Reporting (Charities)

August-October 2018

Charity Reporting Woes

In the last few months we took on a few registered Charities that have not complied with the new reporting rules since they came into effect. Charities Services can only check a few charities for compliance each year, and a large number of charities – possibly still the majority – are not aware of the new rules and submit non-compliant reports. Occasionally we’re getting surprised looks if we are telling them that there are new rules, and quite a bit of resistance to change.

If this has happened, Charities Services advised us that they will not require an organisation to re-file past years if they start complying from when they become aware of it.

To clarify, a Charities Annual Return has two components:

The actual Annual Return, which is an online form. Your responses to this form are posted in pdf format in the ‘Annual Return Summary’ column in the Annual Return tab on the Charities Register.

This form, amongst many other things, asks about some financial figures. These figures are the basis for the ‘Total Income’ and ‘Total Expenditure’ figures in the table in the ‘Annual Returns’ tab.

A compliant ‘Performance’ Report, which contains your financial statements as well as other mandatory information about your Charity and your service activity. This report is generated by the charity and must comply with accounting standards. It is posted on the register under the ‘Financial Statements’ column in the ‘Annual Reports’ tab, and can be in any software format. The figures entered into the Annual Return must be based on the Financial Statements.

Occasionally we find that an organisation files a ‘performance’ report with Charities Service based on a template, but approves a completely different set of Financial Statements at their AGM. This is problematic.

The statements filed with Charities Services must be your ‘official’ statements for the general public. There cannot be another set of financial statements for this purpose.

You can have different financial reports for internal use. For example, you may produce accrual-based accounts for your own purposes, but use cash-based reporting for Charities Services, because it is simpler. If these other accounts are presented at an AGM it must be made clear to people attending that these are not the official financial statements of the organisation but financial reports produced for internal purposes only.

For audit purposes, if your rules or constitution says you have to have an audit, then this audit in general must be on the same statements that you posted to the Charities Register, not any other financial report.

Review of not-for-profit accounting standards

February 2021

The External Reporting Board (XRB), who is the issuer of accounting standards, including those mandatory for registered charities, is reviewing those applying to Tier 3 and Tier 4 entities. This is of relevance not only to Charities, as it is likely that compliance with these standards will become mandatory for all Incorporated Societies, regardless of whether they are registered or not.

Feel free to make a submission (go to www.xrb.govt.nz). XRB is a government agency, but operates outside government control: its activities cannot be influenced or directed by the government other than through legislation or budget.

CCA accountants will probably make a submission, mostly in the hope to at least avoid a further tightening of the screws. We will advocate for:

the removal of the Statement of Service Performance from the standards (not the right place for this kind of reporting, and XRB is the wrong agency for it) and instead making this Charities Services’ business;
continuing to allow freedom in the presentation of the components of the statements (within limits), as is international practice for all other accounting standards;
replacing the ‘use or return’ definition for certain grants with something more workable, to make grant reporting consistent;
allowing the use of project categories in expenditure, rather than always having to separate out wages. We think it is often more useful for an organisation to report how much money have been applied to which projects rather than being stuck with functional categories. This would also better meet the ‘telling a story’ narrative, and would be consistent with the higher reporting Tiers;
some simplifications for Notes and Accounting Policy disclosures that add no value to not-for-profits, distract from the important bits, and just make the reader feel dumb.

XRB’s White Flag

October 2023

Opinion – by Harald Breiding-Buss

The External Reporting Board (XRB), the guys who are in charge of the accounting standards that are mandatory for registered charities, have issued a re-write of both the Tier 3 and Tier 4 standards, which cover around 95% of all registered charities. [more…]

This is the result of a two-year review, and this second instalment is a mixed bag. For Tier 3 (organisations with more than $140,000 in operating expenditure) there is some much-needed clarification on accounting issues, and changes in format that make those accounts more useful. They have responded to a large number of CCA’s concerns and suggestions, although not always in the way we would consider most sensible.

In contrast, the new Tier 4 “cash-based” standard reads like the raising of a white flag. For one, it is full of encouragement not to use it at all and switch to the higher Tier 3 standard instead. It has been stripped down to the point that it is no longer easily recognisable as a (primarily) financial report, with a format that is even less flexible than before. For example, any information about an organisation’s assets and liabilities has been relegated to the Notes, even though information about an organisation’s wealth is arguably more important for external stakeholders than their financial performance. And, probably to the dismay of many grant funders, disclosure of unexpended grants will no longer be mandatory in this Tier at all.

This radical rewrite was likely a response to dismal compliance numbers. Chartered Accountants Australia/New Zealand (CAANZ) says that 5 years after the standards were introduced, the majority of Tier 4 accounts submitted to the charities register still did not meet requirements – and the trend was heading further the wrong way.

One likely reason would be that no research had been done on what is most useful for the not-for-profit sectors stakeholders in terms of public financial reporting before regulation. As a result, the usual business assumptions have been used about what stakeholders are after, supplemented largely by opinions and hunches. Small charities, therefore, probably see these requirements as nothing more than a compliance exercise, with no practical use or relevance – if they are even aware of the requirements at all.

