Incorporated Societies and Non-Charitable Trusts: The Forgotten Children in the New Financial Reporting Regimes
Over the last year we’ve been very proactive about discussing the new financial reporting regime, its impacts, the process, the decisions, the frameworks, and all of the positives and negatives in between.
As we’ve been working through the various permutations that are possible with clients, a number of issues surrounding incorporated societies have arisen.
As a rule of thumb, if you are a trust or incorporated society:
1 that is not a registered charity
2 that has a constitution or other founding document which specifically does not require preparation of generally accepted accounting practice (“GAAP”) compliant or general purpose financial statements
3 is not obliged under another Act to prepare GAAP financial Statements (eg, Public Finance Act)
4 whose board actively does not voluntarily elect to adopt GAAP
then you actually have no formal reporting obligations.
In theory, this means you would report using a special purpose reporting framework. While CAANZ have produced a special purpose framework that has a broad application, given the nature of such frameworks, entities can adopt it completely, in part, or make one their own version entirely.
It’s almost like you could do what you want, except the auditors, funders, members, and stakeholders may have other ideas…
Auditors work within the requirements of audit standards, and these apply to special purpose reports just as much as they do to audits of GAAP compliant financial statements. Accordingly, auditors will still focus on ensuring that the financial statements fairly present the results and operations for the entity.
This will therefore still require trusts and incorporated societies to demonstrate that the reporting method you have adopted is appropriate for the financial statements. And it will require your organisation to work through a robust process to decide on what basis your financial statements are prepared.
Some auditors are of the opinion that if you are an incorporated society then you should still adopt the new reporting regime even if you don’t actually have to. This would normally mean the IPSAS framework (think Telecom accounts for charities) or the IPSAS lite tier three reporting.
We have some sympathy for this approach, though given the view that all trusts and incorporated societies will likely be forced into the GAAP regime at some point in the future (possibly three to five years) – who wants to convert twice?
Although in saying that, it’s important to remember that your financial statements are yours, not the auditors – so you should start with what you want and what your stakeholders need.
Also, if you are having an audit, it can be helpful to attach your financial statements to a framework so you can follow it going forward (although you need to recognise the SPFR framework does qualify as a framework).
However, the conversion process and increase in disclosures in notes moving from old GAAP to the new IPSAS reports can be significant work and costly, especially if your expenses are over $2m (including grants given).
The path forward
Subject to your own organisation’s circumstances
we suggest you:
1 undertake a framework and tier assessment first – figure out what you have to do before thinking about what you can/want to do
2 consider voluntarily adopting IPSAS in 2016 if you have quasi regulatory function or a complex set of activities – even if you don’t have to
3 consider a special purpose reporting framework that is based on the tier three reporting standards (IPSAS lite) if your current financial reports are straight forward, or your organisation’s focus is not that varied and members’ needs are low; then just take out the bits you don’t like – this will also make converting properly easier
4 do something now, 2016 is fast approaching and the last thing you want to do is have a disagreement with your auditor after balance date.
If you want more information, please don’t hesitate to contact us and we will do our best to answer your questions or at least point you in the right direction.
Everyone’s organisation and circumstances are different, the reporting changes and nuances can be complex – please take some advice before relying on the general information included in this article.
For more information contact:
Partner, Privately Held Business
D +64 (0)4 495 3787
M +64 (0)21 797 221
Brayden Smith Associate, Audit
D +64 (0)4 495 3768
M +64 (0)21 240 9570