Charities should offer their view of accountancy plans

Two major consultations could have a major effect on charities, says Ray Jones of the Charity Commission

Ray Jones
Ray Jones

Recent months have seen consultation fever mounting in the world of accountancy. Charities are being asked for their views on two proposals, both of which could significantly change the way charities report on their income and spending.

The Accounting Standards Board is consulting on the move to a new framework based on International Financial Reporting Standards.

The proposal is for a three-tier framework. Organisations with equity or debt traded on public markets, and deposit-taking businesses, would be required to use tier one - which reflects the complexity of the full EU-adopted IFRS. At tier two is a slimmed-down version of IFRS, available to any organisation falling outside the definition above.

Small organisations have a 'no-change' option of sticking with the existing UK financial reporting standard for smaller entities - this is the third tier.

Although more than 95 per cent of UK charities could opt for the 'no-change' option, there is no certainty as to how long it will remain available after the proposed implementation of the new framework in 2013. There is some debate as to whether a move to this framework, which is more in line with international standards, would improve the quality of reporting.

The ASB is quite clear in its own assessment. It argues that existing UK accounting standards are "not tenable" in the longer term and describes its own standard as an "incoherent mixture" that fails to provide a consistent framework. In contrast, it views tier two, the slimmed-down version of IFRS, as "proportionate", "targeted" and "easy to apply". The move to a new framework is also supported by the key accountancy bodies.

The House of Lords Economic Affairs Committee, however, recommends that the application of IFRS should not be extended beyond those companies already compelled to use it. The committee argues that IFRS is inferior to existing UK accounting standards and even suggests that IFRS is partly responsible for the banking crisis.

My guess is that pragmatism will prevail and that the need for international harmonisation means the new framework will be adopted. But I would not be surprised to see a compromise develop, whereby the scope of the 'no-change' option is extended to include some larger organisations.

Meanwhile, charities face even more change. The ASB has just launched a consultation on the proposed public benefit entity standard. The next Statement of Recommended Practice will be written in the context of this standard and the new framework, which means it will need to address the proposed three-tier framework.

As I've said previously, a sector standard would provide welcome recognition of the importance of charity accounting. It's designed around IFRS but focuses on sector-specific issues not addressed in commercial standards. It's a 'high-level' standard and those who are used to using the Sorp will be relieved to see that it's largely consistent with existing practice. There are a few surprises: for instance, charity shops are asked to value their stock of donated goods - a technically correct approach, but one that adds complexity.

Consultations, of course, are designed to encourage contributions, so I would encourage all charities to give their views on the proposals.

The IFRS consultation closes at the end of April. The consultation on the proposed public benefit entity standard closes at the end of July.

- Ray Jones is policy accountant at the Charity Commission

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