In August the ASB published its Exposure Draft 'Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities' (following on from its preceding Discussion Paper, of the same name, issued in May 2003), in which it sets out to articulate how the principles of financial reporting apply to public benefit entities. The ASB believes that common principles should underlie reporting by all entities, but identifies some areas where some re-expression or change of emphasis is needed in the way the principles are articulated to make them easier to apply in the public benefit context.

Public benefit entities are defined as "reporting entities whose primary objective is to provide goods or services for the general public or social benefit and where any risk capital has been provided with a view to supporting that primary objective rather than with a view to a financial return to equity shareholders".

Some of the main areas addressed by the Exposure Draft are:

Liabilities
The recognition of liabilities for commitments to provide public benefits has proved to be the most challenging area of this project. The Exposure Draft aims to establish the principles of when such commitments give rise to liabilities. General or policy statements of intention do not create liabilities because they do not create such an expectation that the entity cannot withdraw or change the terms of the intention. In relation to specific commitments, those provided under contracts or performance-related grants (which are analogous to contracts) are executory contracts and should be accounted for as performance progresses. For other specific commitments to provide public benefits a liability arises when the entity can no longer avoid the outflow. However, in meeting these commitments the entity will be creating a benefit by meeting its objectives and therefore the arrangement can be viewed as executory in nature. As a result an expense/liability will be recognised when the objectives are met, usually when the reporting entity provides the goods or services (as this is a nonperformance- related situation, it would not be on the basis of underlying performance by the recipient or another recipient in a chain).

Residual interest
The residual interest is the monetary amount found by deducting all an entity's liabilities from all of its assets. A portion of the residual might reflect restricted assets and it is appropriate to distinguish between that portion and the remainder. However, some public benefit entities have a practice of creating further distinctions within the residual interest, often based on management's intentions. Such designations do not reflect any legal or otherwise enforceable requirement to allocate resources in a particular way and can be changed. Neither do such designations reflect a transaction. Therefore the ASB proposes that such designations should not be reflected in the financial statements, but may be discussed in accompanying information.

Capital contributions
A capital contribution is one that establishes an ongoing financial interest in an entity (it does not include a grant or other contribution given to assist with the purchase of a fixed asset) these should be accounted for as an increase in residual interest. Other contributions would be reported as gains.

Capital grants
Consistently capital grants should be recognised as gains once the conditions attached to the receipt of grant have been met; a requirement to repay a grant if the relevant asset is sold does not act as a barrier to that recognition. However, because there is a risk that the value of the asset will be overstated (perhaps without the grant the purchase of the asset would not have satisfied the economic criteria of the reporting entity for a successful project), an asset that has been wholly or partly financed by a capital grant should be tested for impairment on completion or acquisition.

Voluntary gifts of assets and services
Many public benefit entities receive voluntary gifts; some are in the form of goods (or assets) and some are in the form of services. Gifts of goods should be recognised based on their current value to the recipient. The receipt of voluntary services may also have an economic impact on the recipient entity, for example it avoids purchasing those services. Practical difficulties may arise in the reliable measurement of voluntary services however, and therefore the Exposure Draft proposes that only certain services (those services that would have been purchased) should be recognised if they can be reliably measured, the nature of those that are not recognised should be disclosed. It is expected that volunteer time would rarely be recognised.

The Exposure Draft is available on the ASB's website at http://frc.org.uk/asb/technical/projects/project0017.html. Comments are requested by 30 November.