The future of financial reporting for charities<br />May 2011<br />
The Background<br />
Development of IFRSs<br />First developed in the 1970s to provide a GAAP for those countries without an established standa...
CONVERGENCE WITH IFRS<br />‘Pure’ UK GAAP standards<br />FRS 19 ‘Deferred tax’ (2000)<br />FRS 27 ‘Life Insurance’ (2004)<...
CONVERGENCE WITH IFRS<br />IFRS based UK standards<br />FRS 20 (IFRS 2) Share based payment (2004-2009)<br />FRS 21 (IAS 1...
UK ASB’s proposed framework<br />Tier 1<br />Publicly accountable entities<br />Apply full<br />IFRS<br />Tier 2<br />All ...
Tier 3<br />Small entities eligible to use FRSSE<br />Apply FRSSE<br />Small entities<br />Tier 2<br />All other entities<...
IFRS FOR SMALL AND MEDIUM SIZED ENTITIES<br />Stand-alone standard published July 2009<br />Why developed<br />Full IFRS t...
IFRS TRANSITION: Earliest dates?<br />
Current not for profit accounting framework<br />
Future framework for charities<br />Financial Reporting Standard for Public Benefit Entities<br />
Future framework for charities<br />Financial Reporting Standard for Public Benefit Entities<br />
The FRSPBE<br />
FRED 45: FRS for Public Benefit Entities<br />Application of financial reporting requirements<br />Concessionary loans<br ...
1. Definition of a PBE<br />“An entity whose primary objective is to provide goods or services for the general public, com...
Important factor = primary purpose of entity is not to provide economic benefits to investors
 Absence of investors = a PBE?
Unclear for certain types of membership organisations (e.g. trade unions, professional bodies)
Members could be considered “investors” and their annual subscriptions “equity”?
Primary purpose is to provide economic benefits to members?</li></li></ul><li>2. Concessionary loans<br />“A loan made or ...
3. Property held for the provision of social benefits<br /><ul><li>“Properties held for the primary provision of social be...
What is the primary purpose?
Beware:
Future developments on investment definitions
Potential developments in lease accounting</li></li></ul><li>4. Entity combinations<br /><ul><li>“Market” transaction (van...
Merger accounting
no party to the combination is portrayed as either acquirer or acquiree
there is no significant change to the class of beneficiaries of the combining entities or the benefits provided as a resul...
Equal participation of each of the combining partiers in determining management structure and personnel, with decision bei...
Combinations that are in substance a gift
Usually nil consideration
Net assets received = credit to income
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The Future of Financial Reporting for Charities, Don Bawtree, BDO

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Current developments in Charity reporting and the agenda for implementating new international financial reporting standards.

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The Future of Financial Reporting for Charities, Don Bawtree, BDO

  1. 1. The future of financial reporting for charities<br />May 2011<br />
  2. 2. The Background<br />
  3. 3. Development of IFRSs<br />First developed in the 1970s to provide a GAAP for those countries without an established standard setting process<br />Taken on real importance since 2000<br />IOSCO endorsement (1999/2000)<br />Main basis of accounting for EU listed companies since 2005<br />Required or permitted in over 100 countries (EU, China, Brazil, Australia, Canada, South Korea, South Africa, Russia)<br />Seeking to achieve convergence (US, India, Japan)<br />Designed primarily (solely?) for use by stakeholders, principally investors, in profit making organisations<br />
  4. 4. CONVERGENCE WITH IFRS<br />‘Pure’ UK GAAP standards<br />FRS 19 ‘Deferred tax’ (2000)<br />FRS 27 ‘Life Insurance’ (2004)<br />good practice embedded prior to IFRS adoption<br />FRS 28 ‘Corresponding amounts’ (2005) <br />due to removal from CA85 requirement to present comparatives<br />FRS 30 ‘Heritage assets’ (2009)<br />UITF 40 ‘Revenue Recognition and service contracts’<br />UITF 43 ‘Interpretation of equivalence for purposes of S228A CA85’<br />
