NOT FOR PROFIT FINANCIAL REPORTING GUIDE

NOT FOR PROFIT FINANCIAL REPORTING GUIDE

New Zealand Institute of Chartered Accountants This document is copyright. Apart from any fair dealing for the purpose of private study, research, criticism, or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Inquiries should be addressed to the publisher. Published August 2007 by: New Zealand Institute of Chartered Accountants 40 Mercer Street PO Box 11 342 Wellington New Zealand ISBN 978-1-877430-77-0 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

The New Zealand Institute of Chartered Accountants The New Zealand Institute of Chartered Accountants represents the interests of nearly 29,000 members of the accounting profession working in New Zealand and around the world. It upholds the highest levels of responsibility and trust vested in the profession, by providing appropriate standards, policies and services to support members in their work. Those intending to become Chartered Accountants, Associate Chartered Accountants or Accounting Technicians are required to achieve prescribed academic and professional standards before being admitted to the Institute. All members must comply with a rigorously enforced Code of Ethics and undertake continuing education to ensure they are up to date with best business practices and information. Financial reporting, professional and auditing standards are prepared by the Institute of Chartered Accountants and followed by its members to ensure the credibility of information used by decision-makers in business and the capital markets. The Institute of Chartered Accountants also takes a leading role in working with government and policy-makers to advocate for more efficient taxation and commercial laws that promote the interests of New Zealand. For further information about the Institute, visit www.nzica.com About this report This Guide has been prepared by the Public Benefit Entity working group, a sub-committee of the Financial Reporting Standards Board of the Institute. It is intended to be used in conjunction with the model financial statements and disclosure checklist for notfor-profit entities that are reporting in accordance with New Zealand equivalents to International Financial Reporting Standards. Disclaimer This publication has been prepared for the New Zealand Institute of Chartered Accountants by the Public Benefit Entity working group. It is intended to assist members of the Institute involved in preparing or auditing general purpose financial statements for not-for-profit entities that are reporting in accordance with New Zealand equivalents to International Financial Reporting Standards. Whilst every effort has been made to ensure that it reflects current legislation and financial reporting standards relevant to not-forprofit entities, neither the Institute nor any members of the working group shall be liable on any ground whatsoever to any party in respect of decisions or actions they may take as a result of using this publication nor in respect of any errors in, or omissions from it. The information contained in this publication is a general commentary only and should not be used, relied upon or treated as a substitute for specific professional advice. Whilst the Institute encourages members to use this Guide in working for or with not-forprofit entities, it will be the sole obligation of the member concerned to ensure that the member complies with the member s wider professional and legal obligations. NOT FOR PROFIT FINANCIAL REPORTING GUIDE

FOREWORD The New Zealand Institute of Chartered Accountants (the Institute) has published this Guide to assist members of the Institute who prepare financial statements for not-for profit entities, advise not-for-profit entities on financial reporting issues or audit the financial statements of not-for profit entities. Its focus is on small to medium not-for-profit entities with relatively simple operations, but it may be a useful starting point for larger not-for-profit entities or those with more complex transactions. Financial statements are frequently the main source of financial information for members and others interested in the financial performance of a not-for-profit entity. The Institute believes that the users of the financial statements of a not-for-profit entity are entitled to high quality financial reporting and acknowledges that not-for-profit entities can experience significant challenges in providing these. The Institute has prepared this Guide to help members improve the quality and consistency of information in notfor-profit financial statements. Financial statements play an important role in demonstrating accountability for the use of resources. The Institute considers that financial accountability is best demonstrated by general purpose financial statements prepared in accordance with generally accepted accounting practice in New Zealand. The Institute Code of Ethics requires that members of the Institute who are involved in, or have responsibility for, the preparation and presentation of general purpose financial statements and non-financial statements (for example, as an employee, an external advisor or a volunteer) should take all reasonable steps within their power to ensure that generally accepted accounting practice is complied with. This Guide is intended to make it easier for members to identify and understand the requirements of New Zealand equivalents to International Financial Reporting Standards in respect of small or medium not-for-profit entities. It outlines the key requirements of standards that are relevant to the majority of small to medium not-for-profit entities with relatively simple operations, and discusses other financial reporting issues that are particularly relevant to such entities. It does not cover all financial reporting standards. For example, it does not explain the detailed financial reporting requirements for foreign currency transactions, financial instruments or the acquisition or disposal of other entities. This Guide does not establish new or additional authoritative requirements and is not a substitute for reference to the standards themselves. The Institute intends to update the Guide from time to time. I am confident the Guide will be a valuable tool for members involved in the preparation, presentation, or audit of the financial statements of not-for-profit entities. Denise Bovaird President August 2007 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Contents Chapter 1 Introduction 1 Chapter 2 Reporting Entity 11 Chapter 3 Financial Reports 17 Chapter 4 Assets and Liabilities: Statement of Financial Position 21 Chapter 5 Income and Expenses: Statement of Financial Performance 46 Chapter 6 Statement of Changes in Equity 61 Chapter 7 Cash Flow Statement 63 Chapter 8 Notes 66 Chapter 9 Statement of Service Performance 74 Glossary 78 Appendix 1: List of Pronouncements 87 Appendix 2: Framework for Differential Reporting 90 Appendix 3: Review Engagements 93 Appendix 4: New Zealand Application Guidance: When is an Entity a Public Benefit Entity? 97 Appendix 5: Accounting Policies 104 Index 108 NOT FOR PROFIT FINANCIAL REPORTING GUIDE

NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Chapter 1 Introduction Key points This Guide is intended to help members of the Institute who are involved in, or have responsibility for, the preparation and presentation of general purpose financial statements of small to medium not-for-profit entities with relatively simple operations. It is also intended to help members auditing such statements. This Guide assumes that entities are reporting in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs). At the time of writing, entities are required to adopt NZ IFRSs for annual periods beginning on or after 1 January 2007. Early adoption is permitted. However, the timing of adoption is under review. Entities are advised to check current requirements. The Institute s Code of Ethics requires that members of the Institute who are involved in, or have responsibility for, the preparation and presentation of general purpose financial statements and non-financial statements should take all reasonable steps within their power to ensure that generally accepted accounting practice (GAAP) is complied with. The Guide focuses on financial reporting by small to medium not-for-profit entities such as clubs and societies, sports groups, churches, and charities. It is not intended for large entities or those with complex operations. A small to medium entity meets two or more of the following criteria: total income under $20 million; total assets of less than $10 million; and fewer than 50 full-time equivalent employees. An entity may exceed one of these criteria and still be classed as small or medium. Although the Guide has been written primarily for members of the Institute, it may also be useful to others with an interest in financial reporting issues relevant to small to medium not-for-profit entities. This chapter explains how to identify an entity s reporting requirements. An entity s reporting requirements may be set out in legislation, regulations, common law, the entity s constitution or contractual arrangements. Financial reporting standards are the main element of GAAP. They state what information must be shown in general purpose financial statements, the general requirements for the presentation of financial information and the treatment of specific items. The Guide assumes that the small to medium not-for-profit entities on which it focuses qualify for differential reporting concessions (exemptions to the full requirements of financial reporting standards). This chapter explains how an entity qualifies for differential reporting concessions. Information provided in the Guide is not, and should not be treated as, financial reporting advice on the interpretation of particular financial reporting standards, or their application to particular transactions, balances, circumstances or entities. Some important terms Here are some definitions or explanations which may be helpful to keep in mind as you read this Guide. Please note that some of these definitions or explanations have been simplified for the purposes of this Guide. There is a full Glossary at the back of the Guide, which contains definitions of these and many other terms. Financial reporting standards are documents that state what must be shown in general purpose financial statements, the general requirements governing the presentation of financial information and the treatment of specific items for accounting purposes. Financial reporting standards are approved by an independent body, the Accounting Standards Review Board. Generally accepted accounting practice (GAAP) is the term used to describe the basis for preparing general purpose financial statements. The term includes both the broad concepts and principles to be used in preparing general purpose financial statements and the specific practices and procedures to be used when reporting on particular transactions and events. The key aspect of GAAP is compliance with appropriate financial reporting standards. A more detailed explanation of GAAP is included in this chapter. General purpose financial statements are statements provided to meet the information needs of external users who are unable to require or contract for, the preparation of special reports to meet their specific information needs. The general purpose financial statements of a not-for-profit entity are prepared for members, supporters, contributors and anyone else who is not able to obtain special purpose financial statements for their own specific needs. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 1

General purpose financial reports are financial reports that may include general purpose financial statements, non-financial statements and supplementary information. For the purposes of this Guide, a not-for-profit entity 1 is a public benefit entity that is: organised, to the extent that it can be separately identified; not-for-profit 2 and does not distribute any surplus that may be generated to those who own or control it; institutionally separate from the Government (that is, private); self-governing, that is in control of its own destiny; and non-compulsory, that is membership and participation are voluntary. A public benefit entity is a reporting entity whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders. Guidance on assessing when an entity is a public benefit entity is set out in an Appendix to NZ IAS 1 Preparation and Presentation of Financial Statements. This Appendix is reproduced as Appendix 4 to this Guide. A small to medium entity meets two or more of the following criteria: total income under $20 million; total assets of less than $10 million; and fewer than 50 full-time equivalent employees. These criteria are used in NZ IFRSs to distinguish between large and other entities. Other criteria may be used by bodies such as the Charities Commission. Special purpose financial reports are financial reports tailored to meet the specific information needs of a particular user. Financial statements included in special purpose reports may be prepared using different accounting policies than would be used for general purpose financial statements, or the statements themselves may differ from those in general purpose financial statements. Who should read this Guide? 1.1 The Guide is intended to help members of the Institute who are involved in, or have responsibility for, the preparation and presentation of general purpose financial statements of small to medium not-for-profit entities with relatively simple operations. It is intended to help members meet their professional obligation to take all reasonable steps within their power to ensure that generally accepted accounting practice (GAAP) is complied with. This obligation is set out in the Institute s Code of Ethics. It is also intended to help members auditing such statements. Members may assist not-forprofit entities as employees, board members, external advisers or in a voluntary capacity. The Guide is intended to help members by identifying the most common aspects of GAAP in relation to small to medium-sized not-for-profit entities reporting in accordance with NZ IFRSs. 1.2 Although this Guide has been written mainly for members of the Institute, it may also be useful to others with an interest in financial reporting issues relevant to small to medium not-for-profit entities. 1.3 The following flow chart indicates when this Guide is likely to be useful. 1 These characteristics of not-for-profit entities are taken from Counting Non-profit Institutions in New Zealand, Statistics New Zealand, 2005. 2 Statistics New Zealand classifies organisations as not-for-profit if they make profits but any surplus is ploughed back into the basic mission of the organisation and not distributed to the owners, members, founders or governing board. An entity distributing a surplus to another not-for-profit institution is still a not-for-profit institution under the Statistics New Zealand not-for-profit criterion because the surplus remains within the not-for-profit sector to be used for charitable and other not-for-profit purposes (refer to Identifying Non- Profit Institutions in New Zealand, Statistics New Zealand, April 2006). 2 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

FIGURE 1: WHEN TO USE THIS GUIDE Is the not-for-profit entity a public benefit entity? Yes Does the entity intend to prepare general purpose financial statements that comply with NZ GAAP in accordance with NZ IFRSs? Yes Is the entity small to medium in size (and does it qualify for differential reporting concessions)? Yes No No No Caution The Guide is not intended for: profit-oriented entities with limited notfor-profit activities; special purpose reports; or large not-for-profit entities (or entities that do not qualify or differential reporting concessions). The financial reporting requirements for such entities can differ from those set out in this Guide. For the requirements applicable to such entities please refer directly to the appropriate financial reporting standards. Read this Guide! What this Guide covers 1.4 This Guide outlines the key requirements of GAAP under NZ IFRSs in relation to the general purpose financial statements 3 of small to medium not-for-profit entities. The Guide assumes that entities are reporting in accordance with NZ IFRSs. At the time of writing, entities are required to adopt NZ IFRSs for annual periods beginning on or after 1 January 2007. Early adoption is permitted. However, the timing of adoption is under review. Entities are advised to check current requirements. The Guide also discusses what to do when there is no financial reporting standard that covers a particular type of transaction. 1.5 The Guide explains the most common transactions and events and the resulting assets, liabilities, income and expenses of small to medium not-for-profit entities. It provides only a brief overview of the treatment of financial instruments and does not deal with a number of more specialised topics such as foreign currency transactions or the acquisition or disposal of other entities. Appendix 1 to this Guide lists the standards current at the time of writing and explains the extent to which they are covered by the Guide. Individual chapters also indicate which issues are not covered by the Guide. Where entities have transactions and events not covered by this Guide, members will need to refer directly to the relevant financial reporting standards. 1.6 Information provided in the Guide is not, and should not be treated as, financial reporting advice on the interpretation of particular financial reporting standards, or their application to particular transactions, balances, circumstances or entities. 3 If an entity does not have an obligation to prepare general purpose financial statements then special purpose financial statements maybe an option for the entity. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 3

