Review of the Financial Reporting Act, 1993 — Discussion Document
This is the second discussion document. The NGO sector was generally very critical of the initial discussion document and this second paper appears to have taken much of that criticism on board.
Reproduced by kind permission of Angoa and Pat Hanley.
09 February 2005
PAT HANLEY
lawler.hanley@paradise.net.nz
(04) 239 8027
76 Rawhiti Rd. Pukerua Bay Porirua
The Financial Reporting Act 1993 sets out the reporting requirements for New Zealand businesses. In March 2004 the first discussion document on the review of the Financial Reporting Act 1993 was published by the Ministry of Economic Development. This is the second discussion document. One of the objectives is to bring New Zealand into line with International Financial Reporting Standards and to extend the standards to a wide range of "entities" including NGO's.
The NGO sector was generally very critical of the initial discussion document and this second paper appears to have taken much of that criticism on board.
The discussion document runs to approximately 100 pages and I do not intend to cover the many complex issues raised. Others within the sector are more qualified to address these issues. Rather, this report provides an overview of the broad, sector wide issues with particular regard to their relationship to the Charities Bill currently before Parliament.
It should be noted that the ministry advises that any changes to the Financial Reporting Act are unlikely to come into effect before 2009.
Two broad criticisms arose out of the initial discussion document:
- It was proposed that financial reporting requirements would be "entity neutral" ie no distinction would be made as between for profit and not for profit 'entities".
- Compliance costs for many community organizations would be extremely onerous and unjustified.
It is now proposed that the financial reporting standards setting body would have the responsibility to determine what must be reported and how but will not be responsible for determining who must report.
Who must report will be set out in other legislation including the Charities Act. It is now recommended that only registered charities will be required to provide financial reports and the reporting requirements will be set out in the regulations to the Charities Act.
Regulations associated with the Charities Act are currently being developed and these include provision for financial reporting as part of the initial registration process and subsequently the annual reports of registered charities. It is likely that these financial reporting requirements will be established this year concurrent with the establishment of the Charities Commission.
However, once the Financial Reporting Act is amended, likely to be in 2006, the Standards Setting Authority may seek to harmonise its reporting standards and those set out in the regulations of the Charities Act. This is to be done in conjunction with the Charities Commission and the charitable sector.
For the purpose of financial reporting it proposed to establish a three tier system. These tiers and associated reporting requirements are:
Tier 1 — Organisations with incomes of less that $100,000
- Report by way of receipts and payments
- No audit required
Tier 2 — Income of more than $100,000 to $2.5 million
- Financial reports based on accrual accounting
- Independent financial review but not a full audit.
Tier 3 —Income greater than $2.5 million
- Report based on International Financial reporting Standards
- Full audit.
An organization's income would include a combination of donations, income from business activities and income from government including grants and contracts.
This three tier system is different from the original proposal in that it is based on income only. The previous proposal was for a three tier system with the three categories being determined by reference to any two of assets, turnover and number of staff. That would have placed many relatively small charitable organizations in tier two, particularly if they employed large numbers of volunteers.
The new proposal means that a large number of community and voluntary sector organizations will have no reporting requirements because they choose not to register as charities or their reporting requirements are reasonably consistent with current practice.
Duplication of reporting is to be avoided by having the Charities Commission responsible for receiving financial reports and forwarding those to the Accounting Standards body.
The Discussion Document sets out a series of questions for each section of the Report. The Questions relating to charities specifically are set out at pages 49-50 of the discussion document.
Several key points to be considered include
- Should only registered charities be required to provide financial reports?
- Is the three tier system appropriate and workable?
- Is the measurement of income based on donations, income from business activity, and government grants and contracts the appropriate basis for reporting?
Submissions on the Discussion Document closed on Friday, February 25th.