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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.

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

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