What this chapter covers 1.7 In order to help members determine whether the material in this Guide is likely to be of use to them in preparing or auditing the financial statements of not-for-profit entities that are reporting in accordance with NZ IFRSs, this chapter provides an overview of the following topics: members professional obligations under the Code of Ethics; general purpose financial statements; special purpose financial statements; GAAP (including variations in GAAP for different types of entities); and identifying the financial reporting and auditing requirements applicable to not-for-profit entities. Ethical obligations of NZICA members 1.8 The Institute s Code of Ethics applies to all members of the Institute. Members must be able to demonstrate at all times that their actions, behaviour and conduct comply with the Code of Ethics. Non-compliance with the Code of Ethics may lead to disciplinary action against the member. 1.9 The Code of Ethics includes rules on compliance with professional and technical standards. Two key requirements of the Code of Ethics (paragraphs 103 and 104) are set out below. The Code of Ethics (paragraph 105 and Appendix 2) also contains guidelines for members in employment who are involved in disputes with their employer regarding compliance with their professional obligations. 103 Members who are involved in, or have responsibility for, the preparation or presentation of general purpose financial reports should take all reasonable steps within their power to ensure that generally accepted accounting practice is complied with. 104 All material departures from generally accepted accounting practice should be disclosed and explained in the general purpose financial report. The explanation should include the reasons for the departure and its financial and nonfinancial effects. General purpose financial statements 1.10 General purpose financial statements are financial statements provided to meet the information needs of external users who are unable to require, or contract for, the preparation of special reports to meet their specific information needs. In the context of a not-for-profit entity, external users would include members, supporters, contributors and anyone else who is not able to obtain special purpose financial statements for their own specific needs. A number of not-for-profit entities are required to prepare general purpose financial reports that include general purpose financial statements. 1.11 The New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements is based on the presumption that general purpose financial statements are prepared and presented in accordance with GAAP. Special purpose financial statements 1.12 Not all not-for-profit entities prepare general purpose financial statements. Some may prepare only special purpose financial statements. Special purpose financial statements are tailored to meet the specific information needs of a particular person, group of people or organisation. They include financial statements prepared for internal users such as officers of the organisation and for external parties who have the power to demand particular information to meet their information needs, such as lenders, bankers and government departments. Such users can specify the accounting policies to be applied, the format of the financial statements and other material to be included in a special purpose financial report. If an entity has no obligation to present general purpose financial statements in accordance with GAAP (for example, under legislation or its own constitution), and all the members of the entity are in agreement, it may be appropriate to prepare special purpose financial statements. There is no requirement for special purpose financial statements to comply with GAAP. Rather, any special purpose financial statements should specify the basis on which they have been prepared. Although this Guide does not cover special purpose reporting, it may also be useful for those purposes. 4 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

More about GAAP 1.13 The Institute s Code of Ethics imposes an obligation on members who are involved in, or have responsibility for, the preparation or presentation of general purpose financial statements to take all reasonable steps within their power to ensure that GAAP is complied with. The Institute considers that financial statements prepared in accordance with GAAP are necessary for a not-for-profit entity to demonstrate its financial accountability to members and other stakeholders. The financial reporting standards that constitute GAAP are approved by an independent body. The use of independent standards gives users more confidence in the reliability of the financial statements. In addition, users can more easily compare the financial statements of different entities when those financial statements are prepared in accordance with a common set of standards. 1.14 When an entity is required to prepare general purpose financial statements in accordance with GAAP, the law or document establishing that requirement may not specify what it means by GAAP. For most not-for-profit entities the following definition of GAAP will apply. GAAP means: compliance with all New Zealand equivalents to International Financial Reporting Standards (IFRSs), and Financial Reporting Standards (FRSs) applicable to the entity; and in relation to matters for which no provision is made in New Zealand equivalents to IFRSs, or FRSs and that are not subject to any applicable rule of law, adopting accounting policies that: o are appropriate to the circumstances of the entity; and o have authoritative support within the accounting profession in New Zealand. New Zealand Preface, paragraph 11 1.15 In some cases (for example, where a not-for-profit entity issues debt securities to the public or operates as a company under the Companies Act) a not-for-profit entity may be required to report in accordance with the Financial Reporting Act 1993 and apply the definition of GAAP in that Act 4. 1.16 The standards referred to in the definition of GAAP are generally developed by the New Zealand Institute of Chartered Accountants and approved by the Accounting Standards Review Board, an independent body. Copies of the standards are available on the Institute s website 5. Collated copies of the standards are published regularly. 1.17 Several years ago the Accounting Standards Review Board decided to replace the financial reporting standards that had been developed by New Zealand with International Financial Reporting Standards (IFRSs) developed by the International Accounting Standards Board. These standards, adapted as necessary for the New Zealand environment, are referred to as New Zealand equivalents to IFRSs (or NZ IFRSs). The changeover from the previous set of standards to NZ IFRSs is scheduled to occur for annual periods beginning on or after 1 January 2007. Early adoption is permitted. However, the timing of adoption is under review. Entities are advised to check current requirements. This Guide assumes that entities are reporting in accordance with NZ IFRSs. 1.18 NZ IFRSs are developed for application by a wide range of entities. Some requirements in NZ IFRSs apply only to profitoriented entities or public benefit entities (the definition of public benefit entities includes most public sector entities and not-for-profit entities). This Guide focuses on the requirements of NZ IFRSs in respect of not-for-profit public benefit entities only. The Appendix to NZ IAS 1 Presentation of Financial Statements New Zealand Application Guidance: When is an Entity a Public Benefit Entity? gives guidance on the definition of public benefit entities. It discusses indicators that can be used in determining the primary objective of a public benefit entity. 6 These indicators include the entity s founding documents, the nature of the benefits, the amount of the expected financial surplus, the nature of the equity interest and the nature of the entity s funding. The Appendix to NZ IAS 1 should be used to decide whether the public benefit entity reporting requirements in NZ IFRSs are appropriate for an entity. 4 Section 3 of the Financial Reporting Act states: For the purposes of this Act, financial statements and group financial statements comply with generally accepted accounting practice only if those statements comply with (a) Applicable financial reporting standards; and (b) In relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that (i) Are appropriate to the circumstances of the reporting entity; and (ii) Have authoritative support within the accounting profession in New Zealand. 5 Copies of the standards are available at http://www.nzica.com 6 The Appendix to NZ IAS 1 is reproduced as Appendix 4 to this Guide. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 5

