Community Accountants Conference

What’s changed and what’s changing…

2 February 2012

Ray Jones – Head of Accountancy Policy

What’s changed and what’s changing…..

• A new strategic plan for Commission• A new accounting framework for the UK • A new approach to investments • A new (but same) Charities Act

Feedback from Consultation

• Given resource pressures the Commission needs to focus on core duties, including:

• registration of charities

• providing guidance

• statutory advice or permissions

• ensuring transparency through annual returns

• investigation of alleged wrongdoing

Strategic Plan 2012 - 15

Two key areas of priority for the next four years:– Developing accountability and compliance of

sector; and– Developing self-reliance of the sector

Developing accountability

• Rigorous approach to granting charitable status

• Holding charities to account (review of information we require of charities)

• Promote need for charities to file on time

Online filing…

• Over 90 per cent of charities file Annual Return on line

• But only around 60 per cent file accounts on line• Why is this? • Absence of a "trusted intermediaries" log on for

accountants ?• Unsure about how to convert to PDF (there are

lot's of free packages on the web) ? • We advise customers to go onto Google and type

in “pdf converter”

Developing compliance

• Timely action

• Decisive interventions

• More proactive

• More co-ordinated

New Risk Framework

The risk assessment :

• Does the Commission need to engage?• If it does, what is the nature and level of risk?• If it does, what is the most effective response?

New Risk Framework

• Single point of contact: First Contact (enquiries@charitycommission.gov.uk)

• First stage filter:– Is it for the Commission?– Is it straightforward or requires web guidance?– refer to specialist teams

• Concerns about non-compliance passed to:– Operations Units, or in the most serious cases to:– Investigations and Enforcement

What the Commission will not do in future …

We will not : • give advice to individual charities if the guidance is on

our website • get involved where a member of the public disagrees

with decisions made lawfully by the charity’s trustees• engage in internal or external disputes that are the

responsibility of trustees to resolve • engage in issues that do not pose a serious risk to a

charity’s status, assets, services or beneficiaries • deal with incidents of poor service from a charity were

there is no general risk to its services, its beneficiaries or its resources

• get involved in issues that are the responsibility of another statutory or supervisory body

Future of UK GAAPRemember the tiers

• Tier 1 - EU adopted IFRS• Tier 2 - The FRSME• Tier 3 - The FRSSE• Plus a PBE Standard…

A new accounting framework?

• Accounting periods commencing 1January 2015 • Tier 1 - No extension of EU- adopted IFRS beyond that

currently required by law • Tier 2 – The proposed Financial Reporting Standards

for Medium-sized Entities (the FRSME)• Tier 3 - The Financial Reporting Standards for Smaller

Entities (The FRSSE)• Public Benefit Entity Standard (The PBE Standard) –

will be incorporated into FRSME• Receipts and Payments – not subject to accounting

standards

Full EU –adopted IFRS

• ASB to remove definition of ‘public accountability’ from framework

• No extension of EU-adopted IFRS (Tier 1) beyond current requirements in law

• Only companies (other than charities) with securities admitted to trading on a regulated EEA must apply EU-adopted IFRS

• No charity will be forced into Tier 1 reporting

Tier 2 – the FRSME

• Based on IFRS for SMEs – initially plan was for minimal change … but significant changes now expected

• The FRSME to be reissued for consultation in early 2012 • Amendments likely to allow accounting options

provided in UK GAAP ( e.g.. Revaluation and capitalisation of interest on developments)

• Amendments to facilitate Company Law formats • Additional disclosure of Financial Instruments applying

to Financial Institutions • The PBE Standard be incorporated into the ‘FRSME’ –

setting out ‘what’s different’ for PBEs

Tier 3 - the FRSSE

• The Financial Reporting Standard for Smaller Entities

• Based on company law framework for small companies

• EC proposals to amend Accounting Directives– Increased thresholds for small companies– Simpler notes for small companies

• ASB indicate that FRSSE will be retained but revised in line with new directives

• ASB propose consultation on FRSSE later in 2012

FRSSE Thresholds – EC proposals

• Currently an entity is small if not exceeding 2 of the following:– Assets of £3.26m– Net turnover of

£6.5m– 50 employees

• Proposal - small if not exceeding 2 of the following:– Assets of EUR 5 m

(approx. £ 4.417 m)– Net turnover of

EUR 10 (approx £8.834 m)

– 50 employees

What about the PBE Standard ?

