Financial reporting requirements webinar

Transcript

Duration: 25:04

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Slide 1 - New Financial Reporting Requirements for Incorporated Societies

Opening slide including logos for External Reporting Board (XRB), Ministry of Business, Innovation & Employment (MBIE) and the New Zealand Companies Office.

Audio

The webinar begins with Anthony Heffernan, Director of Accounting Standards at the External Reporting Board, speaking to the first slide in this presentation.

“Okay, I can still see people coming through, but in the interest of time, and we've got lots we want to talk about today will make a start.

So kia ora. Good afternoon, everyone. Welcome to this webinar where we will be providing an overview of the new financial reporting requirements, introduced through the Incorporated Societies Act. The new Act, which was passed into law in April.

Some opening comments from me. Given the Act replaces the previous 1908 Act, it should come as no surprise that it does introduce new reporting requirements, and that will be the focus of this webinar for the next hour or so.

We will be focused, conscious of time and allowing for questions. We've got lots of people online. So, we look forward to those questions later. And you can use the Q and A function at any time to raise those questions, and we'll try our best to get through as many as possible.

Incorporated societies have always had a requirement to prepare financial statements. Those annual financial statements - balance sheet, profit or loss - to explain to their members and wider stakeholders, how they've used the funding received and how they're managing and protecting members assets and societies assets. That has always been important, and it continues to be important.”  

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Slide 2 - XRB Accounting Standards Team

The XRB Accounting Standards Team are responsible for developing and issuing the accounting standards that certain organisations (such as incorporated societies) are required by law to follow when preparing their annual financial statements.

Your presenters today:

• Anthony Heffernan – Director, Accounting Standards (anthony.heffernan@xrb.govt.nz)
• Jamie Cattell – Project Manager, Accounting Standards (jamie.cattell@xrb.govt.nz)

With a guest presenter from MBIE:

• Robert Clarke – Principal Policy Advisor (robert.clarke@mbie.govt.nz)

Audio

Anthony Heffernan speaking to the XRB Accounting Standards Team slide.

“And that's ultimately about maintaining trust and confidence in the society, and it's going to continue to exist for future generations.

To date, incorporated societies can choose - and underline that word, can choose - how they prepare their financial statements.

They can effectively make up their own rules under the 1908 Act. There are some minimum requirements, but no detail behind that.

So the headline news is that that's about to change. Under the new Act that certain incorporated societies will have requirements to prepare annual financial statements in accordance with standardised requirements.

The accounting standards issued by the External Reporting Board. So we will spend time to explain exactly what that is today. Who's caught. And if you're caught by these new requirements, what those new requirements, could look like or will look like.

So my name is Anthony Heffernan, Director of Accounting Standards at the External Reporting Board. Absolute privilege to be speaking to you today. And I'm sure I'll be speaking again in the future. This is just the start of explaining what these changes are.

My job is leading the team that develops accounting standards for profit entities - companies, public sector (which includes the whole of government) - and also not for profit entities.

And there’s a wide range of not-for-profit entities in New Zealand, that already follow XRB standards, namely registered charities. Now, incorporated societies.

Certain incorporated societies are coming into that loop of required to follow our standards, joined by Jamie Cattell, Project Manager, XRB, who will be explaining a bit more around what these accounting standards are and what they look like.

And handing over to Robert from MBIE to introduce himself and provide some formal opening comments.”

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Slide 3 - MBIE Opening Karakia

• Tāwhia tō mana kia mau, kia māia
• Ka huri taku aro ki te pae kahurangi, kei reira te oranga mōku
• Mā mahi tahi, ka ora, ka puāwai
• Ā mātau mahi katoa, ka pono, ka tika
• TIHEI MAURI ORA

Audio

Anthony hands over to Robert Clarke, Principal Policy Advisor, Ministry of Business Innovation and Employment (MBIE).

“Thanks Anthony, and I'd like to start with the MBIE opening karakia.

Tāwhia tō mana kia mau, kia māia

Ka huri taku aro ki te pae kahurangi, kei reira te oranga mōku

Mā mahi tahi, ka ora, ka puāwai

Ā mātau mahi katoa, ka pono, ka tika

TIHEI MAURI ORA

The gist of which is that if we work together, we will flourish.”  

