18. NZ charities that receive bequest income

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Introduction

 

Many small charities struggle to find regular donation income.  Then, if they are lucky, they receive a large bequest and they never look back.  For the first time they put in place initiatives that they couldn't dream of doing before.

 

Bequests can be game-changers for many charities.  It's like winning lotto - especially if there are no conditions attached and the charity can use the money as it sees fit.

According to the most recent returns filed by registered New Zealand charities (which include a mixture of 2012 and 2013 financial years), 798 or 3% of total charities received bequests totaling $176 million.*  That is an average of $221,000 for each of the lucky 798 charities.   So is it easy money, or are there lessons hidden in the data on the charities register?

 Summary

If you would like your charity to join the 3% of charities which receive bequests, here are 10 helpful hints based on returns filed with the New Zealand charities regulator:

1. Be an incorporated association or a trust.  About two thirds of charities which recorded bequests in their most recent return fell into these two categories.  Don't be a limited liability company - only six received bequests last year.

2. It helps to have a longstanding history and name recognition.

3. Don't be greedy and insist that all the money from an estate goes to your charity.  Just under half of charities that received bequests reported receiving $10,000 or less.

4. You're likely to receive more bequests if you operate in the health sector, followed by the religious sector, disability sector or education / training / research sector.  If you operate in the sport / recreation sector your probability of receiving bequests is slim.

5. If you are going to receive a bequest you will already have attracted donors who provide you with regular donation income (unless your charity is going to be set up with a bequest).

6. Don't rely on regularly receiving bequests as your only source of income.  Only one charity has managed to do that so far.

7. Don't assume New Zealanders are actively looking for new charities to leave their money to.  Over the last four years the number of registered charities receiving bequests has only grown by 1.8% per annum.  So you are going to have to work hard to stand out from the crowd.

8.  Remember that bequests can be challenged in the courts.  Don't recognise bequest income until you've received the cash or the donated assets have come under your control.

9. If you employ one or more paid staff you're more likely to receive a bequest and the value of bequests you do receive will be larger.  However all is not lost if you just rely on paid volunteers - these charities accounted for 26% of total charities that received bequests, and they received 7% of the total amount of bequests.

10. You're mostly likely to get a bequest if your postal address is in Auckland, although if your postal address is in Wellington your average total bequests will be larger.  If your postal address is in Malborough or Darfield you might get something too, though don't expect too much.

 

The details

Since 2008, the amount of bequest income received by New Zealand registered charities has been published on the charities register.  That puts New Zealand one step ahead of Australia in terms of providing an insight into bequests.  Across the Tasman, registered charities will only start reporting their income to the charities regulator from 2014.  Even then, they will just report bequest income as a combined total of bequest and donation income, and Basic Religious Charities will be exempt from reporting requirements altogether.

For accounting purposes, bequest income is not usually recognised until cash is received by a charity, or when donated assets come under control of a charity and can be reliably measured. This avoids problems that could arise if bequest income is recognised earlier and is subsequently contested by other estate claimants. 

Four-year trends

As shown in Graph A, the trend in New Zealand over the last four complete years from 2009 to 2012 has been an average increase of 7.3% per annum in the value of bequests received by registered charities.  The amount bequested to registered charities rose from $114m in 2009 to $139m in 2012.  However, the number of registered charities receiving bequests has not increased at a similar rate, rising only 1.8% per annum from 706 in 2009 to 744 in 2012.

Graph A

 

The same charities tend to benefit the most from bequests.  Just ten charities receive about one third of the total value of bequests each year. Over the four years 2009-2012 the most successful six charities to obtain bequests have consistently been:

1. Royal New Zealand Foundation Of The Blind

2. The Salvation Army New Zealand Group

3. The Priory In New Zealand of the Most Venerable Order of the Hospital of St John of Jerusalem

4. Cancer Society Of New Zealand Auckland Division Incorporated

5. National Heart Foundation Of New Zealand

6. The Society for the Prevention of Cruelty to Animals Auckland Incorporated

It is not surprising that these successful charities have a longstanding history and are well known to the New Zealand public.  Presumably the average person who leaves money to a charity in their will wants to be confident it is going to a charity that has proven itself to be a safe pair of hands with money and can be relied on to make a positive difference in the community.

 Size of bequests

With just 10 charities accounting for one third of bequest income, this suggests many charities receive quite small amounts of bequests.  In fact, as shown in Graph B, 12% of charities that receive bequests actually receive less than $1,000.   About 1/3rd receive total bequests of between $1,000 and $10,000.  And at the other end of the scale, about 1/4 of charities that receive bequests, receive total bequests of $100,000 or more.  (This graph includes returns for the 30 deregistered charities and it also includes the bequest of $44m made to the Joyce Fisher Charitable Trust).

