Charitable Funds consolidation under IFRS (PDF 47KB) by ycb91681


									                                                                                  FRAB (93) 04
                                                                              2 OCTOBER 2008

Financial Reporting Advisory Board Paper

Consolidation of Charities Under IFRS

Issue:                   There are tensions between the control requirements of IAS 27 and
                         the independence inherent in charitable status.          This paper
                         recommends that a specific FRAB Working Group be created to
                         research the impact of these tensions on the consolidation boundary
                         for public sector bodies.

Impact on guidance:      N/A at this stage

IAS/IFRS adaptation?     To be researched

IPSAS compliant?         To be researched

Interpretation for the   To be researched
public sector context?
Impact on budgetary      N/A
Alignment with           N/A
National Accounts
Impact on Estimates?     N/A

Recommendation:          That the Board agrees to the creation of a specific Working Group to
                         research the issue in full.

Timing:                  Depends on the Alignment Project timetable

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                                                                                              FRAB (93) 04
                                                                                          2 OCTOBER 2008



1. The Charity Commission recently wrote to public sector auditors explaining that, in their view, the
consolidation of a charity into the accounts of a public sector body could be indicative of a lack of
necessary independence inherent in charitable status.

2. The Charity Commission publication RR7, The Independence of Charities from the State
provides guidance in this area.         RR7 explains that charities can legitimately be set up by a
government authority to carry out charitable purposes which further one of the authority’s functions
without undermining its charitable status, as the motive of the promoter (i.e. the public body sponsor)
is irrelevant in deciding charitable status of a funding recipient.

3. A charity can never be used in order to benefit another organisation that is not a charity. It may
sometimes be the case that in furthering its own purposes, a charity may incidentally provide a
benefit to another organisation. For example, a charity for the relief of sickness may purchase a
piece of equipment for use in a NHS hospital. This furthers the purposes of the charity and the fact
the NHS hospital has additional equipment is an incidental benefit to the hospital concerned. Any
benefit the charity conferred on an organisation for the purpose of providing that benefit to that
organisation rather than the furtherance of its own purposes would not be an incidental benefit. For
a body to have a charitable purpose it must be independent. RR7 outlines how a charity
independent of government would be expected to operate, the trustees should be free to;

           •   decide whether or not they accept funding from government;

           •   take their own legal and financial advice;

           •   prepare their own business plan and policies for the charity;

           •   conduct business with government on an arms length basis;

           •   not be bound to effect the wishes of government, and

           •   make their own decisions.

The fewer of the above conditions that can be demonstrated, the more likely it is that the entity exists
to promote the public body’s interests and thus exists for a non-charitable purpose.

Alignment Project

4. As the Board is aware HM Treasury’s Alignment Project is examining the differences between
the national accounts, budgeting, Estimates and resource accounting frameworks, the objective
being to remove or minimise these difference and develop clear reporting where such differences
cannot be removed or minimised.

5. The Alignment Project team are considering the consolidation of executive NDPBs in the
accounts and Estimates of departments as a fuller application of IAS 27 Consolidated and Separate
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                                                                                          FRAB (93) 04
                                                                                      2 OCTOBER 2008

Financial Statements and to align with the departmental budgeting boundary.     This may result in
executive NDPBs that are charities falling within the departmental boundary.

6. Under IAS 27 (and FRS 2) the consolidation of subsidiaries is based on control. There appear to
be tensions between the control requirements of IAS 27 and the requirements in RR7 for charities to
be independent of the promoter. Consolidation of NDPBs that are charities into the accounts of
‘sponsoring’ departments could have unforeseen repercussions for the charity sector.


7. Executive NDPBs are classified as public sector bodies by the ONS. In classifying a body as
public or private sector the ONS consider the extent to which the government exercises control over
the body. The ONS’s considerations are informed by CLASS (2000)1 which provide guidance on
the extent of government control broadly applying the definition of control in FRS 2.

FRAB Working Group

8. This issue is not confined to charitable NDPBs as the same problem essentially applies to
charities created by local authorities, NHS Trusts and Foundation Trusts.

9. An initial discussion between HMT officials, the Charity Commission, the Department of Health,
Monitor, the NAO and the Audit Commission indicates that further research is required into the
tensions between IAS 27 and RR7 to ensure the consolidation boundary is properly set for
departments and the whole of government.

Summary and Recommendation

10. This paper recommends that a specific FRAB Working Group consisting of officials from the
above bodies (plus CIPFA and departmental representation) be created to research this issue in
more detail and to provide the FRAB with proposals on the consolidation of charitable bodies. It is
proposed that HMT will chair the group and provide regular updates to the Board.

HM Treasury
2 October 2008

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