Lynne Lamont stresses the importance of keeping track of any investments

Checking the financial pages in the morning might not be the first thing on charities’ minds; but it’s become increasingly relevant to them in recent weeks.

At the start of 2015, a small but significant change was introduced to accounting standards. Brought in to little fanfare, Charities: Statement of Recommended Practice (SORP) FRS 102 requires charities to record any change to the value of their investments as an operational loss or gain in their accounts at their year-end.

That’s not an issue when markets are stable or even rising. On 2 January 2015, the day after the change was introduced, the FTSE 100 stood at 6,547 points. At the time of writing, it’s sitting around 1,000 points higher.

This rise, however, hasn’t come in a straight line and in the past six months, in particular, we’ve seen much more volatility. The FTSE 100 hit an all-time high of 7,877 on May 22, a 14% rise from 6,888 just a couple of months earlier. It has since oscillated between 7,500 and 7,800 points, with some sectors particularly unpredictable.

In the context of the amended SORP, this can present a challenge for charities with invested assets. If their year- end happens to fall on a day when the market has tumbled, it can create a distorted picture of their actual financial performance over the year. And, to the casual reader, it could appear the charity is failing with its overall strategy and operations.

Communicating through this issue is critical. While the investment result will have to be explained in terms of capital gain or loss and income generation over this fixed 12-month period, charities need to put this into a wider context.

They should explain why they have investments and the purpose of the investment reserve to ensure that stakeholders can better interpret the financial outcome, whatever it may be, and see it within the long-term strategic goals of the charity.

In most cases, it’s there to generate essential income, to be called upon for future capital expenditure, or a long-term reserve to ensure fixed costs can be covered, when other sources of income are less reliable.

Likewise, it’s an ideal opportunity for charities to ensure that their investment strategy is appropriate to their current financial circumstances and their Investment Policy Statement is kept up to date. They also need to ensure their assets are suitably diversified to help manage overall risk.

A move to a potentially lower volatility strategy to ‘smooth’ the numbers over the year may seem like an option. But with cash and government bonds, among other low risk assets, generating returns well short of inflation, this would make it difficult to protect the spending power of the capital.

It’s important that the annual accounts are seen for what they are: a 12-month snippet in time. The position in relation to the investments shouldn’t be over-analysed, but has to be clearly articulated. What this change to reporting must not do is influence investment policy – particularly at the expense of a well thought out long-term strategy.

Lynne Lamont is head of charities for Scotland at investment and financial advisers Brewin Dolphin