Charities Act and Financial Reporting Changes

It has been a busy old time in the Charities Act space over recent months – so we have distilled the key changes in our article below for you. 

Alongside, things are also progressing with changes under the Incorporated Societies Act 2022 – in particular, re-registration for all existing incorporated societies is now available commencing this month. We will give you a comprehensive update on the changes coming through for Incorporated Societies in our next Advisory update to be sent out very shortly.

Charities Amendment Act 2023
The Charities Amendment Act became law on 5 July 2023, bringing a wide range of changes for charities to be aware of. These changes take effect on three dates over 2023 – 2024 (5 July 2023, 5 October 2023, 5 July 2024) of which we have listed some of the key changes below:

1. The definition of who is an “officer” in a charity is now wider than previously stated;
2. Charities will need to review their rules within the next 3 years (and confirm this to Charities Services);
3. The Charities Registration Board will be able to disqualify officers for serious wrongdoing after an investigation without having to deregister the charity (previously an officer could only be disqualified if their charity was also deregistered);
4. Charities will be able to appeal decisions taken by Charities Services to the Taxation Review Authority (this change takes effect from 5 July 2024)

Changes to the definition of Officer

Under the new definition, your officers includes anyone who occupies a position in the charity, and who can exercise significant influence over substantial decisions of the entity.

For trusts, your officers include the trustees. In societies and companies, your officers are all the members of the board, committee or governing body of the charity.

No matter what type of entity your charity is though, your officers also include anyone who occupies a position where they can exercise significant influence over substantial decisions. These might include a chief executive (CEO), chief financial officer (CFO), general manager, or another person with significant influence over strategic, financial or operational decisions. It is important to note, if your charity is a trust your officers may now include both trustees and non-trustees, such as CEO’s or CFO’s.

This change does not remove any people who have previously been identified as officers. It simply broadens the scope.   

Review your rules and governance procedures
One of the key changes to the Act is that charity’s now have a statutory duty to review their rules and governance procedures at least every 3 years.
Your review will need to comprise two main aspects:

• your charity’s rules documents, which could be a trust deed or constitution;
• any policies or guidelines relevant to your charity’s governance obligations, such as policies on financial management, conflicts of interest and staff and volunteers.

When you review your governance procedures, you need to look at whether your rules and other procedures are still fit for purpose, and that they allow your charity to achieve its charitable purpose and meet its obligations.
You will be required to indicate in your annual return to Charities Services when you have carried out a review of your rules and governance procedures.

New annual return forms for charities
Charities Services consultation process for its proposed changes to the annual return forms for Tier 1 – 4 charities recently closed. Several of the proposed changes to the forms come from the Charities Amendment Act 2023 and XRB revised Tier 3 and Tier 4 reporting requirements (see further below). Charities Services will now review the feedback received and have advised that the new forms should be ready by mid-2024.

Proposed changes to Charities reporting tier Thresholds
The accounting requirements for charities are set by the External Reporting Board (XRB). Charities are grouped into one of four reporting tiers depending on their size based on its annual expenditure. The XRB are currently looking at increasing the Tier 2 and Tier 3 thresholds and are seeking feedback on their proposals.

The XRB are proposing to increase:

• The Tier 2 threshold from $30 million to $33 million annual expenditure
• The Tier 3 threshold from $2 million to $5 million annual expenditure

You can provide feedback to the XRB on their website (www.xrb.govt.nz) which explains the proposals in more detail. The consultation period closes on 26 January 2024.

New Financial Reporting standards for Tier 3 and Tier 4 entities 
Earlier this year (May 2023) the External Reporting Board (XRB) issued new reporting standards for Tier 3 and Tier 4 not-for-profit entities. The new standards must be applied for accounting periods beginning on or after 1 April 2024 (with early adoption also available).

The new Tier 4 Standard is now less complex, including no longer requiring a Statement of Resources and Commitments. A dedicated webpage on the XRB website for Tier 4 entities is available which includes:

• a simplified reporting template (along with short guidance video)
• guidance notes that will be developed and added to over time

The new Tier 3 Standard changes some existing requirements and adds some new changes. 
There is again a dedicated webpage on the XRB website for Tier 3 entities including reporting template and guidance notes including an at-a-glance document outlining what has changed in the new Tier 3 Standard. Some of the key changes include:

• Service Performance Reporting - the terms “outcomes” and “outputs” for service performance reporting have been removed and replaced with terms that are more aligned with the Tier 2 Standard. Further guidance has been provided around reporting service performance information.
• Asset valuation - property, plant and equipment, investment property and financial investments that are publicly traded can now be revalued without opting up to Tier 2 Standards.
• Accumulated Funds - new requirement to disclose information about how an entity is managing its reserves including providing a description of the purpose of each reserve, the entity’s plans for applying the reserve, and when the entity expects the reserve will be applied to advance the entity’s objectives.
• Revenue recognition – a new model for recognising revenue based on “documented expectations” has been implemented. The previous revenue recognition model based on “use or return” conditions has been removed. Instead a significant grant, donation or bequest with a “documented expectation” over its use, the funding may be recognised over time as the expectation is satisfied.
• Revenue and expense categories – clearer categories for classifying revenue and expenses are more clearly defined.

What to do next? 
As outlined above there is a myriad of changes impacting upon charities and not-for-profit entities which have taken effect or will be become effective over the coming period.

There are substantial resources available to navigate through these changes, in particular resources available on Charities Services and External Reporting Board websites. 

There are also significant changes coming through which impact upon Incorporated Societies, which we will cover off in our next Advisory Update, coming out shortly.

Lynch & Associates are well placed to assist you in understanding how any of these changes specifically impact upon your charity or not-for-profit organisation and we are here to help.

We are always available to assist you with any questions, queries or help you may need – please do contact us if you need any help.