Differential reporting concessions for small to medium NFPs 1.19 Many small to medium not-for-profit entities will qualify for exemptions, called differential reporting concessions, from some of the specific requirements of financial reporting standards (for example, entities that qualify for differential reporting concessions are not required to prepare a cash flow statement). These concessions mainly exempt an entity from making the disclosures required by standards, but they also allow some simplified methods for recognition and measurement. Recognition is the process of incorporating an item in the financial statements and it is subject to an item meeting relevant definitions and criteria. Measurement is the process of determining the monetary amounts at which items such as assets and liabilities are to be recognised and carried in the financial statements. 1.20 The criteria for qualifying for differential reporting concessions are set out in the Framework for Differential Reporting for Entities Applying the New Zealand Equivalents to International Financial Reporting Standards Reporting Regime 2005 (Framework for Differential Reporting) 7. An entity qualifies for differential reporting exemptions when the entity does not have public accountability (as defined in the Framework for Differential Reporting) and: at balance date, all of its owners are members of the entity s governing body; or the entity is not large (as defined in the Framework for Differential Reporting). 1.21 Appendix 2 of this Guide explains the criteria and what they mean for not-for-profit entities. In the vast majority of cases not-for-profit entities that qualify for differential reporting concessions will do so because: they are not publicly accountable for the purposes of the Framework for Differential Reporting (the definition of public accountability in the Framework for Differential Reporting focuses on issuers and entities with the ability to tax or rate); and they are not large (as defined in the Framework for Differential Reporting). 1.22 This Guide focuses on the financial reporting requirements applicable to not-for-profit entities that qualify for differential reporting concessions. The differential reporting concessions available in individual standards are described in an Appendix to the Framework for Differential Reporting and are identified within individual standards 8. Any readers seeking information on the financial reporting requirements for other entities should refer to the requirements of each applicable standard. 1.23 Differential reporting concessions are not compulsory a qualifying entity can choose to take advantage of some concessions but not others. However any concessions used must be applied consistently. If a qualifying entity chooses to make any disclosure from which it is exempt, the entity must do so in accordance with the relevant standard. Entities that qualify to use differential reporting concessions and that elect to do so will not be able to assert compliance with IFRSs. Identifying financial reporting and auditing requirements for not-for-profit entities Types of not-for-profit entities 1.24 Not-for-profit entities have a wide variety of purposes and forms. Some not-for-profit entities achieve their objectives through their own activities, while others do so by making grants to individuals or other organisations. Some operate as a single entity while others operate in combination with other entities or organisations such as branches or supporters groups. Some are financed from permanent endowments or public appeals, others from regular subscriptions, and others from the proceeds of trading profits. Not-for-profit entities include incorporated societies, unincorporated societies, trusts and companies. 1.25 This section explains how to identify the financial reporting and audit requirements applicable to not-for-profit entities and illustrates this by application to some common types of not-for-profit entities. Identifying financial reporting requirements 1.26 Figure 2 identifies key questions in identifying the financial reporting requirements applicable to not-for-profit entities. 7 The Framework for Differential Reporting is included in Applicable Financial Reporting Standards (published by the Institute on a regular basis) and is available on the Institute s website at http://www.nzica.com 8 Disclosure concessions are identified by way of an asterisk beside the relevant requirement in the standard. Other concessions are described in the scope section of each standard. 6 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

FIGURE 2: DETERMINING REPORTING REQUIREMENTS Does the entity have an obligation to prepare accounts? Check statutes and case law and documents such as constitutions, trust deeds and rules to establish obligations and identify the specific requirements of those obligations. Most entities are required by law to prepare accounts. For example: Companies are required to maintain accounting records that record and explain transactions and enable the financial position of the company to be determined with reasonable accuracy (Companies Act 1993). Unless they qualify as an exempt company, companies are required to prepare financial statements in accordance with GAAP, as defined by the Financial Reporting Act 1993. If such financial statements do not give a true and fair view, additional information is required. Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives (Partnership Act 1908). Trustees are required by case law to prepare accounts sufficient to show the discharge of their duties. Incorporated societies are required to provide specific statements and information to the Registrar of Incorporated Societies each year (Incorporated Societies Act 1908). Yes No The entity has no external requirements to prepare financial statements. Does the entity have an obligation to prepare general purpose financial statements that comply with GAAP in accordance with NZ IFRSs? Most financial statements required by legislation or an entity s constitution are general purpose financial statements. The main exception is where reports are prepared to meet the specific needs of a regulator or legislator and would not also be suitable for other users. Where the financial reporting requirements do not specify that the financial statements must be prepared in accordance with GAAP an entity will need to decide whether to prepare GAAP compliant statements. Where specific reporting requirements are in conflict with GAAP (for example, a requirement to present a statement of receipts and payments) an entity will need to decide whether to prepare GAAP compliant statements as well as the required statements. No If there is no requirement to prepare general purpose financial statements and all members agree, the entity may prepare special purpose financial statements. 1.27 Where an entity prepares general purpose financial statements, regardless of the external reporting requirements, members of the Institute that are involved in, or have responsibility for, the preparation or presentation of those statements have an obligation under the Institute s Code of Ethics (as discussed in paragraph 1.9) to take all reasonable steps within their power to ensure that generally accepted accounting practice is complied with. Where an entity prepares special purpose financial statements members should ensure that these statements are clearly labelled as special purpose and that the basis of preparation is clearly explained. 1.28 Financial reporting requirements in relation to some types of entities are outlined below. Please note that there may be some overlap in the categories for example, some incorporated societies may also be charities registered with the Charities Commission and subject to any reporting requirements established by the Commission. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 7