Graph B

Popular sectors

Based on all returns filed since the NZ Charities Regulator began, 21% of the value of all bequests went to the health sector, followed by 16% to the religious sector, 13% to the disability sector and 13% to the education / training / research sector.  The three sectors that received the smallest proportion of the value of bequests, all less than 1%, were the accommodation/housing sector, emergency/disaster relief sector, and sport/recreation sector.  The sector breakdown, along with the names of charities in each sector which received the highest bequest income, are shown in Graph C and Table I. 

Graph C

 

Table I

Legal structures

The most common entity type to receive a bequest was incorporated associations (293 or 37% of the 798 bequest-receiving charities).  They were followed by trusts (180 or 23%),  unincorporated churches or parishes (75 or 9%), foundations (49 or 6%), committees of St John (46 or 6%), charitable trusts (43 or 5%), unincorporated societies (15 or 2%), unincorporated associations (9), diocese (8),  limited liability companies (6), unincorporated institutes (4), fire brigades (4), unincorporated centres (4) and estates (1).  61 charities did not give any indication of their entity type.  

 Bequests vs donations

Normally you might expect that charities which receive bequests will also receive donations.  In fact only 666 or 83% of the 798 charities in receipt of bequests also received donation income.  That left 132 charities where members of the public did not donate money to them when they were alive, but left $40m to them when the passed away.  However that is not as unusual as you may think.  Most of those charities had only just been established and the bequest was the reason they existed.  Others transferred legacy funds from one entity to another (usually into a Foundation).  For example the IHC transferred $14m of accumulated legacy funds from IHC Incorporated to the IHC Foundation in 2013. 

Paid staff and volunteers

Out of the 798 charities which received bequests in their last financial year, 529 (66%) employed one or more paid staff; 204 (26%) just relied on volunteers, and 65 (8%) recorded no paid or volunteer staff at all.  Based on the total of $176m of bequests received in the most recent returns, $145m or 82% of this amount of bequests went to charities that employed one or more staff, $12m or 7% went to charities which just relied on volunteers, and $19m or 11% went to charities which recorded no paid or volunteer staff.

Geographic location of bequests

Using the postal addresses supplied to the charity regulator, Auckland charities accounted for 176 or 22% of the 798 total charities that received bequests, receiving $71m or 40% of the $176m total bequests.  They were followed by charities in Christchurch which made up 124 or 16% of bequest charities (receiving $18m or 10% of total bequests).  Then came Wellington with 110 or 14% of charities (receiving $48m or 27% of total bequests).  Out of the three cities, Wellington charities received the highest total bequests on average - $436k, compared to $403k in Auckland and $145k in Christchurch. Other towns and cities with individual bequests over $1m were Gisborne, Hamilton, Havelock North, Lower Hutt, Manukau, North Shore and Tauranga. Some of the most modest bequest locations included Marlborough (total bequests were $10) and Darfield (total bequests were $85).

Unusual charities

In any piece of analysis on the charities register it is possible to find 'unusual' charities.  Analysis of bequest income is no exception.  For example, the Kingdom Legacy Trust is the only charity that has recorded bequests as its only source of revenue for the last five years ($1.3m, $176k, $242k, $155k and $242k).  It also has significant transactions with related parties. The trust's officers are Jasu and Jagdish Govind and Graeme Skeates (a senior partner in Skeates Law Ltd).   Back in 2009 it had received loans from the Jasu Govind family trust and the Jagdish Govind family trust, and lent this money at a nil interest rate to NZ Nail Industries, a company also owned by Jasu and Jagdish Govind and Graeme Skeates. In its most recent return the trust has used its bequest income to pay off the debt to the family trusts and has total assets of $4.4m now invested in land in Epsom and Kaeo.  Although the charity reports making charitable grants for religious purposes of $103k-$186k each year and says 10% is spent overseas, it is unclear who received the grants or whether there was any personal benefit from the related party transactions.  Nor is there any explanation why people are making bequests to this charity each year.

__________________

* 829 charities recorded bequest income in their most recently filed return to the regulator.  However, unless otherwise stated, this blog analyses results from 798 charities.  The 798 total excludes 30 deregistered charities and it excludes the Joyce Fisher Charitable Trust.  The latter received a bequest of $44m in the year ended 31/03/2012.  This trust operates in the fundraising sector and the bequest has been excluded on the basis that its bequest is so big it skews all of the sector results.  

17. Australia vs New Zealand: Comparing information charities provided to the regulators

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Last week the Australian Charities and Not-for-profits Commission (ACNC) shared its first insights into the charitable sector based on the initial 3,000 Annual Information Statements filed by Australian registered charities. 

