Frequently Asked Questions about the Tier 3 and Tier 4 Standards for Not-for-Profit Entities

These frequently asked questions and answers provide general advice, and are not a substitute for reading the Tier 3 and Tier 4 Standards, and the associated Explanatory Material.

The Frequently Asked Questions are set out in the following sections. Click the hyperlink to go to the relevant section.

  1. Tier Structure (below)
  2. Application Date
  3. Election_of_Tier
  4. Cash_and_Accrual_Accounting
  5. Definitions
  6. Incorporated_Societies
  7. Templates
  8. Audit Requirements
  9. New Charity
  10. Operating_Payments_just_under $125,000
  11. Moving_Between_Tiers
  12. Early Adoption
  13. GST
  14. Non-cash Donations

1. Tier Structure

1. Which Tier should my charity report under?

The new reporting standards have a Tier Structure which recognises the need for simpler reporting requirements for smaller entities which don’t have “Public Accountability”. To determine the tier that you may elect to report under, look at the annual operating expenses in your financial statements for the last two years and review the following table:

Tiers Entities Standards
Tier 1 Entities with total expenses > $30 million or with “Public Accountability” (which is defined in the response to question 29) Full PBE Standards
Tier 2 Entities with total expenses ≤ $30 million PBE Standards with Disclosure Concessions
Tier 3 Entities with total expenses ≤ $2million Simple Format Reporting Standard – Accrual for Not-for-Profit Entities (also known as the Accrual Standard or the Tier 3 Standard)
Tier 4 Entities with total operating payments ˂ $125,000 Simple Format Reporting Standard – Cash for Not-for-Profit Entities (also known as the Cash Standard or the Tier 4 Standard)

2. Application Date

2. When do I have to start applying the new Tier 3 or Tier 4 Standards to my charity?

Charity's Balance Date Standards apply from Balance date of first performance report due date to submit to charities services
31 March 1 April 2015 31 March 2016 1 October 2016
30 April 1 May 2015 30 April 2016 1 November 2016
31 May 1 June 2015 31 May 2016 1 December 2016
30 June 1 July 2015 30 June 2016 1 January 2017
31 July 1 August 2015 31 July 2016 1 February 2017
31 August 1 September 2015 31 August 2016 1 March 2017
30 September 1 October 2015 30 September 2016 1 April 2017
31 October 1 November 2015 31 October 2016 1 May 2017
30 November 1 December 2015 30 November 2016 1 June 2017
31 December 1 January 2016 31 December 2016 1 July 2017
31 January 1 February 2016 31 January 2017 1 August 2017
28 February 1 March 2016 28 February 2017 1 September 2017

3. Election of Tier

3. What is the process for choosing the Tier of reporting for my charity?

The governing body is responsible for deciding whether a charity reports in accordance with the Tier 3 or the Tier 4 standard. The choice of tier needs to be disclosed in the Performance Report. If you are using the optional XRB Template for Tier 3, you will see that the choice of tier is disclosed in the Statement of Accounting Policies under the heading “Basis of Preparation”. If you are using the optional XRB Template for Tier 4, you will see that the choice of tier is disclosed in the Notes to the Performance Report, under the heading “Basis of Preparation”.

4. Cash and Accrual Accounting

4. What is the difference between cash and accrual accounting?

Under cash accounting, transactions and other events are recorded in the Performance Report only when cash is received or cash is paid. When cash accounting is used the Statement of Receipts and Payments is the main financial statement in the Performance Report.

Under accrual accounting, revenue and expenses are recorded when they are earned or incurred, rather than when the cash is received or paid. There are adjustments for the timing of revenue and expenses called accruals. These include debtors or accounts receivable (which is money owed to the charity), and creditors or accounts payable (which is money owed by the charity). Also under accrual accounting, depreciation of fixed assets is recorded to recognise the use of those assets. When accrual accounting is used the Performance Report includes three key financial statements: the Statement of Financial Performance (showing revenues and expenses), the Statement of Financial Position (showing assets and liabilities) and the Statement of Cash Flows (showing cash receipts and cash payments).

