UK: International Accounting Standard 27 - Briefing Update

Last Updated: 3 August 2011
Article by Jonathan Brinsden


Recent developments have re-ignited the debate surrounding the government's intention to apply the International Accounting Standards 27 (IAS 27) to NHS linked charities.

IAS 27 will require the consolidated financial statements for a group of entities under the control of a parent body. NHS charities governed by corporate trustees which are themselves NHS bodies (eg NHS Trusts, Primary Care Trusts etc) are set to be affected by the IAS 27.

To date, NHS charities have been exempt from the effect of IAS 27, with HM Treasury deferring the implementation of IAS 27 to NHS charities several times. The government now intends to implement IAS 27 for NHS linked charities from 1 April 2013. HM Treasury is going ahead despite considerable criticism from the media, lobbyists, the Association of NHS Charities and the Charity Commission itself.

The Implementation of IAS 27

HM Treasury has deferred the application of IAS 27 to NHS bodies several times since it was due to take effect in 2009/10 financial year, when the government adopted the International Financial Reporting Standards. In large part these delays have been the result of considerable media and lobby group pressure, though the Treasury remains unswayed by the serious criticism the proposal has provoked. In advance of the most recent deferral, the Treasury published its 'Report of the Review Group of NHS Linked Charities in the context of the government accounting framework', in which it concluded that IAS 27 would 'not impact the legal integrity of trustees' nor would it 'affect the use of funds by NHS Bodies.' Yet many interested parties remain unconvinced by the Treasury's conclusions, suggesting that they are 'potentially misleading' and its report 'ignores or misinterprets fundamental issues'.

The Concerns It is anticipated that IAS 27 could give rise to a number of adverse implications for NHS Charities. Control A key concern, as argued by the Charity Commission from the outset, is that the definition of 'control' used for the purposes of IAS 27, is inappropriate in the context of NHS Charities. In relation to the IAS 27, 'control' is defined as 'the power to govern the financial and operating policies of an entity so as to obtain benefit from its services'. In the Charity Commission's view, any assumption that this definition covers the relationship between NHS Charities and their corporate trustees undermines the fundamental characteristics of any charity – independence, public benefit and having an exclusively charitable purpose. Further, there is considerable concern about what impact characterising charitable funds as being under such 'control' might have. Could the consolidation ultimately encourage the relevant NHS bodies to consider the charities' respective funds as within their budget?

While government maintains that the consolidation is 'purely a technical accounting matter', authors of the 'Review Group of NHS Linked Charities in the context of the government accounting framework: Dissenting Report' see the potential for a 'hard-pressed finance team within a NHS trust' to 'come to regard the charitable funds as simply another budget'. Far from the Treasury's aim of 'enhanced transparency and accountability', they suggest the consolidation 'may actually enhance the potential for bad practice.'

Transparency and donor confidence

At the centre of this debate, is the question donor confidence and the growing concern that consolidation will create the impression that charity funds have been 'nationalised'. The Treasury argues that consolidation will bring the 'increased transparency and accountability' required for the government's Big Society plan – the use of third sector groups to deliver services currently provided by the government – to achieve its aims of 'empowering communities, redistributing power and fostering a culture of volunteerism.' In stark contrast, the dissenting report suggests that a 'particular concern of the public in the present economic climate is that donations may be counted in to fill gaps in the NHS budgets.' Consolidating accounts may appear to confirm this suspicion and thereby 'damage public confidence,' ultimately reducing the number of donations and amount of funds available, in what the dissenting report characterises as 'a double financial blow so far as the ultimate beneficiaries of the charities – the NHS patients – are concerned.'

Additionally, despite suggesting that consolidation will increase transparency, in its report, the Treasury blurs a key distinction between the objects of NHS charities and NHS bodies. In its opinion, like NHS charities' objects, 'the objects of NHS bodies is similarly to benefit NHS patients, so that there is a convergence of objects.' But this somewhat syllogistic approach fails to address a fundamental objection posited by critics. This is that unlike, NHS bodies, 'the activities of the charity are not conducted according to the specific business needs of the NHS body' but directly channelled towards the specific needs of the patients.

Cost and practicality

Critics argue that the consolidation will incur considerable cost and will give rise to problematic practical difficulties. For example, while the NHS and linked charitable trusts operate on the same financial year, charitable trustees have ten months to produce accounts while the NHS must produce accounts within 11 weeks. The change would require charity account arrangements to adjust to comply with the NHS' considerably shorter time frame. The Treasury's expectation, that such adjustments will require 'moderate increases in staffing and audit costs,' is directly contradicted by the dissenting report, which asserts that the cost would be 'significant' and 'questions the implications' by the Treasury that 'the requirements would not be expensive.' Taken together, the Treasury's attempts to address the specific concerns fuelling opposition to the consolidation focus less on addressing and quelling those concerns, and more on driving home its message that consolidation will 'apply in full to the NHS in respect of linked charities,' regardless of these fundamental issues.

Going forward

What can NHS charities do to avoid consolidation and secure independence in advance of the implementation date in 2013? Wait and see? Fundamental changes to the NHS are waiting in the wings. PCTs are to be abolished; GP consortia will be established in their wake. At least 39 PCTs in England hold charitable funds in their own right, while many other PCT funds are held on their behalf by other NHS bodies. Revised trustee arrangements will inevitably have to be constructed for all these funds. The dissenting report considers this 'precisely the wrong moment to distract NHS organisations and their associated charities with trying to implement consolidated accounts' which, given the restructuring, may only be required 'for a few years.' Hold on, and if critics can secure another year long implementation deferral, this could render the entire debate moot under the new NHS structure.

New Governance model for NHS Charities

The Barts and The London Charity recently pioneered a new constitutional framework taking it completely outside the scope of IAS 27. The Barts Charity has replaced its Section 11 trustee body with a corporate trustee in the form of a charitable company limited by guarantee. In doing so, it hopes to reassure supporters that their charitable donations will not be subsumed into hospital accounts. At present, it is relatively commonplace for NHS charities to have corporate trustees. Until now these trustees had always been NHS bodies. Under the Barts Charity model, however, the corporate trustee (also a registered charity in its own right) is governed by company and charity law, not NHS legislation. So, while the corporate trustee would be a charity, it would not be a NHS charity thereby diminishing the Department of Health's confused role of quasi charity regulatior.

By making this change, the Barts Charity is in a better position to provide much needed certainty to current and potential donors as to the ultimate use of funds.


At the root of HM Treasury's argument for implementation of IAS 27 is a drive for 'enhanced transparency and accountability'. The move 'is intended to keep UK government in line with accounting best practice.' However, critics of IAS 27 perceive it as the thin end of the wedge that will inevitably culminate in charity funds forming part of the NHS budget for Treasury purposes. Given the weight of criticism mounted against the move by lobbyists and the media, and the considerable misgivings of the Charity Commission and the Association of NHS Charities, each NHS Charity would be wise to make up its own mind on how to achieve transparency of accounting and best practice.

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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