New financial reporting standards and the state of the sector
For many charities 2016 was the first year that they had to produce full financial statements under the new public benefit entity (PBE) standards. BDO has recently surveyed 709 New Zealand charities (75% of which were Tier 3 or Tier 4) to gauge the impact of the new standards on the sector.
Why the change?
Previously there was very little legal oversight when it came to charities’ financial reporting. An annual return was filed but there were no minimum standards on the content or quality of these financial statements.
It was decided that charities, with significant amounts of revenue drawn from government funding and public donations, and their tax free status, should be subject to greater reporting standards and accountability.
A tiered approach by the External Reporting Board ("XRB") was developed - large charities and government entities were subject to higher levels of regulation, while smaller Tier 3 and 4 charities (those with less than $2 million in annual expenses) had simple, but consistent reporting standards to follow. This would facilitate consistent, quality information, providing more transparency to the public and greater accountability for charities.
It took longer, but didn’t always cost more
Of the charities surveyed it was found that just over half of the participants found it took an additional 1-5 hours to complete the new reports. Another 27% spent 5 or more hours on the final reports. Despite this, over half of all respondents stated that preparing the reports did not cost any additional money. This is impressive given the complexity of the changes and shows that Charities Services’ free templates helped charities meet the new requirements.
For Tier 3 and 4 charities the statements of cashflows, (a new addition to annual reporting) was especially challenging. Charities leant on external accountants or Charities Services for assistance with these.
For a sector undergoing probably its single biggest change in financial reporting ever, signs are positive. Encouragingly less than 5% of survey respondents haven’t adopted the new financial reporting standards. The changes implemented seem to have been achieved with extra hours and occasionally extra costs. Going forward, annual compliance should prove easier each year, as New Zealand moves towards greater transparency and accountability for all charities.
For more assistance with the new financial reporting standards, contact your local BDO adviser.