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FRC’s Response to IFR4NPO’s International Non-Profit Accounting Guidance – Exposure Draft 2 (ED2)
Financial Reporting Council
12 March 2024
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. Our detailed comments in response to INPAG ED2 are included in the Appendix to this letter. However, there are two key themes which I would like to highlight here.
1. The scale and complexity of the INPAG project
We believe the project has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs).
We understand that the ambition of the project is to provide a standalone financial reporting framework usable by NPOs worldwide. However, we are concerned that the direction of travel of the project may result in guidance that is too complex for NPOs to be able to apply successfully in practice. In this regard, I draw your attention to our response to INPAG ED1 highlighting our concerns on the drafting approach to INPAG; by organising guidance into the Authoritative Guidance, Implementation Guidance, Basis for Conclusions and Illustrative examples, the whole document has become unwieldy. Undoubtedly, this will lead to confusion in practical application. In addition, in the Appendix to this letter, we raise significant concerns regarding the structure and content of proposed Section 23 Revenue of INPAG.
In order to be successful in practice, INPAG will need to be proportionate to the size and complexity of the entities expected to apply it. We have consistently heard feedback that public benefit entities (PBEs) in the UK are resource- and expertise-constrained compared with commercial entities, and we expect that this will be true in many other jurisdictions as well. As discussed, in our detailed response we are concerned that INPAG will be too complicated to adopt and apply in practice. This may introduce barriers to entry, and/or to the successful application of INPAG to produce high-quality, understandable financial reporting.
The scale of the INPAG project, and related output, has been expanded as a result of the decision to develop various supporting guidance, in addition to being based on the foundational framework of the IFRS for SMEs Accounting Standard. This is in contrast to the approach taken in the UK, where most PBEs are required to comply with a general-purpose financial reporting standard (FRS 102), which includes requirements for PBE-specific transactions, and additional guidance is set out in the Statements of Recommended Practice (SORPs) to aid the interpretation of the general-purpose standard.
We have similar concerns around the complexity of the process for developing INPAG, with three separate and lengthy Exposure Drafts. While the INPAG team has taken significant steps to raise awareness of the project amongst a wide cross-section of stakeholders, constructive and comprehensive engagement with the detailed proposals may be a challenge for some stakeholders. Even from our perspective as an accounting standard setter, we are aware of the scale of ED2 especially in terms of the amount of content to engage with and the number of questions posed in the Invitation to comment. Whilst, at this stage in the project, your ability to address this will of course be limited, we recommend that you consider whether it is possible to reduce the number of questions posed in the Invitation to comment on INPAG ED3, to focus on the most fundamental issues.
2. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.1 The scope of FRS 102 includes PBEs and therefore includes the most significant and relevant PBE-specific issues.
As set out in the Appendix, we have some fundamental reservations about certain aspects of the proposals in relation to the accounting for revenue and services in-kind. Specifically:
- In respect of Section 23 we have concerns about the overarching terminology related to grant arrangements and the structure of the section. It is also difficult to comment comprehensively on some of the proposals for that section without seeing whether and how you intend to modify Section 12 Fair Value Measurement to reflect NPO requirements (which is expected to be set out in INPAG ED3).
- We disagree that the recognition of services in-kind should be determined by an assessment of whether they are 'mission critical'. We believe that making this assessment is likely to introduce significant judgement, and that an NPO may be in receipt of material services in-kind that may not be mission critical but should nevertheless be recognised. INPAG ED2 proposes only to encourage, not require, recognition of such services in-kind, which we think risks substantively understating an NPO's income.
- On the other hand, we recognise that even when services in-kind are 'mission critical', their measurement can be challenging. INPAG ED2 proposes to require their recognition when the value of such services can be reliably measured. We agree with this principle, and suggest that, to reduce the amount of judgement required of preparers, it might be better to state that general volunteer contributions cannot be measured reliably and therefore shall not be recognised.
At the time of writing, the FRC is in the process of finalising amendments to FRS 102 which were exposed for public comment in FRED 82 Draft amendments to FRS 102 and other FRSs – Periodic Review. Therefore, our response to INPAG ED2 refers to extant FRS 102 and the proposed amendments in FRED 82, but may not necessarily reflect the final amendments, which we currently expect to publish in the first half of 2024.
The views expressed in our response to INPAG ED2 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Omadevi Jani or Adrian Wallis at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: [Redacted] Email: [Redacted]
International Non-profit Accounting Guidance (INPAG) Exposure Draft 2
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 2.
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 12 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish.
You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 15 March 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say.
| First name: | Mark | Organisation: (who do you work for) | Financial Reporting Council |
|---|---|---|---|
| Last name: | Babington | Response: Are you submitting your response | On behalf of my organisation |
| * on behalf of my organisation | |||
| * as an individual | |||
| Email: | [Redacted] | Country: (this should be the country in which you are based) | United Kingdom |
| Position: | Executive Director, Regulatory Standards | Professional interest: please choose from: | Accounting standard setter |
| * NPO, ie preparer of financial statements, | |||
| * auditor, | |||
| * accounting standard setter, | |||
| * professional accounting organisation, | |||
| * regulator of NPOs, | |||
| * donor, | |||
| * academic, | |||
| * civil society, | |||
| * user of NPO services, | |||
| * other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Tick boxes |
|---|---|
| No |
This document has been designed purely to enable feedback to Exposure Draft 2. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Financial instruments
INPAG Section 11 provides guidance on the treatment of financial assets and financial liabilities. It has two parts, Part I that addresses simpler financial instruments and Part II that addresses more complex financial instruments. There are no significant changes other than alignment with other sections.
