May 2014 Newsletter


This Issue

Handcrafted Accounts – No templates here!

Auditing – Do you need an audit and by whom?

Un-Tier the Knot – Know your tier under the new financial reporting rules



PO Box 13 625; Ph 669 0542;

Harald:; Rhys:; Yvette:

Lovingly Handcrafted Accounts

One thing that I have thought about a fair bit over the last two years or so is how accounting for not-for-profits differs a lot from business accounting. A lot of the assumptions underlying business accounting either do not apply to not-for-profits, or are actually the reverse.

For example, a business is necessarily focused on revenue-generation, and expenditure is incurred as a necessary evil in the process of doing so. A not-for-profit is focused on expending funds for a specific purpose, and money is raised to cover those expenditure. In the first case it is about performance: how effective is the business in generating revenue from the resources it has used. In the second, performance is irrelevant. A surplus only means that money is held over to be expended in future years, and a deficit means that funds held over from previous years have been expended. What is more important is what the money has been put towards.

You may have noticed that CCA-generated Financial Statements use different titles for the Statements, and some different words for category headers, in order to draw attention to the not-for-profit nature of the organisation and their focus on obtaining funds for expenditure rather than the other way around. This is, by the way, permitted by accounting standards, even the new ones.

When designing financial statements for a client I also think about what level of detail they probably require or find useful, and how I can phrase Notes or Accounting Policies in a language that is useful. I have also tried to make audit reports a little more comprehensible, and give some detail about what I have done. Audit reports for different organisations can be quite different.

Accounting theory acknowledges that accounting is not ‘neutral’. Accounting practice has an impact on the way the entity does what it does. Business-focused accounting practice is by nature somewhat corrosive for purposes where the intention is not to make money. At CCA we’re trying to do our bit to mitigate those effects.


Auditing Requirements

We keep coming across the misconception that audits are mandatory for not-for-profits. They are not. There is no legal requirement for not-for-profits to have their financial statements audited, reviewed, or otherwise confirmed. This will change from 2016 for organisations with annual expenditure of $500,000 or more only.

The requirement to audit most often comes from the organisation’s own constitution, rules, or Trust Deed. Funders also sometimes require it, especially if the application is over significant amounts.

Who is ‘qualified’ to do an audit? Unless it is a statutory audit (one required by a law) the only legal requirement of an auditor is that they have the qualifications to do the job at hand. For non-statutory audits there is no requirement to do an audit a certain way or according to certain rules. Again, funders usually specify that your auditor must have relevant accounting qualifications, but they don’t specify the actual scope of the audit. If funders were to define a tighter scope for the audit, this could potentially bring audit costs down.

Auditors will generally use International Auditing Standards (IAS(NZ)), a reasonably generic suite of guidelines although written with very large commercial entities in mind. Accounting firms that do a fair number of audits will have quite fixed procedures, largely to ensure that nothing gets missed that could possibly make the auditor liable. That, and the fact that auditors tend to be quite highly paid due to the risk they are exposed to when auditing companies, explains why accounting firms charge quite high rates for audits even for very small entities. They do not necessarily spend less time on a small entity than on a larger one.

CCA also uses IAS(NZ), but our own audit procedures are very specific to not-for-profits. IAS(NZ) requires auditors to keep the most likely readers of the Financial Statements in mind, and these are fundamentally different for not-for-profits than for commercial entities.

A ‘review’ is an odd beast – for small organisations there would be little, if any, difference between what a reviewer would do versus an auditor. However, because reviews do not carry any significant risk of liability, more accountants might be prepared to do ‘reviews’ than ‘audits’ as they can avoid the much higher insurance premiums for the latter.

Financial Reporting Changes – The New Tier System

One of the things that community organisations have to get their heads around when the new financial reporting standards come into effect is the tier system.

In general, tier 1 (full compliance with the whole suite of relevant accounting standards) is the default tier. Organisations below a certain turnover can elect to compile their financial statements under another tier. They must state in their Financial Statements which tier they have elected to report under, and why they qualify to do so. Not-for-profits are not automatically slotted into the ‘right’ tier according to size!

In the past, the highest tier (1) always had the most stringent and regulated requirements, while concessions were made further down – the lower the tier, the less reporting requirements there were. The new standards for not-for-profits have somewhat turned this on its head as there are now requirements in tier 3 and 4 that do not exist in the higher tiers, and some of the reporting requirements are more onerous.

For a “normal” community organisation that exists to provides some kind of service, there are no significant accounting concessions from tier 2 to tier 3, but there is added reporting (such as the ‘Statement of Service Performance’, disclosures about your dependence on volunteers, how you finance yourself and others) and less freedom in designing your Financial Statements. Accountants are also more used to the requirements of tier 1 and 2 than the tier 3 and 4 formats. We advise all community groups who come under the new regime (registered charities for now) to think carefully about which tier they want to use. Below is a table which outlines some of the different requirements for the different tiers.

Susan Wallace, from Community Law Canterbury, advises that incorporated Societies that are registered Charities may need to decide at their upcoming AGM if they want to report under any other tier than the default one (tier 1).

  Tier 1 Tier 2 Tier 3 Tier 4
  Default < $30m

+elects this tier

< $2m

+ elects this tier

< $125,000

+ elects this tier

Requirements Full compliance with PBE-NFP standards Full compliance with concessions Separate Standard Separate Standard
Reports Required:        
Income Statement Yes Yes Yes No
Statement of Financial Position Yes Yes Yes Yes (1).
Statement of Cash Flows Yes Yes Yes Yes (2)
Statement of Changes in Equity Yes Yes Disclosures in Notes No
Statement of Accounting Policies Yes Yes Yes Merged with Notes
Notes Yes Yes Yes Yes
Statement of Service Performance No No Yes Yes
Entity Information Basic Basic Detailed Detailed
Other Disclosures        
Payables, Receivables, other Accruals Yes Yes Yes Yes + descriptions
Depreciation, Impairment and/or Valuation of fixed assets Yes Yes Yes No
End-of-year grant balance Yes Yes Yes Yes + details
Capital Commitments Yes Yes Yes Yes
Templates available (optional) No No Yes Yes


(1) Simplified and does not need to balance.

(2) Called ‘Statement of Receipts and Payments’