The Public Benefit Entities (PBE) branch of the reporting standards is somewhat easier to navigate than the For-Profit bough - which has considerably more knots and birds nests to navigate.
If, after looking at founding documents, beneficiaries, and issues of funding we decide that the entity is indeed on the PBE branch there are four slots of financial reporting that we can choose from. This is a bit like a machine that sorts fruit. We jiggle through a series of criteria and the smaller fruit drop into the appropriate hoppers.
The first filter is all about to whom the entity is accountable. The criteria seems to be primarily about where the funding for the entity is derived. Thus an entity may be for public benefit but not publicly accountable - for example a charity for helping the homeless that is funded by support from corporate sponsors. Or an entity may be publicly accountable but for-profit rather than for public benefit - for example banks, insurance and superannuation providers, publicly listed companies and others that trade debt or equity instruments to the public. The specific criteria are provided by the Financial Markets Conduct Act 2013 (FMC Entities) and by the IASB definitionof public accountability.
Tier 1 - The Plumpest Fruit
On the PBE fruit sorter anything that is publicly accountable will jiggle to the end basket Tier 1 - full compliance with full PBE accounting standards - the full treatment. Also falling into that basket will be large entities - defined in this case by expenditure - over $30million. This size is specified by the XRB A1 Accounting Standards Framework document. It has been estimated that there are only about 60 charities in this category in New Zealand.
Tier 2 - Not so Large and not Accountable
PBEs that are neither publicly accountable or with expenses over $30million are sorted based simply on their expenditure level. Under $30million but over $2million drops into Tier 2. These are subject to the same PBE accounting standards as the larger entities, but with some reduced disclosure requirements concessions (“RDR”). There are estimated to be about 900 charities in this category. An important point to remember is that all PBE entities, regardless of size and type, will by default go into the Tier 1 bin unless they elect to adopt another category.
Tier 3 and 4 - Small in Value but Large in Number
Dropping into the Tier 3 bin will be entities under the $2million expenses mark, but over $125,000. Under that level falls into Tier 4. Tier 3 uses what is known as “PBE Simple Format Reporting Standard - Accrual” (PBE SFR-A). Tier 4 uses "Public Benefit Entity Simple Format Reporting - Cash" (PBE SFR-C (“C” for “cash”)). Over 90% of the 27,000 NZ registered charities fall into Tier 3 and 4, so this will be where most of our work will focus. The XRB has published a extensive guides and Charities Services has downloadable Excel templates for completing these reports (follow the links above).
But will they need to be audited?
Which of these entities will be required to be audited? Under the Accounting Infrastructure Reform Bill current proposals are for mandatory audit for entities with expenditure over $1million for the two preceding accounting periods. For expenditure between $500,000 and $1million for the two preceding accounting periods the option would be for a Review Engagement. Under $500,000 there would be no requirement, apart of course from any requirement from founding documents or funding sources. The requirement is also that this be performed by a “qualified auditor” in compliance with the appropriate assurance standards. The effect of this will be hard to determine. Most large charities are likely to be properly audited already. Many smaller charities that are not currently audited or reviewed and don't see the need will continue as before - although they will need help to complete the new reporting requirements.
One advantage to Audit firms is that the gap will close on who may issue an "audit" opinion. There should no longer be so much confusion as to who can do an audit and what an "audit" constitutes. Unqualified and unregulated "auditors" will no longer be allowed to pass themselves off as able to do this work.