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Slide 4 - Broader Context

• Now: Incorporated Societies Act 1908
• October 2023 – April 2026: Switch to Incorporated Societies Act 2022
• Upon switching:
  • No need to use a common seal
  • Can go down to 10 members
  • Must offer members a proper internal disputes mechanism
  • Some incorporated societies will need to change how they prepare their financial statements

Audio

Robert Clarke speaking to the 'Broader Context' slide in this presentation.

“I’d just like to point out, when I start with the slide on the broader context, that if you're a registered charity as well as being an incorporated society, then your financial reporting obligations won't be changing.

You're already subject to the standards set by the XRB.

So, if that's the case for your incorporated society, just put your feet up and enjoy the rest of the presentation.

If you look at the first bullet point on this slide, the situation at the moment is that we have an Incorporated Societies Act from 1908. And that's pretty creaky so it has fines in shillings and pounds.

And it also happens to have very little about how to run a society. It's very good on how to create one and how to wind one up, but there's a bit missing in the middle.

On the second bullet point you'll see that from October 2023 to early April 2026, societies are going to have the opportunity to switch from that 1908 Act to the new 2022 Act.

And if you look at the third bullet point at the very moment that they switch they'll become subject to the new obligations under that Act. There's a couple of points of good news so, once you've switched you won't need to use the common seal anymore. That's the pesky rubber stamp that you have to put on to a few important documents.

You can also go down to about 10 members, down from 15. On the other hand, you are going to have to offer members, a proper internal disputes mechanism.

Essentially, give them the right to be heard by an impartial group of members, and allow the person who's been accused as well perhaps, to have a right of reply.

Now the last point on this third bullet point is where we come to today's presentation.

And that is that upon switching, some incorporated societies will need to change how they prepare their financial statements.

We've already seen that that doesn't include societies that are registered charities, and we'll see that later that it also doesn't include a special group called ‘Small societies’.“  

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Slide 5 - When new reporting requirements become effective

Incorporated Societies Act 2022

• April 22 – New Act passed
• May 22- Oct 23 – Regulations developed to support new Act
• Oct 23 – April 26 – A society will have 2½ years to register

Once a society reregisters, it will have to start using XRB standards when preparing its annual financial statements, unless it qualifies as a ‘small society’.

Audio

Robert Clarke speaking to the next slide in this presentation 'When new reporting requirements become effective'.

“This is really just a visual representation of what I've been saying so far.

If you take a look at the speech bubble on the right-hand side, there you can see that period of October 2023 to April 2026, that I was discussing. That's the period of two and a half years you will have to switch over, to reregister we call it. And that will involve uploading a fresh constitution to the Companies Office.

And you may wonder why do we have to wait till October 2023? And that's where the speech bubble in the middle comes in, it shows us that we're not twiddling our thumbs. We're busy working on regulations to supplement and support the Incorporated Societies Act that was passed back in April 2022.

So those regulations will sort out a few of the specifics that haven't been canvassed by the Act. One of the bigger ones will be, for example which societies will need to have their financial statements audited.

And just to finish off you see down in the orange box down there.

Once a society re-registers that will have to start using XRB standards when preparing its annual financial statements unless it qualifies as a small society.

And so, I can hand it back over to Anthony for him to talk us through the details of that.”  

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Slide 6 – New Zealand Reporting Environment

Two key questions:

• Who has to report? Set in legislation (MBIE logo)
• What information gets reported? Set in standards (XRB logo)

Audio

Anthony Heffernan speaking to the 'New Zealand Reporting Environment' slide.

“Thanks, Robert. That's really useful context to set up this discussion, which is focused on those new financial reporting obligations for certain entities.

And I know you'll be really keen to understand which entities are captured.

So, when establishing these new requirements, we're really looking at two questions at a broad level. Who has to report, who is caught? And that’s set by legislation through the Government. And MBIE and Robert has been leading that through a number of years, bringing in this new piece of legislation.

So this really gives a good illustration of the next presentation coming up, and how it’s split. So, I will talk quite a bit around that the ‘who’, and then I will hand across to Jamie who will talk about the ‘what’.

And the XRB is the independent crown entity in New Zealand that set standards for entities, that have got a legislative requirement set in legislation to prepare financial statements in accordance with GAAP – GAAP being Generally Accepted Accounting Principles.

The XRB is charged with developing those standards that are appropriate for different types of entities.  

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Slide 7 – Who has to report?

