1. The document discusses the future of financial reporting frameworks for charities in the UK. It outlines the development of International Financial Reporting Standards (IFRS) and their increasing global adoption. 2. It proposes a new Financial Reporting Standard for Public Benefit Entities (FRSPBE) that would apply specifically to charities and non-profits. Key aspects of the proposed FRSPBE include definitions of public benefit entities, accounting for concessionary loans, property, entity combinations, and incoming resources from non-exchange transactions. 3. Charities would choose between applying the full IFRS, the proposed FRSPBE, or the Financial Reporting Standard for Smaller Entities (FRSSE) depending

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

4. CONVERGENCE WITH IFRS ‘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’

5. CONVERGENCE WITH IFRS 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 IFRS Tier 2 All other entities Apply adapted version of the IFRS for SMEs (“FRSME”) Tier 3 “Small” entities Apply FRSSE Subsidiaries Reduced disclosure Subsidiaries 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

8. IFRS FOR SMALL AND MEDIUM SIZED 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 Impairment Funding Commitments Incoming Resources from non exchange transactions Heritage assets FRSPBE

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”?

22. What is the primary purpose?

23. Beware:

24. Future developments on investment definitions

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

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

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

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

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

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

61. Format of primary statements

62. Fresh start accounting (to replace merger accounting)

63. Associates

64. Social Benefit Obligations

67. The timetable - for the same reason

68. The FRSBE - because of cross sector lobbying

69. The Sorp(s)

70. Because they have to!

72. Decision Publically accountable – no choice, full IFRS Smaller entity FRSSE FRSME IFRS RP? Tier 2 FRSME IFRS

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