The External Reporting Board and other organizations have begun seminars to educate registered charities about upcoming changes to financial reporting and assurance requirements. New standards will require charities to prepare financial statements using accrual or cash accounting depending on size, and will establish tiers for reporting and assurance based on operating expenses. Large charities with over $1 million in expenses will need an audit, while medium charities between $400,000-1 million can choose an audit or review. Only qualified accountants will be able to perform assurance services for large and medium charities under the new laws.

1. 30 MAY 2013
BUSINESS
T
he External Reporting Board (XRB), in conjunction with
the Department of Internal Affairs – Charities (DIA),
the Ministry of Business, Innovation and Employment
(MBIE) and the Association of Non-Governmental
Organisations of Aotearoa (ANGOA), has begun a
series of seminars covering the proposed new accounting
and assurance requirements for registered charities. Therefore it is
now timely to take a consolidated look at all the changes that are
anticipated for registered charities.
The aim is to increase the quality of financial reporting in registered
charities. Significant amounts of money flow through registered
charities and, due to the exemption from income tax, improved
accountability and transparency is in the public interest.
Those of you who have clients that are registered charities, or are
employed by registered charities, might be asked for advice or even be
responsible for implementing the changes, so it is important you are
aware of what is ahead.
Financial reporting requirements
It is legislation that determines “who” should report. Currently,
registered charities are not required by law to meet any particular
standard of financial reporting. At the end of July 2012 the Financial
Reporting Bill (the Bill) was introduced into Parliament. Once
enacted, it will repeal the Financial Reporting Act 1993. This Bill also
requires changes to be made to 23 other Acts, including the Charities
Act 2005.
The Bill proposes that registered charities must prepare general
purpose financial statements in accordance with generally accepted
accounting practice. Depending on the size of the registered charity, this
may reflect accrual accounting or cash accounting. Those registered
charities that are not “specified non-profit entities” are permitted by
law to use the cash accounting standard issued by the XRB. An entity
is a specified non-profit entity in respect of an accounting period if, in
each of the two preceding accounting periods of the entity, the total
operating payments of the entity are $40,000 or more.
The registered charity will be the legal financial reporting entity
established under the Charities Act 2005. If multiple branches of a
charity are registered separately, then each branch will need to prepare
separate financial statements, but there is no requirement to prepare
consolidated financial statements. If there is a single registration for
a charity with multiple branches, then only consolidated financial
statements need be prepared; there is no
requirement to prepare individual branch
financial statements. So in summary, only one
set of financial statements will be required to
be prepared per registered charity.
Financial Reporting Standards
The Bill gives the XRB’s applicable financial
reporting standards force of law, so the
XRB determines what should be reported.
Registered charities are a subset of not-for-
profit (NFP) entities and therefore are part
of the framework for public benefit entities
(PBE). Last month’s Journal contained
an article on the simple format reporting
standards for NFPs in Tier 3 (accrual) and
Tier 4 (cash) that have been exposed by the
XRB.
Figure 1 demonstrates that the majority
of registered charities meet the criteria to be
in Tier 4, so will be eligible to report using
the simple format cash accounting standard.
Based on the current timeline, registered
charities will have to prepare financial
statements that comply with the new
standards for the financial year commencing
1 April 2015.
Assurance requirements
Again, it is legislation that determines who
needs assurance and what type. Currently
there are no statutory assurance requirements
for registered charities. On 21 February
2013, the MBIE released a discussion paper
containing concrete proposals for future
legislation for auditing and assurance for
large and medium registered charities. The
proposals have been revised as result of
the submissions received on the Ministry
of Education’s (MED) tentative proposals
outlined in a discussion paper back in April
2012. In summary, MBIE agreed that:
• the dollar amount for defining “large” was
too low
• the review option band should be much
wider
• the cost estimates were oversimplified,
and failed to take into consideration many
variables involved
• compliance with applicable accounting
standards will need to be monitored.
The revised proposals outlined below are
Proposed changes for
charities
A number of changes are proposed to
increase the quality of financial reporting in
registered charities.
By Zowie Murray CA

