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 organisation.
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 handled.
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 of time,
- 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 expected.
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 reporting templates.
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 requirements.
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.