5. If my charity qualifies to use the Tier 4 Standard, but I currently do accrual accounting, must I change to cash accounting?

No. You may elect to report using the Tier 3 Standard if you wish. Please note that you will need to follow all of the requirements in that Standard if you elect to use it, including preparation of a Statement of Cash Flows.

6. Can I pick and choose what to report using either the Tier 3 or Tier 4 Standard?

No. You must elect the tier in which you will report, and follow all of the requirements for the standard for that tier. However, you are allowed to include relevant information that is additional to the requirements of the standard.

If you are reporting in accordance with the Tier 3 Standard and you have transactions that are not covered by that Standard, you may use the requirements of a Tier 2 Standard for that class of transactions.

7. If the charity reports using the Tier 4 Standard, can we still depreciate the fixed assets?

No, depreciation is not a cash transaction. Therefore, it cannot be included in the Statement of Receipts and Payments.

8. Is a Statement of Cash Flows required only in Tier 3 (and not Tier 4)?

Yes. However, the information provided in the Statement of Cash Flows in Tier 3 is similar to that provided in the Statement of Receipts and Payments in Tier 4.

9. My charity is a registered charity and it meets the criteria to report using the Tier 4 Standard. However, my charity is controlled by another registered charity that reports using the Tier 2 Standards. Does my charity have to prepare a report that uses the Tier 2 Standards?

No. You may still report using the Tier 4 Standard. However, the charity that controls your charity is likely to require further details from you (such as a list of accruals) to prepare their consolidated report.

10. If my charity reports using the Tier 4 Standard, can I include a balance sheet instead of a Statement of Resources and Commitments?

No. The Tier 4 Standard requires a Statement of Resources and Commitments. If your charity properly accounts on a cash basis, you cannot prepare a full balance sheet that works in conjunction with the Statement of Receipts and Payments. However, you are allowed to include relevant information that is additional to the requirements of the standard.

5. Definitions

11. What does total expenses in Tier 3 include?

Total expenses is total operating expenses, which are those relating to day-to-day activities of your charity. Examples of common operating expenses include rent, power, office running expenses, staff expenses, professional fees, fundraising costs, grants or donations made to others, and repairs and maintenance. Operating expenses do not include expenditure on capital items, such as office furniture, computers, vehicles or property, which would be capitalised as assets in the statement of financial position.

12. Are grants that my charity makes to others included in total expenses (Tier 3) and total operating payments (Tier 4)?

Yes, grants are included in total expenses (Tier 3) and total operating payments (Tier 4).

13. Is depreciation included in total expenses for Tier 3?

Yes, depreciation is included in total expenses for Tier 3.

14. What is meant by Significant? Is there an amount or percentage that I can use?

Significant is defined in the Glossary of the Tier 3 and Tier 4 Standards. Significant has the same meaning as the term “material” which is used in the accounting standards for larger entities. An amount or disclosure is Significant if leaving it out or getting it wrong could influence someone’s understanding of a charity’s overall performance. There is no amount or percentage that can be used for all charities. Whether or not something is significant to a charity depends on the charity’s circumstances. Further information is available at EG A7 Explanatory Guide: Materiality for Public Benefit Entities.

15. How do I determine what makes up my reporting entity?

Your Registered Charity is a reporting entity because the Charities Act 2005 requires registered charities to prepare a Performance Report in accordance with XRB Standards. You need to establish the extent of the reporting entity to determine what you need to report. This depends on individual facts and circumstances. You need to determine whether your entity controls other entities, or is itself controlled by another entity, for financial reporting purposes. You may need to get professional accounting advice to help you answer this. For example, your charity (the reporting entity) may control a charity shop whose operations need to be included in the Performance Report of the reporting entity.
You may find it helpful to refer to the two explanatory guides:

16. What is meant by control for financial reporting purposes?

Control is defined as the power to govern the financial and operating policies of another entity so as to benefit from its activities. This definition and further guidance are provided in PBE IPSAS 6 (NFP)Consolidated and Separate Financial Statements (Not-for-Profit), which is available on the XRB website www.xrb.govt.nz. This is a complex subject requiring the application of judgment, and it may be appropriate to seek professional accounting advice regarding your specific situation.