These first 3,000 returns only give an indicative view of the sector - the ACNC is expecting about 57,000 returns in total between now and mid/late 2014.  But it’s interesting nonetheless to compare these insights to information provided by New Zealand’s 24,321 registered charities in their most recent returns.  What stands out is how similar the charitable sector statistics are between the two countries, based on the limited amount of data released by the ACNC so far. 

SUMMARY

Charity sizes: Australia reported that 74% of its charities fall into the small category and 11% fall into the large category, with the remaining charities falling into the medium category.  New Zealand's equivalent is 81% small charities and 7% large charities, using the same criteria.  The proportion of small, medium and large charities is therefore fairly similar between the two countries – with New Zealand having slightly more small charities and Australia having slightly more large charities.

Beneficiaries:  Both countries list the general public and children/youth as two of their top three charity beneficiary categories.  Australia also lists the elderly in their top three, but New Zealand lists religious groups as the third most common beneficiary group (the elderly come in at number seven). However, beware of the problems with capturing charity beneficiaries on the regulator form – the approach differs markedly between the two countries.

International assistance: 16% of Australian charities and 13% of New Zealand charities work to help people internationally. 

Charity volunteers and paid staff: By coincidence, 42% of Australian charities and 42% of New Zealand charities reported that they solely rely on volunteers.  At the end of their 2013 reporting period, Australia’s 3,000 charities reported a total of 225,000 volunteers, along with 13,000 full-time employees and 18,000 part-time employees.  New Zealand’s 24,321 charities reported a total of 413,000 volunteers, 112,000 full time and 440,000 part time employees.  However, once again, beware of the problems with capturing information about charity employees and volunteers.  The New Zealand information suggests that up to 16% of registered charities may be failing to complete the “your people” questions despite engaging paid or volunteer staff, so the aggregate totals could be materially understated.

The extent of red tape and reporting: 29% of Australian charities that have submitted an Annual Information Statement indicated how much time per annum they spent on reporting to Commonwealth, or state and territory departments and agencies. Small charities indicated that they relied heavily on volunteers, with volunteers completing 70 hours of government reporting, compared to 16 hours by paid staff.  Large charities, on the other hand, indicated that they relied heavily on paid staff, with paid staff spending an average of 288 hours and volunteers spending 20 hours reporting to government.  New Zealand does not ask these questions so there are no comparable figures.

THE DETAILS

Charity sizes (based on total revenue)

The ACNC reported that 74% of the 3,000 charities which have filed their 2013 Annual Information Statement were small charities (with annual revenue of less than $250 000), 15% were medium (with annual revenue of $250 000 - $999 999) and 11% were large (with annual revenue of $1m and over).

In New Zealand the figures are surprisingly similar if you apply the Australian thresholds to the New Zealand charities’ gross income.  Approximately 81% of New Zealand’s 24,321 filers would be small, 12% would be medium and 7% would be large.

The only noticeable difference is that New Zealand has slightly more small charities and slightly less large charities than Australia.  Which is what you might expect based on Australia’s population compared to New Zealand – Australia would naturally have more charities in the ‘large’ category.

Beneficiaries

The top three beneficiaries listed by the Australian charities were children and young people, the general community in Australia and elderly people. This is out of a total of 19 possible options (excluding ‘other’).

The top three beneficiaries listed by the New Zealand charities were the general public in New Zealand, children/young people, and religious groups.  This is out of a total of 11 possible options (excluding ‘other’ which I have mostly recategorised).

Initially this may lead you to conclude:

(1) New Zealand has a bigger charitable focus on religious groups than Australia, and

 (2) New Zealand is far less charitable to its elderly people compared to Australia (elderly people are actually ranked seventh out of 11 New Zealand beneficiary types).

However, on closer inspection, the conclusion about religion is incorrect.  Australia’s annual charity form does not even have a beneficiary category for religious groups.  Instead, it identifies religious-related charities through its purpose question (the advancement of religion) and its activities question (religious activities). So we still do not know whether New Zealand is more focused on religious groups compared to Australia, because the beneficiary data between the two countries is not comparable.  [I have published more information about New Zealand's religious charities in my September 2012 blog "Religious Charities".]

The smaller proportion of charities helping older people in New Zealand is not so easily explained.  One theory is that many elderly New Zealanders belong to religious groups, so charities may have nominated religious groups, rather than older people, as the appropriate beneficiary category.  In any case, it’s worth keeping an eye on how the figures compare with Australia as more Australian charities file their returns.

There’s one final point worth noting about beneficiaries.  The questions used by regulators to elicit charity beneficiaries are likely to have a high error rate in both countries for the following reasons:

·        Too many beneficiary options: There are a lot of boxes to tick to identify the relevant beneficiaries (19 in Australia and 11 in New Zealand) – so some charities may simply give up and tick one or two, whereas more categories may be appropriate.