Incorporated societies 1.29 An entity that is incorporated under the Incorporated Societies Act 1908 is required by that Act to file a certified copy of its annual financial statements with the Registrar of Incorporated Societies each year 9. The annual financial statements must include the following information: the income and expenditure of the society for the latest financial year; the assets and liabilities, as at the close of the financial year; all mortgages and secured loans of any description, affecting any of the property of the society, as at the close of the financial year; the society s full name; and the financial year that the financial statements have been prepared for. 1.30 There is a suggested format for the financial statements, but the format is not mandatory 10. 1.31 Because the relevant legislative requirements do not specify that the financial statements must be prepared in accordance with GAAP, an incorporated society will also need to consider whether there are any relevant requirements in its constitution. If the constitution is silent, the incorporated society will need to decide whether to prepare GAAP compliant financial statements. Trusts 1.32 The Charitable Trusts Act 1957 does not impose any specific financial reporting obligations on trusts incorporated under that Act. However, trustees have a legal obligation, owed to the beneficiaries of the trust, under the Trustees Act 1956 to keep adequate accounting records. The statutory obligation arises by virtue of the duty of trustees to properly carry out the general powers and duties conferred on them by the Trustee Act 1956. The courts have confirmed in many cases that there is a common law obligation on trustees, as part of their general fiduciary obligations to the beneficiaries, to keep and to prepare accounts. The general standard for trusts is the preparation of proper accounts, or full and clear accounts or appropriate financial records. Whether this requires the preparation of general purpose financial reports and adherence to GAAP is a question to be answered on a case by case basis. 1.33 Whatever standard is applied, the accounts must clearly present the state of affairs of the trust. What seems essential is that the accounts are appropriate for the potential users of that information, primarily being the beneficiaries and the trustees. In the case of trusts carrying debt, the creditors might also have a legitimate expectation as to the preparation of proper accounts. 1.34 Because beneficiaries can request full information about the trust from the trustees, does this provide them with the right to require the preparation of a special purpose report? Possibly, depending on the rights of the particular beneficiary and the nature of the request, but it does not necessarily preclude the need for general purpose financial reports particularly where there is more than one beneficiary and/or different classes of beneficiaries. 1.35 Does the beneficiaries ability to inspect financial records through their access to full information about the trust mean that the trustees can opt out of producing general purpose financial reports? If this were so, there would be no need for the courts to determine that full and clear accounts were required. There is clearly a requirement to produce financial statements (referred to as accounts in the case law), distinct from the requirement to allow access to, or to supply full information. Companies 1.36 All companies must complete financial statements that meet the requirements of the Financial Reporting Act 1993. Unless they qualify as an exempt company 11, companies are required to prepare financial statements in accordance with GAAP, as defined by the Act. Generally compliance with generally accepted accounting practice will result in 9 Incorporated Societies that register under the Charities Act do not have to file annual financial statements with the Registrar of Incorporated Societies. The Companies Office retrieves this information directly from the Charities Register. 10 For more information refer to www.societies.govt.nz 11 Exempt companies are small companies which are permitted to prepare very simple accrual-based financial statements. An exempt company as defined by the Financial Reporting Act means a company, other than an overseas company or an issuer, if, (a) at least two of the following subparagraphs apply: (i) as at the balance date of the accounting period for which financial statements are required, the value of the total assets of the company (including intangible assets) reported in the statement of financial position did not exceed $1,000,000; (ii) in the accounting period for which financial statements are required, the turnover of the company did not exceed $2,000,000; (iii) as at the balance date of the accounting period for which financial statements are required, the company has 5 or fewer full-time equivalent employees; and (b) as at the balance date of the accounting period for which financial statements are required, the company (i) was not a subsidiary of another body corporate or association of persons; and (ii) did not have any subsidiaries. 8 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

financial statements that give a true and fair view of the matters to which they relate if it does not, the Act requires additional information. The reporting requirements for companies are currently under review by the Ministry of Economic Development. Unincorporated entities 1.37 Unincorporated entities are clubs, societies and other groups that are formally organised but are not incorporated and hence not registered under any act of parliament. They are the largest group of not-for-profit entities in New Zealand. There are no statutory financial reporting requirements applying to such entities. However, in the case of disputes regarding financial reporting the courts will imply an obligation to prepare accounts. Identifying audit requirements 1.38 Entities may be required by law, their constitution, or as a condition of receiving a grant, to have their financial statements audited. For example, the Lotteries Grants Board requires audited financial statements for grants over a certain amount. An audit of financial statements is designed to provide independent professional assurance that the financial statements reflect the underlying transactions and events. The cost of an audit of financial statements reflects the amount of work required to obtain the evidence to support this opinion. The audit opinion does not: provide a guarantee of absolute accuracy in the financial statements; express a view on the adequacy of the entity s accounting and internal control systems or the effectiveness and efficiency with which the entity has conducted its affairs; or guarantee the entity s future viability. 1.39 In some cases a review of the financial statements may be a more cost-effective option than an audit. A review is designed to provide a negative assurance report giving only a moderate level of assurance to readers on the reliability of the financial information. This means the reviewer states that nothing has come to the reviewer s attention to indicate that the financial information is not presented fairly in accordance with GAAP. For example, if only members of the entity, or a third party such as a funding body, need to know that the financial statements comply with GAAP, an audit of the financial statements may not be needed to provide the level of assurance these users require. Review engagements are designed as a limited review of financial statements; therefore the risk of mistakes, omissions or incorrect disclosures is considerably greater than with an audit of the financial statements. However, because the level of assurance provided by a review is lower, less work is required and the cost is often significantly less. Entities considering a review rather than an audit of financial statements need to decide whether a review will provide the level of assurance required. They must also have authorisation from members or the third party for a review rather than an audit of the financial statements. An entity may be able to change its constitution to specify that a review of the financial statements is permitted. Appendix 3 to this Guide contains more information on the nature of review engagements. Financial reporting requirements under review 1.40 At the time of writing the reporting requirements for a number of entities are under review. The Ministry of Economic Development will be consulting on proposed reporting requirements for charities. The Ministry has stated that the earliest possible date for any change to charity financial reporting requirements would be for financial years beginning on or after 1 January 2010. 1.41 Charities that are registered with the newly established Charities Commission will need to ensure that they comply with any requirements established by the Commission (refer www.charities.govt.nz). Registered charities are required to submit an Annual Return that is accompanied by a copy of the charity s financial statements. The information provided in these Annual Returns will be publicly available on the Charities Register unless the Charities Commission decides it is in the public interest to withhold it. Currently there is no requirement in the Charities Act for an Annual Return to include audited financial statements or to comply with any standards set by external groups. However, if an entity has audited financial statements, then the Charities Commission requests that the audited financial statements be provided as part of the annual return. The financial reporting requirements for charities continue to be found in: the document, deed, rules, or constitution of the charity itself; or any legislation the charity is subject to. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 9