• The Public Benefit Entity Standard

• Recognition by ASB that commercial standards did not address key PBE issues

• ASB now propose to address PBE issues by supplementary paragraphs within the FRSME

The PBE standard – what it covered

• Concessionary loans• Property held for social benefit• Entity combinations• Impairment of assets• Funding commitments• Income from non-exchange transactions • Heritage assets taken into FRSME

Receipts and payments accounts

• Unaffected by accounting standards • Only applicable if charity is not a company• But will be an option for CIO when available• Charities Act review might look at thresholds

(income of £250,000 or less) and need for format rules – but no changes predicted

• August 2011 – BIS consultation on accounting for Micro Entities ( EC proposals to exempt from 4th Directive)

• Proposals received mixed reception from accountancy profession in UK

What about SORP

• SORP will need to be updated• Needs to address charities using

either:– The FRSSE; or– The FRSME

• Need to be in place by 1 January 2014• ASB promise 18 months between

finalising new standards and their application

• A modular web-based SORP – download what is relevant

A modular web-based SORP

Choose framework

FRSSE(choose modules)

Modules(activity specific)

FRSME(choose modules)

Modules(activity specific)

New time-line

• ASB re-consult on framework and FRSME in early 2012 • ASB consult on FRSSE in 2012• New EC rules for micro entities and small companies?• New SORP and accounting regulations ideally needed

by 1 January 2014 • Implementation of new framework for accounting

periods commencing on or after 1 January 2015

Charities and investment

• In 2010 – registered charities held £78bn as investments

• Traditionally investment held to provide income that supports charitable purposes

• But charities increasingly interested in moving beyond conventional investments and looking to invest in further aims more directly

Motives may differ…

• Financial investments • Programme related investments• Mixed motive investments

Financial investment

• An asset held to provide the best financial return (income or gain) within the level of risk considered to be acceptable

• Trustees can invest in any asset that is intended to produce income and/or gain subject to investment powers

• Need to meet trustees’ investment duties• Need to be aware of tax rules

Trustees’ duties when investing…

• A duty of care • Consider how suitable any investment is for their

charity • Consider the need to diversify investments• Take advice from someone experienced in investment

matters where they consider they need it; and• Review investments (and their investment manager)

from time to time, changing them if necessary.

These legal requirements do not apply to trustees of charitable companies. However, they should adopt these principles as good practice when making investment decisions.

An ethical stance to investment

The law permits an ethical approach if:• a particular investment conflicts with the aims

of the charity; or• the charity might lose supporters or

beneficiaries if it does not invest ethically; or • there is no significant financial detriment.

Programme related investment

• A programme related investment is investment made by a charity specifically to further its aims for the public benefit.

• This means that the rules on financial investment, for example in the Trustee Act 2000, do not apply. However, while PRI is bound by different rules, it can still be considered as a form of investment.

Mixed motive…a new category?

• Some charities seeking both a financial and charitable return find they are unable to justify making the investment solely on the basis of it either furthering the charity's aims or as a financial investment.

• We consider that the law permits, where it can be justified in advance of the investment decision, a mixed purpose investment.

Best interest of the charity…

Core question – can trustees demonstrate they

are acting in best interests of their charity by

either investing for:– Best financial return (financial investment)– Furthering the charity’s aims (programme

related investment)– Or doing both (mixed motive investment)

Charities Act 2011

• The Charities Act 2011 consolidates previous charity legislation into a single Act.

• The implementation date is 14 March 2012.   • Refer to the provision of the Charities Act

2011 on documents executed on or after 14 March 2012

• Refer to the provisions of the Charities Act 1993 (or other relevant legislation) in documents executed before 14 March 2012

Charities Act 2011

Download 2011 Act:

www.legislation.gov.uk/ukpga/2011/25/enacted

Download destination tables:

www.legislation.gov.uk/ukpga/2011/25/resources

New references for independent examination

• Independent examiners following the 2011 Act would state that:– Their examination of the accounts was under

section 145 of the Act.– They follow the Directions made under section 145

(5) (b) of the Act.– The charity keeps accounting records under

section 130 of the Act.– The accounts comply with the requirements of the

2011 Act.

Review of Charities Act

• Lord Hodgson of Astley Abbotts to report to Parliament by 17 July 2012?

• Lord Hodgson will issue a call for evidence from charities and others

• Possible issues:– Commission’s funding– Tribunal – Social investment/social enterprise/mixed purpose investments– Volunteering– Calman Report and definition of charities and passporting– Fundraising, self regulation and collections – Thresholds

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