Answers as at 30 September 2015
These frequently asked questions and answers provide general guidance, and are not a substitute for reading the PBE Standards and Explanatory Guides. The frequently asked questions are grouped into sections and where applicable, reference has been made to the relevant PBE Standard(s) and Explanatory Guide(s). All PBE Standards and Explanatory Guides are free to download from the XRB website (www.xrb.govt.nz). (Please be aware that the PBE Standards and Explanatory Guides are regularly updated as a result of international and domestic developments).
Remember your charity will need to use the new reporting standards for annual financial statements covering periods beginning on or after 1 April 2015.
(Refer to the various versions of XRB A1 Accounting Standards Framework (a version of XRB A1 Application of the Accounting Standards Framework is currently on exposure for comment) and XRB A2 Meaning of Specified Statutory Size Thresholds)
Q1.1 Can I assume that my registered charity is a Public Benefit Entity (PBE)?
PBEs are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.
There is a presumption that a registered charity would meet the definition of a PBE and would report under the PBE accounting framework.
However, refer to Appendix A of XRB A1, which contains guidance and illustrative examples on “when is an entity a public benefit entity?”
For-profit entities are not defined. If a registered charity does not meet the definition of a PBE then it would report using the standards for for-profit entities.
If you have a charity that is a PBE, and it controls a for-profit entity for financial reporting purposes, you should refer to the guidance in Appendix B of PBE IPSAS 6 (NFP) Consolidated and Separate Financial Statements for the preparation of consolidated financial statements by the charity (the controlling entity).
Q1.2 What are Public Sector PBEs?
They are PBEs that are public entities as defined in the Public Audit Act 2001 (for example, departments and local authorities).
Q1.3 What is the Reduced Disclosure Regime (RDR)?
The Reduced Disclosure Regime provides disclosure concessions for Tier 2 public benefit entities (PBEs) applying the PBE Standards. Tier 2 PBEs are not required to comply with disclosure requirements denoted with an asterisk (*). However, they are required to comply with any RDR paragraphs associated with the concession.
Q1.4 What do I do if my charity that has been reporting at Tier 3 increases in size and I need to report at Tier 2?
In the period that the charity meets the size criteria that require it to apply the accounting standards for Tier 2, the charity is permitted to continue to apply the accounting standards for Tier 3 in that period and for one more reporting period. This is to allow the charity time to prepare to report under the higher tier. However, if the charity had decreased in size, such that it qualified to use the standards of a lower tier, it could do so immediately to reduce its costs of reporting.
Please note that if a charity meets the definition of public accountability at any time during a reporting period, it must apply the Tier 1 PBE Accounting Requirements for the reporting period in which it meets the definition.
XRB A1 contains information on moving between tiers.
Q1.5 What revenue can be netted off against expenditure when calculating my charity’s total expenses for the tier size criteria?
You can only do this if an accounting standard requires or permits revenue and expenses to be offset.
(Refer to XRB A1 Tier Criteria)
Q1.6 Where do I find details of the size criteria for tiers 2 to 4?
The size criteria are in XRB A1, and the definitions of terms such as total expenditure and total operating payments are in XRB A2.
The following table summarises the PBE Accounting Standards Framework:
Tier Entities Standards 1 “Public Accountability”
PBE Standards 2 No public accountability
PBE Standards RDR 3 No public accountability
Simple Format Standard (accrual) 4 No public accountability
Where Law Allows (Payments <$125k)
Simple Format Standard (cash)
Q1.7 My charity holds assets on behalf of another charitable trust. Are these assets held in a fiduciary capacity, and does my charity therefore have public accountability?
The term public accountability is a defined term. It is defined more narrowly than the everyday use of the term. In accordance with the definition of public accountability in XRB A1, a charity has public accountability if it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance providers, security brokers/dealers, mutual funds and investment banks. It is not typically the case for charities.
