DisasterRelief is a charity that provides aid to those affected by events such as flood and famine. It owns a consignment of 10,000 blankets, which are stored in a warehouse in Oxfordshire. It has no present use for the blankets, but holds them so that when the next disaster strikes they will be available for immediate despatch for free distribution to the victims. To an accountant, the first question is whether those blankets are assets.
This is the sort of question that the Accounting Standards Board's Statement of Principles for Financial Reporting (SoP) is supposed to help to answer. Unfortunately, the statement defines an asset in terms of future economic benefit, so this seems merely to change the question to whether or not the blankets will provide economic benefit to DisasterRelief. Some might conclude that, as the blankets are destined to be given away, they are not assets. Is this right?
We will return to that question later. However, it clearly shows that application of the SoP to charities and similar entities may not be straightforward, and gives rise to questions that are rarely, if ever, encountered in the commercial sector. And yet, in the ASB's view, the same principles should underlie financial reporting irrespective of the sector in which an entity operates.
For this reason, it has developed an Interpretation for Public Benefit Entities of its SoP, which has just been published.
This represents the culmination of a project that started with a discussion paper in May 2003 and continued with an exposure draft in August 2005. Throughout this process, the ASB was assisted by its advisory Committee on Accounting for Public-benefit Entities (CAPE) and took account of numerous comments submitted by interested parties.
The interpretation explains that the term 'public benefit entities' embraces entities in both the private and public sectors whose primary objective is to provide goods or services for the general public or social benefit. These entities are of great significance to the UK economy.
The interpretation is intended to operate alongside the SoP. Changes are confined to rewording and shifts of emphasis designed to clarify the application of the principles to public benefit entities. The close relationship between the interpretation and the original SoP is made clear by the inclusion of tables comparing it with the SoP paragraph by paragraph.Clarifications
A few examples will demonstrate the approach taken in the interpretation.Stewardship
There is considerable controversy about the importance of stewardship as part of the objectives of financial statements - and the ASB has made clear that it believes this concept is important. Whatever may be the right answer for profit-oriented enterprises, the interpretation suggests that the importance of information on stewardship requires special emphasis in the context of public benefit entities.Funders and financial supporters
The SoP identifies present and potential investors as the defining class of user but many, perhaps most, public benefit entities would have difficulty in identifying parties who would consider themselves 'investors' - indeed the interpretation notes that providing a financial return to shareholders will not be a primary objective of such entities. Instead, 'funders and financial supporters' are identified as the defining class of user for financial statements in the public benefit sector.Funds
It remains common in the public benefit sector, long after it has become obsolete elsewhere, for financial statements to attempt to portray something about an entity's financial position by dividing the reserves into various funds.
While acknowledging that this may be legitimate - for example, where there is a trust that legally restricts the deployment of resources - the interpretation notes that mere designation reflecting no more than management intent should not be recognised as a transaction in the financial statements.
Information of this kind would normally be provided in accompanying information, for example, in the management commentary.Assets
The interpretation notes that, in the context of the definition of assets, the term economic benefits includes 'service potential' as well as cash inflows. Service potential includes the ability to provide goods or services to beneficiaries in furtherance of the entity's objectives - so, yes, DisasterRelief's blankets are assets! Perhaps of even greater relevance, the interpretation notes that under this view historic and inalienable items are also assets because they provide services to the entity or its beneficiaries. This is the view the ASB has consistently expressed in its work on heritage assets.The interpretation in practice
It would be unrealistic to expect a framework document such as the interpretation to provide solutions to all the issues that arise in the public benefit context. However, the interpretation should guide the work of those responsible for the development of financial reporting in the sector.
This will include bodies developing statements of recommended practice (SORPs) in accordance with the ASB's standing arrangements and the board itself in framing new accounting standards.
However, the interpretation is not an accounting standard and does not override the requirements of existing accounting standards or SORPs. Where there is an inconsistency between the principles set out in the interpretation and a standard, the standard must be followed until it is replaced or revised.
For example, application of SSAP 4, Accounting for Government Grants, may result in the recognition in the balance sheet of deferred credits that do not meet the definition of liabilities. This is an issue that the ASB will be considering further: the International Accounting Standards Board has a review of its corresponding standard within its sights as well and progress on this will obviously influence developments.The future
As noted above, the interpretation is closely based on the ASB's original Statement of Principles for Financial Reporting. In developing the interpretation, the ASB did not try to re-debate or update the SoP, which is now almost 10 years old. The SoP itself will need updating in due course, and a review will be necessary in any case in the light of international developments.
In particular, the IASB and the US Financial Accounting Standards Board are working on a converged framework. The ASB is closely following this work and seeking to engage its constituents in debate on it. It has also joined forces with the standard-setters of Australia, Canada and New Zealand and is monitoring in particular the framework's applicability to not-for-profit entities in the public and private sectors.
This work has resulted in the publication of a report on the IASB/FASB's first discussion paper on the conceptual framework project, which is available on the ASB website at www.frc.org.uk/asb/technical/projects/ project0061.html.
The ASB is also working closely with the International Public Sector Accounting Standards Board. The IPSASB has launched its own project to develop a Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities, although this does not include the many private sector not-for-profit entities.
ASB chairman Ian Mackintosh serves on the sub-committee that prepares issue papers and draft consultation papers for the IPSASB to discuss, and David Loweth, ASB technical director, is taking the lead on one of the first issue papers, on the objectives of financial reporting.
While the interpretation will no doubt be revised in the light of this international work, its publication now will help ensure that UK views are fully considered. And, as the international projects will take some time to complete, the interpretation has an important immediate role in the development of financial reporting in the UK.
Alan O'Connor is secretary of the Accounting Standards Board's Committee on Accounting for Public-benefit Entities (CAPE).