Charities and financial reporting
There has been some concern in the charitable sector about potential changes to financial reporting requirements, especially in relation to registration under the Charities Act 2005.
To provide general information on this issue for charities, the Commission has outlined below the current financial reporting framework that charities operate under, and has given some background to the current proposals for review of the Financial Reporting Act and related requirements.
The current framework
The financial reporting requirements for a charity that were in place before the passing of the Charities Act 2005 continue, with one exception (refer to the table below)
These requirements can be found in one of two places:
- the document, deed, rules, or constitution of the charity itself; or
- any legislation the charity is subject to.
An unincorporated charity has no statutory requirement to meet any particular financial reporting standard.
Section 23(4)(b) of the Incorporated Societies Act says that an incorporated society that is also a charitable entity (i.e. registered under the Charities Act 2005) does not have to file an annual financial statement to the Registrar of Incorporated Societies. This applies as soon as your organisation is registered with the Charities Commission. Incorporated Societies that are also registered under the Charities Act must otherwise comply with all reporting requirements of both Acts. |
Charities incorporated under the Charitable Trusts Act have no particular obligations for financial reporting under that Act.
Charities incorporated under another Act should check that particular Act for any specific financial reporting requirements.
Charities applying for grants may find that, regardless of their constitutional arrangements, the funding agency to which they are applying may require financial statements prepared to a certain standard, and possibly audited.
Reporting under the Charities Act 2005
After registration, charities need to submit an “Annual Return”. The regulations defining the Annual Return and other registration forms came into force on 1 November 2006.
The Annual Return asks for a copy of the charity’s financial accounts and includes a statement of the financial performance of the charity.
While there is no requirement for the Annual Return to contain information that comes from a financial audit, if a charity’s accounts have been audited, the form asks for these to be attached.
Currently there is no requirement in the Charities Act for an Annual Return to include audited accounts or to comply with any standards set by external groups. However, the Commission expects that charities will do their best to provide accurate financial information.
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view or download the Annual Return form (PDF, 580KB)
Review Advice
The Financial Reporting Act is in a review process. The Charities Commission will highlight any outcomes of that review that will impact on the Financial Reporting obligations of charities on this website.
Financial Reporting Act 1993
No change until at least 2010
For most charities, the reporting standards arising out of the Financial Reporting Act 1993 do not apply. There are some specific exceptions, for example those charities that are companies or “issuers” in terms of the Securities Act. An example would be aged care facilities where the style of ownership is by issuing occupiers with a “licence to occupy” or a similar “security”.
While a further review of the Financial Reporting Act 1993 is expected to happen this year (2006), the Charities Commission has been advised that the Government will not be making any decisions arising from this review until there has been further consultation with stakeholders.
The Charities Commission understands that any changes arising from this review will have a long transition period before coming into force. The Commission has been further advised that the earliest possible date for any change to come into effect would be for financial years beginning on or after 1 January 2010.
The Financial Reporting Act 1993
With the exception of most charities, the Financial Reporting Act 1993 applies to many entities (whether for-profit or not-for-profit). Some specific exceptions were noted earlier in this article, and there may be other specific instances where the Financial Reporting Act also applies.
The Financial Reporting Act creates the Accounting Standards Review Board. This Board can review and approve financial reporting standards, these include standards developed and submitted to that Board by the New Zealand Institute of Chartered Accountants (“NZICA”).
The NZICA has established a framework of financial reporting and auditing standards, and members of that Institute are required by their professional ethics to observe those standards when they are either preparing or auditing financial statements. While the standards are applicable to all types of organisations, certain smaller entities are exempt from some standards because of their size. This is known as “differential reporting”.
If an organisation is not incorporated, and/or is not required to prepare financial accounting reports for consideration by external agencies, then it may use whatever standards it chooses in preparing internal financial reports.
The Financial Reporting Act also defines “generally accepted accounting practice” (‘GAAP”) as:
- applicable financial reporting standards;
- in the absence of applicable financial reporting standards, those standards and policies that are appropriate to the circumstances of the reporting entity.
Some guidance on applying GAAP to not-for-profit organisations appears in a booklet prepared in 1999 by the NZICA called “Financial Reporting by Voluntary Sector Entities” (also called R-120).
Review Initiatives
As noted above, the Financial Reporting Act is currently undergoing a review. The Ministry of Economic Development intends to publish a discussion document as a part of this review process during 2006.
The standards set by the NZICA are also under review as New Zealand falls into line with international practice and adopts International Financial Reporting Standards. The Commission is advised that as each standard is introduced into New Zealand, it is being modified to suit not-for-profit organisations in particular. These standards are likely to continue to provide for some form of differential reporting for smaller organisations.
The Financial Reporting Act and the NZICA requirements will continue to apply only to those reports required by legislation or constitutional documents. When a member of the NZICA is involved in the preparation or audit of the report, their standards will also apply.