Holding assets on behalf of another charitable trust does not appear to meet the notion of fiduciary capacity as described, and hence the charity would not have public accountability.
XRB A1 also discusses other aspects of public accountability.
The NZASB was aware that there would be some first-time adoption issues for charities applying the new standards. The NZASB was aware that charities would be coming from different starting points and developed the following two standards:
Charities will need to use either PBE FRS 46 or PBE FRS 47 when they start reporting under PBE Standards.
Q2.1 Is there a comparison/mapping of the old standards to the new standards?
There is no comparison of the accounting requirements between the old standards and the new standards. However, the XRB has produced two documents that show how the old standards relate to the new standards. These documents show where there are similar standards in both sets of standards, and where there are new standards. You can access these documents by clicking on the following links:
Q2.2 Are changes required to the format of my charity’s income statement?
This will depend on what standards your charity has been reporting under prior to adopting PBE Standards. Under the PBE Standards your charity will produce either:
(a) a single statement of comprehensive revenue and expense, with surplus or deficit and other comprehensive revenue and expense presented in two sections; or
(b) two statements: a statement displaying components of surplus or deficit (separate statement of financial performance) and a second statement beginning with surplus or deficit and displaying components of other comprehensive revenue and expense (statement of other comprehensive revenue and expense). This is the same as the requirement under NZ IFRS PBE but not under Old GAAP.
(Refer to paragraph 22.1 of PBE IPSAS 1 Presentation of Financial Statements)
It is likely that many charities will disclose a greater detail of revenue categories as these will be split between exchange and non-exchange revenue.
(Refer to Part B of Appendix B of PBE IPSAS 1 which contains illustrative financial statements for a Not-for-Profit entity)
(Refer to PBE IPSAS 6 (NFP) Consolidated and Separate Financial Statements; PBE IPSAS 7 Investments in Associates; PBE IPSAS 8 Interests in Joint Ventures; EG A8 Explanatory Guide: Financial Reporting by Not-for-profit Entities: The Reporting Entity and EG A9 Explanatory Guide: Financial Reporting by Not-for-profit Entities: Identifying Relationships for Financial Reporting Purposes)
Control is a very important concept when it comes to financial reporting. If registered charities are in a control relationship, the controlling entity will have to prepare consolidated financial statements, consolidating its financial information with the financial information of all the entities that it controls.
Q3.1 What are the filing requirements if my charity is separately registered but is also controlled by another entity that produces consolidated financial statements?
The filing requirements are for each registered charity. If each charity is separately registered, each charity will need to file its own set of financial statements and the controlling entity will need to file a set of consolidated financial statements.
Q3.2 If my charity currently comes under the registration of an associated entity and I find out my charity is not controlled by the associated entity, what should I do?
If you want your charity to obtain the benefits of being a registered charity you will have to separately register it.
Q3.3 Do I have to prepare consolidated financial statements for my charity, even if the branches are separately registered?
Under the new financial reporting standards, if one registered charity controls another entity (whether it is a registered charity or not), the standards require the controlling entity to prepare consolidated financial statements.
Q3.4 My charity is currently registered as part of a group with DIA Charities Services. Will I have to change this?
If your charity is registered as part of a group that equates with a group for financial reporting purposes, you will not need to make any change. However, if there is a mismatch between the group registration and the group for financial reporting purposes, you will need to work with DIA Charities Services to sort out the mismatch.
Q3.5 Does the ability to remove the governing body of another entity give a charity control over that other entity?
Control is defined in PBE IPSAS 6 (NFP) as the power to govern the financial and operating polices of another entity so as to benefit from its activities. This definition requires both a power element and a benefit element for control to exist.
Paragraph 39.1 of PBE IPSAS 6 (NFP) lists some circumstances which establish a rebuttable presumption that control exists. A unilateral power to appoint or remove a majority of the members of the governing body of an entity is listed as one of these circumstances. Establishing the existence of control will depend on the facts and circumstances of each charity.
