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Don't let accounting principles get in the way of good sense

They can sometimes lead to strange decisions, says Ray Jones, policy accountant at the Charity Commission

Ray Jones
Ray Jones

A staggering 98 per cent of respondents to the Accounting Standards Board's consultation on the future of the UK Generally Accepted Accounting Principles wanted to retain sector-specific Statements of Recommended Practice. More than 90 per cent supported the development of a Public Benefit Entities standard.

So it's no surprise that the ASB gave the green light for the development of this new standard and agreed to the retention of key sector Sorps at a meeting in April. So is it now a straight run to convergence with International Financial Reporting Standards and a new charities Sorp? Well, in some ways yes; but there are going to be quite a few hurdles to overcome on the way. One question is how principles and practicability will be balanced in the development of this new standard.

Accountancy is a principle-based discipline - in theory, at least. If you apply the right principles, you get the right answers, free from bias - or so the theory goes. But life is never quite that simple. Remember the debate on heritage assets? Principles say that if you hold something that provides continuing benefit, you have an asset to include on your balance sheet. But try putting that principle into practice when you have to value a heritage coastline, Stonehenge or a collection of preserved but extinct creatures.

Practicability and cost clearly have a part to play in applying principles. Think about charity shops. The Charities Sorp says you get income from donated goods when they are sold in the shops. That's certainly a simple approach, but it's not what accounting principles say: they say you get the income when you receive the donated goods. So all of a sudden, you have to value donated goods when you receive them, including the unsorted goods in the black bags at the back of the shop, and then value them as stock at the end of the year.

There are many more questions like these to be thrashed out in the journey to a new standard. For example, do we really want to see programme-related investments treated as financial instruments? Do we want to see trustees forced to disclose any donations they make to their charities as related-party transactions? And what about placing a cash value on volunteers?

The answer to such questions will all depend on whether you believe that applying principles always gives a 'neutral' answer, free from bias, or that principles occasionally need to tempered by pragmatism and some consideration of the costs that are involved.


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