All change for accountancy standards

Proposed changes to accounting rules could place additional reporting responsibilities on charities. David Ainsworth looks at what's already been decided, and what may yet change

New rules: If enacted, charity shops will have to put a value on all donated goods when they are received
New rules: If enacted, charity shops will have to put a value on all donated goods when they are received

For the past seven years, the Accounting Standards Board, the body that sets the rules for the preparation of accounts in the UK and Ireland, has been overhauling the rules governing statutory accounts to bring them in line with international financial reporting standards.

For charities, this will mean a comprehensive new structure that is intended to integrate charity accounting more closely into the main set of accounting rules.

Publicly listed companies already follow the IFRS, but other organisations do not. The ASB is currently developing a simplified standard for those entities not currently covered, known as the financial reporting standard for medium-sized entities, or FRSME. Smaller organisations, including most charities with turnovers of less than £6.5m a year, are likely to have their own financial reporting standard for smaller entities, or FRSSE. The ASB's current suggestion is that reporting for small charities would be based not on the international financial reporting standards, but on the existing UK accounting principles.

Additionally, because the new international standards were not designed with charities and other public benefit organisations in mind, these organisations will have their own standard to sit alongside the FRSME. The ASB launched a separate consultation in March this year on this financial reporting standard for public benefit entities, or FRSPBE, which will cover charities, universities and housing associations.

The ASB has agreed that charities will retain their own statement of recommended practice, prepared by the Charity Commission and the Office of the Scottish Charity Regulator, and based on the new public benefit entities standard.

Revaluation of property

Since the start of the year there have already been several changes in the way the ASB will proceed, says Pesh Framjee, head of charities at accountants Crowe Clark Whitehill. One is that there will be no increase in the number of entities in the top tier that have to prepare accounts under the full international financial reporting standards.

Initially, the ASB planned to expand tier one to cover entities that take deposits or hold public debt, he says, but that requirement has now been scrapped, meaning no charity will now be in tier one.

This is good news, he says, for charities such as the Charities Aid Foundation and Charity Bank, and for many credit unions, which will now be able to prepare simpler accounts.

Another area where the ASB has changed its mind since its consultation on the FRSME is the revaluation of fixed assets such as property. Under previous proposals, organisations subject to the FRSME would not be permitted to change the value of assets such as property on their balance sheets to reflect rising values - an issue likely to lead to the breach of loan agreements based on that property. However, the ASB has now announced that revaluation will be at the discretion of each individual organisation.

This is a better situation, argues Nick Brooks, head of not-for-profit at the accountancy firm Kingston Smith. "Under the old proposals, you had a situation where it was compulsory to do something under tier one accounting, and forbidden under tier two," he says. "That couldn't be right." While the FRSME is beginning to take shape, there is less certainty about the FRSSE.

At present, the ASB's proposal is that this standard will continue to be based on the UK generally accepted accounting principles, the standard that the international financial reporting standards are intended to replace. But this might yet change. Some accountants feel it is not sensible to have two standards based on different sets of principles operating simultaneously, and the ASB could yet change its policies.

Katherine Smithson, a policy officer at the Charity Finance Directors' Group, who has collated responses to the standard from charity finance directors, says it's not yet clear what is going to happen with reporting standards for smaller entities. "Different people have different views about what ought to happen. We would like to consult further on the FRSSE because we need to ask our members what they want."

She says that many people favour an "FRSME-lite" approach, in which the standard for micro-entities is based on the FRSME standard, but indicates clearly where there are opt-outs for small organisations.

Putting a price on donated goods

There are also some major issues still to be resolved within the FRSPBE.

One proposal that has caused controversy is that charities should have to value all goods, including donated stock in charity shops, at the time they are received.

This would cause major problems for shops, which would have to value thousands of bags of clothes and other items each year. Ray Jones, policy accountant at the Charity Commission, says the ASB will probably compromise. "I think it will move to an approach that would recognise valuation is not always practical," he says. "I think a narrative approach was suggested by some people. You could say 'we have 20 shops and each has six weeks' supply of goods', and so on. That sort of detail would be much more useful to the typical user of the accounts.

"That compromise might suit the ASB because it would retain the principle that you value things when they are received or receivable."

Another problem, he says, is when to recognise grants covering more than one year. According to accounting principles, money should be recognised in accounts when it is clear that the organisation has an obligation to pay it, but many charities dislike doing this with multi-year grants.

On these issues, there seems little prospect of finding a final agreement, says Smithson. "This is just something where different charities have different views," she says.

Read the standard

The sector's statement of recommended practice has already been largely rewritten to comply with the FRSME and the public benefit entities standard, although it cannot be finished until final decisions have been taken by the ASB.

One question that is still to be answered is how much detail will be in the Sorp, and how much in the public benefit entities standard.

"The popular view seems to be that the high-level stuff should be explained in the single standard and the detail left to the charities Sorp," says Framjee. "The reality is that people read the Sorp and not the standards." He says it is difficult to find the right balance between brevity and clarity: "Should you make it a one-stop shop or cover only those things that are not in the standard?

"We can't cover everything, so unfortunately people will have to read the standard."

The ASB has already announced plans to consult again on the FRSME, and many in the sector hope that it will take the same decision on the public benefit entities standard.

There are tentative plans to do this, says ASB project director Joanna Spencer, who is leading the proposals on public benefit entities. She hopes it will happen by the end of the year, but says that nothing has been decided.

She says a decision to consult again would be an opportunity to combine the public benefit entities standard into the main standard, but no decision has yet been taken on whether this will happen.

"From my point of view, I'd like to have the public benefit entities standard integrated into the main standard - and that's also the view of the people I speak to," she says.

The ASB hopes to have the new standards apply to the accounting period that starts in January 2014. For this to go ahead, however, the final version of the FRSME would have to be available by the end of June 2012, which many in the sector feel is unlikely to happen.

"We expect the final date to slip back," says Brooks. "To have everything ready for the proposed date is ambitious."

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