New accounting proposals could force some charities to have to renegotiate loan agreements with their bank, PwC has warned.
Under current accounting rules, housing associations, universities and charities - described as public benefit entities (PBE) - can adjust their accounts to recognise assets that have risen in value.
However, the Accounting Standards Board, which is trying to align UK standards more closely with international, is consulting on changing the rules so PBEs will only be allowed to illustrate assets at their original price and not reflect rises in value.
The situation could put some organisations at risk of failing loan covenant tests - because the agreements are based on balance sheets showing the most up to-date value of those assets, PwC said.
There are clauses in some banking agreements which legislate for changes in accounting rules, but PwC warns that organisations could face tough talks with lenders if they are not prepared for such a change.
PwC is now urging those who believe they might be affected to clarify their position to avoid potentially onerous talks with their lenders.
Matthew Hodge, director at PwC said: “It is vital that organisations take advice, because there are accounting options that may help avoid the need to renegotiate contracts with banks.”
The Accounting Standards Board (ASB) has decided to create an accounting standard for charities and other public benefit entities, as part of its work to harmonise UK accounting standards with international ones.
Last year the ASB issued two new ‘exposure drafts’ that outlined its proposals for a new three-tiered approach to UK financial reporting and a new accounting standard based on the international reporting standards for small and medium-sized entities. These proposals are still out for consultation.
