The future of financial reporting for charitiesMay 2011

The Background

Development of IFRSs

• First developed in the 1970s to provide a GAAP for those countries without an established standard setting process

• Taken on real importance since 2000- IOSCO endorsement (1999/2000)- Main basis of accounting for EU listed companies since 2005- Required or permitted in over 100 countries (EU, China, Brazil, Australia, Canada, South Korea, South

Africa, Russia)- Seeking to achieve convergence (US, India, Japan)

• Designed primarily (solely?) for use by stakeholders, principally investors, in profit making organisations

CONVERGENCE WITH IFRS

‘Pure’ UK GAAP standards• FRS 19 ‘Deferred tax’ (2000)• FRS 27 ‘Life Insurance’ (2004)

- good practice embedded prior to IFRS adoption

• FRS 28 ‘Corresponding amounts’ (2005) - due to removal from CA85 requirement to present comparatives

• FRS 30 ‘Heritage assets’ (2009)• UITF 40 ‘Revenue Recognition and service contracts’• UITF 43 ‘Interpretation of equivalence for purposes of S228A

CA85’

CONVERGENCE WITH IFRS

IFRS based UK standards• FRS 20 (IFRS 2) Share based payment (2004-2009)• FRS 21 (IAS 10) Events after the balancer sheet date (2004-

2009)• FRS 22 (IAS 33) EPS (2004)• FRS 23 (IAS 21) Effects of foreign exchange (2004)• FRS 24 (IAS 29) Hyperinflation (2004)• FRS 25 (IAS 32) Financial instruments: presentation (2004 -

2009)• FRS 26 (IAS 39) Financial instruments: recognition &

measurement (2004-2009)• FRS 29 (IFRS 7) Financial instruments: disclosure (2005,2007-

2009)• Annual improvements project• UITFs 39, 41, 42, 44 and 45 (since Feb 2005)

UK ASB’s proposed framework

Tier 1

Publicly accountable

entities

Apply fullIFRS

Tier 2

All other entities

Apply adapted

version of the IFRS for

SMEs

(“FRSME”)

Tier 3

“Small” entities

ApplyFRSSE

Subsidiaries

Reduced disclosure

Subsidiaries

Reduced disclosure

Tier 1

Publicly accountable entities

Apply EU adopted IFRS

Publicly accountable entities

Everything else

Small entities

Tier 2

All other entities

Apply UK adopted IFRS for SMEs

Tier 3

Small entities eligible to use FRSSE

Apply FRSSE

IFRS FOR SMALL AND MEDIUM SIZED ENTITIES• Stand-alone standard published July 2009• Why developed

- Full IFRS too complicated – cost v benefit analysis- Full IFRS does not meet needs of majority of users of accounts

• Based on IFRS- shorter (230 pages)

- 35 sections and 300 notes

- less fair value measurement and more use of historical cost accounting

• 5 years in the making- 2004 discussion paper- 2007 exposure draft- 2009 final standard

• To be updated and improved every 3 years

IFRS TRANSITION: Earliest dates?

“31 July 2012”: Opening balance sheet needed for first performance statements

31 July 2014: First accounts under FRSME

Current not for profit accounting framework

• Charity Sorp• Regulations

• Housing Sorp• General

Determination

• HE/FE Sorp• Directions?

• Nothing• Statement of

Principles ?

CharitiesHousing Associati

ons

FE and HE

Institutions

Other not for profits

Future framework for charities

Future framework for charities

Full IFRS

FRSSE

IFRS for

SMEsReceipts and

Payments

The FRSPBE

FRED 45: FRS for Public Benefit Entities

Application of financial reporting requirements

Concessionary loans

Property held for the provision of social benefits

Entity Combinations

Impairment

Funding Commitments

Incoming Resources from non exchange transactions

Heritage assets

FRSPBE

1. Definition of a PBE

“An entity whose primary objective is to provide goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity’s primary objectives rather than with a view to providing a financial return to equity providers, shareholders or members.”

• Purpose ≠ to benefit the public as a whole• Important factor = primary purpose of entity is not to provide

economic benefits to investors• Absence of investors = a PBE?• Unclear for certain types of membership organisations (e.g.

trade unions, professional bodies)‐ Members could be considered “investors” and their annual

subscriptions “equity”?‐ Primary purpose is to provide economic benefits to

members?

2. Concessionary loans

“A loan made or received between a public benefit entity and a third party at below the prevailing market rate of interest which is not repayable on demand.”

