prepares closing accounts (full year or part-year) and treats the transfers as a series of payment of balances in furtherance of the objects of that charity across to the recipients and so records it as an expense in the SoFA (unless a fund is endowment in which case it is treated as a “transfer out”) with an explanatory note leading to a nil balance sheet and then deregisters. The recipient charities are acquiring control of the balances and report the transactions only from the date of acquisition. In order to clearly distinguish the acquisition from routine incoming resources, the gain is treated as a “transfer in” (i.e. as part of the reconciliation of funds section of the SoFA) of charitable funds with an explanatory note. Acquisition accounting is a better solution because whilst A is being dissolved, its component charities and funds are being paid across to more than one recipient and merger accounting might confuse because charity A has gone but recipients say B, C, and D are responsible for different parts of the former charity A only and so acquisition accounting offers an arguably more logical solution than a merger in this scenario because there is no single successor entity containing all of A.
3a An NHS reorganisation where there is a continuation of all the charities involved but with certain funds transferred
In this scenario the original NHS charity A is not being dissolved, instead certain component charities or particular fund elements are required to be transferred to one or more NHS charity recipients. The principles are the same as scenario 4, the original charity will still be producing final accounts, however it will need to provide additional disclosures in the annual report and the accounts explaining the nature of the transfers, distinguishing those charities within its NHS group registration which are separately registered. The treatment is essentially the same as scenario 4 with charitable funds transferred by way of payment and treated as a “transfer out” in the SoFA (both income and endowment funds in this case are treated as a “transfer out”).
The recipients, as in scenario 4, adopt acquisition accounting and treat the charity or individual funds transferred across as a “transfer in” of balances with an explanatory note.
4a As a result of an NHS reorganisation, a speciality transfers from Trust A to Trust C and the DoH requires Trustee A to transfer the associated charitable funds
In this case the solution will differ depending upon whether for that speciality the register entry for Trustee A was an individual charity or not.
If a separate charity is not in the entry for Trustee A then the charitable funds are merely one of several funds making up the charity. So for example let us assume that the charity entry is Oncology Special Charity A and this charity is made up of 8 funds, one of which is clinical haematology. The clinical haematology specialty transfers to NHS Trust C from NHS Trust A and so Trustee A treats the transfer as a payment in furtherance of its objects of the funds in the form of a grant to C and so it is treated as an expense in the SoFA as at the date those funds are paid across or C is entitled to the funds, whichever is the earlier (i.e. C becomes a creditor to A) in the SoFA (unless a fund is endowment in which case it is treated as a “transfer out”). The recipient charity then treats the grant received as voluntary income received (unless a fund is endowment in which case it is treated as a “transfer in”). This treatment is a better solution than merger accounting because the donor can see the sums paid out by A and received by C and it avoids confusion because the register entries of the component charities are unchanged before and after the payment.
If the scenario is the same but the register entry is an individual charity, then the accounting treatment for Trustee A treats the payment as a “transfer out” as it treats the transfer as a payment across of balances in furtherance of the objects of that charity and so records it as an “transfer out” in the SoFA with an explanatory note (both Income funds and endowment in this case are treated as a “transfer out”). The recipient charity though is acquiring control of the balances and reports transactions only from the date of acquisition. In order to clearly distinguish the acquisition from routine incoming resources, the gain is treated as a “transfer in” (i.e. as part of the reconciliation of funds section of the SoFA) of charitable funds with an explanatory note. Acquisition accounting is a better solution because it is only one component of Trustee A’s register entry and merger accounting might confuse because A still relates to the same NHS hospital(s) and aside from this one specialty the same facilities and C has only acquired one charity from the date of acquiring the speciality so it is arguably more logical to view it as an acquisition than a merger in this scenario.
5a Merger to facilitate simplified administration
The Department of Health operates a policy of ensuring that charitable funds are managed over a certain size and this may lead to one NHS charity having a responsibility to act as trustees of charitable funds for more than one NHS beneficiary. Where this explicitly a merger for administrative purposes it follow that merger accounting best fits the intention. This is the case whether the former trustee body or bodies dissolve upon the merger taking place or if one assumes the role of administering the funds and the other NHS bodies involved are effectively continuing only to advise on the distribution of funds.
Merger accounting provides a continuity of explanation to the donors and funders that the new administering trustee is taking forward a number of NHS charitable funds in a single administrative envelope and ensures that whether the merger took effect on 1 April or part way through the year, the whole of the income and expenditure in the year the merger took place is explained. Merger accounting presents the prior year figures as though the funds had always been administered by one trustee so facilitates ease of comparison. The trustees’ annual report and the notes should fully explain what has happened. This approach will require the co-operation of the previous NHS trustees and it is recommended that early contact is made to obtain the requisite information on the funds, fund balances and prior year income and expenditure.
