Financial reporting requirements webinar — Questions and answers

Q. What will be the audit requirement threshold... is it going to be audit only if you are not considered small.

A. The audit requirements will be set by MBIE through regulations expected to be issued for consultation this year. It is expected that the audit requirement will be above $2 million.

Q. Why an Audit by a CA and not a Review by CA?

A. I understand the review option has not been considered by the legislation because of the audit threshold being considered - over $2 million.

Q. If you are not required to have an audit, will societies still be required to have a review?

A. No.

Q. Can a grant organisation request an incorporated society to be audited? That grant to be given upon audit report?

A. This is not a question we know the answer to. It is not a matter covered by the Incorporated Societies Act 2022.

Q. What is a reasonable cost to have one's yearly financials audited/assessed to XRB (large club) and what if this outweighs the benefit of being an incorporated society.

A. We are not able to advise on auditing costs. If you find that the costs outweigh the benefits of being an incorporated costly, you could consider winding up and incorporating as a company or a charitable trust.

Q. Audit requirement - $2 –$5 million of assets? Or operating expenses?

A. I expect it will be based on 'operating payments'. 

Q. Regarding Audit requirement level, doesn't it make sense to keep the levels the same as for Registered Charities using Tier 3 format > than $500,000 a Review and > than $1,000,000 an Audit?

A. There is a view that incorporated societies (that are only accountable mainly to their members) have a lower level of accountability in contrast to charities (who are accountable to the broader public). 

Q. Statement of Service Performance, if required to be audited, what kind of verification (third party/internal) would be required?

A. The XRB has issued specific assurance standards auditors are required to follow when auding service performance information. We suggest discussing this further with your external auditor. 

Q. Can an Account Reviewer still be used for Tier 4 or 3?  Does the reviewer need to be a qualified accountant?

A. This will be confirmed through regulations being developed by MBIE, which are expected to be issued for public consultation later this year.

Q. Tier 4 - can you still choose a review?

A. Yes, it is expected that Tier 4 incorporated societies will have no statutory audit or review requirements, like the current position for registered charities.

Q. Currently our Organisation is Tier 4, therefore can we have our financials reviewed by a retired C.A., rather than a full audit?

A. You can continue with this practice. It is expected that Tier 4 incorporated societies will have no statutory audit or review requirements, like the current position for registered charities.

Q. What if our assets fluctuate from year to year (over and under $50k threshold)?

A. The size criteria test is based on two consecutive years, to void the one-off fluctuations.

Q. With inflation running quite high, how often will the $50k threshold between small and large societies be reviewed?

A. There is no review of the threshold provided for in the legislation. This means that the threshold will only change if Parliament decides to consider the matter. 

Q. Does the 2 million (approx.) include or exclude assets please?

A. The reference made was to operating payments only. However, it was a hypothetical example of what the audit threshold could be. The actual threshold (including whether it will refer to just operating payments or also to assets) will be determined through the upcoming public consultation on regulations.

Q. Does the current assets $50,000 threshold include bank deposits?

A. Yes it will include bank deposits, term deposits, and all investments. 

Q. Would books held by a library be "current assets"? Getting them valued would bankrupt us and dealers would just pay $2 each anyway.

A. This is a good question for clarification in the regulations. The intention will be not to require a Society to revalue all its assets at market value.

Q. Small societies, you stated current assets under $50,000, does that include term deposit savings?

A. The definition of current assets for deciding whether a society is a small society is still to be set in regulations. In general, we expect that current assets would include bank deposits, term deposits, and all investments.

Q. Regarding "Small Societies" where do investments fall in relation to current assets?

A. Under the current draft definition, investments will be included under current assets. However, this is a good question for MBIE to consider when developing the regulations which will define 'current assets'.

Q. Is the $50K small society threshold for each of the 2 years or is it a combined total of both years?

A. It is for each of the two financial years preceding the financial year you are preparing a statement for.

Q. Our society owns a building, under our current rules it cannot be sold off or disposed of but must be donated to the city council on dissolution - what is the asset value when we can't realise the value?

A. This will depend on what Tier you are reporting under and your accounting policy - you could choose to value the building based on a cost or revalued amount. If you wish to measure the building at a revalued amount, it would typically be revalued on a depreciated replacement cost basis - being the cost to replace the building less any wear and tear from its current use. We suggest discussing this further with your accountant.

Q. If your current assets in the form of bank balances, can current liabilities be offset where subscriptions to sports club are paid in advance on balance date?

A. We are not sure of the context of this question, but in general off-setting is not permitted when applying reporting requirements and when assessing size criteria. 

Q. $50,000 seems quite low for current assets when expenditure for tier 4 is less than $140,000. Any thoughts if this threshold will be increased once the review has been undertaken?

A. There is no review of the threshold provided for in the legislation. This means that the threshold will only change when Parliament decides to consider the matter.

Q. If our incorporate society in future given/bought a property value of 1.5 mil. Will this have categorised as an asset and no longer classed as "small society”?

A. A property that you do not intend to sell within the next 12 months will not count as a current asset, so will not affect your ability to qualify as a small society.

