Tracing Donations Will Be Easier

Mark Hucklesby, National Technical Director, for chartered accountants Grant Thornton New Zealand, looks at Government moves to reduce the cost and complexity of preparing and then filing financial statements. This is the second of three articles that covers the not-for-profit sector.

Ever wondered where that $20 went that you donated to a not-for-profit (NFP) organisation? How much went into overheads and how much actually made it to the “coal face”?

The Government indicated its intentions to seek more financial accountability from not-for-profit organisations in an 81-page Discussion Paper issued by the Ministry of Economic Development (MED) in September 2009.

But what level of reporting is appropriate? The more than 100,000 not-for-profit organisations in the country have until 29 January 2010 to have a say on what their reporting responsibilities should be and what they should report on.

The MED is particularly interested in whether organisations that spend over $20,000 per annum should file their financial statements with a regulator.  They are also asking whether all organisations with an annual expenditure greater than $100,000 per annum should be subject to an annual review, and when their expenditure exceeds $1 million should they automatically be subject to an audit?

Also noteworthy is that the closing date for submissions to the MED just happens to coincide with another closing date set by the Accounting Standards Review Board (ASRB).  The ASRB has an important role to play because it is the independent crown entity that presently gives financial reporting standards the force of law.

Simply put, the MED is proposing is that if a NFP organisation issues a set of financial statements that do not comply with the applicable financial reporting standards approved for not-for-profit organisations by the ASRB, then all members of the NFP’s governing body might end up being individually prosecuted for failing to comply with the Financial Reporting Act 1993. 

And the consequence of failing to comply with the Act if financial reporting breaches are not corrected will either be significant fines, imprisonment, or  in extreme cases, both!

Although NFPs are quite different from companies (ie they are service oriented rather than profit driven), according to the MED, the principles that determine “who should report” should be the same, no matter what sector the reporting entity operates in.

The MED proposals require answers to three important questions: First, is the entity publicly accountable? Second, are all the people who have an interest in the entity directly involved in managing and governing it? And finally, is the entity economically significant? The answers provided then drive how much reporting and disclosure is required to be made by the NFP entity, and whether or not it should be subject to an audit or a review.

In almost every case, NFPs will have public accountability (because they receive funds from the public) and there are very few NFP organisations where all of its members are directly involved in the day-to-day running and governance of the organisation.  

Given this, size will then determine if the NFP needs to report and, if so, how much its needs to disclose.  It will also determine as a minimum, whether or not a review or an audit is required.

It’s clear from reports issued following recent high profile fund raising events, that many donors are wanting to know through annual financial statements how much of their donated dollar is reaching its intended recipient (eg telethons and pub charities). 

So if you think these proposals place an unfair burden on NFPs, now is the time to put pen to paper and share your point of view with officials at the MED and the ASRB.  This is a rare opportunity to comment – make the most of it.

In the next article we will consider how the MED and ASRB proposals affect Public Sector entities.

For further information, contact:

Mark Hucklesby
Grant Thornton New Zealand
National Technical Director
T+ 09 308 2534
M+ 021 664 585
E mark.hucklesby@nz.gt.com

Financial Reporting Adviser - Changing New Zealand’s financial reporting landscape

IPSAS = International Public Sector Accounting Standards

NFP Application = modifications that will be made to IPSAS by the ASRB, or its successor, to tailor them for NFPs

NZ Differential Reporting = A regime to reduce the level of disclosure made in financial statements

Simple Form Reporting = A template solution built upon accrual accounting concepts.