·        Temptation to identify the widest possible number of beneficiaries:  Some charities may be tempted to tick all of the boxes to show they are really there for the general community (even though both countries provide a specific ‘general community box).

 

·        Odd beneficiary categories:  Both countries suffer from odd beneficiary categories.  New Zealand's category for 'family'whanau' came in as the fourth most common beneficiary, but what does it mean in the charitable context?  New Zealand also has a category for "people of a certain ethnic/racial origin" - without explaining exactly what a certain ethnic/racial origin is.  Are Pākehā a certain ethnic/racial origin?  Who knows.  But less than 2% of charities have ticked that box, so I doubt that is how charities are interpreting it.  Australia also has its foibles.  For example, it has separate categories for 'Children' and 'Young People' without telling us what the difference is between the two (New Zealand combined these categories).  It also goes to the trouble of having separate 'men' and 'women' categories but unlike New Zealand it doesn't have a category for animals.

 

·        Excessive use of the ‘other’ beneficiary category.  Perhaps one of the advantages of Australia’s long list of beneficiaries is that charities are less likely to create their own ‘other beneficiaries’ category.  In New Zealand almost 4,000 or 16% of charities listed an ‘other beneficiary’ as their main beneficiary (though well over half of these unnecessarily repeated one of the official beneficiary categories).  The remaining “other” categories described by New Zealand charities are specific and varied.  There are common themes, some of which tend to match the additional Australian categories.  For example, a lot of charities which used an "other" category identified their main beneficiaries as:

-         “school children/students/university students”

-        “schools/universities”

-        “artists/musicians”

-        “women/women and children”

-        “hospital/hospice patients/people with cancer”

-        “offenders/ex-offenders”

-        “the local community”

-        various sports club members (such as golf, tramping, deerstalking, bowling, croquet, canoeing, squash, bridge, rowing, triathlon, equestrian, football, and motorsport)

-        commercial industries (such as deer farming, dairy industry, pastoral farming, fruitgrowers, and oil and gas). 

There is also the occasional unusual beneficiary category, such as “income accumulation” or “land owners” or some rather annoying references to other documents such as “see section 4.1 of trust deed”.   Income accumulation is unusual if it is at the extreme end of the scale.  For example The Charitable Foundation Of The Bishop Of Dunedin listed its main beneficiary as “Nil current beneficiaries - still establishing capital base”.  The foundation had $11m gross income in 2012, assets of $152m and equity of $119m, so potential beneficiaries may well be left wondering when its capital base will be established so it can start helping the community.

·        No use of “main beneficiary” or “date of change” box in Australia: The New Zealand charity regulator seems to take the beneficiary question very seriously – not only do charities have to identify their beneficiaries but they also have to identify their ‘main’ beneficiary and if any of the beneficiaries changed, or if the main beneficiary changed, they must specify the effective date the beneficiaries changed (they have three months to notify the regulator after they become aware of this change).  Australia takes a much more relaxed approach and only requires charities to identify who was helped by the charity – there is no ‘main beneficiary’ category and no date of change required. 

International assistance

16% of Australian charities said they worked to help people internationally. Over 150 countries were listed, with New Zealand, the US, India, the Philippines and Papua New Guinea the most popular.

New Zealand is not far behind with 13% of New Zealand charities saying they either sent a percentage of their funds overseas, made grants overseas, conducted international activities or had an overseas area of operation (or a combination of these factors).

The New Zealand regulator asks charities to list the continent they operate in, rather than a specific country (note to the New Zealand regulator: it would be great if that could change in the future – country information provides more useful insights!)  The continents listed in order of frequency are Oceania, which includes Australia and the pacific islands (1,139 charities), Asia (995 charities), Africa (542 charities), Europe (405 charities), North America (297 charities), South America (282 charities) and Antarctica (45).

The most unusual insight here is that Australian charities list the US as the second most common country that they operate in, whereas it might be reasonable to expect poorer countries to rank above the US.   New Zealand’s priority list is less surprising, with North America ranking behind Oceania, Asia and Africa, as you might expect.

Volunteers and employees

42% of Australian charities reported that they solely relied on volunteers. At the end of their 2013 reporting period, these 3,000 charities reported a total of 225,000 volunteers, along with 13,000 full-time employees and 18,000 part-time employees. These figures will increase as more Annual Information Statements are submitted.

