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We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA

We examine the emerging issues for non-profits

The Financial Reporting Council (FRC) is committed to updating the suite of standards constituting UK-Irish Generally Accepted Accounting Practice (GAAP).

The exposure draft of the new FRS 102 standard is expected later this year and to inform their approach the FRC has been holding a number of stakeholder workshops covering the topics of lease accounting, revenue recognition and credit loss accounting.

The question posed is how far GAAP should be updated for the IFRS framework in these areas, for example changing lease accounting to bring all leases on balance sheet (statement of financial position), to adopt a new approach to recognising revenue and a new approach for accounting for certain financial transactions including financial guarantees.

These changes will affect for-profit entities and non-profits, including charities. However, the different operating context for non-profits justifies a modified approach. General purpose financial statements are intended to provide information to inform decision-making by the users of the accounts, but user needs are very different between non-profit and for-profit sectors.

In a series of three papers, a modified approach for non-profits is recommended that may better serve the sector than a straight read across of for-profit accounting treatments:

  • Lease accounting – rather than automatically creating a right of use and applying net current value calculations to impute a financing component, a modified approach is offered to bring leases on balance sheet which is based on cashflows and adjusting fund balances for leases related to activities for the public benefit and also to simplify accounting for charities
  • Rather than take a customer-based approach to revenue recognition in all cases, a modified approach is recommended for recognising revenue from donations, grants and gifts, based on the current methodology found in the Charities Statement of Recommended Practice (SORP)
  • In respect of certain financial guarantees made for the purposes of public benefit, rather than seek to calibrate using the expected credit loss model the argument is made to retain an approach based on accounting for provisions as found in the current existing FRS 102.

A great strength of FRS 102 is that it already includes public benefit entity (PBE) specific accounting treatments in recognition of the needs of the sector. The author advocates adding to these when updating FRS 102. It is important that practitioners engage with the changes to FRS 102 because this will affect their non-profit clients or organisations when the new GAAP takes effect, most likely in 2025.

ACCA will respond to the Financial Reporting Exposure Draft of FRS 102 when it is published and welcomes the engagement of members. The three papers mentioned in the article provide a thoughtful discussion of issues affecting non-profits, but it is only one view.