Q3.6 If my charity substantially funds another organisation, does my charity control that organisation?
The definition of control represents control of an ownership form. An ownership form of control has been adopted as the criterion for the preparation of consolidated financial statements. Other forms of control exist, but are outside this definition. Substantial funding of another organisation in and of itself is not control for financial reporting purposes.
(Refer to PBE IPSAS 6 (NFP) paragraph A7)
Q3.7 If two charitable trusts have some trustees in common, does this have any bearing on control?
If a charitable trust has some of the same trustees as another charitable trust, the cross trusteeship does not in itself lead to control. Establishing the existence of control will depend on the facts and circumstances of each charity.
However the charity may need to think about whether there are any related party disclosures that would need to be made under PBE IPSAS 20 Related Party Disclosures.
(Refer to PBE IPSAS 23 Revenue from Non-Exchange Transactions)
Q4.1 There are a lot of people that give their time freely to my charity. Do I have to account for that time?
PBE IPSAS 23 does not require the recognition of services in-kind (i.e. giving time freely). However, the Standard encourages disclosure in the notes to the financial statements of the nature and type of services in-kind received during the reporting period. This helps readers of the financial statements better understand the resource level required to operate the charity.
(Refer to paragraphs 98-103 and paragraph 108 of PBE IPSAS 23)
Q4.2 Do I have to account for non-cash items donated to my charity?
The general rule is that non-cash items donated to a charity, particularly non-cash items that become fixed assets of the charity, are to be recognised at their fair value at the date the charity receives the donated non-cash items.
(Refer to paragraph 97 of PBE IPSAS 23)
Q4.3 How do I determine the fair value of donated assets?
Paragraph 97 of PBE IPSAS 23 states that for many assets the fair value will be readily ascertainable by reference to quoted prices in an active and liquid market. For example, current market prices can usually be obtained for land, non-specialised buildings, motor vehicles and many types of plant and equipment.
Q4.4 Please explain the recent Exposure Draft (ED) on donated goods.
In July 2015 the New Zealand Accounting Standards Board published for public comment* an Exposure Draft, ED NZASB 2015-3 Donated Goods (Amendments to PBE IPSAS 23). The proposals mean that a charity may elect not to recognise donated goods if it is not practicable to measure reliably the fair value of the goods at the date the charity receives the goods such that the costs of recognising the goods at the date of receipt outweigh the benefits. This is particularly relevant for charities that receive a lot of low value second-hand goods that they sell. Charities adopting this exemption will instead recognise revenue for the donated goods at the point of resale.
*Comments close on the 30th of October 2015.
Q4.5 My charity operates a food bank. How do I account for the donated goods received, bearing in mind that they have value but a limited life?
The New Zealand Accounting Standards Board recognised that valuing donated goods in a food bank is an issue and this has been addressed in ED NZASB 2015-3 Donated Goods (Amendments to
PBE IPSAS 23). The proposals contained within the ED mean that a charity may elect not to recognise donated goods if it is not practicable to measure reliably the fair value of the goods at the date of acquisition such that the costs of recognising the goods at the date of acquisition outweigh the benefits.
(Refer to paragraph 97.1 and paragraph B19 of ED NZASB 2015-3).
There are two PBE Standards that deal with revenue, one on non-exchange revenue PBE IPSAS 23 Revenue from Non-Exchange Transactions and one on exchange revenue PBE IPSAS 9 Revenue from Exchange Transactions.
Q5.1 How do I decide if the revenue my charity receives is exchange revenue or non-exchange revenue?
If your charity receives assets or services, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another organisation in exchange, then the revenue would be exchange revenue. Some examples of exchange revenue are the sale of goods, the provision of services and the lease or rent of assets for a similar amount as you would charge others.