By coincidence, 42% of New Zealand charities also reported that they solely relied on volunteers.  That is, they did not record any paid (full time or part time) employees, but they did record one or more volunteers or volunteer hours.  However the surprise statistic from New Zealand is that 18% (4,491) of total registered charities recorded that they had neither volunteers nor paid employees.  Out of the 4,491, 3,900 still received some type of income.  For example, Rescare Homes Trust recorded no details about employees or volunteers, but disclosed gross income of $9m (and a salary expense of $7m) for the year ending 31 March 2013.  It is therefore likely that up to 3,900 (16% of total charities) are not completing the volunteer and employee statistics when they should be, so aggregate employee and volunteer numbers on the register could be materially understated.  A further 591 charities (2%) appear to be inactive with no income and no paid employees or unpaid volunteers.   

The New Zealand register shows an aggregate of 413,000 volunteers, 112,000 full time and 440,000 part time employees.  But as mentioned above, these figures are likely to be understated due to a significant number of charities not completing the “your people” questions on the annual form.

The extent of red tape and reporting

29% of Australian charities that have submitted an Annual Information Statement indicated how much time per annum they spent on reporting to Commonwealth, or state and territory departments and agencies.  This is an optional section in the form, so 29% seems to be a good response rate.

Large charities indicated that paid staff spent an average of 288 hours and volunteers spent 20 hours reporting to government. For medium charities these figures were 135 hours by paid staff and 94 hours by volunteers. Small charities relied much more heavily on volunteers, with non-paid staff completing 70 hours of government reporting, compared to 16 hours by paid staff.

How does New Zealand compare?  We don’t know because the New Zealand regulator doesn’t ask the question.  Perhaps that’s where Australia’s regulator really stands out compared to New Zealand.  The ACNC is focused on reducing red tape for charities, so it has an interest in measuring what the burden is today and how it changes over time.  Or is there simply an assumption by the New Zealand government that charities do not have a red tape problem?  It would be interesting to know the answer.

16. Grant Thornton Australia and New Zealand Not for Profit sector survey 2013/2014

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Accounting firm Grant Thornton recently released the results of its bi-annual survey of not for profit (NFP) organisations in Australia and New Zealand: Doing good and doing it well? Grant Thornton Australia and New Zealand Not for Proft sector survey 2013/2014.  The report does not refer to the number of entities in the Australasian not for profit sector, but common estimates are 600,000 in Australia (of which 57,000 are registered charities) and 90,000 in New Zealand (of which 26,000 are registered charities).  The results are based on 72 Australian survey responses and 344 New Zealand survey responses.

SUMMARY

It’s always good to get an insight into the NFP sector, particularly when that insight compares New Zealand and Australia, so the Grant Thornton report is worthwhile reading.   Bear in mind that their findings are based on a small sample size of only 416 organisations out of about 690,000 organisations in the Australasian NFP sector.

I have to admit I’m still not convinced about the final conclusion that there are “few significant differences between New Zealand and Australia”.

From the points highlighted in this blog, it looks to me like Australia’s NFP sector is way ahead of New Zealand in the use of social media, concerns about compliance and government regulations, the level of board member awareness of their obligations, NFP support for a national regulator, and NFP reliance on government funding. 

So rather than the Australasian NFP sector being homogenous, there are still enough differences for us to take lessons from our neighbour across the ditch.

DETAILS

Here are eight observations in the survey that caught my eye.

1.  By and large, and once size and turnover are taken into account, there are few significant differences between New Zealand and Australia (p.4).

On the face of it, this observation isn’t unexpected because New Zealand and Australia have so many similarities.  However I wonder what a detailed analysis, rather than a small survey, of the two sectors would uncover.   For example, are there significant differences in the NFP structures and vehicles used?  Do significantly more NFPs qualify for donation tax credits / deductible gift recipient status in one country than another?  Which country has the most effective tax policy for NFPs?  Does the proportion and profile of NFP volunteers significantly differ between the two countries?  The survey left me questioning whether there actually are significant differences in the two NFP sectors but the areas of difference just aren’t canvassed in the survey.

2. The use of social media is one area in which Australian organisations seem to be generally more sophisticated than their New Zealand counterparts (p.5).  The survey reveals that 79% of New Zealand respondent’s organisations have a website, whereas the corresponding figure is 99% in Australia (p.23).

They could well be right.  Shame on New Zealand NFPs for being stuck in the twentieth century.

3.  Funding and fundraising were identified as the major issues by around three quarters (76%) of New Zealand respondents and around two thirds (68%) of Australian respondents (p.6).

No surprises here. I doubt this will ever change - funding is always going to be a dominant issue for the sector.

4.   Australian NFPs are particularly concerned about government and compliance with government regulations, including new governance standards by the Australian Charities and Not-for-profits Commission (ACNC) and the introduction of the National Disability Insurance Scheme.  By contrast, government and compliance were not such significant issues in New Zealand (p.6).

