By Hayes Knight – 10 July 2014

New financial reporting standards are coming for registered charities. When do we have to apply them? When should we apply them? Should we adopt them early?

As readers will be aware from our earlier articles; recent financial reporting legislation means that registered charities will have to apply new accounting standards in future.

The accounting standard setter; the External Reporting Board through its accounting standards sub-board, the NZASB (New Zealand Accounting Standards Board) has been busy developing and issuing the new standards for the relevant tiers of reporting entities.

For Public Benefit Entities (PBEs) these new standards have been issued for Tier 3 (these apply to registered charities with annual operating expenditure less than $2m) and Tier 4 (registered charities with annual operating expenditure less than $125,000).

The standards for Tier 1 not for profit entities (“publicly accountable”, which is a definition that is much more restricted than the common English understanding of that term, or large = over $30m annual operating expenditure) and Tier 2 (annual operating expenditure between $2m and $30m) have not yet been issued in their final form.  There are current standards issued which are essentially the international standards.  However an exposure draft was released proposing possible New Zealand amendments to these standards.  The exposure draft period ended in May 2014 and these standards are expected to be issued in the 3rd quarter of 2014.

When will the new standards take effect?

This new legal requirement becomes effective for accounting periods beginning on or after 1 April 2015.

The following table shows the year of mandatory first adoption for a range of common balance dates.

Balance Date

First Year-End Under the New Standards

31 March

31 March 2016

30 June

30 June 2016

30 September

30 September 2016

31 December

31 December 2016

Should we adopt early?

It depends.

There is no correct answer and it is ultimately up to each entity to decide. Also of importance is to understand that the impact of the new standards will vary depending upon the size, nature, type of entity and variety and complexity of operations it is undertaking.   However here are our initial observations.

  • For tier 3 and 4 entities we think adopting early should be given serious consideration.  It is quite possible that the accounting requirements under the relevant accounting standards, along with the model templates provided will mean easier accounting compliance than under existing generally accepted accounting practice for some entities.  If this is the case and the entity has the accounting resources to do so, then adopting early may make good sense. 

    However organisations need to be alert to the additional requirements that are required by these new standards.   These require that financial statements are accompanied by greater background information regarding the entity and also information that outlines their delivery against non financial objectives for the year – a statement of service performance.  Such a statement may require some internal processes to be developed to enable information to be provided accurately.

  • For tier 1 and 2 entities our assessment is the opposite.  For many entities the accounting will be more complex than what they are complying with at present.  This is especially the case if they are currently complying with old generally accepted accounting practice as defined by Financial Reporting Standards and Statements of Standard Accounting Practice.   For entities currently applying NZ IFRS the likely level of change will not be quite so significant. 

    Also of relevance to tier 1 and 2 entities is that in the first year of adoption of the new standards, comparative figures will also need to be restated under these standards as well as an opening balance sheet.   This will involve more work and will take time and hence it may be more prudent  to use the period between now and the mandatory introduction date is to get to grips with the new requirements and get ready for the change-over.

Can we adopt up to a higher tier?

Yes.  This option is always open to an organisation to adopt a higher level reporting requirement than is required of them by law.

Reasons an organisation may consider opting up to a higher tier include:

  1. The organisation is on a strong growth path and can forsee their organisation crossing a tier threshold in the near future.
  2. The accounting at the legally required tier is considered too simplistic for the organisation and the nature of their transactions and the more complex accounting and disclosure at the next tier is considered more appropriate.  Note: an organisation can choose to adopt a single accounting standard of a higher tier for a particular type of transaction if they deem that more suitable – however they have to apply this standard for all of those transactions and also clearly note in their financial statements that they have adopted the particular higher level accounting standard.
  3. The governing body sees it as a strategic move to demonstrate good governance and to seek to make themselves more comparable with larger organisations.

All of the above reasons would need to also be weighed up against the potential costs and accounting impacts of complying with a higher level of accounting standard.  There is no single answer to this and the costs, impacts and benefits will vary from entity to entity depending upon the types of operation they run.

Footnote: I was fortunate to be able to discuss a recent early adopter tier 3 set of financial statements with a significant philanthropic funding team.  Very pleasingly the consensus view was that the new tier 3 format with its additional entity information and other non-financial information content made these a far more useful information source to the funder.  Well done to the XRB!