By Hayes Knight – 6 October 2011

What are the proposed changes to the financial reporting requirements for charities? How are they being created? Who will be affected by the changes? When are charities expected to use the new reporting requirements?

What are the proposed changes to the financial reporting requirements for charities?

At present under the Charities Act 2005, registered charities are required to file annual financial reports. However, there are no standards governing what needs to be prepared and it is unclear what needs to be filed.Changes proposed to the Financial Reporting Act will require the External Reporting Board (XRB) to set the financial reporting requirements for registered charities, and for other not-for-profit entities that have reporting obligations.

Under changes proposed by the XRB, the vast majority of registered charities will be able to prepare simple format reports to satisfy their financial reporting requirements under the Charities Act.

Implications:

We believe this will be good for the charitable and wider NFP sector as it should;

  1. Force consistency of accounting and financial reporting thereby allowing better comparability of financial statements.
  2. Help force some basic financial disciplines on small entities.
  3. Be easier to use accounting standards that are “fit for purpose” as written for, and applicable to, the sector.
  4. Be more cost effective via the use of tiers of reporting requirements and model financial statements.
  5. Potentially also allow more innovation in cost effective accounting solutions such as Xero, especially at the smaller end of the charitable and NFP market.

How are the new financial reporting requirements for charities being created?

The XRB will continue to consult with the community and voluntary sector, as it establishes the financial reporting templates. The XRB has released a position paper and two consultation papers for public feedback. The submissions deadline is Friday 16 December 2011. See the XRB website for more information: www.xrb.govt.nz

Implications:
  1. Proposes a 3 tier financial reporting framework (4 tiers in reality with a simple cash basis financial reporting requirements for the bottom subset of tier 3) enabling better “horses for courses”.
  2. New Zealand is at the forefront of international developments regarding developing appropriate accounting standards for the NFP sector as no ideal models currently exist internationally. However the XRB structure, people involved, and approach appears to bode very well for appropriate sector specialist involvement and consultation.
  3. The very simple format financial reporting standards and models, which should apply to a large number of New Zealand NFPs, will be New Zealand developed from scratch.
  4. The intention for tiers 1 & 2 is that the accounting standards will be based on International Public Sector Accounting Standards (IPSAS), but modified as required for any special features of New Zealand Public Sector and NFP entities, as well as an intention to where possible to harmonise with Australia.
  5. Given IPSAS are reasonably similar to IFRS the devil will be in the detail as to the complexity of accounting treatment and disclosure that tier 1 and 2 entities will have to follow.  Early indications appear to show a policy appetite to stay as pure to IPSAS as practical. However it is also recognised that there are some shortcomings with IPSAS as they exist now so some modification will be needed.

Who will be affected by the changes to reporting requirements for charities?

The XRB has determined that a multi-standards approach, with different standards applying to for-profit and public benefit entities should be used under the new arrangements. The XRB is about to consult on the details but tentative proposals are that:

  • The largest 5 per cent of registered charities will be required to file reports in accordance with generally accepted accounting practice
  • The remaining 95 per cent of charities will just need to use the simple formats

The proposals are detailed in a position paper and two consultation papers that are now posted by the XRB on its website: www.xrb.govt.nz.

Implications:
  1. As for implications at Q 1.  Good result for the majority of entities.
  2. A disappointing feature of the proposals is that the MED chose to delay any decisions regarding the question of whether audit or other assurance would be required and what forms this assurance could take. This means the unclear status quo continues in the medium term.

When are charities expected to use the new reporting requirements?

There will be a significant lead-in period to allow charities to adjust to the new reporting requirements. The XRB is proposing that the simple reporting templates for registered charities will only need to be used from financial years starting on or after 1 July 2014. Charities will be able to choose to use them ideally a year before that date.

A Bill detailing these changes will be introduced into Parliament in 2012, with a view to being enacted in mid-2013.

Implications:
  1. Sounds a long way off but there is a considerable amount of work to do to consult and develop appropriate standards, educate and implement.

The team at Hayes Knight intend to keep their clients and contacts up to date with developments and likely implications.