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When can Tier 3 entities apply Tier 2 standards for certain transactions?
Note: This blog deals with technical issues and you may like to seek professional advice if any of these scenarios apply to you
The Tier 3 standard is pretty handy. You are eligible to be in this tier if your operating expenses are below $2 million, or, you may have opted up from Tier 4 because you prefer to use accrual accounting. The standard is written clearly, and there are defined parameters within which to report, so if you have some familiarity with accounting concepts it’s relatively straightforward.
There are a couple of areas, however, where you might be required to, or choose to opt up to the Tier 2 standard* for certain transactions. The Tier 3 standard allows you to adopt certain Tier 2 standards without having to comply with the Tier 2 requirements in their entirety**.
The most common reasons you would have for applying a Tier 2 standard are:
I’ll go through each one in detail. This is a somewhat complex area, so if you think these apply to you, we would recommend seeking professional advice.
Under the new reporting standards, you are required to think about whether your charity “controls” for financial reporting purposes, other entities (whether these are charities or not). If your charity controls other entities, then you must prepare a consolidated Performance Report for the controlling charity, and the Tier 3 standard requires the consolidation to be prepared in accordance with PBE IPSAS 6***.
Control is defined in PBE IPSAS 6 (NFP): Consolidated and Separate Financial Statements (Not-for-Profit) as “the power to govern the financial and operating policies of another entity so as to benefit from its activities”.
This means that the overall format of the Performance Report will follow that prescribed under Tier 3, but the way you consolidate will be following the Tier 2 standard. PBE IPSAS 6 and Explanatory Guides EG A7 and EG A8 have a lot of guidance to help you determine whether your charity does control other entities so it’s worth having a read if you are not sure. These can be found on the XRB website(external link).
Key concepts for PBE IPSAS 6 in a Tier 3 context:
Some charities hold a lot of property, and in particular, land and buildings. In the past, the charity may have recorded the value of those properties in their financial statements at the current market value. Under the Tier 3 standard if you purchased the land or buildings, then you must record that asset at the cost price. If you want to also disclose the market value, you can do so in the notes.
Under Tier 3, if you want to revalue the assets then you must apply the revaluation guidance in the Tier 2 standard, PBE IPSAS 17: Property, Plant and Equipment. You might want to do this if the value of your land and buildings has increased significantly over time, and you see the merit in reflecting this in your Statement of Financial Position.
Key concepts for PBE IPSAS 17 in a Tier 3 context:
The type of investment that we get the most questions about is unit trusts or portfolio investment entity (PIE) schemes. These are where you purchase units in a scheme, and the scheme invests the money into a variety of things such as shares, cash, bonds, notes etc. The value of your investment is dependent on how the investments are performing in the markets. These types of investments are usually managed by portfolio managers and they report to investors regularly with an update on the value of the investment.
Under the Tier 3 standard, for simplicity, investments are required to be valued at cost, which would be the amounts originally paid for the investment. Quite a few charities made their investments many years ago, and some are finding it hard to find the original cost values. In these cases, they want to record the current or market value of the investments, and to do this, they must opt up to the relevant Tier 2 standards and assign a “fair value” to the investments.
This is probably one of the most complex areas of the Tier 2 standards and therefore we would recommend seeking professional guidance if you are not familiar with these concepts. The relevant Tier 2 standards are:
Key concepts for PBE IPSAS 28, 29 and 30 in a Tier 3 context:
For charities applying the Tier 3 standard, wherever possible we would encourage you to stick to the standard to make things as simple as possible for yourself. In the first instance we suggest you carefully read the Tier 3 standard and associated guidance notes. If you are having problems getting the information you need, please get in touch with us and we will try and help you or find a solution where possible. Call 0508 CHARITIES or e-mail email@example.com