If your charity receives cash, other assets or services from another organisation without directly giving approximately equal value in exchange, then the revenue would be non-exchange revenue. Some examples of non-exchange revenue are donations of cash, donated assets, bequests, goods and services in-kind and fundraising proceeds.
However, it is not always immediately clear if revenue is exchange or non-exchange so judgement may be required. The substance rather than the form of the transactions should be considered.
Refer to PBE IPSAS 23 paragraphs 8-11
Q5.2 My charity receives a lot of grants, donations and other funding, how do I account for the receipt of these?
If the revenue is non-exchange in nature, the general rule under PBE IPSAS 23 is that when the asset (for example, cash) is received the charity recognises the asset (Dr Bank) and the revenue (Cr Revenue). Refer to Q5.3 below for a discussion of the circumstances in which a charity can recognise a liability on receipt of the asset.
If the revenue is exchange in nature, for example, a service contract, the charity will need to refer to
PBE IPSAS 9, paragraphs 19 to 27 which deal with the rendering of services. As a general rule the revenue will be recognised in the reporting periods in which the services are provided.
Q5.3 How do I decide if I recognise a liability when my charity receives a grant?
A charity can only recognise a liability (and hence defer the recognition of the revenue received) when the charity receives grants or funds with stipulations attached that meet the definition of a condition as explained in detail in paragraphs 14-25 of PBE IPSAS 23. Conditions require that the charity use the grant for specific purposes or otherwise repay the grant to the funder. Conditions give rise to a present obligation, that is, a liability. Deciding whether a grant has conditions attached will depend on the facts and circumstances of each grant.
Where the grant has a condition attached, the charity initially recognises an asset (Dr Bank) and a liability (Cr Liability). As the charity fulfils the conditions revenue is recognised (that is, Dr Liability, Cr Revenue).
(Refer to paragraphs 14-25 and paragraphs 55 of PBE IPSAS 23)
Q5.4 My charity has received a bequest. How do I account for it?
Appendix B of PBE IPSAS 23 provides New Zealand implementation guidance for not-for-profit entities with the following types of transactions: bequests, cash donations and fundraising, goods and services in kind, uncompleted contracts.
Table A of the appendix contains guidance on the accounting treatment of common types of bequests.
Q5.5 If my charity receives a grant to construct a new asset do I have to account for the grant differently?
How the grant will be spent does not affect when or how the revenue is recognised.
Q6.1 Does a Tier 2 Charity have to provide a Statement of Service Performance?
There is currently no requirement for a Tier 1 or Tier 2 charity to produce a Statement of Service Performance. However, if a charity wants to produce service performance information, there is guidance contained in Appendix C of PBE IPSAS 1 Presentation of Financial Statements.
The XRB is currently working on a standard on Service Performance Reporting for Tier 1 and Tier 2 charities, and is intending to issue the proposed standard for comment by early 2016. The XRB is also developing an assurance standard as once in place this service performance reporting information will require to be audited in future.
Q7.1 Are there any templates or model financial statements available?
We have not developed templates for the Tier 1 and Tier 2 charities. However, some of the larger chartered accountancy firms have model financial statements available to download from their websites.
Two PBE Standards contain illustrative examples of financial statements. Appendix B of PBE IPSAS 1 Presentation of Financial Statements contains an illustrative example of financial statements of a not-for-profit entity and PBE IPSAS 2 Cash Flow Statements contains an illustrative example of a cash flow statement of a not-for-profit entity.
(The PBE Standard to refer to is PBE IPSAS 17 Property, Plant and Equipment)
Q8.1 Do I have to depreciate my charity’s fixed assets (property, plant and equipment)?
Q8.2 Can I use tax depreciation rates to depreciate my charity’s fixed assets?
No, you can no longer use tax depreciation rates to depreciate fixed assets as a default rate. Instead a first principles approach to depreciation is required to be undertaken in order to assess what are the appropriate rates required to allocate the depreciable amount of the fixed assets on a systematic basis over their useful lives. The use of tax depreciation rates was a differential reporting concession permitted by previous standards. This concession is no longer permitted under the new standards.