17. What is a Performance Report?

A Performance Report comprises a set of statements which collectively tell the story of the charity for the financial year. The information required in a Performance Report is summarised as follows:

Tier 3 Tier 4
Entity Information Entity Information
Statement of Service Performance Statement of Service Performance (outputs only)

Statement of Financial Performance

Statement of Statement of Cash Flows

Statement of Receipts and Payments
Statement of Financial Position Statement of Resources and Commitments

Accounting Policies

Notes

Notes

18. I’m not familiar with the titles of some of the statements in the Tier 3 standard. Are there other terms used that I may be more familiar with?

Yes. Other terms for the Statement of Financial Performance include Statement of Revenue and Expense or Operating Statement. The Statement of Financial Position is also commonly called a balance sheet.

19. Do I file the Performance Report with the XRB?

No, both the Annual Return and Performance Report are filed with Charities Services. They are due six months after your entity’s balance date (see column 4 in the response to question 2).

6. Incorporated Societies

20. If my charity is an Incorporated Society and a Registered Charity, where do I file my Performance Report?

You need to file your Performance Report with Charities Services together with the Annual Return. Your Performance Report doesn’t need to be separately filed with the Registrar of Incorporated Societies.

21. Do all Incorporated Societies have to comply with the XRB Standards?

Only Incorporated Societies that are also Registered Charities are required to apply the XRB Standards. This is because currently there are legal requirements for all Registered Charities to apply XRB Standards, regardless of the form of those charities, but no legal requirements for Incorporated Societies. However, the government is expected to require Incorporated Societies to comply with XRB Standards at some point in the future.


7. Templates

22. Are the templates compulsory?

No. However, if you complete the appropriate template correctly for your charity, you will meet the requirements of the relevant standard. Even if you don’t want to use a template, you might find it useful to look through one of them, to give you some ideas on how to present particular items of information:

23. Are the templates in an acceptable format for an auditor?

Yes, they are in an acceptable format for your auditor.

8. Audit Requirements

24. What are the new statutory requirements to have an audit?

From 1 April 2015 there are minimum statutory requirements for Registered Charities to obtain assurance on their Performance Reports, based on their annual total operating expenditure. The statutory requirements are as follows:

Charity Size Assurance Required
Total Operating Expenditure ≥ $1 million Audit
Total Operating Expenditure ≥ $500 000 Audit or Review
Total Operating Expenditure < $500 000 None

Note that an audit provides a higher level of assurance than a review. If you have a statutory requirement to have an audit or a review, these must be carried out by a qualified auditor, and in accordance with XRB Auditing and Assurance Standards.

25. My charity’s total operating expenditure is below $500,000 (the level at which there is a statutory requirement to have an audit or review), but the constitution requires one. Do I still need to have an audit?

Yes. However, because there is no statutory requirement for an audit, you can decide what information is subject to audit based on what the constitution requires to be audited (e.g. just the financial statements contained within the Performance Report, not the entire Performance Report). Further, you can decide who will carry out the audit (i.e. you do not have to use a qualified auditor).

You may want to consider changing the constitution to remove the requirement for an annual audit if there is limited benefit obtained from having an audit carried out annually.

9. New Charity

26. If I form a new charity, how can I determine what Tier to report under? How does the operating payments threshold apply to a new charity?

You won’t have a record of operating payments or operating expenses to consider. Therefore, you will have to base your decision on what you expect. Once you have some history, you may need to reassess your decision and report under another Tier.

10. Operating Payments just under $125,000

27. What Tier should I choose if my charity has operating payments just below $125,000?

So long as the charity does not have “public accountability” as defined (see the response to question 29), it will be eligible to report using the standards of any Tier. However you are likely to be deciding between Tiers 3 and 4. In making the decision, you may want to consider the way in which you are currently accounting. If you are currently reporting on a cash basis you may want to use the Tier 4 Standard. However, if you are currently reporting on an accrual basis and want to continue doing so, you could decide to use the Tier 3 Standard. Also, you may want to consider your expectations about the future annual operating payments. If you expect operating payments in excess of $125,000 in the future, you may want to use the Tier 3 Standard.

