The new charity accounting framework must serve the needs of users, argues Nick Brooks.
Accountants are generally practical and, in many ways, creative people. But there is a danger in our ‘tick-box society’ that their pragmatism and common sense is slowing draining away.
Over the years we have, by and large, translated the substance of transactions and events into transparent, true, and fair disclosures. We must not now create structures which are inflexible and require the substance to be ‘straightjacketed’ into legal form. The new accounting framework must serve the needs of users.
Before I look at the issues in the draft Financial Reporting Standard for Public Benefit Entities (FRSPBE), there is an important issue in the earlier framework consultation. That is, should there be two or three tiers of accounting, with tier 3 being applicable for smaller organisations, including many charities? The Accounting Standards Board (ASB) has now tentatively proposed that no charity should fall within tier 1, but the debate remains over whether tier 3 should remain or not.
The view of my firm, and that of the Institute of Chartered Accountants in England and Wales (ICAEW), is that tier 3 – based on the existing UK Financial Reporting Standard for Smaller Entities (FRSE) – is untenable for a number of reasons. Not least that it is not a complete accounting platform, as it relies on UK GAAP when the FRSE is silent, and undoubtedly in a short period of time will need to be replaced. The general feeling is that a third tier might be appropriate but based on a new financial reporting standard for micro entities. This has been discussed in Europe but progress is slow.
Turning now to the FRSPBE, I believe that there are two particular areas of difficulty. The first concerns what the FRSPBE calls “incoming resources from non-exchange transactions”, and what we might term ‘donated goods’. The FRSPBE implies that goods donated for resale are recognised as income at fair value at the date of acquisition and should be included in the balance sheet as stock.
Assuming that there is general agreement that donated goods should not be shown as stock, the argument perhaps should follow the principles enshrined in company law, which effectively says that stock must be shown at the lower of cost or net realisable value. The question then is what value is cost in respect of donated goods? A sensible approach would be to deem cost as nil.
The danger is that without clarity on this issue, different charities may treat their stock of donated goods in different ways.
The second area that concerns me is the valuation of donated services by volunteers. To remind readers, the current position as laid down in the Sorp is that “the contribution of volunteers should be excluded from the Statement of Financial Activities as the value of their contribution to the charity cannot be reasonably quantified in financial terms”. The wording in the draft FRSPBE leaves the reader with the distinct impression that it is permissible to value volunteered services in the accounts. The danger is that, if the FRSPBE maintains its current position, those charities that believe they can quantify the value of their volunteers would be able to show these amounts in the SOFA. This is fraught with difficulties. Not only in ascertaining a basis of valuation acceptable to audit scrutiny, but also allowing comparable organisations to treat volunteer services in different ways, depending on the strength of their argument on quantification.
The right approach
I am generally keen to ensure that interpretation of financial reporting standards is left to the Charities Sorp. But the Sorp will not be able to change any specific rules imposed by either the FRSPBE or the tier-2 standard, the proposed Financial Reporting Standard for Medium-sized Entities (FRSME), so we have got to get their final versions correct.
I believe that the ASB has an open ear, but that does not mean that the sector will get everything that it wants. My plea is that we must not forget the need for common sense. What feels like the right approach often is the right approach, irrespective of what the ‘tick box’ tells us.
Nick Brooks is head of not for profit at Kingston Smith LLP and chairs the ICAEW charities technical committee