February 2014 Newsletter
Make your cash work for you– Maybe its time to talk to an investment advisor.
Minimalist Coming Up – This spreadsheet is as basic as it will get under the new ‘Tier 4’ rules.
Fee Increases – But not for smaller groups.
The Road to 2016 – Realistic depreciation rates are now mandatory.
Investing your Reserves
Many not-for-profits hold significant amounts of cash as reserves in case of funding shortfalls or other unforeseen circumstances. Unlike businesses, they cannot rely on a ‘line of credit’ with the bank, as they have nothing (especially not future income) to borrow against. As a result, reserves are a must. CCA recommends that not-for-profits have reserves worth 9-15 months of typical operating expenditure, although this depends a lot on the type of not-for-profit.
Typically, ‘excess’ cash is invested as term deposits, partly because this is a convenient investment option, partly because it is safe, and in large part because there is little awareness of better options.
Very few not-for-profits whose accounts we work with here at CCA look for alternatives, but those who do generate quite significant income that way. Where a term deposit will yield somewhere around 4%, bonds will yield at least 7% (more commonly 8%), and managed funds can quite comfortably fall between 10-20%. Bonds (which are loans to large companies) are a rather safe investment option, and if you are a Kiwisaver member your retirement earnings already depend largely on managed funds.
A not-for-profit with $50,000 in cash reserves could increase their investment income by at least $2,000 per year, quite possibly by up to $5,000. That’s a small grant!
There are ethical choices available even in New Zealand for managed funds – keep in mind that even if you stick to term deposits your money will be used to finance industry projects which you may not be comfortable with. Getting more bang for your buck could be seen as a way of diverting a little of business profits to not-for-profit purposes.
It’s worth making an appointment with an investment advisor at your bank to explore options. For DIYers, RaboDirect seems to be the only NZ bank which offers self-managed investments in a limited (but still sizeable) selection of funds from well established firms.
CCA has a new staff member: Nick Hsu starts work on Monday 2 March and will go fulltime from April. Nick is an Associate CPA, and holds a Bachelor of Applied Management (Major Accounting). Some of you may have met him as an intern last year, where he proved so capable that we just couldn’t let him go….
Nick is expected to initially handle most of the smaller accounts, while Harald will look after and increasing focus on training and education this year (as well as still doing a lot of accounting).
Announcing the ‘Minimalist’
Some time next month we will release our Accounting 4.0 spreadsheets – and its little brother, the ‘Minimalist’. The Minimalist comes just in time to be used for the financial year starting 1 April 2015 if you are a Charity wanting to report under Tier 4.
It is a ‘traditional’ Excel spreadsheet which uses no Macros and should be compatible with quite old versions of Excel as well as other spreadsheet software (such as google, Open Office and others). It provides a way to record your day-to-day transactions, organise them in the minimal number of categories required by the new Tier 4 accounting standard, and produce a compliant report at the end of the year. It also has a template for your assets and liabilities which you can fill in to use as your ‘Statement of Resources and Commitments’, as well as our standard grant tracking functionality.
We would recommend them for very small groups that just want end-of-year reports with as little hassle as possible. The categories are too vague to be of much use for anything else, such as Board/Committee meetings, but we think they are more than adequate for example for more seasonally active groups (such as sports clubs, groups existing to organise specific events or so), which don’t need to keep a constant eye on their finances all year round.
Fee Changes at CCA and GST
Because we expect demand for Community Accounting to keep growing at at least the present rate for some time, we are employing another fulltime accountant as from April this year, the start of our financial year. At the moment we have 152 clients enrolled with us, which we expect to increase to at least 200 by Christmas. Despite a similar increase last year, grants from our funders were overall slightly lower than the year before, meaning we cannot expect such grants to increase proportionally with our work in the future.
From 1 April we will have to be GST-registered, which means non-GST registered organisations will have to pay 15% more for our services. Otherwise, fees for groups with under $104,000 in income remain the same. We want to continue to give priority to small groups who cannot afford big accounting bills. As before, we’ll waive or reduce any fees for small organisations if they can’t pay, or if the fees would create a barrier to accessing our services in the first place. Just talk to us.
Our hourly rate for groups over $208,000 will increase to $60 +GST (from $51 at the moment), and our subsidised hourly rate for those between will go up to $30 +GST (from $25).
The fees of larger organisations subsidise the smaller ones. If you know a small organisation that needs help with their accounts, send them along and tell them they don’t have to worry about fees. Likewise, if you know a larger not-for-profit that could do with competent community accountants, suggest us. A big thank you to those larger groups that use us, and help keep smaller ones afloat.
The Road to 2016
Monthly feature to prepare for the new Financial Reporting Standards for Charities.
Many charities use Inland Revenue depreciation tables to determine depreciation for their fixed assets. CCA’s policy has been to discourage our clients from doing so, but still accept these rates in an audit if they are being used, unless they are wildly unrepresentative.
Inland Revenue depreciation tables show the maximum depreciation rates a business may use for Income Tax purposes. The new financial reporting standards, however, say that depreciation must be realistically applied over the expected useful life of the asset. This means on purchase (or donation) of a new asset, it should be estimated (or judged from experience) how long this asset will be used by the organisation and depreciated accordingly. If you are buying a used vehicle for your staff and volunteers to use, and you expect this to last you about 5 more years, your deprecation rate is 20% per year, meaning the vehicle is completely ‘written off’ after 5 years.
One type of asset that is particularly affected is buildings. These should not be depreciated unless there is an actual deterioration of market value. Also, IRD asks businesses to depreciate certain repairs or improvements to buildings and land. If a business replaces carpets in its buildings, the new carpets must be depreciated as a separate item for tax purposes. ‘Proper’ accounting is to either count the new carpets as an expense (if they only replace what was there before) or, if they actually improve the value of the building, to add them to the capital value of the building. The cost of building an extension would be added to the capital value of your building, while the cost of replacing your roof is a ‘repair’ and should be counted as an expense (unless it is a new kind of roof which ‘upgraded’ your house). Whether it’s a capital expense or not has nothing to do with the amount that has been spent.
Many organisations make improvements to buildings they lease, for example dividing up a room or installing a reception area. Generally these are organisation’s assets – but only for as long as they occupy the building. Therefore they should be written off over the remaining time of the lease. If your lease runs another ten years, then any building improvements should be depreciated at 10% per year.
Remember: if you are using Tier 4 for your Financial Statements, you do not need to apply depreciation at all.