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The future of Charity reporting - IFRS

The future framework of charity accounting and reporting is being debated in the most fundamental review for a generation.

What is changing?

Currently, UK Generally Accepted Accounting Practice (‘UK GAAP’) provides the standards governing the preparation of accounts in the UK. The Accounting Standards Board (‘ASB’), sets accounting standards in the UK. In August 2009, the ASB issued a consultation on ‘The future of UK GAAP’.

The consultation set out a strategy for the convergence of UK accounting standards with International Financial Reporting Standards (‘IFRS’). (IFRS already apply to all UK companies listed on a recognised stock exchange). Under the ASB’s proposals, IFRS would apply to all organisations whose accounts are intended to give a ‘true and fair’ view.

Those organisations which are not listed on a stock exchange would be allowed to adopt a simpler standard designed for small and medium sized entities - the ‘IFRS SME standard’.

These proposals would mean that UK GAAP would cease to exist, being replaced by the accounting framework of IFRS.

What is the effect on charities?

A move to IFRS-based standards would have a significant impact on charity accounting. IFRS have been developed mainly for businesses trading for profit. How can IFRS address the accounting and reporting needs of ‘public benefit’ entities, such as charities, whose motivation is social and altruistic rather than financial? The ASB’s preferred solution is to develop an accounting standard for public benefit entities which would include charities.

The consultation asks if such a standard should be ‘stand alone’? This would have the advantage of providing a single reference point, based around the simpler IFRS SME standard. The link to the ASB’s consultation is: http://www.frc.org.uk/asb/press/pub2054.html

What are our views?

In January 2010, we made a submission on the ASB’s proposals in support of a successful public benefit entity standard This needs to be relevant to all charities, including smaller ones, be proportionate and should use as a model the existing international accounting standard designed for small and medium sized enterprises.

We agreed with the ASB’s views that there will continue to be a need for sector-specific guidance albeit not in the form of a SORP, see the article on the future of the SORP. We also agreed with the need for a public benefit standard, with sector-specific guidance. To make this easier to read and understand, the information in the PBE standard which differs from the SME standard should be distinguished by font or layout and the sector-specific guidance should use a different font or layout again.

As at present with SORP’s, there would be value in the ASB providing a statement that the relevant sector specific guidance is consistent with the public benefit standard. This would prevent errors, variations or inconsistencies creeping in on guidance produced by different regulators.

A key step for the ASB is to issue an exposure draft of a public benefit entity standard for consultation. This will be a challenge in that IFRS deal with financial statements and not narrative reporting. For a charity, the Trustees' Report is as important as the financial statements and the public benefit entity standard will need to address this aspect.

The other key issue is timing. The consultation by the ASB on the IFRS SME standard ended on 1 February 2010, with a proposed implementation date of years ending on and after 31 December 2012. This may or may not be achievable. The ASB needs to analyse and report back the feedback on the consultation and presumably publish a revised Exposure Draft for final comments with a view to the final document being published before 31 December 2011.

This is a demanding timetable, although, in the interests of convergence generally, we would hope that this timetable is met if at all possible. The IFRS for public benefit entities is unlikely to be published before 31 December 2011 as the exposure draft has yet to be written and there will be more issues than on the SME standard.

As noted above, there is the question of including in some way the need for narrative reporting in the Trustees' Report. There is also the need to consider the relevance going forwards of the information in the Charity SORP 2005, (Statement of Recommended Practice:

Accounting and Reporting by Charities) published by the Charity Commission in March 2005.

The relevance of the Charity SORP is also covered in this newsletter, together with our further thinking on the timing of the implementation of the public benefit standard.

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