Changing the rules of financial reporting

Accounting is undergoing a global shake-up as the International Financial Reporting Standards come into force. David Ainsworth examines the implications for the sector.

This year and the next are set to be times of change for third sector accounting as the International Financial Reporting Standards are applied in the UK.

In February, the Accounting Standards Board closed its consultation on the future of the UK's Generally Accepted Accounting Principles. The UK body's plans include a new reporting standard for public benefit entities, which will cover charities, education providers and registered social landlords.

Andrew Lennard, chair of the ASB's Committee on Accounting for Public Benefit Entities, known as the Cape Committee, says he envisages the publication of a draft of the standard by the end of this year. The standard will be based on and will supplement a standard for small and medium-sized enterprises that is due to be published in the autumn.

The SME rules are likely to be between 300 and 400 pages long, about a tenth of the length of the full IFRS rules, which already apply to publicly accountable organisations - mostly government bodies and publicly listed companies. The public benefit entities rules that supplement the SME rules are likely to be only 30 to 40 pages long, with three or four pages addressing the main issues the ASB has identified as particular problems for the sector.

Lennard admits the targets the ASB has set itself are ambitious, with a lot of work still to be done to draw up the necessary standards, but he anticipates that they can be met with hard work. He is also confident that the ASB will give its backing to the continued existence of a Statement of Recommended Practice for the voluntary sector, which will interpret the rules in the public benefit entities standard. Third sector accountants gave their strong support to its continued existence. "The Sorp is valued in the sector," he says. "We expect to continue with Sorps for the time being."

While the draft of the standard is being drawn up, the Charity Commission and the Office of the Scottish Charity Regulator will lead work to create a new Sorp for the charity sector.

The new Sorp is likely to be reasonably similar to the one drawn up in 2005, says Ray Jones, policy accountant at the commission and an observer member of the ASB's Cape committee."The SME standard is what the public benefit entities standard will be written around," says Jones. "That will be much more manageable than the full standard and fits reasonably well with the existing charities Sorp. There will be some changes, but we are not looking at a radically different framework."

So what questions will need to be answered by the new Sorp? And what problems will arise after the public benefit entities standard is created?

One issue that Jones highlights is the change in the legislative underpinning of the Sorp, which at present is based on charity law, not the ASB's rules. "We will need to consult on changing the legislative basis for the Sorp," he says. "The Scots will also have to do the same. The Sorp is in Scottish law, too."

Another problem with the new Sorp is that it will need to work for all charities, from the largest to the smallest, even though they will use three different tiers of the new accounting standards. Although accounting for public benefit entities will be based chiefly around the SME standard, some charities will have to use the full IFRS standard, known as Tier 1, because of the complexity of their financial structures. In particular, charities that have issued listed debt to the public or provide banking services are likely to have to use the full, 3,500-page IFRS standard.

Some small charities might want to use a third-tier solution, the Financial Reporting Standard for Small Entities, an accounting standard intended to make accounting easier for very small businesses. But many accountants expect this third standard to be phased out in coming years.

Don Bawtree, head of not-for-profit at accountants BDO, says many of the disagreements that were raised when designing the last Sorp are likely to be aired once again. One potential issue that is likely to cause changes, he says, is that the Sorp will be brought much more closely in line with the Sorps governing universities and housing associations.

"If the other bodies get involved, we could see it move away from a standard designed just to suit charities," he says.


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