  5. 5. CONVERGENCE WITH IFRS<br />IFRS based UK standards<br />FRS 20 (IFRS 2) Share based payment (2004-2009)<br />FRS 21 (IAS 10) Events after the balancer sheet date (2004-2009)<br />FRS 22 (IAS 33) EPS (2004)<br />FRS 23 (IAS 21) Effects of foreign exchange (2004)<br />FRS 24 (IAS 29) Hyperinflation (2004)<br />FRS 25 (IAS 32) Financial instruments: presentation (2004 - 2009)<br />FRS 26 (IAS 39) Financial instruments: recognition & measurement (2004-2009)<br />FRS 29 (IFRS 7) Financial instruments: disclosure (2005,2007-2009)<br />Annual improvements project<br />UITFs 39, 41, 42, 44 and 45 (since Feb 2005)<br />
  6. 6. UK ASB’s proposed framework<br />Tier 1<br />Publicly accountable entities<br />Apply full<br />IFRS<br />Tier 2<br />All other entities<br />Apply adapted version of the IFRS for SMEs<br />(“FRSME”)<br />Tier 3<br />“Small” entities<br />Apply<br />FRSSE<br />Subsidiaries<br />Reduced disclosure<br />Subsidiaries<br />Reduced disclosure<br />
  7. 7. Tier 3<br />Small entities eligible to use FRSSE<br />Apply FRSSE<br />Small entities<br />Tier 2<br />All other entities<br />Apply UK adopted IFRS for SMEs<br />Everything else<br />Tier 1<br />Publicly accountable entities<br />Apply EU adopted IFRS<br />Publicly accountable entities<br />
  8. 8. IFRS FOR SMALL AND MEDIUM SIZED ENTITIES<br />Stand-alone standard published July 2009<br />Why developed<br />Full IFRS too complicated – cost v benefit analysis<br />Full IFRS does not meet needs of majority of users of accounts<br />Based on IFRS<br />shorter (230 pages)<br />35 sections and 300 notes<br />less fair value measurement and more use of historical cost accounting<br />5 years in the making<br />2004 discussion paper<br />2007 exposure draft<br />2009 final standard<br />To be updated and improved every 3 years<br />
  9. 9. IFRS TRANSITION: Earliest dates?<br />
  10. 10. Current not for profit accounting framework<br />
  11. 11. Future framework for charities<br />Financial Reporting Standard for Public Benefit Entities<br />
  12. 12. Future framework for charities<br />Financial Reporting Standard for Public Benefit Entities<br />
  13. 13. The FRSPBE<br />
  14. 14. FRED 45: FRS for Public Benefit Entities<br />Application of financial reporting requirements<br />Concessionary loans<br />Property held for the provision of social benefits<br />Entity Combinations<br />Impairment<br />Funding Commitments<br />Incoming Resources from non exchange transactions<br />Heritage assets<br />FRSPBE<br />
  15. 15. 1. Definition of a PBE<br />“An entity whose primary objective is to provide goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity’s primary objectives rather than with a view to providing a financial return to equity providers, shareholders or members.”<br /><ul><li>Purpose ≠ to benefit the public as a whole
  16. 16. Important factor = primary purpose of entity is not to provide economic benefits to investors
  17. 17.  Absence of investors = a PBE?
  18. 18. Unclear for certain types of membership organisations (e.g. trade unions, professional bodies)
  19. 19. Members could be considered “investors” and their annual subscriptions “equity”?
  20. 20. Primary purpose is to provide economic benefits to members?</li></li></ul><li>2. Concessionary loans<br />“A loan made or received between a public benefit entity and a third party at below the prevailing market rate of interest which is not repayable on demand.”<br />Example<br />PBE X makes an unsecured £100,000 loan interest free to another entity (Non-PBE Company Y) repayable in 5 years. The market rate of interest that company Y would be charged for such a loan is 10%<br />
  21. 21. 3. Property held for the provision of social benefits<br /><ul><li>“Properties held for the primary provision of social benefits, e.g. social housing, shall not be classified as investment property”
  22. 22. What is the primary purpose?