That lesson has still not been learned – the not-for-profit sector continues to be regulated without a good research basis informing such regulation, and as a result the necessary buy-in from the sector will still be missing. I don’t think any meaningful change is possible without it.

I feel that the sensible response to the failure of raising any sort of enthusiasm or even plain understanding in the sector for these financial reporting rules would have been to go back to the old system: have a basic financial template as part of the annual charities return, but, within limits, let organisations themselves decide how exactly they present their annual accounts. You will still get a lot of rubbish, but also a fair amount of good, meaningful reports. This is what the rest of the world is doing.

New Zealand is alone in the world in requiring small charities (and soon all incorporated societies) to comply with accounting standards set by an external agency. Eight years after its introduction in New Zealand, no other country (at least as far as I can find) has shown any appetite to follow this example, let alone to require a report on ‘Service Performance’. But, given how proud the XRB was of itself when first introduced, it may well be another 20 years before we can abandon this particular dead end again, without anyone losing face.

The biggest reason given for the original introduction of accounting standards in 2016 was to improve the quality of financial reporting of charities. This may have been achieved for the 20% or so medium to large charities, most of which had already had good financial reports. But for the rest, we are worse off now than we were before 2016.

Changes to Tier 3 and Tier 4 Reporting for Charities

July 2024

As reported in our January newsletter, 1 April 2024 saw reporting rules for Tier 3 and 4 charities change significantly. Those with Balance Dates of 31 March 24 can still use the old rules, but anything after that must comply with the new standards.

Charities Services has been exceptionally slow in reacting to these changes, and at the time of writing still has the old templates and all the old no longer applicable resources on their web site. Xero, which is the only accounting software provider in New Zealand that provides charity reporting templates for partner subscriptions, has also not provided any new templates. At this point in time, templates (which are NOT mandatory to use) can only be downloaded from the XRB web site here: https://www.xrb.govt.nz/standards/accounting-standards/ (there’s a bit of clicking involved to get there).

This suggests that even though the rules have changed, it is unlikely that anyone will pick up on tardy implementation by charities. It also hints at capacity issues at Charities Services.

One thing that has changed for both tiers is mandatory categories to be used in Income/Expenditure-type statements. The number of these categories has increased, and they can no longer be broken down on the face of the statements, only in the Notes. They can be re-named though.

For Tier 4, here’s some guidance on how these categories are meant to be used (Tier 3 is equivalent):

Official Name (can be re-named by organisation)	Previous category under old rules	Explanation
INCOME
*Donations, koha, bequests, and other fundraising*	Donations, fundraising and other similar receipts	Self-explanatory.
General grants received	Donations, fundraising and other similar receipts	All grants from mostly philanthropic sources, such as gaming machine funders, community trusts (Rata etc), Lottery, local councils and others, where there’s some sort of condition on spending.
Membership fees or subscriptions	Fees, subscriptions and other receipts from members	Note this no longer includes receipts from donations or sales involving members.
Service delivery grants/contracts	Receipts from providing goods or services	Awkwardly named, but fully equivalent to the old category. This includes grants or contracts with government agencies, where the agency effectively ‘purchases’ a service from you. It also includes any fees you charge for your services or any other income that is a direct result of your services.
Sale of goods and services (commercial activities)	Donations, fundraising and other similar receipts	This is essentially a category for ongoing/permanent fundraising activities, i.e. things an organisation does for the sole purpose of raising money to fund its activities, and which is not a part of the organisations normal service delivery. Examples would be an Op Shop, a Café, or rental property. Sausage sizzles or other smaller one-offs are still meant to go into the ‘donations etc’ category.
Interest or dividends received	Interest, dividends and other investment income receipts.	Self-explanatory.
Other cash received	n/a	Should only be used for unusual and uncommon transactions.
EXPENDITURE
Fundraising costs	Payments related to public fundraising	Probably fully equivalent to previous category, and self-explanatory
Employee remuneration and other employee- related costs	Volunteer and employee related payments	Wages, salaries, KiwiSaver and ACC payments. Regular contractors should also now be included in this category.
Volunteer related costs	Volunteer and employee related payments	Honoraria, petrol or gift vouchers, free lunches etc – costs to reward volunteers for their work. Any costs to do with recruiting volunteers should also go here.
Costs related to sale of goods or services (commercial activities)	Payments related to public fundraising	As above for commercial income. No costs should be included here that were not incurred to generate the income in the ‘commercial income’ category.
Other costs related to delivery of entity objectives	Payments related to providing goods or services	Fully equivalent to the old category. Includes all your normal operating costs other than staff, such as rent, travel, project costs, accounting, legal etc.
Grants and donations paid	Grants and donations paid	Self-explanatory and unchanged.
Other cash paid	Other cash paid	No change. Note that this category is not meant for administrative expenses, but mostly for unusual items.