October 2014 Newsletter
Problems Reserved– Beware the ethics of putting money away for a rainy day.
Hagley Update – What are you waiting for? Enrol!
GST Reminder – Careful with CCA bills: we aren’t registered
Floats and Bonds – They live on the Balance Sheet.
Accounting Standards Update – Some issues clarified after the seminars.
The cost of accountability
The charities register receives a mere 100,000 hits on its web site per year. That’s four hits per charity, and at least half of this can easily be explained by administrative traffic alone (charities filing their annual return and looking up their own information). By comparison, our own much smaller and very local web site receives about 40,000 individual visits per year. CCA alone generates about 500 visits per year on the Charities web site for convenience in the process of audits, student projects and other purposes – and we are just one group working with Charities. It would also be safe to assume that most of the external hits on the charities register would be generated by those wanting to find out about the high-profile charities, who already have to report under a standards regime and are not significantly affected by this.
In a best-case scenario, the average cost of the changes to charities will be a mere $100 per year per charity, or $2.5m for the about 25,000 charities affected. If we are very optimistic and assume that half of the visitors to the Charities web site really do use the information to make a donation decision about a small charity, this equates to a cost of $50 per visitor, borne by charities, to bring this information to them.
I conservatively estimate the cost of the changes for each charity to be closer to $500, including not just increased accounting and audit costs but also lost staff time that would otherwise have been put to meeting the purpose of the organisation. Also, let us assume that the number of external users of the new reports through the charities web site (they won’t be published anywhere else) is closer to 10,000. This is still a very optimistic number given that not only does the user have to access the information about a specific charity, they also have to click on the Annual Report section, from there click again to access the actual attachment, and then need to be able to actually understand the information. The total cost of $12.5m per year to charities would equate to a cost of $1,250 per user to bring this information to them.
That seems prohibitive, but the cost to society would be even higher. The last Statistics NZ Not-For-Profit Satellite Account (2006) found that for every employment hour in a charity there are three volunteer hours. If charities are deprived of $12.5m annually through increased compliance costs, the number of volunteer hours must also fall. There will be less planting in reserves, for example, if some of the money to purchase seedlings had to be spent to pay the accountant, administrator and/or treasurer, and therefore less volunteer hours.
Even the highly optimistic $50 per user would be a staggering price tag for this sort of thing. However, for this investment to lead to any gains, the following conditions also must be met:
- Each user must make a different donation decision than they would have made before the changes. If the changes do not lead to different decisions this must indicate that the reporting changes have not actually improved reporting from the user’s point of view.
- Each user must either make a wiser decision about their donation, one that leads to a more efficient use of the funds than would have been the case with their original decision; or they must make a larger donation than they would otherwise have made. In both cases the effect of the donation decision (larger or wiser) must outweigh the cost of bringing the information to them for there to be any net gain.
I would estimate that already at least $2m must have been spent in developing the standards and the training/information efforts so far, about $500,000 borne by charities and the rest by taxpayers.
Even acknowledging that the charities register may be used in a wider accountability sense, such as by the media or through research, I am rather sceptical that the new reports will be accessed much by these sources: journalists are not accountants, and researchers would need the numbers in a database format (they are of little use to them hidden away in individual attachments).
For these costs to be justifiable, the charities register would have to register visits in the millions, not thousands, and they must be visits to the information about small and medium-sized charities, not the large, high-profile ones. I am disappointed that no research has been done on the use of the register (or financial information generally) by the general public before imposing an across-the-board change like this.
It is also notable that the changes come at the same time as the NZ Institute of Chartered Accountants faces competition in the NZ market for the lucrative audit business as well as other services, especially through CPA Australia, one of the world’s largest professional accounting bodies. The increased accounting and audit bills for charities will help offset some of the lost business…
Update on NFP Course at Hagley
The prospectus for after-3 community education in 2015 at Hagley Community College is now available, and enrolments are open. This includes the Not-for-Profit Management and Administration course.
Key learning outcomes include that participants will be able to produce fully compliant financial reports and are able to make confident decisions about their structure and way of operating. It targets people working or volunteering for small to medium not-for-profits and those thinking of setting one up, but would also be suitable for those working in larger ones who want to have a better foundation about these issues.
The cost is a one-off enrolment fee of $40. See here for more information.
Reminder: We are NOT GST-registered
This means you cannot claim GST back on our fees.
To reiterate: you can only claim GST back on items over $50 if you have a tax invoice from the supplier. It must clearly say ‘tax invoice’ at the top of the invoice, and have a GST number.
Floats and Bonds
Many organisations account for floats and bonds as income and expenditure. This is incorrect, and tracking it down in an audit can be quite time-consuming for everyone involved.
A ‘bond’ is money that you take, for example, from a club member for using uniforms owned by the club. This is not income because the money remains the property of the member, just as the uniform remains the property of the club. Bond money must be accounted for as a current liability. Where it is collected together with actual income (such as membership fees or a donation), it must be separated out in your cashbook/software.
Likewise, when the member returns the uniform and receives their bond back this is not an expense. Instead, the bond re-payment to the member eliminates the bond liability.
A ‘float’ is money you take out of the bank account and put into a cashbox in order to have change at hand during a fundraising or sales event. Transferring money from a bank account into a box does not make it an expense (just as it is not ‘income’ from your cashbox’s point of view). Floats are current assets, and when the day’s takings are banked need to be separated out.
Accounting for bonds and floats as income or expenditure distorts your financial reports: it makes both your income and your expenditure appear higher than it really is, and can lead to some rather fictional ‘profits’ made from fundraisers.
Accounting Standards Update
The recent seminars by Charities Services advising on the introduction of new Financial Reporting rules have left many people somewhat confused. Here, we clarify two issues that people have asked us about since:
– Can Tier 4 groups produce an accrual-based Statement of Financial Performance instead of a cash-based statement, but otherwise comply with Tier 4 rules? It has been suggested at least in some of the workshops that this is not possible and that the organisation would have to do all their reporting under the higher Tier 3.
To clarify: from March 2016 all charities have to produce a cash-based statement of monies received and paid. In Tier 4 this is called ‘Statement of Receipts and Payments’, and in all other Tiers ‘Statement of Cash Flows’. Despite the different names, these two Statements are fundamentally the same. Tier 4 entities do not also have to produce an accrual-based Statement of Financial Performance. The (Tier 3) Statement of Financial Performance is not equivalent to the (Tier 4) Statement of Receipts and Payments, and therefore one cannot replace the other.
However, there is nothing in the Standards preventing an organisation doing Tier 4 Statements to also supply an accrual-based Statement of Financial Performance if they so wish, for example because they have produced an accrual-based statement in the past.
The terminology of calling Tier 4 ‘cash-based’ and Tier 3 ‘accrual-based’ is unfortunate. Both Tiers have cash- and accrual-based components, and no charity will be able to avoid accrual-based disclosures in future.
– Will Incorporated Societies that are not registered at Charities have to comply with the same rules in future? One of the slides shown during the workshops states this as a fact.
The changes to the Incorporated Societies Act have not yet made it into parliament and are not yet finalised. There will be submissions asked for, and a democratic process to go through. It appears that these changes are still a few years away. It is also possible that any proposal to bring Societies into the reporting regime will be influenced by the success (or otherwise) of the rollout for registered charities.
Non-Charity incorporated societies include a large part (possibly the majority) of sports clubs in New Zealand, and it is harder to make an argument for public accountability for these.