The ASB published an Interpretation for Public Benefit Entities of its Statement of Principles for Financial Reporting in June 2007. Alan O'Connor, Secretary of the ASB's Committee on Accounting for Public-benefit Entities (CAPE), sets out a summary of the document and further international developments.

The Interpretation is intended to operate alongside the Board's Statement of Principles (SoP) that was published in December 1999. It explains that the term 'public benefit entities' embraces entities in both the private and public sectors whose primary objective is to provide goods or services for the general public or social benefit. These entities are of great significance to the UK economy. The close relationship between the Interpretation and the SoP is made clear by the inclusion of tables that compare the two documents paragraph by paragraph. Changes are confined to rewording and shifts of emphasis designed to clarify the application of the principles to public benefit entities.p>

Clarifications made in the Interpretation

A few examples will demonstrate the approach taken in the Interpretation.

Stewardship: There is considerable controversy about the importance of stewardship as part of the objectives of financial statements - and - as reported on page 1 - the ASB has made clear that it believes this concept is important. Whatever may be the right answer for profit-oriented enterprises, the Interpretation suggests that the importance of information on stewardship requires special emphasis in the context of public-benefit entities.

Funders and financial supporters: The SoP identifies present and potential investors as the defining class of user but many, perhaps most, publicbenefit entities would have difficulty in identifying parties who would consider themselves 'investors' - indeed the Interpretation notes that providing a financial return to shareholders will not be a primary objective of such entities. Instead, 'funders and financial supporters' are identified as the defining class of user for financial statements in the public benefit sector.

Funds: It remains common in the public-benefit sector, long after it has become obsolete elsewhere, for financial statements to attempt to portray something about the financial position of an entity by dividing the reserves into various 'funds'. The Interpretation notes that mere designation, reflecting no more than management intent, should not be recognised as a transaction in the financial statements. Information on the adequacy of resources for future needs and plans would normally be provided in accompanying information, for example in the management commentary.

Assets: The Interpretation notes that, in the context of the definition of assets, the term economic benefits includes 'service potential' as well as cash inflows. Service potential includes the ability to provide goods or services to beneficiaries in furtherance of the entity's objectives. Under this view, historic and inalienable items are assets because they provide services to the entity or through it to its beneficiaries. This is the view the ASB has consistently expressed in its work on heritage assets.

The Interpretation in practice

It would be unrealistic to expect a framework document such as the Interpretation to provide solutions to all the issues that arise in the public benefit context. However, the Interpretation should guide the work of those responsible for the development of financial reporting in the sector. This will include bodies developing Statements of Recommended Practice (SORPs) in accordance with the ASB's standing arrangements and the Board itself in framing new accounting standards.

The Interpretation is not an accounting standard and does not override the requirements of existing accounting standards or SORPs. Where there is an inconsistency between the principles set out in the Interpretation and a standard, the standard must be followed until it is replaced or revised. For example, application of SSAP 4 'Accounting for government grants' may result in the recognition in the balance sheet of deferred credits that do not meet the definition of liabilities. This is an issue that the ASB will be considering further: the IASB has a review of its corresponding standard within its sights and progress on this will obviously influence developments.

The future

As noted above, the Interpretation is closely based on ASB's original Statement of Principles for Financial Reporting. In developing the Interpretation, the ASB did not try to re-debate or update the SoP, which is now almost ten years old. The SoP itself will need updating in due course, and a review will be necessary in any case in the light of international developments.

As reported on this page, the IASB and FASB are working on a converged framework. The ASB is closely following this work and seeking to engage its constituents in debate on it. It has also joined forces with the standard setters of Australia, Canada and New Zealand and is monitoring in particular the framework's applicability to not-for-profit entities in the public and private sectors. This work has resulted in the publication of a report on the IASB/FASB's first Discussion Paper on the Conceptual Framework project, which is available on the ASB website.

The ASB is also working closely with the International Public Sector Accounting Standards Board (IPSASB), which has launched its own project to develop a Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities, although this does not include the many private sector not-for-profit entities. Ian Mackintosh, ASB Chairman, serves on the sub-committee that prepares issue papers and draft consultation papers for IPSASB and David Loweth, ASB Technical Director, is taking the lead on one of the first issue papers, on the Objectives of Financial Reporting.

While the Interpretation will no doubt be revised in the light of this international work, its publication now will help ensure that UK views are fully considered. And, as the international projects will take some time to complete, the Interpretation has an important immediate role in the development of financial reporting in the UK.