In these circumstances it is anticipated that all the funds will either be restricted (permanent endowment or expendable endowment, or restricted income) or be designated funds. The only unrestricted fund that would not be designated would be that of the administering NHS charity in relation to its own trusts and its own NHS partner body to whose benefit it administers those charitable funds. The reserves policy is likely to be more complex in this situation and need a fuller explanation of designated funds and the nature of the administration being undertaken by the trustee on behalf of multiple NHS bodies.
6a Payments in furtherance of an endowment or other trust held where there are multiple NHS Trusts or NHS bodies entitled to call upon the charitable fund(s)
The various NHS Acts which establish the NHS charities formed under those Acts also state the charitable purposes of those bodies. This is important because the NHS Acts have normally provided for a general object to hold charitable funds on behalf of the NHS and then a more specific object citing the related NHS Trust of facility or body (such as a Primary Care Trust).
This provides flexibility for one NHS charity to accept a gift, normally an expendable endowment, but also it could relate to a specific NHS charity as a restricted fund, that explicitly is to the benefit of two or more NHS bodies in carrying out their role in patient care.
In this case the administering trustee will be making grant payments to more than one NHS body and receiving income, investment income or related capital gains or losses, and donations on behalf of two or more NHS bodies.
The accounting is a two step process, firstly the creation of the merged body (refer to scenario 5) and subsequently the administering NHS charity treats the grants paid as expenses in furtherance of its charitable activities in the Statement of Financial Activities and the recipient NHS charities, where appropriate treat the income as incoming resources credited to the restricted fund or if the recipient is an NHS body as income in its accounts. Where the payment involves the spending of part of the expendable endowment the accounting is also a two stage process. The administering trustee first decides how much of the expendable endowment is to be spent and transfers that sum out of the expendable endowment (using the transfers line in the Statement of Financial Activities) and adds the sum to the restricted or unrestricted income funds, as appropriate. Then the grant is made as an expense of charitable activities.
It is unlikely that these circumstances will apply to the unrestricted fund because this fund is available for any of the charity’s charitable purposes and so will not explicitly be related to two or more NHS bodies, instead the “general fund” supports the activities of the charity’s main beneficiary.
7a All charitable fund balances are intact, the associated NHS hospitals or facilities are unchanged and a simple change of trusteeship occurs
The simplest change is the conversion of an existing NHS charity from one form of governance to another at the direction of the Department of Health (DoH). This normally applies because there is a parallel change in the related NHS body which is mirrored by the charity or the DoH has decided to discontinue corporate trusteeship in favour of a body of appointed trustees (s11 or s54).
Although NHS charities normally have broad general objects, reflecting the provisions of the NHS Act applicable at the time of the charity’s inception, the constitution will specifically refer to particular NHS hospitals or facilities. If these associated NHS hospitals or facilities were the same after the change of trusteeship, as they were before the change of trusteeship, then from the public’s perspective they gave funds for the benefit of say hospital A and the charitable funds into which their donation was paid before and after the change still relate to hospital A.
The other key aspect is that the charitable funds being administered before the change are all subsequently administered by the new trustee after the change. There is therefore no discontinuity in the charitable funds such as a winding up or an alteration of objects. To the public the gift was given to charitable fund AA for hospital A and that fund was and remains in existence to assist hospital A.
What has essentially happened here is that the existing charitable funds administered by the old trustee have been transferred entirely to the new trustee. Therefore for transparency purposes merger accounting offers the better solution because to the public nothing has changed aside from the character of the trustee. Remember the trustee is simply administering the funds, and those funds have not changed.
Under merger accounting the comparative figures are provided for the preceding year before the change of trusteeship and the current year is that of the new trustee. If the change of trustee happens within the financial year under merger accounting the new trustee still presents the figures for income and spend for the whole year as though they administered the charitable funds for the whole year. Of course the change and timing of the change of trusteeship should be disclosed in the annual report and this form of accounting relies upon all the data being available to the new trustee for the prior period.
The standard form of NHS charity governance is that of the corporate trustee, whether as an NHS Trust, NHS Foundation Trust, Care Trust or Primary Care Trust where the NHS body itself is the trustee of the charitable funds. Upon gaining Foundation Trust status the DoH considers the essence of trusteeship, namely corporate trusteeship, not to have changed and so no Statutory Instrument is made. In support of the DoH view we therefore advocate merger accounting and all the data should be available because the same Trust or NHS body Board is in place before and after the change of trusteeship.