First-time adoption of NZ IFRSs 1.42 This Guide assumes that entities are reporting in accordance with NZ IFRSs. At the time of writing, entities are required to adopt NZ IFRSs for annual periods beginning on or after 1 January 2007. Early adoption is permitted. However the timing of adoption is under review. Entities are advised to check current requirements. As required by NZ IFRS 1 Firsttime Adoption of New Zealand Equivalents to International Financial Reporting Standards, the transition occurs at one point in time and is marked by an explicit and unreserved declaration that the financial statements comply with NZ IFRSs. 1.43 When an entity first adopts NZ IFRSs, both the financial statements for the period of adoption and the comparative financial statements must comply with the new standards. So if an entity adopts NZ IFRSs for the period beginning 1 April 2007, it would prepare financial statements for the year ending 31 March 2008 in accordance with NZ IFRSs. It would also need to prepare opening and closing balances and a statement of financial performance for the year ended 31 March 2007 as the comparative financial statements. A note explaining how the transition from previous GAAP to NZ IFRSs affected the entity s financial statements is also required at the time of first adoption. 1.44 To establish opening balances an entity will need to: recognise all assets and liabilities whose recognition is required by NZ IFRSs; no longer recognise items as assets or liabilities if NZ IFRSs do not allow the recognition of such items; reclassify items previously recognised as one type of asset, liability or component of equity which are a different type of asset, liability or component of equity under NZ IFRSs; and apply NZ IFRSs in measuring all recognised assets and liabilities. 1.45 The transition process can be viewed as a good opportunity to review all assets and liabilities and ensure they are accounted for in accordance with GAAP. 1.46 Many not-for-profit entities are unlikely to see much change in the types of assets and liabilities included in the statement of financial position. The main differences are likely to relate to classification (for example, investments may need to be reclassified depending upon the purpose for which they are held) and measurement. However, the adoption of NZ IFRSs provides an opportunity to consider appropriate accounting policies for an entity. 1.47 Chapter 4 discusses the requirements of financial reporting standards in relation to categories of assets and liabilities commonly held by not-for-profit entities. 1.48 When an entity changes its accounting policies (for example, as a result of adopting NZ IFRSs) the general rule is that the new accounting policies have to be applied retrospectively that is, as if they have always been applied. However, some standards contain transitional provisions and there are some exceptions to this rule. For example, NZ IFRS 1: grants exemptions from some requirements of NZ IFRSs (paragraphs 13 to 25F); prohibits retrospective application of some aspects of NZ IFRSs (paragraphs 26 to 34B); and provides some concessions from the requirement to present comparative information. 1.49 The exemption that is most likely to be used by not-for-profit entities is the option to measure an item of property, plant and equipment at the date of transition at its fair value and use that fair value as its deemed cost at that date (paragraphs 16 to 19). 10 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Chapter 2 Reporting Entity Key points A reporting entity is an entity which provides financial statements to external users as the major source of financial information about the entity. The reporting entity concept determines which activities or operations are covered by the financial statements. The reporting entity for which financial statements are prepared may be broader or narrower than what is commonly thought of as the notfor-profit entity. Where an entity is a separate legal entity the relevant legislation often specifies the reporting entity. A not-for-profit entity which does not have any branches, or conducts its activities through other groups or organisations or affiliated bodies, prepares financial statements for its own assets and liabilities, income and expenses. Where a not-for-profit entity has branches, or conducts its activities through other groups or organisations or affiliated bodies which form part of the same legal entity as the not-for-profit entity the transactions of these branches etc will form part of the not-for-profit entity s financial statements. Where these activities occur in separate entities, the not-for-profit entity may need to include some or all of the assets and liabilities, income and expenses of those other entities in consolidated financial statements (which are a set of combined financial statements). Where a not-for-profit entity has branches, or conducts its activities through other groups or organisations or affiliated bodies these other entities may be reporting entities in their own right. If it is not clear which activities should be included within an entity s financial statements, specialist advice may be needed. Introduction 2.1 A reporting entity is an entity which prepares general purpose financial statements for users who rely on those financial statements as their major source of financial information about the entity (NZ Framework). In other words it is the entity that is the subject of financial statements in an annual report. 2.2 In some cases it is easy to identify the reporting entity. A separate legal entity that is required (for example, by its constitution, trust deed or legislation) to prepare financial statements is usually also the reporting entity. This will be the case for the majority of not-for-profit entities. 2.3 However, identifying the reporting entity is not so clear cut if the entity: is not specifically required to prepare financial statements; and is part of a group or operates in conjunction with other linked organisations. 2.4 If an entity has no clear requirement to prepare financial statements it needs to consider whether there are external users which rely upon its financial statements to find out information about the entity. For example, a national group which is a separate legal entity may have five regional branches which are not themselves separate legal entities and which are not required by legislation or their constitution to prepare financial statements. However, the branches may consider that they have a responsibility to provide a public report due to their role in the community. Individual branches can present their own financial statements, and should do so in accordance with generally accepted accounting practice (GAAP). In this situation each branch is a reporting entity. 2.5 This chapter explains how to identify the reporting entity for some common structures used by not-for-profit entities: a not-for-profit entity with branches which carry out specific activities of the entity, or operate in a particular geographical area (these branches may or may not be separate legal entities) a not-for-profit entity with one or more sub-entities such as trusts or trading companies a not-for-profit entity that is the national body of a federation of local organisations and co-ordinates the activities of those organisations a not-for-profit entity which carries out activities in partnership with other bodies but without establishing a separate legal entity. For example, a church may enter into a joint arrangement with other churches to carry out certain activities. 2.6 Mergers of entities and the acquisition of one entity by another can also occur but are not covered in this Guide. Guidance on accounting for mergers and acquisitions can be found in NZ IFRS 3 Business Combinations. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 11

Control and significant influence 2.7 Working out how to account for different parts of a not-for-profit entity often depends on whether the overall (parent) not-for-profit entity controls or has significant influence over the other parts (such as branches and sub-entities). Control 2.8 Control is the power to govern the financial and operating policies of an entity so as to receive benefits from its activities (NZ IAS 27 Consolidated and Separate Financial Statements paragraph 4). Control often exists when one entity has created or acquired another entity. 2.9 NZ IAS 27 provides guidance on determining whether control exists (NZ IAS 27 paragraphs 13 to 21). Power to govern the financial and operating policies of an entity so as to receive benefits from its activities exists when the parent entity: owns more than half of the voting power of an entity; has power over more than half of the voting rights; has the power to govern the financial and operating policies of the entity under a statute or agreement; has the power to appoint or remove the majority of the members of the board of directors or equivalent governing body that runs the entity; or has the power to cast the majority of votes at meetings of the board of directors or equivalent governing body that runs the entity. 2.10 This means that a not-for-profit that has branches and, in accordance with NZ IAS 27, is able to govern the financial and operating policies of the branches has control over those branches. 2.11 There is more information on control in FRS-37 Consolidating Investments in Subsidiaries (paragraphs 4.13 4.37 and 5.9 5.11) and International Public Sector Accounting Standard IPSAS 6 Consolidated Financial Statements and Accounting for Investments in Subsidiaries (paragraphs 26 36) 12. This additional guidance applies only to public benefit entities (NZ IAS 27 paragraph NZ 12.1). Significant influence 2.12 Significant influence is the power to participate in financial and operating policy decisions but not control them (NZ IAS 28 Investments in Associates paragraph 2). A holding of 20% or more of the voting power (directly or through subsidiaries) indicates significant influence unless it can be clearly demonstrated otherwise. If the holding is less than 20%, the entity is presumed not to have significant influence unless influence can be clearly demonstrated by other means (NZ IAS 28 paragraph 6). 2.13 Significant influence is usually shown in one or more of the following ways: representation on the board of directors or equivalent governing body; participation in the policy-making process; material transactions between the two entities; interchange of managerial personnel; or provision of essential technical information (NZ IAS 28 paragraph 7). 2.14 This means, for example, if a charity beneficially holds 20% or more of the voting rights in another entity, it would be presumed to have the power to participate in and influence over the other entity s operating and financial policy, unless this was proven not to be the case. The charity would have significant influence over the other entity. Branches 2.15 Many not-for-profit entities have branches, which will be either part of the overall legal entity or separate legal entities in their own right. 2.16 If the branches are part of the overall legal entity, they are included in the overall entity s financial reports. This means that the transactions and balances of the branches (for example, their assets and liabilities) are included in the financial statements of the overall not-for-profit entity. Even where branches form part of the overall legal entity they may be reporting entities in their own right and may have an obligation (explicit or inferred) to provide financial statements to their members on the activities of the branch. 12 Although IPSAS 6 is the more recent pronouncement, the guidance in FRS-37 is more relevant for not-for-profit entities because it was developed for application by a wide range of entities. IPSAS 6 which was developed for application by public sector entities drew heavily on the material in FRS-37. Exposure Draft 112 Proposed Application Guidence for NZ 1AS 27 Consolidated and Separate Financial Statements to Assist in Determining Whether a Public Benefit Entity Controls Another Entity (June 2007) is also relevant. 12 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

