UK: Public Benefit Accounting

Last Updated: 17 August 2011
Article by Smith & Williamson

A new exposure draft suggests how the ASB's proposals for UK GAAP will apply to public benefit entities.

Following on from FRED 43 and 44, the ASB has now issued an exposure draft which sets out the financial reporting requirements for public benefit entities (PBEs) which were excluded from those standards. FRED 45 'Financial Reporting Standard for Public Benefit Entities' (FRSPBE) will be an add-on standard to the FRSME. While FRED 45 currently states a proposed date of application of the FRSPBE of 1 July 2013, it is assumed that this will be aligned with any later date of application of the FRSME.

The draft FRSPBE contains guidance on a number of accounting treatments (including presentation and disclosure) specific to PBEs, many of which are consistent with current practice in the sector. These are considered briefly here.

Concessionary loans

Concessionary loans are loans at below market rate and a choice of treatment is proposed of either:

  • applying the recognition, measurement and disclosure requirements of the basic financial instruments section of the FRSME – initial measurement at fair value and subsequent measurement at amortised cost using the effective interest method; or
  • measuring at the amount paid or received and adjust to reflect interest payable or receivable.

Property held for the provision of social benefits

Properties held for the primary provision of social benefits, e.g. social housing, are held at cost, less any provision for impairment, and amortised over their useful economic lives. Consistent with the general approach in the draft FRSME there would be no option to carry properties at valuation and capitalisation of borrowing costs is not permitted. However, it is assumed that any change to the FRSME in this respect would also find its way to the FRSPBE.

Entity combinations

The guidance within the FRSPBE is in respect of the following types of entity combination only: those at nil or nominal consideration that are, in substance, a gift; and those that meet the definition and criteria of a merger. Other types of business combination, e.g. an acquisition, are dealt with by the FRSME.

Combinations at nil or nominal consideration that are, in substance, a gift would be accounted for in accordance with the FRSME (which requires acquisition accounting) except that any excess of fair value of assets received over liabilities assumed should be recognised as a gain in the income statement.

Combinations that meet the definition and criteria of a merger should be accounted for by applying merger accounting. The definition and criteria for mergers are set out in the FRSPBE along with guidance on the accounting treatment.

Impairment of assets

When considering indicators of impairment, PBEs will be required to consider whether there is any indication that the service potential of an asset has been impaired, for example the cessation, or near cessation, of the demand or need for services provided by the asset.

When determining an asset's fair value less costs to sell, any restrictions imposed on the asset would need to be considered. In this situation, costs to sell would include the cost of obtaining a relaxation of any restriction in order for the asset to be sold.

Where an asset is held for its service potential rather than its ability to generate cash flows, the exposure draft suggests it may be more appropriate to determine value in use as the present value of the asset's remaining service potential. This will normally be equivalent to depreciated replacement cost, although other measures may be appropriate depending on the circumstances.

Funding commitments

Liabilities will only be recognised when the obligation is such that the reporting entity cannot withdraw from it and the commitment does not depend on the performance of the recipient. Commitments made which are performance related would be recognised only when those performance conditions are met.

Incoming resources from non-exchange transactions

Examples of non-exchange transactions include donations and legacies. Where there are no specified future performance conditions imposed, receipts would be recognised at fair value when receivable. Where future performance conditions are imposed, receipts would be recognised at fair value only when those performance conditions have been met.

Smith & Williamson commentary

The FRSPBE is out for comment until 31 July 2011. PBEs will also be affected by the changes set out in the FRSME and are among the commentators whose concerns are discussed in the previous article. The additional guidance in the FRSPB is, however, broadly in line with existing 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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