Charity accounting risks bank covenant breach

by Kevin Reed

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23 Feb 2011

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A pound coin being placed into a charity tin

NEW ACCOUNTING proposals could inadvertently cause universities and charities to break their banking covenants.

PwC warns that the sectors, including housing associations, could be hit by changes to accounting standards for SMEs.

The changes will include stopping UK private businesses and not-for-profit organisations (public benefit entities (PBEs)) from adjusting their accounts to recognise assets that have risen in value.

Loan agreements could be broken as the deals usually include a covenant based on balance sheets showing the most up-to-date value of those assets, the firm warned.

A consultation draft of standards for PBEs is set to be released by the Accounting Standards Board.

Matthew Hodge, 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 called on PBEs to clarify their situation with lenders.


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