New charity reporting – are you ready?
Zowie Murray CA, Senior Policy Adviser, Chartered Accountants ANZ
March 2016
What’s changing?
Recent legislative change has resulted in a comprehensive reform of New Zealand’s financial
reporting landscape. The main implications for charities are as follows:
1.
2.
3.
All charities are required to prepare financial statements in accordance with new sector specific
reporting standards (general purpose financial reports – GPFR)
Some charities are required to have these financial statements audited or reviewed
The audit or review must be carried out by a “qualified auditor”
Why is it changing?
The purpose of the financial reporting reform is to contribute to improving the financial reporting
system as a whole in New Zealand. The objective is to ensure that information is provided to external
users who have a need for an entity’s financial statements but are unable to demand them.
Under the new financial reporting system, GPFR are required to be prepared as a result of displaying
one or more of what are called the indicators of reporting; being publicly accountable, having
economic significance, or if there is separation between the ownership and management. Charities are
deemed to be publicly accountable due to their exemption from income tax. Significant amounts of
money flow through charities, and therefore improved accountability and transparency is in the public
interest.
Requiring GPFR will also improve the quality and consistency of the information in charity financial
statements, and facilitate comparability between charities, and year on year for a particular charity.
Financial reporting requirements
All charities must complete annual reporting to Charities Services which involves filling out an
Annual Return and submitting their financial statements. Up until now, there have been no minimum
standards for the content or the quality of those financial statements. However, all charities now need
to prepare their financial statements in line with new reporting standards issued by the External
Reporting Board (XRB). The new reporting standards came into effect on 1 April 2015, which means
that financial statements for the year ending 31 March 2016 will be the first prepared under the new
reporting standards.
Four different reporting tiers have been developed, and this allows smaller charities to prepare
financial statements on a simplified basis. All charities default into tier 1, but may choose to report in
another tier if they meet certain criteria. The criteria and reporting standards for each tier are outlined
in Standard XRB A1 Application of the Accounting Standards Framework. This is summarised in the
table below:
Tier
1
Criteria
>$30m expenses; or
Has public accountability
≤$30m expenses; and
Does not have public accountability
Reporting standards
Public Benefit Entity (PBE)
Standards
PBE Standards - Reduced Disclosure
Regime
3
≤$2m expenses; and
Does not have public accountability
Simple Format Reporting Standard Accrual
4
<$125k operating payments; and
Does not have public accountability
Simple Format Reporting Standard Cash
2
The tier that a charity reports under is determined by its annual expenses or operating payments for its
previous two financial years, and whether it has public accountability. Whereas the default position is
that all charities are publicly accountable, when charities consider which tier to report under, they can
apply a specific definition which is different to everyday usage. Registered charities which hold cash
or assets on behalf of others as one of their main activities will be required to report under tier 1. This
is typically the case for banks, credit unions, insurance providers, securities brokers/dealers and
mutual funds. Most charities will not hold other’s cash as a main activity and therefore will be able to
utilise all of the tier options.
PBE standards
The tier 1 and 2 standards consist of 38 separate standards derived largely from International Public
Sector Accounting Standards (IPSAS). This set of standards is similar in nature to IFRS but with a
PBE focus. Tier 2 entities are allowed to apply Reduced Disclosure Regime exemptions (RDR). This
means they must apply the same recognition and measurement criteria as tier 1 entities but are
allowed to take advantage of significantly reduced disclosure requirements.
Simple format reporting standards
The tier 3 and 4 standards are short, simple, stand-alone standards that have been developed
domestically. Compared to the tier 1 and 2 standards, they allow for simpler recording of some
transactions and fewer disclosures. Each standard splits the requirements into mandatory and
optional. The tier 4 standard is referred to as a “non-GAAP” standard because it uses a cash basis of
accounting. Furthermore, because cash accounting is not deemed to give a fair presentation in terms
of the financial reporting definition, tier 4 is a “compliance framework”. The tier 3 and 4 standards
require charities to provide non-financial information, such as entity information and a statement of
service performance (SSP) in addition to the financial statements. The complete reporting package is
called a “Performance Report”.
Assurance requirements
The legislative changes have also created statutory assurance requirements for “medium” and “large”
charities. This means that financial statements for the year ending 31 March 2016 may need to be
audited or reviewed. The assurance requirement is determined by the annual operating expenses for
its previous two financial years as follows:
Size
Large
Definition
≥$1m expenses
Assurance requirements
Audit
Medium
≥$0.5m expenses
Review
Charities with annual expenses of less than $500,000 are not required by law to have an audit or
review. However, they may be required by their founding documents (e.g. rules, constitution or
charter) or as a condition of receiving a grant to have their financial statements audited or reviewed,
or may choose to have this service.
Tier 3 and 4 requirements include an SSP which incorporates non-financial information into the
reports. An assurance practitioner must be engaged to audit or review the “financial statements” as a
whole, which encompass this SSP. However, the audit and review standards do not cover nonfinancial information. Under the assurance framework, assurance over non-financial information is
undertaken using ISAE (NZ) 3000 Assurance Engagements Other than Audits or Reviews of
Historical Financial Information. This means that assurance practitioners will have to apply two
different parts of the assurance framework in order to form a conclusion on the overall Performance
Report.
The New Zealand Auditing and Assurance Standards Board (NZAuASB) has issued interim
guidance; EG Au9 on the use of ISAE (NZ) 3000 to form an opinion or conclusion on the entity
information and the SSP included in the performance report of a tier 3 entity. This is whilst they
develop separate audit and review standards on service performance information (SPI).
Qualified auditor regime
From 1 July 2015 when an audit or review is required by law, it must be done by a qualified auditor.
The new qualified auditor regime came into effect on 1 July 2015. This means charities should ensure
they use a qualified auditor to carry out their statutory audit or review for ending 30 June 2016. You
can find the Register of Qualified Auditors on our website.
Annual return
Annual reporting to Charities Services must be completed within 6 months of year end. The Annual
Return has been revised to improve the information collected and align it with the new reporting
standards. Through the Annual Return, Charities Services will monitor charities’ compliance with
these new reporting and assurance requirements.
Further resources
We recognise that many of you may be feeling a little apprehensive about all these changes. For this
reason we have developed a Financial Reporting and Assurance Tool to assist you navigate the new
financial reporting and assurance requirements for charities. This free online tool is user friendly; it
guides you through a series of questions to gather entity specific information in order to determine its
legislative requirements.
We have developed guidance materials which explains, in simple language, an audit compared to a
review, and what to expect from these services. We also have a page on our website dedicated to
charities, which points to further resources that are available to help with implementation of these
changes.