Some key changes for Tier 3 entities include revaluation of property, plant and equipment; additionally financial investments that are publicly traded can be revalued within the Tier 3 framework, without the need to opt up to Tier 2. There is also a new requirement to provide a description of the purpose of each reserve, your organisation’s plans for applying the reserve, and when you expect the reserve will be used to advance the objectives of your charity.
If your entity is an incorporated society, it will need to be re-registered under the Incorporated Societies Act 2022 no later than 5 April 2026. Section 102 of the Act requires specified not-for-profit entities to prepare financial statements in accordance with GAAP, so it’s worth checking your requirements if you are currently preparing reports under a special-purpose framework. Small societies with expenses and total current assets less than $50K in the preceding two reporting periods can continue to prepare special-purpose financial statements.
Registered charities must also prepare financial statements which comply with your relevant reporting tier within six months of your balance date, and this must be included with your annual return. These financial statements may need to be audited depending on the size of your charity:
- Medium-sized charities (total operating expenditure over $550,000 for each of the previous two accounting periods) must have their financial statements either audited or reviewed by a qualified auditor
- Large charities (total operating expenditure over $1.1 million) must have their financial statements audited by a qualified auditor
Even if your charity doesn’t meet the requirements listed above, your organisation may need an audit based on your constitutional requirements, or this could be an opportunity for your team to review your constitution. For example you might consider whether you need an audit or a review, or if assurance over your financial statements isn’t required by legislation.
Templates and guides for both the new Tier 3 and Tier 4 standards are available on the XRB website.
Accounting changes on the horizon
There are also significant regulatory changes anticipated in the Public Benefit Entity (PBE) financial reporting landscape which would impact Tier 1 and Tier 2 reporting entities. Two new exposure drafts are expected to be released for consultation by the XRB in May 2025.
These drafts have been developed so they’re fit-for-purpose for New Zealand not-for-profit entities, using IPSAS 47 and IPSAS 48 as starting points. These new standards would introduce accounting models which focus on whether a binding arrangement exists in a transaction. A binding arrangement defines the rights and obligations for NFPs in the arrangement. For example, a binding arrangement might include funding from a Government agency to your NFP and require your organisation to provide a fixed number of operations over an agreed period of time. Failure to provide the agreed number of operations would mean you will need to return a portion of the funding you received.
PBE IPSAS 47
PBE IPSAS 47 Revenue aims to establish a cohesive, single source of revenue guidance for NFPs, and would replace the two existing revenue standards - PBE IPSAS 9 Revenue from Exchange Transactions and PBE IPSAS 23 Revenue from Non-Exchange Transactions. PBE IPSAS 47 first requires an entity to determine whether revenue arises from a transaction with a binding arrangement to establish the appropriate accounting treatment.
A large volume of transactions within the not-for-profit space is likely to be revenue without binding arrangements such as donations or grants for example. In these types of arrangements, revenue would generally be recognised as or when the entity obtains control of resources, unless a liability exists, in which case revenue is recognised when the liability is satisfied. This model is not expected to be too different to how non-exchange revenue transactions are currently treated under the current PBE standards.
If the revenue arises from a transaction with a binding arrangement, then a 5-step accounting model would be applied to the transaction, under which revenue would be recognised based on satisfaction of compliance obligations. This model is aligned with the approach in NZ IFRS 15 but adjusted to address the specific needs of the not-for-profit sector:
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PBE IPSAS 48
A transfer expense is defined as a cost arising from a transaction, other than taxes, in which an entity provides a good, service, or other asset to another entity without directly receiving any good, service, or other asset in return, for example, some grants, donations in cash or other assets, as well as social welfare payments.
Historically, there has been little guidance on how to account for these types of expenses, and the proposed PBE IPSAS 48 looks to fill this gap in the standards and reduce disparate practices in this area.
You’ll be required to assess whether a transfer expense arises from a transaction with a binding arrangement to determine the appropriate accounting treatment.
For transfer expenses without binding arrangements, an entity will consider whether a provision exists (as defined in PBE IPSAS 19) and whether it should be recognised. If there is a provision, you will need to recognise expenses at the same time as the provision. If no such obligation exists, you can recognise expenses when your organisation ceases to control the resources.
For transfer expenses with binding arrangements, an entity can recognise expenses when (or as) a transfer right asset is derecognised or when a transfer obligation liability is recognised. These are new terms defined in the Proposed IPSAS 48.
We recommend you review the exposure drafts when they are published and consider how it might impact your entity. The consultation period is expected to be open for a 6-month period to give plenty of time to submissions. Both standards are proposed to be effective for periods beginning on or after 1 January 2029.
What are your financial reporting obligations?
The External Reporting Board (XRB) sets out the financial reporting requirements for New Zealand’s not-for-profit entities. There are four tiers your entity can report under – the set of accounting standards you can use is determined by specific criteria linked to total expenses and public accountability.
Tier 1: Full reporting requirements
- Entities with public accountability or total expenses greater than $33 million
- You must comply with the measurement, recognition, and full disclosure requirements of PBE IPSAS
Tier 2: Reduced disclosure reporting requirements
- Entities that are not publicly accountable and have total expenses less than $33 million can opt for Tier 2
- This includes certain disclosure exemptions, but requires full PBE IPSAS recognition and measurement
Tier 3: Simple format accrual reporting requirements
- Entities that are not publicly accountable and have total expenses less than $5 million can opt for Tier 3
Tier 4: Simple format cash reporting
- Entities that are not publicly accountable and have total operating payments up to $140,000 can opt for Tier 4
