What does the IFRS for SMEs mean for the not-for-profit sector?
Thursday, January 14, 2010 | Posted by: Jenny Brown
Categories:
Future of UK GAAP
| Tags: education,
IFRS,
charity,
IFRS for SMEs,
SMEs,
ASB,
not-for-profit,
social housing,
SORP
IFRS for SMEs and the not-for-profit sector: the temptation is to dive in and start identifying individual standards or sections, differences and their impact for the sector. However the ASB’s consultation document forces us to start with the real basics. What should the guidance even look like? Who should be responsible for it? How much should there be?
The consultation suggests a ‘public benefit entity’ standard, which would translate the profit focussed IFRS for SMEs into language that makes sense in a not-for-profit entity, but that also tackles issues such as fund accounting. There are distinct advantages to such a translation, although it does raise questions about the level of detail it could provide if it has to cover the diverse needs of the charity, education and social housing sectors.
Does this signal the end for the SORP?
Do you think we need a SORP for each of the not-for-profit sectors - comments please.
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Find out more on our IFRS for SMEs site
Reader Comments (2)
You raise some interesting points.
I do struggle though with the thought of the not for profit sector somehow getting an exemption from the ‘transfer’. Whilst it may seem now like sticking ‘to what we know’ and UK GAAP would be a far simpler option, failing to keep in line with the ‘commercial’ sector as it moves to IFRS (in one form or another) would make understanding the not for profit sector more difficult and cause a mismatch of accounting in any group that contains a blend of commercial and not for profit entities. In addition, the proposal is that UK GAAP would actually be IFRS for SMEs and this would cause some difficulties in the legal standing of the SORPs and other relevant accounting guidance (who would endorse the standards on which they were based?).
I agree the detail is always an irresistible place! On the assumption that the investments we’re talking about would be “basic” financial instruments, then the IFRS for SMEs says that “if the shares are publicly traded or their fair value can otherwise be measured reliably, the investment shall be measured at fair value with changes in fair value recognised in profit or loss.” This does require movements in the value of investments to be recognised within profit or loss and so it’s a valid point regarding the impact of this treatment on the volatility of the profit or loss line under IFRS for SMEs and the practicalities of budgeting to hit zero.
Realising that the same is not true of a ‘not for profit’ but not charity organisation such as yours, I know that many that charities are already used to such volatility since the Statement of Total Recognised Gains and Losses (STRGL) required under UK GAAP includes gains and losses on investment assets and is incorporated in the lower part of the Statement of Financial Activities (SoFA) under the Charities SORP 2005. Charities and their stakeholders have become used to looking at the net movements in funds line, after the STRGL elements, on the SoFA as part of the assessment of financial performance for the period. The reporting of financial performance and reserves policies in trustees’ annual reports acknowledges the contribution of STRGL elements, such as gains/losses on investments and actuarial gains and losses on defined benefit pension scheme assets/liabilities, towards the bottom line result for the period.
Although I agree that this undeniably causes some difficulty in trying to ‘budget to zero’ (as the movements could still be presented in a revaluation reserve) it would still be possible to identify the underlying results of the organisation whilst truly reflecting the funds available to the organisation at the year end (were the investments to be cashed in).
Added Wed Feb 2010 at 02:02:14
Rather than draft numerous SORPs and translate IFRS for our sector, is there any mileage in lobbying to keep UK GAAP for not-for-profits? We do not all have a clearly “different” legal status, such as a charity. Our not-for-profit status is simply in our mem & arts.
The additional resource and cost of a move to IFRS for SMEs seems simply unnecessary for businesses that do not necessarily raise capital in traditional ways and have no interest in listing or overseas comparability.
Sorry but I cannot resist temptation and dive into the detail because let’s face it - in business all we really care about is the impact on our respective businesses and our ability to deliver our mandate to our Board and members. The deeper issue is that many of us rely on investments for income. Any IFA will tell you that a sensible investment horizon is 10 years so mark-to-market for investments is going to create huge volatility in my P&L and make budgeting to hit zero (already a difficult annual task!) near impossible.
Market prices are set daily, FS are annual and investments span 10 years, so let’s just pick a daily price. Madness. As we have just witnessed the volatility impact of MTM for banks, will we see the collapse of charities and nfps? Probably not, much more likely we will see a substantial cutting back of services and good nfp work because FDs have to take some risk out of the B/S.
The price of “transparency” is that we lose a longer term perspective on service delivery to our trade or community. Classic short-termism.
Added Tue Jan 2010 at 07:01:57