Incorporated Societies Act 2022

• Every society must within 12 months prepare and file with the Registrar annual financial statements
• All societies (except those that are small) will be required to prepare financial statements in accordance with standards issued by the XRB
• Annual financial statements of certain societies must be audited, as prescribed by regulations

Includes an image of the front page of the Incorporated Societies Act 2022

Audio

Anthony Heffernan speaking to the 'Who has to report?' slide.

“So just touching on exactly what is required under the new Incorporated Societies Act for reporting. Every society must prepare financial statements and file them with the register.

And those financial statements will be publicly available. So even though I'm about to talk about exemptions - certain entities that are not caught by XRB standards - in the same breath, all entities will have a requirement to prepare financial statements.

Just not all of them will have to follow the XRB’s requirements.

That's the next bullet point, all societies except those that are small will be required to follow XRB standards.

The audit requirement is, I'm sure, of high interest to many societies.

Will you have a statutory requirement, a legal requirement, to have an audit?

Many societies will choose to have an audit in their own constitution and their own rules. But will you be forced to?

The requirement to have an audit will be set in regulations that are currently working through the process of being finalised over the remainder of this year.

To provide you have some kind of indication, maybe to make some of you feel better, is that the threshold for an audit (that requirement) could possibly (because nothing's been confirmed yet) could possibly be set between 2 million and 5 million.

So I would say, but not locking me in stone, or MBIE in stone, that if you're under $2 million dollars it's likely that you will not have an audit requirement under the regulations. But that has not been confirmed yet, but probably that provides you at least with some kind of indication of the entities that will be caught by audit. Those over 2 million and it's just a question of how much further over the 2 million - it could go to 5, it could be between 2 and 5. We don't know yet.  

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Slide 8 – Who has to report?

‘Small’ societies

Audio

Anthony Heffernan speaking to the second 'Who has to report' slide.

“There's a bit of detail here, but I know everyone's very interested in the ‘small’, and who will not have a requirement to follow XRB standards.

So, we have included the small print to give you all the information.

So, you'll note that it is an ‘and’ test.

To be small, you have to meet all of these criteria you have to tick all of them. If there's one you can't tick, then you're not ‘small’ and you will be required to follow XRB standards when preparing your annual financial statements.

So, the first criteria to tick is operating payments, and I will talk about the next slide (don’t click yet) around what exactly do we mean by operating payments.

But in simple terms that should total payments, excluding your capital payments.

So, the acquisition of assets - the buildings or photocopiers or your desks – it excludes that type of thing. But everything else that you pay money for, everything else that results in money coming out of your bank account will be included in your total operating payments.

Including if you're just distributing grants – if you're just giving $100,000 to another organisation to help them achieve their charitable or incorporated society objectives – that gets included in total payments.

So, $50,000 is the number that's been set. Total current assets - so as long as you've got current assets under 50,000, then you'll be ‘small’. The second criteria.

And the important thing here is ‘current assets’. This is kind of a new idea that's been brought into legislation, specifically to avoid the situations where you might be a small club or a society, but you've got a large asset, you've got a building.

You might have held that building for 50 or 60 years, it was donated by members in the 1950s. Just the fact that you own that building will not push you over the threshold. Buildings and other fixed assets will not be included in current assets.

Current assets is everything, excluding those assets which you're holding for more than 12 months. So, trying to bring in a simple definition there.

And then a donee organisation. In simple terms, donee organisations are mainly those that are registered charities, but there is a definition of whether you're a donee organisation or not.

If you tick that, then you don't meet the ‘small’ criteria. So, it is all 3 of them, you've got to tick. That's quite important."

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Slide 9 - Who has to report?

Incorporated Societies Act 2022

All societies (except those that are small) will be required to prepare financial statements in accordance with standards issued by the XRB. A “small society” may choose to follow either:

• XRB Standards (Tier 1 – 4); or
• The minimum requirements as prescribed by the Act.

Minimum requirements (section 104)

• Financial statements must contain
  • Statement of Income and Expenses/Receipts and payments
  • Statement of Assets and Liabilities
  • Any security interest over the society’s assets.

Audio

Anthony Heffernan speaking to the third 'Who has to report?' slide.

“So, what does it mean if I'm a small society? So you're back into having a choice around what you do. If you're small, you're still have requirements to prepare annual financial statements. That's important to highlight, you still have a requirement to file them.

And they will be available to the public, but you can choose how you prepare them.