Q. What is difference between expense and operating payment?

A. Operating payment is measured on a cash basis, expenses is generally measured on an accrual basis.

Q. If a society's op payments vary i.e., less than 50K 22/23 year and 100K the next year due to receipt of funding can they still be considered "small"?

A. To be considered small when preparing their financial statements for a given financial year (e.g., 2027), they must have had payments under $50,000 for the previous two financial years (e.g., 2025 and 2026).

Q. Does the 'Small Society' operating payments include depreciation?

A. No - operating payments is measured on a cash basis - money that comes out of the bank account.

Q. Annual expenditure?

A. This is broadly the total money you have spent on the club in the year including all payments to suppliers and employees.

Q. Tier 4, petty cash transactions. How are these handled? Perhaps solution is no petty cash paid out?

A. Petty cash transactions are the same as ordinary transactions. There can be different ways of accounting for petty cash, depending on the size and volume of petty cash transactions. If the petty cash is only used for payment of relatively small expenditure (e.g., purchase of milk for office) it would be recorded as "petty cash payments" when money is withdrawn from the bank account.

Q. Will related activity reporting include re-imbursing members for expenses incurred?

A. We would need some more information to enable us to provide a response to this question, it will depend.

Q. Who is going to monitor incorporated societies to ensure that they are using the right tier?

A. This will a decision for MBIE, and I believe will be considered further through the regulations expected to be issued for consultation shortly.

Q. Can we change to a small society if we want to once, we meet the criteria?

A. You will only 'change' into a small society once you have met the criteria for two financial years in a row. 

Q. What happens if you are considered a small society and you get a government grant of $2M to upgrade facilities and the like.

A. You will no longer be small if you exceed the size criteria for two consecutive years, this avoids the risk of becoming not small because of a one-off grant or donation being received and spent. 

Q. If our society is small but has a one-off project i.e., building funded from grants provided which will push us to tier 2 for one year only. Is this just an anomaly and we continue as a small entity or do we need to move to tier 2 reporting and for how long.

A. You will need to use the XRB standard until you once again have two years behind you of meeting the small society criteria.

Q. Our reporting is due to file in December this year, do we use the old reporting standard, or will we be using the new Tier 4 standard?

A. For this year, you will continue to use the current/old Tier 4 Standard. We expect the new Tier 4 Standard will be available for use in 2023.

Q. We tick two of the requirements for Tier 4, will we still need to report?

A. You need to meet all the criteria to be eligible to report as a 'small' Tier 4 entity.

Q. If you are a Tier 4 society can you still report profit & loss and balance sheet info if you choose to?

A. You cannot present these under the Tier 4 Standard as it is cash based. If you are eligible to report using Tier 4, but want to provide a balance sheet, we suggest opting up to Tier 3 instead. 

Q. And Tier 4. Can we continue with Accrual rather than cash basis? As some invoices are paid later than the financial year. And some members subscriptions are paid before the start of the financial year.

A. An entity eligible to report under Tier 4 can opt-up to Tier 3 and continue to apply accrual-based reporting requirements.

Q. We are a Residents' Association, we have operating costs of about $1500 but we are a donee association as our income is basically community donations. Therefore, am I correct in assuming we are Tier 4 organisation.

A. Yes. You will need to use XRB Tier 4 standards when preparing your financial statements.

Q. It looks like we will be a Tier 3 organisation.  We currently operate on a Cash basis for financial reporting so will we need to change to an Accrual basis once we re-register and should our accountant already be aware of this?

A. This sounds correct - the main challenge will be recording all your assets and liabilities in the first year when moving across to XRB standards. 

Q. We are Tier 2 society and already preparing our financials in accordance with ("PBE IPSAS RDR") along with audit report. Does this revised act/change affect us?

A. The changes do not affect you, in terms of financial reporting. Other changes (such as the requirement to provide for dispute resolution procedures) will affect you. 

Q. How do we obtain a copy of the standards?

A. The Standards for NFPs are all available on the XRB website www.xrb.govt.nz

Q. Disagree - the SSP is the most important document for a person unfamiliar with reading financial statements - have a look at a DHB's financials for a sophisticated SSP.

A. We apologise if we have provided the impression that the SSP is not important, this statement provides very useful information for any not-for-profit entity. In fact, the feedback we have heard is the opposite. Many people find the SSP to be the most important statement for not-for-profits.

We intended to highlight that service performance information for an incorporated society will be reported from a different perspective than other not-for-profits as an incorporated society is mainly accountable to its members. This means the focus of the information will be different when contrasted with other not-for-profit entities (such as DHB's) that are accountable for use of funding received from the public (either through taxes or donations) and who provide services for whole-of-community benefit. 

Q. Will the Tier 4 template be used by Charitable Trusts as well

A. Charitable Trusts are not required to file financial statements.

Q. Does an incorporated society that is also registered as a charity have to re-register as an incorporated society?

A. Being a registered charity is not enough to give your organisation its own legal personality – the right to sign contracts, sue and be sued. Only being registered as an incorporated society, a company, a charitable trust, or other similar entity does.

