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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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