Charities and Financial Reporting
There has been some uncertainty in the charitable sector about potential changes to financial reporting requirements, especially in relation to registration under the Charities Act 2005. The following information provides an update and guidance on this issue.
Charities Act 2005
When a charity registers under the Charities Act, it is asked to provide some simple and straightforward financial information on the application form, and to send in a copy of the financial report for the latest completed financial year.
The Charities Commission has not specified any standards for this report, and organisations that do not normally publish a formal annual report will only need to furnish a simple statement of receipts and payments. There will be no requirement for these statements to be audited.
The same requirements will apply when a registered charity files its annual return with the Charities Commission.
Financial Reporting Act 1993
Unless a charity is also an issuer of securities (such as debt debenture open to public subscription) the legislative reporting requirements (and penalties) set out in this Act do not currently apply.
The Ministry of Economic Development is intending to release a discussion document later in 2006. This document will ask stakeholders if it would be useful for the Accounting Standards Review Board to regulate for financial reporting standards for registered charities and, if so, what steps or preconditions would be required to achieve a smooth transition.
The Government will not be making any decisions on this matter until there has been effective consultation with stakeholders. There will be a long transition needed before any changes came into force. The earliest possible date for any change would be for financial years beginning on or after 1 January 2010.
Generally Accepted Accounting Practice (GAAP)
Members of the New Zealand Institute of Chartered Accountants who have responsibility for the preparation or presentation of general purpose financial reports are expected through their Code of Ethics to take all reasonable steps within their power to ensure that generally accepted accounting practice is complied with.
Generally accepted accounting practice is usually defined as approved and applicable financial reporting standards and other authoritative support. For reporting periods beginning from 1 January 2007 these standards will be the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). These standards have been developed by the International Accounting Standards Board and amended where necessary by New Zealand standard setters to ensure their applicability to the not-for-profit sector. As with the previous standards, there are provisions in NZ IFRS for "differential reporting" that allow smaller charities to present simpler financial reports should they wish to do so.
Some guidance on applying GAAP to not-for-profit organisations appears in a booklet prepared in 1999 by the New Zealand Institute of Chartered Accountants called Financial Reporting by Voluntary Sector Entities (also called R-120), but this guidance is dated. The Institute is currently updating this guidance to apply in the NZ IFRS environment and expects to release the new version in late 2006.
Auditing Requirements
No legislative requirements require charities to be audited, although this is often a requirement established in the constitutional documents of a charity or as a condition of receiving grants.
The New Zealand Institute of Chartered Accountants is currently in the process of adopting the International Standards on Auditing (ISAs), and the International Standards on Assurance Engagements (ISAEs) and International Standards on Review Engagements (ISRSs), for the same purpose. Adoption of the ISAEs will ensure there are standards covering assurance engagements other than audits of historical financial information (which are covered by the ISAs). The international standards will all come into force on 1 January 2008.
The use of assurance engagements rather than audits may be worthy of increased consideration by charities.
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