Reporting must enable us to reflect public benefits

A recent Charity Commission consultation on investment highlights how difficult it is to account for investments that produce social and financial return

Ray Jones
Ray Jones

Accounting is all about reflecting transactions consistently and fairly. The discipline therefore tends to respond to innovative transactions and developments with new rules and conventions. One example is the development of complex rules for accounting and reporting financial derivatives; another is the effort made to prevent transactions being recorded off the balance sheet.

Such responses do not always meet with success - take the Enron scandal or the recent banking crisis. Did their accounts offer a warning about what was to come? But accountants don't give up - they go back to the drawing board to try to ensure the next set of accounting rules reflects what is actually going on. So accounting is always in the process of catching up.

In the context of the charity sector, the term 'innovation' tells a happier story. However, even here, accountancy is working to keep pace with transactions taking place today.

The recent Charity Commission consultation on investments provides a good case in point. Traditionally, an investment is held to produce income and/or capital gains that can then be used by a charity to further its purposes. From an accounting perspective, this approach is straightforward - there is income and there are gains that can be recognised in accounts and a market value that reflects the investment's future financial prospects, which can easily be slotted into a balance sheet.

But what happens when an investment is held partly to produce a financial return and partly to further a charity's purposes? How do you measure the value of an investment that provides its return partly in a non-cash form? How do you report the non-cash benefit of an investment that partly furthers your charitable purposes? How do you assess whether such an investment is impaired (is valued at more in the accounts than on the open market) and should be written down?

The answers to these questions obviously need some thought and deliberation. The framework underpinning charity accounting was developed commercially and has only recognised recently that benefits can be achieved in ways other than through the receipt of cash.

That said, however, there are hopeful signs: the proposed new public benefit accounting standard, on which the Accounting Standards Board is consulting, is in itself recognition that charity and public benefit reporting are different and special. The proposals recognise, for example, that an investment in the form of a loan given at below the market rate is a common arrangement used by charities to fund projects that further their charitable purposes. Such investments need not be accounted for as 'financial instruments' and discounted because of the concessionary interest rate. So orthodox accountancy is beginning to get the message.

But to keep this progress going, we all need to continue to press accounting standard setters, in the UK and internationally, to keep charities and public benefit accounting in mind in everything they do. The charity sector does things differently - and accounting must reflect this fact.

Ray Jones is policy accountant at the Charity Commission

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