New reporting standards for registered charities
All registered charities must complete annual reporting to Charities Services. This includes filling out an Annual Return and attaching financial statements. Up until now, there have been no minimum standards on the content or the quality of those financial statements. After 1 April 2015, new reporting standards come into effect and registered charities will need to prepare financial statements in line with these new standards.
The reporting standards are set by the External Reporting Board (XRB), the independent Crown Entity responsible for developing and issuing accounting standards. With over 27,000 registered charities in New Zealand, of all different shapes and sizes, four different reporting tiers have been developed to allow smaller charities to prepare financial statements on a simplified basis. Larger charities will be required to use a set of accounting standards.
Charities Services expects that about 95% of registered charities will qualify to use the simplified standards. These charities have the option of using specially designed templates and guidance notes.
Refer to the Charities Services resource ‘Which tier will I use?’ for more information.
What are financial statements?
Financial statements provide information about a charity’s activities, transactions and balances. They include a statement of financial performance (profit or loss) which shows revenue and expenses, and a statement of financial position (balance sheet) which lists all the assets and liabilities.
People interested in a charity’s financial statements read them so they can make informed decisions. These people include the governance group, members, funders, and donors. It is important that financial statements fairly present the activities, transactions and balances and give the whole story of a charity.
The new reporting standards for tier 3 and 4 refer to the financial statements as a ‘performance report’. This is due to the fact that those standards require charities to provide non-financial information, such as its mission or purpose and what it does, in addition to financial information.
What is reported on?
To tell the whole story, reports need to include information about all the different parts of the charity.
Some charities will only have a few activities or services they provide, which will make it easy for them to identify all the different parts to include in their reporting. For others it might not be as straightforward, as they may have many activities or services which operate independently from each other. All these different parts of the charity must be reported on, as they all enjoy the benefits of being a registered charity.
The different parts of a charity could include:
- Activities – charities are often involved in many activities for which finances may be recorded separately, for example a special fundraising event.
- Trading operations – goods or services a charity sells to generate income, for example, an opportunity shop.
- Branches – to provide services in different locations, for example a Christchurch charity might have branches in Timaru and Ashburton.
- Bank accounts – different accounts may be established to keep money for different purposes separate, for example, a savings account keeps donations separate from a charity’s day-to-day cheque account.
The term ‘Reporting Entity’ is used by XRB to describe all the parts that must be reported on. If a charity’s situation is complex, refer to the XRB explanatory guide, EG A8: The Reporting Entity, for further guidance on identifying all the parts which must be reported on.
A charity may also need to include information about other organisations if there is a ‘control relationship’ with those organisations. ‘Control’ for financial reporting purposes is the ‘power’ to govern the policies of another organisation in order to ‘benefit’ from its activities. Both power and benefit must exist for a control relationship to exist. Refer to the Charities Services resource ‘Financial reporting and control relationships’ for more information.
When will charities have to prepare financial statements that comply with the new standards?
Although the standards come into effect on 1 April 2015, they will only apply to a charity’s first full financial year that starts on or after 1 April 2015.
Charities may wish to use the standards before this time. This would give them the opportunity to become familiar with the standards before they become mandatory.
Find out more information
You can find more information in the new reporting standards section on the Charities Services website.