2. 31MAY 2013
in line with NZICA’s submission.
• Charities with greater than $1,000,000
operating expenses (“large”) for the
preceding two years must have their
financial statements audited.
• Charities with between $400,000
- $1,000,000 operating expenses
(“medium”) for the preceding two years
must have their financial statements
audited or reviewed.
• Such audits and reviews must be carried
out by those meeting the qualification
requirements in clauses 34-36 of the
Financial Reporting Bill.
• The Department of Internal Affairs (DIA)
will monitor charities compliance with
applicable accounting standards from
2015.
This two-tier system of an audit for
large charities and an audit or review for
medium charities is consistent with the
Australian Charities and Not-for-profits
Commission Act 2012, except the large
threshold has numerical, rather than value,
alignment with Australia. It is likely that
the proposed assurance requirements will
be integrated into the Charities Act 2005
at the same time as those amendments
arising from the Financial Reporting Bill,
so that the requirements become effective
simultaneously. In reality, this change is
only going to impose a statutory assurance
requirement on approximately 3,000 of the
25,000 registered charities in New Zealand,
see figure 2. Of these, the majority are likely
to be having their financial reports audited
or reviewed already.
The MBIE decided against aligning the
assurance tiers with the financial reporting
tiers on the basis that it does not follow that
assurance costs outweigh the benefits simply
because a charity is eligible for simple format
reporting. Therefore registered charities
that are large for the purpose of assurance
will either be in Tier 1, 2 or 3 for financial
reporting purposes. All other registered
charities could be in either Tier 3 or 4 for
financial reporting, but both will be applying
simple format reporting standards.
Qualifications of auditors
Currently there is nothing preventing any
person from acting as auditor of a registered
charity (section 15(3)(c) NZICA Act 1996).
Many NZICA members with retired status
play an active part in registered charities,
through the provision of assurance
services, sometimes even on a pro-bono
basis (including reduced fees). Under the
proposals this will only continue to be
permitted for “small” registered charities
(those with operating expenses less than
$400,000) if the entity opts to have an audit
or a review. However, this does not negate
the requirement for the financial statements
of small registered charities to be prepared in
accordance with the simple format reporting
standards issued by the XRB.
Large and medium registered charities
would be required to have an audit or review
by law, and the proposals require that such
assurance engagements must be carried out
by a qualified accountant. Section 25 of
the Bill refers to section 19 of the NZICA
Act 1996; but where there is a statutory
assurance requirement the engagement can
only be conducted by a member of NZICA’s
College of Chartered Accountants (CA) who
also holds a Certificate of Public Practice
(CPP). The authority for this lies in section
18.3(b)(ii) of the NZICA Rules.
Figure 1: All registered charities by tier - financial
reporting requirement
Figure 2: All registered charities by size -
assurance requirement
Large and
medium
registered
charities
would be
required to
have an audit
or review by
law, and the
proposals
require
that such
assurance
engagements
must be
carried out
by a qualified
accountant

3. 32 MAY 2013
BUSINESS
Inhibitors
The concrete proposals for assurance
do not override the requirements
in the registered charities founding
documents, nor does it override
funding organisations requirements.
So there are some other
considerations needed to enable the
remaining 22,000 small registered
charities to fully take advantage
of these proposals, which permit
them to avoid having their financial
statements audited or reviewed
altogether.
Firstly, a number of registered
charities self-impose an audit
requirement in their founding
documents. This may need to be
reassessed in terms of what the
users of those financial statements
actually require, bearing in mind
that some users are not in the
position to demand assurance.
Registered charities should consider
aligning their founding documents
requirement for assurance with the
regulatory requirements.
Secondly, a number of funding
organisations require audited
financial statements as part of a grant
application, regardless of the size of
the registered charity, or the size of
the grant. An education process is
needed here for both government
and non-government organisations:
if the above assurance levels are
acceptable by law, the question must
be asked as to why this would not
be acceptable when applying for a
grant?
Feedback
These proposals will impact all
registered charities, but to varying
degrees. All registered charities
will need to be ready so they can
comply with the new financial
reporting standards and assurance
requirements when they become
law. The XRB seminars are free,
will be held around the country, and
run until 9 May. See the Charities
Commission website charities.
govt.nz/for dates, locations and to
register your attendance.
NZICA’s Technical Services Team
is planning to prepare submissions
on the XRB’s simple format
reporting standards for NFPs, and
the MBIEs concrete proposals for
assurance for registered charities.
If you would like to contribute
to our submissions, please email
your comments to submission.
feedback@nzica.com.
Zowie Murray CA is a Technical
Advisor on NZICA’s Technical Services
Team.

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