Australia’s multiple layers of government, particularly at the State/Territory and Commonwealth levels, make it no surprise NFPs would be more concerned with compliance that side of the Tasman.  That is why they are so focused on initiatives to reduce red tape and administrative burdens on the sector.  Perhaps the Australian concerns are heightened because their legislation tends to have more administrative and other penalties for non compliance, so the consequences of not complying with government regulations can be harsh on NFPs.  Australian law also tends to be more prescriptive – for example they have regulated governance standards for registered charities whereas New Zealand has not.  Arguably, however, that gives the sector more certainty about what is expected, so it raises the sector standards and consequently the level of public trust and confidence in NFPs.

5. Directors and Trustees of NFPs are expected to meet increasingly high standards of performance and accountability.  Less than half (43%) of New Zealand respondents said that all board members understand this, compared with 65% of Australians (p.10).

The paper notes that “there is still a need for board member education within the sector”.  If 57% of New Zealand boards have at least one member who does not understand their responsibilities, then you can’t argue with that conclusion.

6. New Zealand has recently introduced a number of changes to financial reporting.  77% of respondents said they were aware of the changes and the compliance requirements are largely seen as reasonable.  However one in five were unsure about their impact (p.14). 

This was a surprisingly positive result in respect of the upcoming New Zealand changes, especially given the very high level of special purpose, unaudited and poor quality financial accounts provided to the charities regulator at present.  Perhaps the NZ authorities should be congratulated for ensuring there is public awareness of the changes.  On the other hand, perhaps the level of positivity would significantly reduce if the sample was just taken for small charities. 

7. In Australia the ACNC commenced in December 2012, the charity governance standards came into force from 1 July 2013 and the Statutory Definition of Charity Act comes into force on 1 January 2014.  Australian respondents support the direction of the reforms with a clear majority (83%) believing the sector needs a national regulator (p.16).

This is great news for the ACNC.  Hopefully Grant Thornton’s findings have some sway with the new Liberal Government, which is on record as saying it will abolish the ACNC, replacing it with a centre for excellence focused on innovation, education and best practice.  The findings might also be useful ammunition for the ACNC supporters who don’t see any advantage in having an emasculated regulator.

 8. In 2013, government grants and contracts were the most significant funding source for 53% of New Zealand respondents, whereas they are the most prominent source of funding for 79% of Australian respondents (p.30).  Those organisations in the social services sector are most likely to rely on government grants and contracts and generally deliver services for which government agencies are the default funder.

The paper concludes that NZ NFPs are trying to become less reliant on government funding.  Maybe so.  Although perhaps government funding in Australia is just more obvious, with its vast array of Commonwealth Grant Guidelines and acquittal forms, whereas in NZ NFPs are less likely to recognise funding from the likes of lotteries and councils as government funding.  In any case, the difference between 79% reliance on government funding and 53% does appear to be quite significant.

15. NZ’s proposed new accounting standards for registered charities

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Most registered charities in NZ are not currently required by law to meet any particular standard of financial reporting.   They simply have to complete the financial question in the annual regulator return and attach financial statements that do not need to follow any accounting standards.  From a charity’s perspective this is a good thing – it means the treasurer can be very inexperienced and still prepare simple financial reports which are accepted by the regulator.  From a user point of view, it means the quality of financial information varies considerably between charities, so financial performance is difficult to assess and charity financial information cannot easily be compared.

However, significant changes are on the horizon.   From 1 April 2015 it is proposed that all registered charities will have to prepare accounts which meet accounting standards set by the NZ accounting standard setting body.  Failure to do so could result in fines for the charitable entity and every officer of the charity not exceeding $50,000.

What are the proposed changes, what’s good and bad about them, and will small charities cope?

Summary

For accounting purposes, registered charities will be split into four tiers:

Tier	Entities	Standards
1	- Publicly accountable - Expenses > $30m	Full PBE (Public Benefit Entity) standards
2	Expenses < $30m	PBE standards (Reduced Disclosure Regime)
3	Expenses < $2m	Simple format reporting standard (accrual)
4	Operating payments < $40k	Simple format reporting standard (cash)

The changes summarised in this blog discuss the proposed changes for charities in tiers 3 and 4 – which apparently make up 96% of all registered charities in NZ (39% and 57% respectively).  The changes are outlined in Exposure Drafts issued in December 2012, with feedback due by 28 June 2013.  They include links to templates and guidance notes.  In total, the proposals are outlined in 286 pages – so as you can imagine the devil is in the detail.

Analysis

On the surface, the proposals seem like a good approach.  They will put NZ ahead of Australia, and light years ahead of the current NZ approach, with clearer and mandatory accounting rules for all registered charities.  Financial information reported to the regulator will be more detailed, more consistent and more reliable.

It is excellent to see that related party transactions, the nature of fundraising activities and restricted purpose funds, all appear to be required to be disclosed by Tier 3 and Tier 4 charities.  These are three areas which are important to understand when reviewing any charity’s financial information.