In the unlikely event that your charity has “public accountability” as defined, you would need to report using the Tier 1 Standards.

11. Moving Between Tiers

28. If my charity uses the Tier 4 Standard, but in one year it has operating payments of more than $125,000, and this is unlikely to recur, do I need to report using the Tier 3 Standard?

No. You would need to use the Tier 3 Standard only if operating payments were more than $125,000 for two consecutive years.

29. What is “Public Accountability”?

This is a specifically defined term that mainly includes organisations that issue shares, debentures or bonds that are traded, and entities such as banks, insurance providers and registered superannuation schemes. Few, if any, charities will have “Public Accountability” as defined. However, if you think your charity does, please get professional accounting advice.

12. Early Adoption

30. Can my charity use the new standards now?

Yes. You can follow the new standards before they become mandatory under the Charities Act 2005.

13. Goods and Services Tax (GST)

31. Do I prepare the financial statements on a GST-inclusive, or a GST-exclusive basis?

This will depend on whether your charity is registered for GST. If your charity is GST-registered, you will prepare the charity’s financial statements on a GST-exclusive basis. If your charity is not GST-registered, you will prepare the charity’s financial statements on a GST-inclusive basis.

If part of your charity is registered for GST and the other parts are not registered for GST, you will prepare the charity’s financial statements on a mixed basis (partly GST-exclusive and partly GST-inclusive). Such a situation may occur in circumstances where the IRD permits a single registered charity that comprises a head office and branches to have the head office registered for GST and the branches not registered for GST. Transactions occurring in the GST-registered part of the charity will be recorded on a GST-exclusive basis and transactions occurring in the parts of the charity that are not GST-registered will be recorded on a GST-inclusive basis.

32. Is the operating expenditure and operating payments threshold GST-exclusive or GST-inclusive?

If your charity is not registered for GST, then GST is part of the operating expenditure/payments, so the threshold is GST-inclusive.

If your charity is registered for GST, you collect GST as an agent for Inland Revenue, and it is not part of your charity’s operating expenditure/payments. The threshold is then GST-exclusive.

If part of your charity is registered for GST and the other parts are not registered for GST, the threshold will comprise both GST-exclusive and GST-inclusive amounts. (See question 31.)

14. Non-cash Donations

33. My charity is in Tier 3 and has received a non-cash donation. How do I account for it?

Non-cash donations can include items that have a long term benefit to the charity, such as a vehicle or a computer. These types of items are referred to as donated assets. Non-cash donations can also include items that have a short term benefit to the charity, such as food donated to a food bank or clothes donated to a charity shop. These types of items are referred to as goods received in kind.

A significant donated asset is accounted for as revenue in the Statement of Financial Performance and as an asset in the Statement of Financial Position, unless the value of the donated asset is not readily obtainable. If the value is not readily obtainable a description of the donated asset is disclosed in the notes. For a discussion about “Significant” see the response to question 14.

If there is a significant level of goods received in kind, at a minimum, a description of the goods received needs to be disclosed in the notes. This is likely to be the case for food banks and charity shops that rely on a significant level of donated items. Although it is not required by the Tier 3 Standard, goods received in kind can be accounted for in the same way as donated assets, if the value of the goods received is readily obtainable.

34. My charity is in Tier 4 and has received a non-cash donation. How do I account for it?

Non-cash donations can include items that have a long term benefit to the charity, such as a vehicle or a computer, and items that have a short term benefit to the charity, such as food donated to a food bank or clothes donated to a charity shop.

All significant non-cash donated items that the charity has at year end should be disclosed as a resource in the Statement of Resources and Commitments. In the case of a food bank’s donated food or a charity shop’s donated clothes, although each item separately may be insignificant, collectively the items at year end are likely to be significant, and there should be disclosure about the group of items.

If the value of any non-cash donations is readily obtainable, it is helpful for the value to be disclosed. However, disclosing a value isn’t required by the Tier 4 Standard.

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