The Charity Commission is to launch a three-month consultation with the sector in June on the implementation of the pension accounting standard FRS17.
From June 2003, charities which run defined benefit or final salary pension schemes for their staff will have to show the deficit or surplus of the fund on their balance sheet. FRS17 introduces a "minimum funding requirement
whereby if a scheme goes beyond a set deficit level, the employer has to pay off the deficit in three to 10 years. Around 4,000 to 5,000 charities will be affected.
The Commission has produced a draft bulletin on its preferred solution for charities but the document needs to be approved by the Commission's SORP committee and the Government's Accounting Standards Board. The bulletin will be sent to charities in June with a questionnaire asking for views on the Commission's proposed method of implementing FRS17.
Rosie Chapman, the Commission's director of policy, said: "The implementation of FRS17 will not, of itself, directly affect a charity's cash flow. The risks and rewards of defined benefit pension schemes exist irrespective of the accounting treatment adopted. The challenge facing trustees will be explaining to funders and other users of the accounts the funding impact of a disclosed surplus or deficit."
However, according to Robert O' Donovan, partner with law firm RadcliffesLeBrasseur, FRS17 may inadvertently discourage a charity's funders because it could, in some cases, give a worrying impression of its financial health.
"Short-term fluctuations on a pension scheme become extremely public and people become alarmed about them,
he said. "It could put funders off in particular cases. Funders may feel that they want grants to go to charitable purposes, not to make good a deficit on pensions."