The conversion of a section 11 to a section 54 (previously s22) body upon the award of Foundation Trust status to the beneficiary NHS Trust, is one initiated by the Department of Health. Unlike a change from corporate trusteeship to a section 11 or section 22 body, a new trustee body has not been recruited, instead it is the legal status of the existing body which has changed and this only requires disclosure in the trustees’ annual report. The accounts are unaffected since trusteeship has not transferred and the trusts upon which those funds are held are unchanged. There is no discontinuity in the funds held and the related NHS body, is unchanged, therefore the solution adopted is also merger accounting where the accounts portray the previous year and the year of the change in full. The change in trusteeship is disclosed in the trustees’ annual report and in the notes to the accounts so that the reader is aware of the change in trusteeship that has taken place.
8a All charitable fund balances are intact, the associated NHS hospitals or facilities are unchanged but the form of trusteeship changes
The more complex scenario is a change from a corporate trustee to an NHS trustee body because clearly there is a discontinuity in trustee bodies in this case. Conversion of a corporate trustee into a section 11 or section 54 (previously s22) trustee body is initiated by the Department of Health. The trustee is a new legal form and the body is made up of individual trustees who have not previously been involved with the administration of the charitable funds. However the funds remain together and the trusts upon which those funds are held are unchanged, only the form of trusteeship of those funds has changed.
There is no discontinuity in the funds held and the related NHS body is unchanged, therefore on balance the solution adopted is also merger accounting where the accounts portray the previous year and the year of the change in full. This will require the co-operation of the former corporate trustee to provide comparative year information, and where required for the current year part year information if the change happens during the charity’s financial year. The change in trusteeship is disclosed in the trustees’ annual report and in the notes to the accounts so that the reader is aware of the change in trusteeship that has taken place. Only if co-operation cannot be secured or the information provided is insufficient should acquisition accounting be used. This is because there is no legal requirement once a trustee has ceased to exist for that trustee to prepare accounts and so if the change happens part way through a financial year, the part year will be “lost” with no accounts for prepared for it if acquisition accounting is used instead of merger accounting.
Special considerations when using merger accounting
The timing of the transfer is important. Where the approach taken is “merger accounting” the receiving NHS trustee body is responsible for reporting the whole financial year. This requires the dissolving body to provide both prior year information and current year information to the point of transfer.
If the transfer happens part way through the financial year, the dissolving charity produces no year-end accounts at all. Instead the receiving successor NHS body assumes, following merger accounting principles, the responsibility of reporting the funds for the whole year in its accounts and as the successor body also states or restates their figures for the previous period with an explanatory note.
Where the transfer coincides with the end of the financial year whilst the dissolving charity has wound up, the funds remain held on trust by the NHS because a new charity is taking over trusteeship. The closing charity produces its year-end accounts as normal and discloses the transfer in the reconciliation of funds section of the SOFA with an explanatory note thereby facilitating a nil balance sheet if the funds have been paid across before the accounts are signed off. Otherwise if the funds are still held as at the date the balance sheet is signed, then a transfer entry cannot be made because a transfer has not taken place and so those funds remain on the balance sheet with a note about a non-adjusting post balance sheet event, namely the planned dissolution and transfer. The new charity is continuing the trusts of the old and so adopts a merger accounting approach, as detailed above, upon receiving the funds.
The accounting treatment reflects the oversight of trusteeship by the DoH and distinguishes transfers of trusteeship between one NHS body and another from a simple transfer of assets between NHS trustees.
Transfer by way of grant
Alternatively where merger accounting does not apply and both NHS trustee bodies continue to exist then, although the DoH transfer reflects alterations in NHS arrangements, the principle is that the giving trustee is the principal and reports the funds in its accounts until the point of transfer when it grants those funds to another NHS body. The receiving NHS body then carries on from that point. The giving NHS body treats any payment of balances from unrestricted or restricted income funds to the recipient NHS body as a charitable grant, separately disclosed on the face of the SOFA or in the notes. The receiving body treats the receipt of income funds as incoming resources under the heading voluntary income if its receiving charitable funds but as a “transfer in” if it is taking over trusteeship of a registered charity which is a distinct component of the group registration of the charity handing over control of the funds, the incoming resources (except for endowment) are either classed as restricted income funds or unrestricted income funds and the treatment matches that of the giving charity.
Exceptionally the giving body treats any endowment balance (because endowment cannot normally be spent) as a transfer out and shows it as a deduction in the reconciliation of funds section of the SOFA together with an explanatory note. Endowment funds are treated by the receiving body as a transfer in and shown in the reconciliation of funds section of the SOFA with an explanatory note.
(Note that the income received counts as incoming resources under the heading voluntary income and all the income received, with the exception of endowment, would count for audit and other threshold purposes.)