But you've got some minimum requirements and those minimum requirements around what information you report annually, is set in the legislation itself, and very similar, if not identical to the 1908 Act.

So very similar to your current requirements, so no major change there.

The catch there, and maybe it's just for me because I'm technical, is that, if you're following those minimum requirements, there will be no guidance on how you prepare your financial statements. When you recognise assets, how you measure assets, how you present your information. You've got a whole lot of choices, and a lot of flexibility. As long as you meet the minimum requirements in the Act.

Just me, as an accountant, I like to have some form of guidance, but that's just me.

So, that's your lowest point, following the minimum requirements and legislation. And then if you want to, you can come up to the XRB standards, where you will have more guidance and telling you exactly what to do.

So it just depends on how comfortable you are and what your members are expecting, that would be the main driver. What do the members want out of that annual financial reporting, but you've got choices, if you're small.  

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Slide 10 - Who has to report?

Incorporated Societies Act 2022

A pie-chart showing some broad numbers. Of the 24,000 incorporated societies:

• 8,000 are registered charities
• 9,500 are classified as ‘small’
• 6,500 will be required to apply XRB standards for the first time

Audio

Anthony Heffernan speaking to the fourth 'Who has to report?' slide in this presentation.

“I feel this is quite a just a nice visual of the impact of the legislation and entities that are going to have new requirements or different requirements.

And as Robert highlighted, registered charities (and there's about 8,000 of the 24,000 incorporated societies that are also registered charities) the main message is your reporting requirements do not change. You'll be subject to the existing requirements under the Charities Act.

So that's important.

So registered charities, it’s business as usual.

Small, there's about 9,500 of you. A large number. And again, as I highlighted, you can choose to follow XRB standards, or you can choose to follow those minimum reporting requirements, in the legislation itself.

And then we've got the 6,500 (which is quite a large number) that could potentially, in principle, have new reporting requirements. Why I say potentially is, that a number of those 9500 - why they've got no requirement, under current legislation or previous legislation to follow XRB standards - many will have already chosen to. Either, because it's in their rules or constitution to prepare financial statements in accordance with GAAP or because their members have recognised that XRB is setting best practice, and they get comfort, out of following standardised requirements.

So interesting question around how many of those 6,500 are not currently using our standards. Many will be using old standards that have been in place for the last 20 or 30 years, so yes they will be required to step up and use the latest standards, issued by the XRB.  

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Slide 11 - XRB Not-for-Profit Reporting Standards

Audio

Anthony Heffernan speaking to the 'XRB Not-for-Profit Reporting Standards' slide.

“So, I've talked about the ‘who’ now we’re into the ‘what’. So, if you're ‘small’ you can sit back and relax and see if there's anything here you'd like.

But if you're not small, then these are your new statutory (so legal) reporting requirements. You're into the XRB framework of reporting, and we've got a framework, specifically designed for not-for-profit entities (NFPs).

And we've got four tiers of requirements, recognising that not-for-profits come in all sorts of shapes and sizes. Some very small, some very big.

So we've got different requirements depending on how big you are. And as you move down the tiers, so you get down to tier 4 the requirements are very simple, easy to apply. At least that's our objective. And a lot less difficult.

And at the top tier, you're into the full range of reporting standards and volumes of accounting standards. They’re based on international standards, at least as a starting point.

And, really, if you're into tier 1 or tier 2, which is annual expenses above $2 million, Then you will, I would suggest, need professional advice if you're not currently following our standards, you will need some assistance.

This could be a big deal if you're above $2 million but you're currently following some form of old GAAP, or you've made up your own rules around how you prepare your financial statements.

Depending on the nature of your activities. This could require a lot of work, but if you're just a simple society, hopefully it won't be too much of a drama.

But they are new standards that will require consideration.

So these tiers are mainly based on expenses. As you can see on the slide, public accountability (I don't want to go into small print too much today) but tier 1 public accountability means, have you issued debt or equity instruments in a public market.

• Have you issued shares, have you issued bonds?
• Are you subject to FMA regulations?

Then you're into top tier. And if you're in there, you should, you will already have reporting requirements.

Everyone else other than that, your standard incorporated society, member-based organisation, cricket club, rugby club – your reporting requirements will be based on your annual expenditure.

You will note at the bottom, because I talk about expenses, tier 4 (because it's a cash-based standard) is based on operating payments, the amount of money that comes out of your bank account.