2.17 If the branches are separate legal entities the overall not-for-profit entity may control the branches or have significant influence over them. If the overall entity has control, the branches are accounted for as subsidiaries; and if the overall entity has significant influence, the branches are accounted for as associates in the financial statements of the overall entity (see below). The constitution or other documents such as trust deeds may help to determine whether a branch is controlled or under significant influence. Some branches may have sub-branches. In such cases it is necessary to consider whether the sub-branches form part of the branch and whether the sub-branches are reporting entities in their own right. 2.18 If a not-for-profit entity has branches the notes to the financial statements should clearly state whether the financial activities of the branches are included in the overall entity s financial statements and whether the branches produce their own financial statements. 2.19 Branches need to consider whether they should prepare general purpose financial statements. If the only user of a branch s financial statements is the overall not-for-profit entity it is unlikely that general purpose financial statements are necessary. 2.20 Groups of people who occasionally gather together to raise funds for a charity, and special interest groups that are affiliated to a particular charity but do not themselves undertake charitable activities, are not branches and their financial activities should not usually be combined with those of the reporting entity. Sub-entities such as trusts or trading companies 2.21 A not-for-profit entity that has established separate legal entities, such as trusts or trading companies, to carry out specific functions will need to consolidate the financial statements of those entities unless the founding entity does not control those separate entities. The methods of accounting for sub-entities that are controlled (subsidiaries) and those that are subject to significant influence (associates) are discussed below. Federations 2.22 If a not-for-profit entity is the national body of a federation of local organisations and co-ordinates the activities of those organisations, it will need to determine whether it controls or has significant influence over the local organisations. Control is less likely to exist in a federation structure than in a branch structure. In many cases the national body merely supports, rather than controls, the local organisations. If the not-for-profit entity controls the local organisations it accounts for them as subsidiaries, and if it has significant influence it accounts for them as associates (see below). Joint arrangements 2.23 Not-for-profit entities may undertake joint arrangements where they operate in partnership with other bodies but without establishing a separate legal entity. Such arrangements may meet the definition of joint ventures (see below) and need to be accounted for as such. Accounting for controlled entities (subsidiaries) 2.24 If a not-for-profit entity controls another entity (that is, it governs the financial and operating policies of an entity so as to receive benefits from its activities), the not-for-profit entity (the parent) must prepare financial statements that include some or all of the assets and liabilities, income and expenses of the other entity in consolidated financial statements (which are a set of combined financial statements). The controlled entities are referred to as the subsidiaries of the parent entity. A number of adjustments such as the elimination of transactions between the entity and subsidiaries are required when preparing consolidated financial statements. 2.25 In some instances a not-for-profit entity with subsidiaries will be required to present both consolidated financial statements and financial statements for the parent entity alone. This requirement would be specified in an entity s founding documents or legislation. Parent entity statements are not required by financial reporting standards. If both sets of statements are required they are usually presented as two columns in a single report. 2.26 There are some exceptions to the requirement to consolidate subsidiaries. For example, if the not-for-profit entity is itself a wholly owned subsidiary, it may not be required to produce consolidated financial statements (NZ IAS 27 paragraph 10). 2.27 Some situations will require careful consideration. For example, a not-for-profit entity may establish another entity for the purpose of providing independent advice on its activities. Such complex situations are not covered by this document. In such cases you will need to consider the detailed requirements of the relevant reporting standards and seek specialist advice. 2.28 When an entity has a subsidiary in which it controls less than half of the voting power, it has to disclose the nature of the relationship between itself and the subsidiary in the notes (NZ IAS 27 paragraph 40(c)). NOT FOR PROFIT FINANCIAL REPORTING GUIDE 13