Q8.3 What depreciation rate do I use to depreciate buildings?
You will need to determine an appropriate depreciation rate to allocate the depreciable amount of your buildings on a systematic basis over their useful lives.
(Refer to paragraphs 66 and 76 of PBE IPSAS 17)
Q8.4 My charity has been using tax depreciation rates, how do I change to accounting depreciation rates?
The charity shall treat the change in depreciation rate for property, plant and equipment as a change in accounting estimate as at the date of transition to PBE Standards in accordance with PBE IPSAS 3 Changes in Accounting Policies, Accounting Estimates and Errors (paragraphs 37–45).
In simple terms this means for periods beginning on or after 1 April 2015 the charity will take the book value of the property, plant and equipment and apply a new rate to allocate the book value over the remaining useful life of the asset.
(Refer to PBE FRS 46 First-time Adoption of PBE Standards by Entities Previously Applying NZ IFRS and PBE FRS 47 First-time Adoption of PBE Standards by Entities Other Than Those Previously Applying NZ IFRS)
Q9.1 Do I need to provide comparative information in the first year of applying the new accounting standards?
The answer depends on the standards your charity was previously applying. If you were previously applying NZ IFRS PBE standards, you will be required to provide comparatives. However, if you were previously applying Old GAAP standards or special purpose reporting and you are now applying Tier 2 standards, you will not be required to provide comparatives. Instead of comparatives, you will have to provide a copy of the previous year’s financial statements, and explain in the notes to the current financial statements the significant differences in accounting policies applied between the two sets of financial statements.
(Refer to paragraphs RDR 27.1 to RDR 27.2 of PBE FRS 47)
Q10.1 How do I decide what is material for my charity’s financial statements?
Material is defined in paragraph 7 of PBE IPSAS 1 Presentation of Financial Statements as follows: “omissions or misstatements of items are material if they could, individually or collectively, influence the decisions or assessments of users made on the basis of the financial statements. Materiality depends on the nature and size of the omission or misstatement judged in the surrounding circumstances. The nature or size of the item, or a combination of both, could be the determining factor.”
The XRB has developed guidance on applying materiality, and this can be found in explanatory guide EG A7 Materiality for Public Benefit Entities.
(Refer to PBE IPSAS 25 Employee Benefits and PBE IPSAS 1 Presentation of Financial Statements for disclosure of information about employee benefits.)
Q11.1 How do I account for long-service leave?
Refer to paragraphs 147-153 of PBE IPSAS 25, which deal with accounting for long-term compensated absences such as long service.
Q11.2 My charity has a single employee. Will I be required to change anything under the new accounting standards?
It depends on how you are currently accounting for your employee benefits, but it would be unlikely that the change to the new reporting standards would have a significant effect.
Q11.3 Is it true that I will have to make a provision for sick leave?
It is possible that you may have to include such a provision in your charity’s financial statements, depending on the circumstances. Refer to paragraphs 14 to 19 of PBE IPSAS 25, which deal with short-term absences.
Q12.1 My charity has a reserve for some funds received from another charity that was wound up. My charity is required to use the funds to continue the other charity’s mission. Can this continue to be treated as a reserve?
Yes it can. Please be aware that in future revenue must be recognised in the statement of comprehensive revenue and expense before an amount can be transferred into a reserve.
Q13.1 How do I account for a low interest loan received by my charity?
PBE IPSAS 29 Financial Instruments: Recognition and Measurement contains application guidance and an illustrative example on the accounting for low interest loans (referred to in PBE IPSAS 29 as concessionary loans). Essentially the requirement is for the accounting to reflect the economic substance of the transaction which will generally include the recognition of a donation element as well as an interest expense appropriately over the life of the loan.
(Refer to paragraphs AG84-AG90 of PBE IPSAS 29)