There are eight specific reporting proposals which I specifically would like to comment on:

1. Reporting burden for small charities in Tier 4 and the lower end of Tier 3 

The level of reporting appears to be potentially onerous in comparison to what is currently provided in question 25 of the annual regulator return, particularly by Tier 4 charities with operating expenditure below $40,000.  For example, many may not be familiar with providing a statement of service performance, a statement of resources and commitments, or even notes to financial statements.  Even the smaller Tier 3 charities may struggle with providing a statement of accounting policies and a statement of cash flows. Although, as a user of the information, I am supportive of having this level of information available, will it create a challenging reporting burden for small charities and can this be alleviated in some way?  If not, what will the consequences be?

2. Lack of detail for grouped and consolidated charities

The exposure draft notes that it is only applicable to single entities and does not address charity groups or consolidation issues.  That is quite a major omission, especially in light of the specific grouping provisions in the Charities Act 2005, which do not require controlled charities to consolidate but leave consolidation decisions entirely at the discretion of the charities (subject to approval from the regulator).  The Act also enables charities to group on a basis other than control which means charitable group membership and totals are likely to be inconsistent with the group membership and totals calculated under accounting standards using the control test.   The omission from the exposure draft is also problematic if, as the exposure draft suggests, the criteria of size shall be applied to consolidated totals.  So it will be important to see how the grouping and consolidation issues will be addressed as soon as possible.   

3. Income from government grants and public donations

I would like to see receipts separately identify government grants and public donations.  This information is valuable because it tells users how much public funds have been made available to the charity.  It is reasonable to assume that such charities will be subject to an increased level of accountability to the public. 

4. Grants and donations paid by a charity

I would also like to see “grants and donations paid” be mandatorily disclosed in all cases, and that they be distinguished between payments made in NZ and payments made overseas.  This is important for the regulator, the Inland Revenue and the general public who would all want to know the extent of financial resources NZ charities are sending within NZ and overseas.

5. Volunteer and paid staff details

I was disappointed that Tier 4 charities do not have to quantify their volunteers and paid staff, which is something they already do for the regulator and gives a valuable insight into their pool of human resources.  I notice that even the UK regulator is making this information mandatory from 2013.

6. Commercial activity disclosed as a method used to raise funds

I would like to see the description of the methods used to raise funds specifically include a description of any commercial activities undertaken.  The example could include a scenario such as the following: “The charity operates a paint manufacturing business in order to raise funds which will be used for charitable purposes”. 

I believe users should be able to clearly identify commercial activities being conducted by a charity, particularly commercial activities that are unrelated to the charitable activities. Commercial activities may be a concern for users for several reasons: the officers of the charity may not be skilled to run commercial operations and therefore governance should be strengthened if commercial activities exist; the commercial operations may expose the charity to business risks and accumulated reserves may need to be diverted from funding charitable activities to propping-up failing business activity; commercial activities could make the charity particularly susceptible to providing private benefits to officers and related parties through business transactions; or the charity may get so involved in unrelated commercial activities that its charitable activities become secondary or virtually non-existent.  

7. Transitional provisions

The first performance report does not require comparative information and pre-existing assets only need to be recorded if they are significant and have values that are readily obtainable.  I believe this should only apply to new charities who have not already reported their financial information to the charities regulator.

8. For the purposes of the NFP tier criteria, should the definition of expenses include or exclude grants made?

I believe the definition of expenses for the NFP tier criteria should exclude grants made.  It is common for constitutional documents to refer to the percentage of surplus that should be distributed by way of grants and donations.  To include grants and donations in as operating expenses is inconsistent with this approach.

In many instances charity officers will have significant discretion over the amount of grants to make.  It would not be helpful if a charity’s officers felt compelled to reduce the amount of their charity’s grant payments because of pressure to avoid moving the charity into a larger tier for accounting purposes (and/or a higher audit/review threshold).  This problem will be avoided if grants are excluded from the definition of expenses.

As an aside, I do not support NZ’s novel approach to categorise charities by operating expenditure as opposed to revenue.  An operating expenditure criterion is not consistent with any international charity regulator approach and it will reduce the ability to compare NZ charities with charities in other jurisdictions.  It will also impose additional costs on charities which are already familiar with using revenue as a threshold measure (for GST, for example) but will now also have to monitor and forecast operating expenditure for threshold purposes. 

Conclusion

My overall conclusion is that the proposals are a huge improvement from the status quo, if you look at them through the lense of a general user.  If changes can be made to accommodate the above issues they would be even better.  However if I was a non-accountant treasurer of a small charity, this new level of detail – and the penalties that come with them – may be alarming.    I suspect that finding a volunteer treasurer for a small charity is going to be a lot more difficult from 1 April 2015.

