As you may be aware, accounting requirements for registered charities are changing from 1st April 2015.
There will be four tiers of reporting, from tier 1, which requires the charity to adhere to full accounting standards, to tier 4 which provides for ‘simple format cash accounting’. All charities will automatically default to tier 1. However, a charity may chose to report in another tier if it meets certain criteria. Most charities will fall into tiers 3 and 4.
Tier 3 requires simple format ‘accrual accounting’, and is applicable to charities with annual operating expenses under $2m and which are not publically accountable. Tier 4 allows for simple format ‘cash accounting’, and is suitable for charities with annual operating expenses of under $125,000 and which again are not publically accountable.
- Cash accounting is basically: money coming in and money going out which leaves you with what is in your bank account
- Accrual accounting is: taking the basics of cash accounting as above and adding such things as debtors and creditors – those who have not yet paid or been paid
The new reporting requirements are intended to answer the following questions:
- “Who are we?” – an overview of the charity
- “Why do we exist?” – why the charity was established and what it seeks to achieve (objectives) and its purpose
- “What did we do?” – what the charity did during the year in providing goods or services (outcomes)
- “What did it cost?” – how much was paid to provide goods or services, and to run the charity
- “How was it funded?” – the sources of cash used to pay for the activities in providing goods or services
- “When did we do it?” – the period covered by the report and a comparison of information with previous reporting periods
- “How did we do our accounting?” – the accounting policies applied
- “What do we need to do to continue?” – the ability of the charity to continue achieving its objectives and operate in the future
The answers to most of these questions should already be known by all charities. However, charities are now also required to prepare a Statement of Service Performance, which explains what the charity did. This report is based around two elements:
- Outputs (what the charity is seeking to achieve in terms of its impact on society) and;
- Outcomes (the goods and services that the charity delivered during the year). As far as possible, the Outcomes should be quantifiable. For charities that do not currently report on outcomes, it is important that they consider this requirement now and set in place any procedures or policies that will be necessary to ensure that the required information is collated.
Audit or Review
Another change that your charity needs to consider is whether you require an audit or review. The type of assurance (audit) required by a charity will now depend upon its total operating expenditure. For example, charities with total operating expenditure of less than $500k will not be required (under the new assurance standards) to have their accounts audited or reviewed. However this does not supersede any requirement in a constitution for a charity to be audited. Some funding organisations will also require that a charity’s financial statements are audited as a condition of providing funding. Each charity will need to consider its own circumstances and review its constitution to determine what will now be required.
The External Reporting Board (XRB) is responsible for setting these new standards and has a wealth of information available on its website. This includes optional templates and guidance notes for charities to assist them in applying the new standards.
Charities Services is also available to assist charities to work through the transition process – contact them on www.charities.govt.nz, email email@example.com or phone 0508 242 748.
Things for charities to do now to be ready for implementing the new standards:
- Decide which tier the charity falls into. Consider any relationships with other entities for financial reporting purposes and any public accountability requirements.
- Define Outcomes in terms of what the charity is seeking to achieve with its impact on society.
- Put policies and procedures in place to collect information required to complete the Statement of Service Performance.
- Review the Constitution and requirements of any funders to determine what will now be required in terms of audit/assurance review.
- Download the templates available from the XRB website and review the step-by-step guidelines to see what additional information now needs to be collated and reported.
And, if you need any assistance or guidance please don’t hesitate to contact us.