Example

PBE X makes an unsecured £100,000 loan interest free to another entity (Non-PBE Company Y) repayable in 5 years. The market rate of interest that company Y would be charged for such a loan is 10%

PBE X Non-PBE Company Y

Dr Receivable 100,000Cr Cash

100,000

Being loan made

Dr Cash 100,000Cr Receivable

62,092Cr I&E

37,908 Being receipt of loan

No interest in year 1 Dr I&E 6,209CR Receivable

6,209Being notional interest

on loan

3. Property held for the provision of social benefits• “Properties held for the primary provision of social benefits, e.g.

social housing, shall not be classified as investment property”

• What is the primary purpose?

• Beware:• Future developments on investment definitions• Potential developments in lease accounting

4. Entity combinations

• “Market” transaction (vanilla acquisition) = apply rules in the FRSME

• Merger accounting– no party to the combination is portrayed as either acquirer or

acquiree– there is no significant change to the class of beneficiaries of the combining

entities or the benefits provided as a result of the combination– Equal participation of each of the combining partiers in determining

management structure and personnel, with decision being taken on the basis of consensus rather than purely by exercise of voting rights

• Combinations that are in substance a gift

‐ Usually nil consideration‐ Net assets received = credit to income‐ All other accounting as per vanilla acquisition inv FRSME

5. Impairment of assets

• Occurs when NBV is more than both– Fair value less costs to sell; and– Value in use

• Fair value less costs to sell would need to factor in any restrictions on the use of the asset in question

• For assets held for their service potential rather than to generate cash flows, value in use is the present value of that future service potential

– Depreciated replacement cost– Other approaches may be used where appropriate (e.g. planned

subsidy…service potential?)

6. Funding commitments

• Provide if and only if‐ Cannot realistically withdraw from obligation (necessarily

must have communicated the commitment to the recipient); and

‐ Obligation is not dependent on performance of the recipient

• Distinction between conditions that are performance related and those that are not performance related

• “In most cases there is no liability, because entities rarely make irrevocable commitments without requiring future performance from the recipient”

7. Incoming Resources from Non-exchange Transactions• Non-exchange transaction = receiving (giving) something of

value without approximately equal value being given (received) in exchange

• Deals only with the receive side‐ If no performance conditions attaching to receipt then

recognise when receivable‐ If receipt is dependent on performance conditions then

recognise income when those performance conditions are met‐ Recognise a liability if resources received before performance

conditions are met. But recognise liability for repayment based on probability

• Conditions that merely reflect an entity’s objects / operating mandate are not performance conditions (implies non-deferral of SHG)

7. Incoming Resources from Non-exchange Transactions (Continued)

• Legacies‐ Recognise when receipt is certain and amount can be reliably

measured‐ Deemed to be following probate and confirmation that there

are sufficient assets to pay the legacy‐ Timing for recognising as income doesn’t seem to link in to

asset recognition criteria in FRSME

• Donated services‐ Recognise as income and expense when value can be

reasonably quantified‐ Current charity SORP prohibits recognition of volunteer time

NEOLITHIC BURIAL MOUNDS

8. Heritage Assets

• Incorporates into FRSME (so that non PBEs can also apply)

• Reflects accounting in FRS 30‐ Cost or valuation if information available‐ If information about cost or valuation not available without

undue cost or effort then do not recognise‐ Same disclosure requirements

Application to tiers

Tier 1 Tier 2 Tier 3

Concessionary loans

Property held for the provision of social benefits

Entity combinations

Impairment of assets: PBE considerations

Funding commitments

Non-exchange transactions

Heritage assets ? n/a (SORP)

Mandatory Best practice guidance Not permitted

Future Developments

• Narrative reporting

• Format of primary statements

• Fresh start accounting (to replace merger accounting)

• Associates

• Social Benefit Obligations

• Fund accounting and link to segmental reporting

FRSBE on narrative reporting

What may change and why

• The FRSME - because of commercial reactions• The timetable - for the same reason• The FRSBE - because of cross sector lobbying• The Sorp(s)• Because they have to!• Modular approach

What you should do about it

Planning

Which framework

Impact on reserves

Bank arrangements

“Impression”

Collecting data

Reporting

Lobbying

Decision

Publically accountable – no choice, full IFRS

Smaller entity

FRSSE

FRSME

IFRS

RP?

Tier 2

FRSME

IFRS

What will influence the decision

Flexibility in final frameworks

Future plans for:

The organisation itself

The FRSME

Importance of the key differences, currently

QuestionsPBAG Future of UK GAAP Seminar

14 June 2011