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The detail: Future proposals

In July 2012 a new Financial Reporting Bill was introduced into Parliament by Commerce Minister Craig Foss.  The Bill, once enacted, will repeal the Financial Reporting Act 1993 and is expected to apply from 1 April 2015.

The Bill amends the Charities Act 2005 to require the annual return of a charitable entity to be accompanied by financial statements. For registered charities in Tiers 1 and 2, the financial statements must comply with GAAP. In the case of other registered charities in Tiers 3 and 4, compliance with a non-GAAP standard (which will set a lower tier of financial reporting) is sufficient.  The proposed change effectively gives the accounting standards as issued by the External Reporting Board (XRB) force of law.

The tiers have been defined as follows:

Tier	Entities	Standards
1	- Publicly accountable - Expenses > $30m	Full PBE (Public Benefit Entity) standards
2	Expenses < $30m	PBE standards (Reduced Disclosure Regime)
3	Expenses < $2m	Simple format reporting standard (accrual)
4	Operating payments < $40k	Simple format reporting standard (cash)

There is also a new section 42B in the Charities Act which provides for an offence of knowingly failing to comply with financial reporting standards. The charitable entity and every officer of the charity may be liable under this offence, which has a penalty of a fine not exceeding $50,000.

Exposure Draft Documents

The XRB says it recognises that NFPs “may have limited access to professional accounting expertise”, and have therefore “written the standards for Tiers 3 and 4 in relatively simple language where possible”.

Below are the links to the Exposure Drafts issued in December 2012 (with feedback due by 28 June 2013).  They include links to templates and guidance notes.  In total, the proposals are outlined in 286 pages.

In summary, for tier 4 registered charities with expenses < $40k (simple format reporting – cash) charities must prepare a performance report which has five sections (two less than Tier 3 entities): entity information, a statement of service performance, a statement of receipts and payments, a statement of resources and commitments (which is similar to a balance sheet) and notes to the financial statements.

For tier 3 registered charities with expenses < $2m (simple format reporting – accrual) charities must prepare a performance report which has seven sections (two more than Tier 4): entity information, a statement of service performance, an income statement, a balance sheet, a statement of cash flows (not required for Tier 4), a statement of accounting policies (not required for Tier 4) and notes to the financial statements.

ED XRB A1 (FP Entities + PS PBEs + NFPs Update) The proposed third revision to Standard XRB A1 issued by the XRB Board to give effect to the new Accounting Standards Framework (69 pages).

ED PBE SFR-A (NFP)	Tier 3 Accrual Accounting Standard (70 pages).
ED PBE SFR-C (NFP)	Tier 4 Cash Accounting Standard (39 pages).

Tier 3
ED Template PBE SFR-A (NFP)	Optional Template for ED PBE SFR-A (NFP) - PDF Version (23 pages)
Guidance Notes	Guidance Notes Accompanying the Optional Template for ED PBE SFR-A (NFP) (42 pages)
Tier 4
ED Template PBE SFR-C (NFP)	Optional Template for ED PBE SFR-C (NFP) - PDF Version (14 pages)
Guidance Notes	Guidance Notes Accompanying the Optional Template for ED PBE SFR-C (NFP) (29 pages)

There are 18 specific consultation questions:

Tier 3

1. Do you consider that the proposed structure will provide appropriate information for users of the Performance Report?

2. Do you consider that the proposals relating to the Statement of Service Performance are practicable?

3. Do you agree that grants, donations and fundraising revenue should be recorded as an asset and revenue when the cash is received (even when there are conditions attached to the donation or grant).

4. Do you agree that significant donated assets should be recorded at a current value?

5. Do you agree with the other simplifications proposed?

6. Do you agree that entities should be permitted to opt up to a Tier 2 PBE standard for a specific type of transaction?

7. Are there any transactions that are not addressed in the ED that are relatively common for Tier 3 and should be addressed?

8. Do you consider that the requirements for the proposed Statement of Cash Flows has been adequately simplified?

9. Do you consider that the proposed transitional provisions are practical?

10. Do you have any comments on the draft template and guidance notes?

11. Are there any other comments you wish to make?

Tier 4

1. Do you consider that the proposed structure will provide appropriate information for users of the Performance Report?

2. Do you consider that the proposals relating to the Statement of Service Performance are practicable?

3. Do you agree with the proposals for the presentation of receipts, payments, resources and commitments?

4. Are there any relatively common transactions for Tier 4 not-for-profit entities that are not addressed which should be?

5. Is there any further information that should be required so as to enable users to better understand the financial statements?

6. Do you consider the proposed transitional provisions are practical?

7. Do you consider that the draft Template and associated Guidance Notes would be useful?