If you haven’t yet read our first blog on the introduction of the Incorporated Societies Act 2022, which covers new requirements for constitutions, management committees, and membership, we recommend checking it out. Click here to read more. Now, let’s dive into the new financial reporting standards that societies need to be aware of.
With the Incorporated Societies Act 2022 now in force, all incorporated societies need to prepare annual financial statements under new reporting standards. Some larger societies will also need to have their financial statements audited. Read more about the introduction of the Incorporated Societies Act 2022 in our first article or continue on to learn about the new financial reporting standards.
New Reporting Standards
Larger societies must use the External Reporting Board (XRB) accounting standards when preparing their financial statements. After re-registering, societies must start using these standards unless they qualify as a ‘small society’. Small societies need to meet the minimum requirements set out in the 2022 Act or can choose to adopt one of the new XRB standards.
XRB Accounting Standards Tiers
The XRB has developed four tiers of accounting standards to accommodate the diverse range of incorporated societies:
Tier 1: Public accountability or total expenses greater than $30 million
Tier 2: Total expenses less than $30 million
Tier 3: Total expenses less than $5 million
Tier 4: Total operating payments less than $140,000
‘Small society’: Total operating payments less than $50,000 in each of the previous two financial years, total current assets of less than $50,000 at the end of the two previous financial years, and is not a registered charity or donee organisation for tax purposes.
Focus on Tier 3 Standards
Tier 3 standards apply to not-for-profits (NFPs) with total expenses under $5 million but more than $140,000. Here’s what you need to know:
Key Changes:
Revenue Recognition
Revenue can now be deferred when there is a “documented expectation” instead of when there is a “use or return condition”.
A “documented expectation” is externally set by a resource provider and evidenced in writing and specific enough to reliably track when the expectation has been satisfied.
This new model will make it easier to defer revenue to reflect how many Tier 3 entities operate.
Any revenue that could be deferred under the use or return condition model will still be able to be deferred under the new documented expectation model.
New diagram to illustrate the new model:
Clearer Categories Provided for Classifying Revenue and Expenses
More categories that are more clearly defined are now included on the face of the Statement of Financial Performance.
Due to the increased number of categories, the option to disaggregate further on the statement of financial performance has been removed.
This change will make it easier for entities to classify their revenue and expense items and promote consistency of reporting.
Note: entities are still permitted to relabel the categories to use different terminology and/or provide more disaggregation in the notes to the performance report.
Service Performance Reporting Clarifications
Removed the terms “outcomes” and “outputs” and replaced them with terms that are more aligned with the Tier 2 Standard.
More guidance on service performance reporting has also been added.
Increased Transparency Over Reserves/Accumulated Funds
New requirement to disclose information about how an entity is managing its reserves.
Entities must provide a description of the purpose of each reserve, the plans for applying the reserve, and when the entity expects the reserve will be applied to advance the entity’s objectives.
These enhanced disclosures will increase transparency over the resources available to an entity and its future plans.
Some Assets Can Be Revalued Without Opting Up to Tier 2 Standards
Entities are now able to revalue their property, plant and equipment, investment property, and publicly traded financial investments without needing to apply the applicable Tier 2 PBE Standard RDR.
New Guidance Provided on Opting Up to Tier 2 Reporting for Certain Transactions
A new Appendix D has been introduced, which contains guidance on when and how to opt up to Tier 2 Standards for certain transactions – if a Tier 3 NFP entity chooses to.
When Are the New Standards Required?
The new standards must be applied to accounting periods beginning on or after 1 April 2024. Early adoption is permitted for accounting periods ending after 15 June 2023, so these standards can be applied for 31 March 2024 and 30 June 2024 year-ends.
Support and Assistance
For any assistance regarding governance, changes in financial reporting or anything else that this new act brings about, please contact Maris on Maris at maris@mytwocents.nz. Maris, our Not-for-Profits Accountant Specialist has an extensive auditing background and significant experience in the not-for-profit space. She is ready to help implement any required changes in your organisation, making sure you are well-prepared for the transition.