| References | Response |
|---|---|
| a) Do you agree that there are no significant alignment changes required to Section 11, other than those that have already been made? If not, set out the alignment changes you believe are required. | We have not noted any specific alignment changes that may be required to INPAG Section 11. However, we note that in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, there is a permitted exception available to Public Benefit Entities (PBEs) in Section 11. PBEs that make or receive concessionary loans have the option of measuring such loans at either the amount paid or received or at fair value. Further details can be found in paragraphs PBE34.87 to PBE34.97. This includes requirements relating to concessionary loans between entities within a public benefit entity group. We understand that guidance on concessionary loans will not be included in the first edition of INPAG. We suggest you consider it for a future update to INPAG. |
Question 2: Inventories
INPAG Section 13 provides guidance on the recognition, measurement and disclosure of inventories. Major changes have been made to broaden the scope of this section to include NPO specific inventory and set out their measurement, where inventories held for use or distribution to be measured at the lower of cost adjusted for any loss of service potential and replacement cost. It has been modified to allow the use of permitted exceptions where certain donated items are not recognised in inventories. It has also been amended to allow NPOs to expense services to be provided to service recipients for no or nominal amounts as incurred rather than as work in progress within inventories. Disclosures have been updated to address the use of permitted exceptions and where donated inventories cannot be reliably measured.
| References | Response ```
General Feedback
Please share any other comments that you wish to raise on Exposure Draft 2. When providing additional feedback please reference the paragraph numbers, where possible and provide a short explanation to support your comments.
1. Our response to ED1 and follow up
This response should be read in conjunction with our response to ED1 because in this response we have generally not repeated more general comments about the scope, structure, and content of INPAG.
Many of the comments we made in response to ED1 would also apply to ED2. For example:
- We think that there should not be separate authoritative Guidance and authoritative Application Guidance. The current drafting approach has led to duplication, and it is not always obvious why some matters are Guidance and others are Application Guidance.
- There is some ambiguity over the definition of an ‘NPO' and the entities intended to apply the guidance, which makes it difficult to comment comprehensively on some matters.
- In general, we recommend caution about replacing established terms and concepts from the IFRS for SMEs Accounting Standard without clear benefit. This is particularly important because INPAG is intended to apply to a broad range of legal forms, and whilst some concepts are expected to be uncommon for NPOs (for example, non-controlling interests or equity claims more generally), the scope of the Guidance does not preclude them.
- We do not agree with the proposal to remove the concept of Other Comprehensive Income (OCI), with items that would have been OCI recognised directly in the Statement of Changes in Net Assets. The proposal mixes items of performance with equity transactions. The two-statement (Income Statement and Statement of Other Comprehensive Income) approach is an established solution to dealing with the presentation of unrealised gains and losses. If an NPO had no relevant items, it would not be required to present OCI in any case.
2. Proportionality and understandability
We think that NPOs are likely to be, at best, no better resourced than profit-oriented entities and therefore have the same, or arguably a larger, need for proportionate accounting standards that are simple to apply in practice. This is supported by the stakeholder feedback that we often hear as part of our development of PBE requirements in FRS 102.
The proposals set out in ED2 contain a significant amount of terminology, in particular the use of several terms and concepts which are not clearly defined, such as OFA, and grant expenses, and therefore may be confusing for practitioners to apply.
We consider that INPAG in its current proposed form is not easy to navigate and is overly complex. There is a risk that INPAG will not serve its purpose and core objectives in creating a standard that improves the quality and transparency of financial reports if it is overly complicated. In its current form, it seems likely that INPAG becomes a more complicated framework than the foundational framework on which it is based.
In closing remarks, we wish to commend the significant efforts of those working on this project and the achievement of getting to this milestone which should not be underestimated and welcome this opportunity to provide our feedback and comments. Whilst we do appreciate that at this stage of the project the ability to address our feedback and comments will be limited, we recommend that in finalising INPAG, the need for proportionality and understandability remain at the forefront.
Footnotes
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For details, refer to the Significant differences between FRS 102 and the IFRS for SMEs Standard available at: https://www.frc.org.uk/accountants/accounting-and-reporting-policy/uk-accounting-standards/significant-differences-between-frs-102-and-the-if ↩
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Both sections include the following question, which you can answer under either section, or cover the grantor and grantee perspectives separately. ↩
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Accounting and Reporting by Charities: Statement of Recommended Practice applicable to charities preparing their accounts in accordance with the Financial Reporting Standard applicable in the UK and Republic of Ireland available at https://www.gov.uk/government/publications/charities-sorp-2005 ↩
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Both sections include the following question, which you can answer under either section, or cover the grantor and grantee perspectives separately. ↩
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Refer to footnote 62 to the glossary definition of 'public benefit entity' in Appendix I to FRS 102 (2022 edition). ↩
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For example, see Question 7: https://media.frc.org.uk/documents/FRCs_Response_to_IFR4NPOs_Exposure_Draft_International_Non-Profit_Accounting_Guidance_Part_1.pdf ↩
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https://www.gov.uk/government/publications/charities-detailed-guidance-notes/chapter-3-gift-aid#chapter-311-gift-aid-for-companies ↩