If you do not reregister your society, it will cease to exist. As a result, all its outstanding debts would need to be paid and any remaining assets would need to be distributed according to your constitution. In addition, your society’s name would lose some of the protection it has under the legislation, because it would become possible for another group to incorporate as a registered society using your society’s name. Your organisation’s members would also lose their right to limited legal liability. 

Q. Are these requirements for financial reporting still relevant to our trust?

A. If your organisation is a charitable trust then its financial reporting obligations will not be affected by the reforms we are discussing.

Q. We are a charity (Tier 4). Do we have to do 2 separate accounts?  This simple basis on XRB Tier 4 or/and the accounts I currently do which more resemble XRB Tier 3.  We are XRB Tier 4.

A. If you are a registered charity your reporting requirements are not changing at all. You will still only be required to file an annual performance report with Charities Services. You will not have to file another report with the Companies Office/MBIE.

Regardless of what tier you are in you can always choose to use a higher tier. In your case you can opt up to Tier 3 even though you meet the requirements for Tier 4.

Many other not-for-profit entities do because the accrual basis of accounting makes more sense to their users in contrast to cash reporting. The important point is that whether you report in accordance with Tier 4 or Tier 3, you will need to apply with all the reporting requirements of your chosen Tier.

Q. Do all current incorporated societies need to file a new constitution under the new Act?

A. When a society reregisters under the new Act, it will be required to provide a constitution that's compliant with the Act 2022. This doesn't mean, however, that every society will need to redo their constitution.

Q. One of the speakers said that a 'Fresh Constitution' is required to be uploaded. Do we have to re-write our constitution OR simply upload existing constitution?

A. When a society reregisters under the new Act, it will be required to provide a constitution that's compliant with the Act 2022. This doesn't mean, however, that every society will need to redo their constitution.

Q. Is there a free service that MBIE can provide so that people can take their existing constitution formed under the old act can be rewritten under the new act, with their help and guidance.

A. Yes, we have a tool called Constitution Builder. We will have it updated by October 2023 to help societies ensure their constitutions meet the requirements of the Act 2022. 

Q. Is there a facility for a society to ask for a review to see if our constitution and policies are compliant - and to check our accounting practices to ensure with are following correct standards?

A. We are working with XRB on developing resources for societies to help them meet the new financial reporting requirements.

We will also have our Constitution Builder tool updated by October 2023 to help societies ensure their constitutions meet the requirements of the Act 2022.

Q. We are a scientific society, and our executive are all full-time academics that look after the society in our own time. Does a small society need to revise their constitution or are we also exempt from that?

A. When a society reregisters under the new Act, it will be required to provide a constitution that's compliant with the Act 2022. This applies to all societies, even small ones. This doesn't mean, however, that every society will need to redo their constitution.

Q. What if your Incorporated Society already has an internal disputes process?

A. You just need to make sure that it meets the requirements of 'natural justice' e.g., it grants a complainant a right to be heard before an unbiased panel. To do so, you could seek legal advice. Failing that, you may want to compare what you have with the procedures set out in Schedule 2 of the Incorporated Societies Act 2022, as these meet natural justice requirements. 

Q. Will a copy of the presentation be available after the presentation?

A. This took a little time to prepare but we have now published the video and slides on the website. Please note though, that we experienced some technical issues so at the moment, only the first half of the webinar video is available.

Q. Are you intending to roll out roadshows around the country from next year?

A. We are likely to run some roadshows from next year, but the details are still to be confirmed.

Q. What website do we access the templates? Ministry of Business, Innovation and Employment or does XRB have their own website?

A. We are working with XRB on developing resources for societies to help them meet the new financial reporting requirements. 

Q. I noted in the new Incorporated Societies Act that the accounts need to be done and met within 6 months of the end of financial year. This has been a challenge with the accounts and the audit to be both completed in that time. Especially during COVID when people were not in offices.

A. If you need more time to prepare your financial statements, you can apply to have your filing deadline extended.

Q. We are planning to incorporate a society that will have less than $50k current assets, less than $50k annual payments, is not registered for GST but will be charitable.

1. Should we wait until October 2023? 2. Do we need a review?

A. If you can wait, wait as this will then avoid having to register under Act 1908 between now and October 2023, and then reregister under the new Act from October 2023. On the second point, you will not need your statements reviewed.

Q. Can new societies register with 10 members, or do they still need 15 to register?

A. If you incorporate your society between now and October 2023, you will need to meet the requirement of minimum 15 members as per Act 1908. From October 2023, when a society reregisters under Act 2022, it will be required to have minimum of 10 members.

Q. Are there any time requirements imposed on providing the annual financial statements to ordinary members? e.g., number of days before the AGM set to adopt them?

A. No. Unless your constitution states otherwise, they just need to be presented at the AGM.

Q. Do you think conflating financial reporting for membership associations essentially with that of Registered Charities (which also receive additional tax advantages not available to incorporated societies) is (a) unfair/disproportionate and (b) may just push more incorporated societies to seek Registered Charity status (if possible), or mistakenly seek to be Charitable Trusts?

A. This issue was settled by Parliament.