Part one: New financial reporting standards - charities

The new standards

Registered charities in New Zealand enjoy a privileged position in that charities are not required to pay tax on income.  Despite this privileged position, to date, there have been no minimum standards on the content or the quality of financial standards for charities.  From 1 April 2015, new reporting standards come into effect for all registered charities in New Zealand.  One of the aims of the new standards is to raise the standards, ensure a level of conformity in reporting, and ensure charities remain accountable to the public.  All charities will now need to complete annual reporting which include, completing an annual return, and attaching to that annual return financial statements/performance reports which comply with the new standards.

Summary of tiers

The new standards have been set by the External Reporting Board (XRB) and introduce four different reporting tiers.  The tier that a charity may report under is determined by the annual expenses or operating payments of its previous two financial years.   The reporting tiers one-four aim to accommodate large to small scale charities.  The tiers mean that smaller charities prepare simplified financial statements and larger charities will be required to use a set of more detailed accounting standards.  It is estimated that 95% of charities will be eligible to use the simplified standards while larger scale charities will have the assistance of specially designed templates and guidance notes.

Tier one

All charities default into tier one but have the option to report to another tier if they meet the criteria. Charities with annual expenses over $30 million or with public accountability must report under tier one.  This tier is generally for large profit entities who must report in an independent and personally designed format.

Tier two

This tier is suitable for non-publically accountable entities and non-large entities with under $30 million annual expenses.  Unlike the full standards applicable in tier one, tier two is subject to a reduced disclosure regime.  This means that significantly less disclosures are expected, reducing the costs of preparing financial statements.

Tier three

This tier is suitable to charities with annual expenses under $2 million and without public accountability.  Charities that use accrual based accounting must report to this tier or the above tiers. Accrual based accounting records the revenue and expenses incurred by the charity at the time when they were earned or incurred (accrual).  Charities are able to use the simplified formatting standards with the assistance of specially designed templates and guidance notes for reporting on accrual based accounting. 

Tier four

All charities with annual operating payments of less than $125,000 and without public accountability will have the option of reporting under tier four.  The simple formatting report under this tier will allow charities to continue using cash based accounting as long as operating payments are below the threshold for this tier.  Cash based accounting is typical in organisations where transactions tend to be small in scale and less complicated than that of larger scale transactions.  Transactions that are cash based are recorded at the time that cash is received or paid, rather than when earned or incurred.  If a charity currently uses accrual based accounting and would like to continue this method of recording then it will have to report to tier three regardless of whether their operating payments are below $125,000.  Operating payments do not include capital payments, for example the purchase of resources (physical assets or investments) or the repayment of borrowings.

Moving between tiers

The annual expenses or operating payments for a charity may change over time meaning the charity exceeds the requirements of the current operating tier.  In these circumstances, a charity may continue to report in their current tier for the accounting period and the following two accounting periods.   It is not until the third accounting period that it will have to report at a higher tier.  If a charity sits around the cost thresholds or fluctuates between the tier thresholds (and expects it will exceed the thresholds in the future) then a charity should consider reporting at another tier to avoid having to change reporting tiers at a later date.

This article is part one of a three part series.  The next article in this series will summarise the information that needs to be included in the new reports.

If you would like further information please contact Jessica Middleton on 07 958 7436.