And we've got a different term there, so we're do need to be careful around terminology, and there's small print here. Operating payments.

So we'll talk briefly, in the next slide, around what do I mean by operating payments.  

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Slide 12 - NFP Reporting Framework

Total Operating Payments

Total amount of any payment, other than a capital payment, made by the entity during the accounting period

• Includes grant payments and income tax payments

Capital payment

A payment made to purchase a resource with an expected life longer than 12 months to be used by the entity to support its activities or to provide services or products.

Audio

Anthony Heffernan speaking to the 'NFP Reporting Framework' slide in this presentation.

“So the operating payments is very similar to the same term that's used in defining if you're ‘small’ or not. And it’s all your payments, it’s everything coming out of your bank account, except those capital payments - acquisition of property, plant, and equipment that you would capitalise – that gets excluded from the capital payments.

So, it’s everything else and defining that. I know that's a question that always comes up.”  

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Slide 13 - Tier 1 and Tier 2

• Full suite of accounting standards for NFP entities with annual expenditure over $2 million
• Based on International Standards (IPSASB)
• Only a relatively small number of incorporated societies will fall into this group
• We recommend discussing with your professional advisers

Audio

Anthony Heffernan speaking to the 'Tier 1 and Tier 2' slide in this presentation.

“It’s interesting that tier framework. I present to universities a lot and quite often I'll talk about that in an hour and we’ve covered that in a couple minutes. But yeah, happy to take questions.

But the main thing is there is 4 tiers. You can go as high as you want. Of course, many of you will be thinking about what is my minimum requirement, and tier 3 and tier 4 are definitely a lot easier.

So with that, I'll hand across to Jamie who will spend a bit more time explaining what do these different tiers look like? What will be the reporting obligations?”

Anthony Heffernan hands over to Jamie Cattell, Project Manager, Accounting Standards at XRB who continues speaking to the next slide in this presentation.

“Thanks very much Anthony. Kia ora and good afternoon everybody. Apologies, my voice is still slightly recovering.

Yeah, so as it says at the start there, I'm going to talk first about what is in tier 1 and tier 2. And the reason I'm doing it first, is because I don't really intend to spend a huge amount of time here.

And there's a good reason for this. These standards are written for the largest entities. So, those that spend over $2 million per year, and then in tier 1 over $30 million per year.

Because of the, the scale of these entities. These standards are based on international standards, and those standards are issued by the International Public Sector Accounting Standards Board.

It's important to note that even though they have public sector in the title, when these were adopted here we made modifications as necessary to make them relevant for not-for-profits. So, we're not asking you to fit yourself entirely into a public sector mould.

Because of the size criteria, we only expect that a few incorporated societies are really going to fall into this group. When we're thinking of entities that are sort of at this end of the scale.

A good example is often something like New Zealand Rugby who have a substantial amount of resources and substantial amount of people that are interested in what they do.

And as Anthony mentioned earlier, many of the entities that fall into these tiers are probably already doing some form of reporting.

They will likely already have advisors that they work with. And because these requirements are quite complex (there's I think over 40 different standards) it's really hard for us to sit here and say, well here's exactly what this set will look like if you're doing a set of financial statements.

So, if you're joining today and you're an entity that's in this group, we recommend getting in touch with your advisors as soon as possible to sort of understand how your reporting could look different.

That is if you're not already voluntarily using our tier 1 and 2 standards."

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Slide 14 - Tier 1 and Tier 2 Financial Statements

• Non-financial information about activities and objectives - Statement of service performance
• Revenue and expenses - Statement of comprehensive revenue and expense
• Assets, liabilities, accumulated funds - Statement of financial position
• Changes in accumulated funds - Statement of changes in net assets/equity
• Cash received and cash paid - Statement of cash flows
• How the entity has done its accounting - Statement of accounting policies
• More detailed information about key items - Notes

Audio

Jamie Cattell speaking to the 'Tier 1 and Tier 2 Financial Statements' slide in this presentation.

“There are a few common elements that are required that we can talk about. This diagram, that's on the slide here shows the individual components of what you have to have, to have a complete set of financial statements in tier 1 and tier 2. As you can see it's quite comprehensive. We won't be talking about all of these statements in detail.

It's really just here for a visual representation, but we will come back to a few of these shortly, as we talk about tier 3 and tier 4, because some of them do repeat. “