UK: NHS Charities: Application Of International Accounting Standard 27

Last Updated: 15 November 2010
Article by Jonathan Brinsden

NHS charities governed by corporate trustees which are themselves NHS bodies (e.g. NHS Trusts, Primary Care Trusts etc.) are set to be affected by the International Accounting Standards 27 (IAS 27). IAS 27 will require the consolidated financial statements for a group of entities under the control of a parent body. Corporate trustees have been deemed by the Department of Health to have such 'control' over their underlying charities. To date, NHS charities have been exempt from the effect of IAS 27, but this is soon due to change highlighting serious governance issues concerning the administration of NHS charities.

The Implementation of IAS 27

The application of IAS 27 to NHS charities was due to take effect in 2009/10 financial year but, after considerable media and lobby group pressure, it was delayed by the Treasury for twelve months to allow time for a review of the government accounting framework.
Having met with relevant stakeholders, the Treasury have still not been persuaded to exclude NHS charities from the new regime going forward, although an eleventh hour postponement may yet be agreed.

Who will be affected?

The Department of Health has interpreted the consolidation implications of IAS 27 to apply to NHS charitable trusts governed by a corporate trustee on the basis that this amounts to sufficient control for the purposes of the measure.

The Charity Commission (along with many other commentators) has argued from the outset that the definition of "control" used for the purposes of IAS 27 is not applicable to NHS charities. "Control" in relation to this provision is defined as "the power to govern the financial and operating policies of an entity so as to obtain benefit from its services". It is the Charity Commission's view that the defining characteristics of charities (comprising independence, public benefit and being established exclusively for charitable purposes) would be undermined by IAS 27 to the extent that the charitable status of NHS charities caught by this provision could potentially be threatened.

In response to the Commission's concerns, Phil Hope, then Minister of Health, emphasised in a House of Commons debate that NHS charity trustees will continue to have full responsibility for charitable funds, stating that the Department of Health's interpretation of the definition of "control" and its subsequent application of IAS 27 will not threaten the independence of NHS charities in any way.

What will be the effect of IAS 27?

IAS 27 will require those bodies acting as corporate trustees to consolidate the accounts of NHS charities with their own annual report.

Much of the debate surrounding the effect of IAS 27 has concerned precisely what consolidation of accounts will entail. In an effort to reassure the public, the then Third Sector Minister, Angela Smith, emphasised in the House of Commons on the 27th January 2010 that, should consolidation occur "The funds of an NHS charity are, and will continue to be, controlled by the charity's trustees for charitable purposes" and further that, "this is purely a technical accounting matter".

In contrast, the Charity Commission, Monitor, charity lawyers and accountants have all expressed concern that this accounting measure represents the thin end of the wedge, tantamount to a form of nationalisation of the gifts and donations of the public, which could lead to a decline in public trust arising from a perceived lack of State independence.

What Next?

Converting from an NHS corporate trustee to a trustee body composed of independents (whether natural or corporate) is the most straightforward way to avoid consolidation and secure independence. Indeed, a number of charities caught by IAS 27 are already exploring this option.
Whilst Charity Commission best practice dictated that changes to trustee arrangements should occur only where the independence of a charity is threatened and not simply to avoid consolidation, it would seem that the two are inextricably linked.

The Department of Health have stated that, if independence is not threatened, NHS charities should simply consolidate their accounts with those of the public body of their corporate trustee once IAS 27 comes into force.
This seems to miss the point that, although technically possible for charities to implement governance policies which mitigate conflicts and secure independence, this will make administration complex, costly and unwieldy. More importantly, it will do little to reassure a nervous public already cynical about the implications of the Big Society that measures of this kind simply blur the lines between charity and Exchequer fund responsibilities to conceal health spending cuts.

With the overall value of donations to hospital charities equating to around £330 million a year, it is vital that the application of IAS 27 will not damage public confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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