April 2015 Newsletter
Green Accounting – Thought about your ‘externalities’ yet?
DIY Tax Refunds – IRD is making it easier for salary/wage earners to do it themselves.
Saving Through CCA – Christchurch NFPs had at least $100,000 in extra cash last year, thanks to us.
The Road to 2016 – Categorising income and expenditure.
Large companies often pride themselves on the fact that they voluntarily produce a Corporate Social Responsibility Report, generally known as a CSR. Such a report is not mandatory in all but a handful of countries, but it is usually readily accessible through the company’s web site.
The lack of regulation means that these reports often look more like marketing tools rather than a genuine stocktake of a company’s social and environmental impact. Because information flows so much more freely, investors have become more involved in researching companies they want to invest in themselves, and more and more they are taking such issues into consideration, meaning that companies will do well to put themselves in a positive light in such regards.
But while it is easy to point the finger at the big corporates, not-for-profits have a social and environmental impact as well – and usually, like companies, put money first. Administrative processes, for example, are quite wasteful in some organisations and sometimes quite incredible amounts of paper are used for unnecessary printouts. Many indirectly encourage the use of private vehicles by staff through very high mileage reimbursement rates. Funders more often than not require ‘competitive quotes’ for proposed asset purchases, indicating that they would fund the cheapest but not necessarily the most environmentally friendly option. And not-for-profits do not seem to have a better record as employers than small businesses, either.
The accounting profession is quite abuzz with the issue of developing reliable measures for such ‘externalities’, which governments can use to ‘charge back’ at companies through taxes or other mechanisms. There are attempts in many countries, generally led by not-for-profits, to develop a set of standards to account for environmental and social impact. Australia introduced ground-breaking legislation a few years ago requiring companies to accurately measure their use of natural resources, production of pollutants and certain waste streams and publicly report them. It was widely anticipated that this would lead to eco-taxes, however the present Australian government has rolled back many of these initiatives in a more ‘low-compliance’ approach to economic policy. Nevertheless, this trend is likely to gain momentum.
While none of this is likely to filter through to small entities, business or otherwise, I think not-for-profits cannot afford to rest on the laurels of ‘doing good’. We all have externalities, and they are not automatically mitigated by our good intentions.
Tax Refunds Becoming Easier
Inland Revenue is making changes to their web site which will enable employees to calculate their own tax refund (if any) from mid-May, and request it to be paid. This will remove the need to use a commercial tax refund company.
To do this you will need your own personal login to the IRD web site, which is done easily enough, although it involves a phone call. See here for the registration process. Even before the changes it had been possible to calculate your tax refund by requesting a ‘Personal Tax Summary’ through your own login.
Although tax refund companies are already advertising heavily, in most cases Inland Revenue will not yet be able to calculate any as they need the complete earnings information from all employers first. Although this was due on 20 April, there are always plenty of stragglers and not all returns are filed correctly.
It is Inland Revenue policy to not ask for additional tax payments from salary/wage earners, so if you find that for some reason you have tax to pay, you are encouraged not to file this information with them.
We recommend every taxpayer to get their own IRD login, as it also offers a way to monitor whether your employer is actually forwarding the deductions taken from your pay to IRD and not using them to shore up their own cash flow. Occasionally, employees find out much later (usually when a company folds) that many of their Student Loan deductions have never found their way to Inland Revenue..
Saving Through CCA!
CCA staff member Nick Hsu has done some research about the cost of audits for not-for-profits while he was still a student at CPIT late last year. He compared audit costs of CCA clients with a representative sample of registered Charities with similar turnover to CCA clients. His results indicate that CCA clients have been saved about $150,000 in direct audit costs during 2014. During the same period, CCA received about $50,000 in funding, meaning we have provided a net cash gain to not-for-profits of $100,000 through audit savings alone. On average, every funding dollar for CCA has provided a net saving of $2 to the sector.
This does not include indirect benefits such as better trained administrators and managers through CCA involvement, and freeing up their time through providing more time-effective solutions. These value-added benefits are the subject of a small research project of a current CPIT intern of ours.
The smallest groups reaped the biggest savings. While the average small CCA client with less than $100,000 in income paid CCA about $200 in audit fees, non-CCA groups faced average bills of $1,150. Smaller CCA clients spend less than half a percent of their income on audit, while their smaller non-CCA counterparts have to use on average 2.3% of their funds on this purpose. While this percentage is relatively constant for CCA clients of any size, in the non-CCA world larger groups pay proportionally much less than smaller ones (0.9%).
The main purpose of the research was to establish a baseline for audit costs for registered Charities before the new Financial Reporting Standards became mandatory. We expect a similar research project to happen in 2016 or 2017 establishing how much these costs have risen for small and medium not-for-profit organisations.
The Road to 2016
Monthly feature to prepare for the new Financial Reporting Standards for Charities.
Mandatory Income and Expenditure Categories
Both the Tier 3 and 4 Financial Reporting Standards have some categories that need to be reported separately. You can use your own names for these categories and can break them down or arrange them any way you wish, but they cannot be lumped together.
For your income these categories are:
- Donation-type income, including grants or sponsorships
- Income from members such as annual subscriptions or fees
- Income from providing services or goods, such as fees you charge, government contracts, door takings at events etc.
- Investment income, such as interest.
Most organisations we come across do not mix these types of income in their Financial Statements, however sometimes fees or charges are incorrectly categorised as ‘donations’.
On the expenditure side the categories are:
- Fundraising-related expenditure
- Payments to Employees and Volunteers
- Donations/Grants Given
- All other operating expenditure
The separate category for employee/volunteer payments (i.e. mostly wages and salaries) can be problematic for organisations that categorise their expenditure by project rather than in a purely functional way. For many organisations it is much more meaningful to disclose the combined cost of, say, a reserve planting project, a community event or the cost of one of your services rather than providing a list of categorised expenditure such as ‘wages’, ‘consumables’, ‘repairs and maintenance’ or similar. In cases like that it would be acceptable to disclose the volunteer/employee figure separately in the Notes rather than ‘downgrading’ your Financial Statements.