The impact of new accounting proposals that are closely aligned with International Financial Reporting Standards (IFRS) could result in many charities breaching loan covenants with their banks.
Under current accounting rules social housing providers, universities and charities can adjust their accounts to recognise assets that have risen in value. According to a new PwC report this will no longer be allowed under new rules being considered for Public Benefit Entities (PBEs) and other private UK businesses.
While the introduciton of IFRS is generally accepted, the revaluation of assets issue - in particular for the impact on housing associations - is increasingly coming up as one thing that needs to change in the consultation process.
This situation could see the organisations break their banking covenants because the agreements are based on balance sheets showing the most up to-date value of those assets.
In particular the social housing and higher education sectors make extensive use of assets and have invested heavily in property projects.
In the future, such groups may only be allowed to hold those assets at cost as the Accounting Standards Board (ASB) works hard to make the rules governing unlisted UK companies more closely aligned to the international standards listed companies follow.
The ASB is preparing to release an exposure draft on a PBE standard, but the banking covenants issue remains on the table while the body seeks comment from businesses on its plans to harmonise UK accounting rules.
Matthew Hodge, a director at PwC said: “PwC welcomes the publication by the ASB of the draft standard, which recognises the unique accounting requirements of public benefit entities.
“However, there are clearly some key issues that these entities will have to face head-on if they want to keep honouring their banking agreements”, Hodge added: “It is vital PBEs take advice, because there are accounting options that may help avoid the need to renegotiate contracts with banks.”
The ASB has proposed a new three-tier accounting framework based on how publicly accountable the companies are.
The PBE standard will be drafted in compliance, but designed to act as a counterweight, with the second of these two tiers known as the FRSME.
Caron Bradshaw, chief executive of the Charity Finance Directors' Group (CFDG), said: "As it stands the FRSME [tier two under the new system] does not permit the revaluation of assets such as property and equipment, which could be an issue for some public benefit entities including charities.
"Full IFRS [tier one] does allow this revaluation to take place, and it might be that some organisations can take the option adopt tier one for this reason. However, this may be a little drastic for many organisations and it is key to remember that the FRSME is currently out for consultation and is not set in stone. CFDG is likely to raise this issue in our response to the Accounting Standards Board and would urge others to do the same if they foresee problems."
The ICAEW has also flagged up the potential effect of the rule changes on the banking covenants of many UK businesses, warning these companies may have to renegotiate their contracts.
Last year eight politicians, financiers and accountants published a letter in The Times calling for the government to repeal the UK’s commitment to IFRS. At the time professor Stella Fearnley, explained that the letter came about as a way of drawing attention to the underlying problems with IFRS.
“The fact that the letter has many signatories shows that disquiet with the accounting model goes beyond a few academics,” she told AccountingWEB.co.uk.
“There’s disquiet on the part of preparers and auditors, but at the policymaker level there’s been a lot of denial that there’s a problem. There’s still a blind determination from the ASB to push this policy into the SME sector and I know from my own experience that this is simply going to cost money. I can’t see any benefit other than putting money in the pockets of accountants.”