  23. 23. Beware:
  24. 24. Future developments on investment definitions
  25. 25. Potential developments in lease accounting</li></li></ul><li>4. Entity combinations<br /><ul><li>“Market” transaction (vanilla acquisition) = apply rules in the FRSME
  26. 26. Merger accounting
  27. 27. no party to the combination is portrayed as either acquirer or acquiree
  28. 28. there is no significant change to the class of beneficiaries of the combining entities or the benefits provided as a result of the combination
  29. 29. Equal participation of each of the combining partiers in determining management structure and personnel, with decision being taken on the basis of consensus rather than purely by exercise of voting rights
  30. 30. Combinations that are in substance a gift
  31. 31. Usually nil consideration
  32. 32. Net assets received = credit to income
  33. 33. All other accounting as per vanilla acquisition inv FRSME</li></li></ul><li>5. Impairment of assets<br /><ul><li>Occurs when NBV is more than both
  34. 34. Fair value less costs to sell; and
  35. 35. Value in use
  36. 36. Fair value less costs to sell would need to factor in any restrictions on the use of the asset in question
  37. 37. For assets held for their service potential rather than to generate cash flows, value in use is the present value of that future service potential
  38. 38. Depreciated replacement cost
  39. 39. Other approaches may be used where appropriate (e.g. planned subsidy…service potential?)</li></li></ul><li>6. Funding commitments<br /><ul><li>Provide if and only if
  40. 40. Cannot realistically withdraw from obligation (necessarily must have communicated the commitment to the recipient); and
  41. 41. Obligation is not dependent on performance of the recipient
  42. 42. Distinction between conditions that are performance related and those that are not performance related
  43. 43. “In most cases there is no liability, because entities rarely make irrevocable commitments without requiring future performance from the recipient”</li></li></ul><li>7. Incoming Resources from Non-exchange Transactions<br /><ul><li>Non-exchange transaction = receiving (giving) something of value without approximately equal value being given (received) in exchange
  44. 44. Deals only with the receive side
  45. 45. If no performance conditions attaching to receipt then recognise when receivable
  46. 46. If receipt is dependent on performance conditions then recognise income when those performance conditions are met
  47. 47. Recognise a liability if resources received before performance conditions are met. But recognise liability for repayment based on probability
  48. 48. Conditions that merely reflect an entity’s objects / operating mandate are not performance conditions (implies non-deferral of SHG)</li></li></ul><li>7. Incoming Resources from Non-exchange Transactions (Continued)<br /><ul><li>Legacies
  49. 49. Recognise when receipt is certain and amount can be reliably measured
  50. 50. Deemed to be following probate and confirmation that there are sufficient assets to pay the legacy
  51. 51. Timing for recognising as income doesn’t seem to link in to asset recognition criteria in FRSME
  52. 52. Donated services
  53. 53. Recognise as income and expense when value can be reasonably quantified
  54. 54. Current charity SORP prohibits recognition of volunteer time</li></li></ul><li>NEOLITHIC BURIAL MOUNDS<br />
  55. 55. 8. Heritage Assets<br /><ul><li>Incorporates into FRSME (so that non PBEs can also apply)
  56. 56. Reflects accounting in FRS 30
  57. 57. Cost or valuation if information available
  58. 58. If information about cost or valuation not available without undue cost or effort then do not recognise
  59. 59. Same disclosure requirements</li></li></ul><li>Application to tiers<br /> Mandatory<br /> Best practice guidance<br /> Not permitted<br />
  60. 60. Future Developments<br /><ul><li>Narrative reporting
  61. 61. Format of primary statements
  62. 62. Fresh start accounting (to replace merger accounting)
  63. 63. Associates
  64. 64. Social Benefit Obligations
  65. 65. Fund accounting and link to segmental reporting</li></li></ul><li>FRSBE on narrative reporting<br />
  66. 66. What may change and why<br /><ul><li>The FRSME - because of commercial reactions
  67. 67. The timetable - for the same reason
  68. 68. The FRSBE - because of cross sector lobbying
  69. 69. The Sorp(s)
  70. 70. Because they have to!
  71. 71. Modular approach</li></li></ul><li>What you should do about it<br />Planning<br />Which framework<br />Impact on reserves<br />Bank arrangements<br />“Impression”<br />Collecting data<br />Reporting <br />Lobbying<br />
  72. 72. Decision<br />Publically accountable – no choice, full IFRS<br />Smaller entity<br />FRSSE<br />FRSME<br />IFRS<br />RP?<br />Tier 2<br />FRSME<br />IFRS<br />
  73. 73. What will influence the decision<br />Flexibility in final frameworks<br />Future plans for:<br />The organisation itself<br />The FRSME<br />Importance of the key differences, currently<br />
  74. 74. Questions<br />PBAG Future of UK GAAP Seminar <br />14 June 2011<br />
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