A three-tiered structure
Pesh Framjee reviews the key proposals for the new public benefit entity accounting standard set out in FRED 45
In 2007, the Accounting Standards Board (ASB) published the Interpretation for Public Benefit Entities of the Statement of Principles for Financial Reporting (the Interpretation) which sets out the principles underpinning the preparation and presentation of general purpose financial statements of public benefit entities. However, this was not a Financial Reporting Standard (FRS) and there has long been some concern that FRSs were written primarily for private sector organisations and did not cater for non- profit ones.
So it is a welcome development that, in March 2011, the ASB published the Financial Reporting Exposure Draft 45 (FRED 45) Financial Reporting Standard for Public Benefit Entities(FRSPBE) to set out proposals for specific financial reporting requirements to be applied by public benefit entities (PBEs).1 The ASB is requesting comments by 31 July 2011. The PBE standard is to be a ‘differences only’ standard – identifying where there are omissions in FRSs that need addressing for PBE purposes.
A three-tiered structure
FRED 45 follows on from FRED 43 and FRED 44 that cover the ASBs proposals for the future of financial reporting.2 This proposes a three-tier structure where, in general terms, all those entities with public accountability (Tier 1) will use EU-adopted IFRS with the balance following new standards according to size. The smallest entities will fall into Tier 3 and prepare financial statements using the Financial Reporting Standard for Smaller Entities (FRSSE), and others (Tier 2) will follow the Financial Reporting Standard for Small and Medium-Sized Entities (FRSME) unless they have ‘public accountability’. It will be possible to opt up to a ‘higher’ accounting regime.
Public accountability
Many regulators such as the Charity Commission have long emphasised that charities must be publicly accountable; however it is not the intention that the definition of ‘publicly accountable’ in FRED 43 will catch all charities. The definition requires that a charity is treated as having public accountability if it has listed debt or equity and/or as one of its primary businesses, if it holds assets in a fiduciary capacity or is a deposit taking entity for a broad group of outsiders. Some charities have expressed concern that they see themselves as holding funds in a fiduciary capacity as they receive funds on trust. The ASB has sought to clarify that the definition is not expected to catch the generality of charities.
Five of the key issues in FRED 45 and proposed changes from existing Generally Accepted Accounting Principles (UKGAAP) and the Charity SORP are summarised in Figure 1, along with comments in each one.
Housing associations will need to note that the proposals are that grants received for capital expenditure will now need to be recognised on a receivable basis (the treatment in the charity SORP) rather than deferred over the life of the related asset. However, new guidance on impairment may allow a measure of matching.
See also Pesh Framjee's longer article on why unsold goods donated for resale should not be included in the balance sheet here.
1. www.frc.org.uk/images/uploaded/ documents/FRED45%20Web%20Optimised.pdf
2. See also www.charitiesdirect.com/caritas-magazine/shape-of-the-sorp-to-come-895.html
Author: Pesh Framjee
Pesh Framjee Pesh Framjee, Head of the non-profit unit at Crowe Clark Whitehill is Special Adviser to CFDG and is a member of the Charity SORP Committee. He has worked with charities for over 35 years and advises charities on financial, governance and strategic matters.
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