Charities: 2012 - Where Are We Going?

Author:Mr Adrian Wild, Fiona Reid, Ian Stinson, David Blenkarn, Ian Richley and Adam Stephens
Profession:Smith & Williamson
 
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EDITOR'S COMMENT: 2012 – WHERE ARE WE GOING?

By Adrian Wild

Since issuing its proposed public benefit entity accounting standard, the UK Accounting Standards Board has decided not to issue separate guidance for public benefit entities.

2012 looks to be an interesting year for charities. The economic outlook continues to be very uncertain. As with other European countries, UK unemployment continues to rise. Demand for many charities' services will also increase.

While we hope that few charities will succumb, we highlight possible actions for charity trustees should the worst come to the worst. Low interest rates help individuals struggling with debt, but reduce income for many charities.

However, on a more optimistic note, by careful selection of investments it is possible to generate higher income yields.

With a focus on service delivery and matching costs to available income, increasing regulation is the last thing that charities need. Here there is some good news – the Charities Act 2011 was recently passed. This hasn't changed the law, but has made it more accessible.

We are also hopeful that the review of the Charities Act 2006 will, in time, enhance the existing law. The significant changes to UK accounting are likely to be deferred (to 2015) and further consultation will take place in the coming year. Hopefully, the changes for charities will not be onerous.

And finally, after much procrastination, we are promised VAT legislation which should help charities share costs and/or work in consortia by removing the 20% VAT cost that they currently suffer. Although HMRC will impose eligibility criteria, we are confident that this will allow charities to improve efficiency and deliver greater services to their beneficiaries.

PERFORMING A U-TURN

By Fiona Reid

In our autumn 2011 charities newsletter we reported on the UK Accounting Standards Board's (ASB) proposed public benefit entity accounting standard, the FRSPBE, which was issued in exposure draft form for comment in March 2011. Since the publication of that newsletter, the ASB has decided to incorporate the requirements of the FRSPBE into the Financial Reporting Standard for Medium-sized Entities (the FRSME) and not issue separate guidance for public benefit entities (PBEs). The ASB has also decided to update the Financial Reporting Standard for Smaller Entities (the FRSSE) to require PBEs to have regard to the PBE requirements of the FRSME.

We noted in the previous edition that the effective date for application of the new accounting standards had been put back from July 2013 to January 2014. However, in November 2011 the ASB announced that this was likely to be postponed even further, to 1 January 2015. This delay may have a knock-on effect on the publication of the charities Statement of Recommended Practice (SORP), as certain modules of the new SORP are in draft format subject to the publication of the final version of the FRSME.

The ASB is considering the feedback received in response to the consultation on the FRSPBE exposure draft and has tentatively agreed to change the proposed treatment of donated goods. The change will allow for income to be recognised when goods are sold if it is not practical or beneficial to estimate the fair value of the goods at the point they are received by the entity. The ASB hopes that this will mitigate the concerns raised during the consultation period in respect of the recognition of low value items donated to charity shops. This does appear to go some way to reducing the issue, but still leaves significant room for inconsistency of approach between entities and therefore is not an ideal solution. The option of a cost-benefit argument may be difficult to apply in practice and could lead to disagreement between PBEs and their auditors.

The ASB has also made further announcements in relation to property held primarily for the provision of social benefit, for example housing properties for social rent. The draft FRSPBE required that these be held as property, plant and equipment and did not permit classification as investment properties.

The implication of this was that under the new standards, as they were initially proposed, it would not have been possible to revalue property held for the provision of social benefit. However, the ASB has reconsidered this and agreed that accounting options currently permitted under United Kingdom Generally Accepted Accounting Practice (UK GAAP) will be included in the next draft of the FRSME. This means that it should be permissible to include properties held in property, plant and equipment at a market valuation instead of at cost.

The ASB has announced that a revised exposure draft of the FRSME will be issued which incorporates the changes noted here, so you should expect to see further updates in future issues of this publication.

PRODUCING A REAL RETURN IN AN UNCERTAIN WORLD

By Ian Richley

What should your charity's investment strategy be in the current unusual economic environment? Ian Richley discusses.

Developed economies are likely to remain overshadowed by structural challenges for many years, principally due to demographic trends and excessive sovereign debt, problems that have been looming for a decade but are only now beginning to force changes in living standards.

This economic malaise poses a huge challenge for charities. Despite an inflation rate which has been above the Bank of England (BoE) target rate of 2% for 24 consecutive months and is currently only modestly lower than that of China, interest rates in the UK have been anchored at their lowest ever rate of 0.5% for more than two and a half years and there is little reason to believe that rates will increase any time soon. On the contrary, the BoE recently embarked on a third round of 'printing money' via quantitative easing (QE).

Against such a backdrop, there have rarely been greater headwinds faced by charities aiming to generate income from their assets while maintaining their real value.

The hope is that QE and a period of unusually low interest rates will provide sufficient support to offset the impact of deleveraging, which threatens to push economies back into a more prolonged recession if left unchecked. The effectiveness of QE is difficult to measure. Although it has probably served to prevent an even greater economic downturn in the short term, the long-term ramifications are more worrisome. Indeed, its primary rationale is to provide banks with liquidity and to underpin asset prices. In other words, savers are being encouraged to borrow and investors to speculate in a bid to maintain the purchasing power of their money. The risk is that the current...

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