By Hayes Knight – 2 April 2012

After a period of relative stability there are a number of potentially significant changes coming down the line that will impact many NFP organisations in New Zealand. What is changing? Why? When are impacts likely?

As featured in the April 2012 issue of Fundraising NZ magazine

Readers of this magazine consist of a wide variety of entities in the charitable and wider NFP sector in New Zealand, either those directly seeking fundraising on their own behalf or individuals and organisations serving such entities.  Accordingly it is important for you to be aware of what changes are coming and likely to impact the sector and potentially your future work.

Other than the introduction of the Charities Commission, thanks to the Charities Act 2005 legislation, there has not really been a huge amount of significant change in what is required of entities in the sector due to legislation.  However all that is about to change with reviews underway regarding financial reporting legislation, a Law Commission review into the continuing suitability of the Incorporated Societies Act, and now a Charities Commission review of the definition of Charitable Purpose in New Zealand.

In this new monthly column we will seek to ensure you are aware of upcoming changes and explore their implications, as well as investigate other topical issues.

Financial reporting legislation

2011 saw a major change in financial reporting and assurance 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 expected.

Some NFP entities such as some incorporated societies are not either registered charities nor otherwise currently required to prepare general purpose financial reporting.  However, as general purpose financial reporting is being specified for the various tiers of registered charities we would anticipate that this may also be mandatorily 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 2015 although with early adoption likely allowed from whenever the applicable financial reporting standards are in place.

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, which account for a significant % of our registered charities in New Zealand, will be able to adopt a very simple format reporting.

The XRB have advised they will continue to consult with the charities and not-for-profit sector in the process of creating the reporting templates.

There are still decisions to be made, and legislation to be passed, such as deciding the final cut-off levels for the different tiers of financial reporting. Hence until the legislation is passed this isn’t certainty as regards all future NFP financial reporting requirements.

Implications

The proposed financial reporting changes are likely to have the following impacts on the NFP sector:

  • Require consistent standards of financial reporting to be followed allowing better comparability, albeit with different requirements for different tiers based on entity size and public accountability.
  • Result in a change of financial reporting for some NFP entities requiring financial education and possibly some improved systems for some NFP organisations
  • Hopefully achieve a better cost/benefit equation for NFPs preparing and presenting their financial information