Three cheers for three tiers

Our columnist takes a close look at the three levels of reporting that will be introduced by the Accounting Standards Board from July 2013

Ray Jones, policy accountant at the Charity Commission
Ray Jones, policy accountant at the Charity Commission

After six years of discussion and consultation, the Accounting Standards Board has published its blueprint for the future direction of UK accounting and financial reporting.

Its plan is for a new three-tier framework to apply from 1 July 2013. The tiered approach offers three reporting options based on accountability to the financial markets and the size of an organisation. Some charities will have to move to International Financial Reporting Standards, but for most the option of sticking with an existing UK standard is still there - at least for the time being. The Charities Sorp will be retained within this new framework and will continue to provide a ‘one-stop shop’ for charity accounting.

So what do these proposed reporting tiers look like?

‘Tier 3’ offers a ‘no-change’ option for small organisations, including charities. So if your organisation meets the Companies Act definition of small, you can continue to apply the existing UK standard for small organisations - the FRSSE. The act defines small organisations as those whose annual incomes fall below £6.5m, which applies to nearly 99 per cent of all UK charities.

‘Tier 2’ offers a shorter and simplified version of the IFRS. It provides an option for charities wishing to move towards international standards while avoiding the complexity that comes with full IFRS. However, this option might nevertheless present first-time users with challenges because of the unfamiliar terminology and the introduction of fair-value accounting and different disclosures.

‘Tier 1’ responds to the needs of capital markets. It involves the use of the full suite of EU-adopted IFRS. This is no simple task: the IFRS includes 50 separate standards and 27 interpretational statements running to more than 3,000 pages. Thankfully, few charities will be required to report under this tier - it is merely an option open to those wishing to apply full IFRS. It will be mandatory only for charities that issue bonds on public markets, hold deposits or manage other people’s money as part of a banking activity.

So how will the new Charities Sorp respond to the new framework? The Charities Sorp Committee believes the best approach is to develop a ‘modular’ Sorp. This would allow charities to download or print off those parts or modules of the Sorp that are relevant to their own particular activities and the tier they’re in. For example, there is no point printing off modules on accounting under the IFRS for small and medium-sized enterprises if you have opted to use the FRSSE.

Similarly, there is little point in printing off a module on accounting for legacies if your charity has received no legacies. The impact of tiered reporting might point to a longer Sorp, but a modular approach could make it shorter for smaller charities with less complex activities. The motto could be "download only what you need".

Ray Jones is policy accountant at the Charity Commission

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