Changes are on the horizon for Incorporated Societies
By Hayes Knight - 17 February 2012
New Zealand has a large number of Incorporated Societies, over 23,000. Along with Charitable Trusts they make up the bulk of our not-for-profit sector in New Zealand. If your organisation is an Incorporated Society or you are a member of one then you should be aware of the reviews currently underway.
These reviews are likely to result in future changes to
legislation that your Incorporated Society will be required to
follow. To help our clients we put together this overview of
the changes and the possible implications for your
Law Commission review of the Act - The
Incorporated Societies Act 1908 is the governing legislation for
Incorporated Societies in New Zealand. This legislation has
remained virtually unchanged since 1908! It therefore comes as no
surprise that many believe it is overdue for a major reform..
The following areas of concern have been raised:
- the level of governance specified in the Act,
- the types of mandatory rules that should apply to all
Incorporated Societies and remain free from variation,
- the lack of adequate processes for dealing with conflicts of
interest and resolving internal disputes, and
- how the liquidation and dissolution of societies should be
As a result the Law Commission has been tasked with conducting a
review. Led by some of New Zealand's best legal minds, it
will take a broader contextual perspective and consider whether
there should be just one statute for the incorporation of
not-for-profit entities in New Zealand.
The Law Commission's call for submissions closed in late
2011. Hayes Knight made a brief submission regarding the
importance linked to financial reporting. Once these
submissions have been considered, the Commission will then issue a
series of recommendations to the relevant Government departments
regarding the revision of the legislation. The timing of this
process is not clear; but given the legislation amendment process,
we are probably still a couple of years away from seeing these
changes come into effect.
- Likely to codify good governance practice. It is therefore
important that this is implemented in your organisation ahead
- May result in a merging of requirements for charitable trusts
and Incorporated Societies. Therefore it is important to seek legal
advice if you are contemplating any structural changes.
Financial reporting - The Incorporated
Societies Act 1908 allows for very simple financial records to be
prepared. These then need to be approved by the society's
members and filed on the public record. The legislation does
not specify that generally accepted accounting standards (GAAP) be
followed. There is no specification for an audit or any other
form of assurance in legislation to be performed.
However, in practice, most Incorporated Societies have voluntarily
chosen to follow GAAP with many requiring an audit. Both
these standpoints support good governance and assist readers'
understanding due to comparability.
Last year (2011) saw a major change in financial reporting
standard setting in New Zealand with the Government establishing
the External Reporting Board (XRB). The Minister of Commerce
confirmed changes to the reporting requirements for charities and
many other not-for-profit entities, including that the External
Reporting Board (XRB) will set financial reporting standards for
registered charities and any other not-for-profit entities required
to prepare general purpose financial reports. The intention
is to make life easier for this sector by setting a consistent
basis for financial reporting and providing certainty as to what is
If your Incorporated Society is not also a registered charity,
the announcement stated that due to the current review of the
Incorporated Societies Act by the Law Commission, no financial
reporting or independent assurance decisions have yet been
made. Instead the Government will consider financial
reporting issues for Incorporated Societies once the review of the
Incorporated Societies Act 1908 is completed.
However, as general purpose financial reporting is being
specified for the various tiers of registered charities we would
anticipate that this may also be required for Incorporated
Societies in future. The exact detail of the reporting for
registered charities is yet to be determined and is unlikely to
become mandatory until years commencing on 1 July 2014 with
possible early adoption from 1 July 2013.
General purpose financial reports will be required to be
prepared under the standards as determined by the XRB. For entities
that are already preparing financial statements in accordance with
generally accepted accounting practice, we are not expecting the
impact of the changes to be overly significant.
However, it is intended that International Public Sector
Accounting Standards (IPSAS) will be used in future for the
not-for-profit sector rather than International Financial Reporting
Standards as the base accounting standards. This is sensible
given they are better suited to the special features of
not-for-profit sector entities. Medium sized entities
in the sector will be able to apply a Reduced Disclosure
Requirements (RDR) version of the full standards, and very small
entities will be able to adopt a very simple format reporting.
Depending upon the eventual outcome of the Law Commission review
this may mean a change in accounting standards to be complied with
in future. The XRB will continue to consult with the
charities and not-for-profit sector in the process of creating the
There are still decisions to be made, and legislation to be
passed, such as deciding the cut-off levels for the different tiers
of financial reporting. Hence with this and the outcome of
the Law Commission review still to be seen we are not as yet able
to provide certainty as regards all your future financial reporting
We will remain actively involved in debating the changing
landscape of financial reporting in New Zealand and to help
influence a sensible outcome for New Zealand NFP entities.
Our primary concern is that your financial statements are fit for
purpose and that the cost/benefit equation of preparing and
presenting your financial information is not out of balance.