Accounting for significant influence (associates) 2.29 NZ IAS 28 explains how an entity accounts for another entity over which it has significant influence (and that other entity is not a subsidiary or an interest in a joint venture). Such entities are referred to as associates. Associates are relatively uncommon in the not-for-profit sector but can occur. 2.30 The requirements in NZ IAS 28 set out a method of accounting referred to as the equity method. Under this method a not-for-profit entity with an associate recognises its share of the associate s surplus or deficit (less any unrealised profits on transactions between the entity and the associate). Accounting for jointly controlled activities (joint ventures) 2.31 In a joint venture situation, an activity is jointly controlled by two or more parties. For example, a number of churches may jointly establish a separate entity to advocate on issues which are of interest to all the churches and to provide aged care services. NZ IAS 31 Interests in Joint Ventures deals with how to identify a joint venture and how to report the activities of a joint venture in the financial statements of the parties that have joint control. 2.32 NZ IAS 31 states that joint control exists when the strategic financial and operating decisions for the activity require the unanimous consent of the parties (NZ IAS 31 paragraph 3). It is possible for a not-for-profit entity to beneficially hold 20% or more of the voting rights in an undertaking but for the management arrangements to be such that control is clearly shared with the other partners. In this case the undertaking is a joint venture rather than an associate. 2.33 The method of combining information on the joint venture s financial activities in the consolidated financial statements depends on the type of joint venture. An entity with an interest in a joint venture can recognise its interest in a joint venture in the financial statements by either proportionate consolidation or the equity method. NZ IAS 31 explains these methods. Maintaining records 2.34 If a not-for-profit entity has subsidiaries, associates or joint ventures it will need to maintain records of transactions between itself and each of these other entities during each period so that the requirements of relevant financial reporting standards can be complied with. When an entity prepares consolidated financial statements NZ IAS 27 requires that it eliminate intragroup balances (for example, loans between the not-for-profit entity and its subsidiary) income and expenses. Registered charities 2.35 Provision exists within the Charities Act 2005 for a group of charities to be treated as if they were a single entity. The requirements for group registration are met if the Commission is satisfied that: each of the organisations within the group qualifies for registration as a charitable entity; and all of the organisations are sufficiently closely related; and it is fit and proper to treat the organisations as forming part of a group. In addition, the Commission must have regard to the extent to which the entities have similar charitable purposes. 2.36 Charities registered as a group under the Charities Act will be subject to any requirements of the Charities Commission in respect of such groups. However, it is not a requirement for group registration that the entities registering be part of an accounting group and, accordingly, such groups of charities will not necessarily be the same as the reporting entity under NZ IFRSs. Examples identifying the reporting entity 2.37 The following examples identify the reporting entity in various situations. Please note The examples here are simplified and do not address the specific circumstances of any particular entity. Each entity will need to consider the facts in its own situation and the application of NZ IAS 27, NZ IAS 28 and NZ IAS 31 to those facts. These examples do not deal with acquisitions or disposals of entities. 14 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Example 1 A sports club is required by its constitution to prepare general purpose financial statements. The club receives some funding from a national body but is independent of that body. The club has not formally established any other clubs or groups. The reporting entity is the sports club. The financial statements would include the assets and liabilities, and revenue and expenses of the sports club. Example 2 An incorporated society is a national body with three branches Auckland, Wellington and Christchurch. The national body receives funding from the Government and co-ordinates fundraising activities by all branches. The national body decides which services will be provided to clients and approves the budgets of each region. The branches are not separate legal entities. The reporting entity is the national body, including the three branches. The financial statements are not consolidated financial statements because legally the branches are part of the national body. As noted in paragraph 2.4 of this Chapter, the branches may also have an obligation to produce general purpose financial statements and be reporting entities in their own right. Example 3 An incorporated society is a national body with ten branches throughout New Zealand. The branches are separate incorporated societies. The governing bodies of the branches are appointed by local members and the branches are free to establish their own rules. Each area conducts its own fundraising activities and decides how to spend money raised in its region. The branches pay a fee to the national body, which provides advocacy and other support services. The national body does not fund the activities of the branches. In the event of dissolution, the constitution of each local branch states that any residual assets are to be distributed to entities with related not-for-profit objectives. The national body and the branches are all separate reporting entities. As the national body has no control over the branches it would not consolidate them in its financial statements. Example 4 A not-for-profit entity (A) that provides services to low-income families establishes another entity (B) to manage the houses that it owns and which are available for rent by its clients. The board of entity B is appointed by the board of entity A. Entity B operates as a property management agency deciding which applicants can rent houses and the amount of the rental, and has considerable autonomy in doing this. If entity B makes a profit it distributes some of that profit to entity A. If entity B makes a loss it can seek additional funding from entity A. The documents that establish entity B require it to prepare separate financial statements. Entity B is controlled by entity A. Entity A would prepare consolidated financial statements that include entity B s transactions and balances. Entity B would also prepare separate financial statements because it is required to do so by its founding documents. If this specific requirement did not exist, entity B would need to consider whether there were any external users who relied upon financial statements to find out information about entity B. Example 5 A charitable trust provides food and accommodation to homeless people. It regularly liaises with other community groups and works with those groups to ensure its services are provided in the areas where they are most needed. It has a group of supporters that help raise money for its activities. The reporting entity is the charitable trust. It does not control (or jointly control) the activities of the other groups. Nor does it control the supporters. Example 6 National Body A is an umbrella body with a number of affiliated associations which operate in various regions around the country. National Body A imposes certain rules and standards on the associations. It does not have the power to wind up its affiliated NOT FOR PROFIT FINANCIAL REPORTING GUIDE 15

associations, but it is able to prevent them from using the name of the National Body. National Body A levies its associations at a fixed fee per member. The governing bodies of the affiliated associations are appointed by the members of those associations. The governing bodies have financial and operating policy-making powers, subject to the rules and standards of the National Body. The reporting entity is National Body A. It does not control the affiliated associations. Each affiliated association may also be a reporting entity. For example, they would be reporting entities if they have obligations to prepare financial statements or if there are external users who rely upon financial statements to find out information about them. 16 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Chapter 3 Financial Reports Key points The financial report of a not-for-profit entity includes the financial statements and narrative information, such as a report from the board or governing body on the entity s performance. Complete financial statements for a not-for-profit entity consist of a statement of financial position, a statement of financial performance, a cash flow statement, a statement of changes in equity, and notes. Statements of service performance are optional but are strongly encouraged. Introduction 3.1 This chapter describes the contents of a financial report of a not-for-profit entity. It also outlines some of the general requirements of New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs) that apply to all financial statements. These general requirements explain when separate disclosure of items is required. Annual reports 3.2 Annual reports include an entity s financial statements and commentary such as a report from the board or governing body on the entity s performance over the past period and its challenges and opportunities. The report may also include non-financial statements such as a statement of service performance. 3.3 The International Accounting Standards Board (IASB) has issued a discussion paper on Management Commentary 13 which suggests that commentary provided with financial statements should supplement and complement the financial statement information. It should provide management s analysis of the entity, and include information on: nature of the activities undertaken; objectives and strategies of the entity; key resources, risks and relationships; management s view of results and prospects; and performance issues and indicators. 3.4 Although the suggestions in the IASB discussion paper are not mandatory, they are a useful guide to preparing a high quality commentary on the financial statements. Financial statements 3.5 The objectives of financial reporting for not-for profit-entities are to demonstrate accountability and provide information that is useful to a wide range of users for making economic decisions. Financial statements can be used to demonstrate an entity s accountability for the resources with which it has been entrusted, its compliance with legislation and contracts, and its actual performance compared with what it set out to do. 3.6 Complete financial statements for a not-for-profit entity consist of: a statement of financial position (also called a balance sheet); a statement of financial performance (also called an income statement or a statement of income and expenditure); a cash flow statement (this statement is optional for entities that qualify for differential reporting concessions); a statement of changes in equity; and notes, which summarise significant accounting policies and other necessary explanations (NZ IAS 1 Presentation of Financial Statements paragraph 8). 14 3.7 Table 1 outlines the key components of each financial statement and the relevant chapters in this Guide. Because each chapter is intended to be able to be read on a stand-alone basis, there is some repetition of information, particularly in Chapters 4 and 5. 13 Management Commentary, A paper prepared for the IASB by staff of its partner standard-setters and others, October 2005 http://www.iasb.org/uploaded_files/documents/8_891_dpmancomm.pdf 14 New Zealand equivalents to IFRSs use profit-oriented terminology to describe the financial statements. NZ IAS 1, paragraph 5, explains that entities may need to amend the descriptions used for particular line items in the financial statements and for the financial statements themselves. This Guide uses terminology that is appropriate to not-for-profit entities. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 17

TABLE 1: FINANCIAL STATEMENT COMPONENTS Statement of financial position Statement of financial performance Statement of changes in equity Cash flow statement (optional see above) Notes Assets Liabilities Equity Income Expenses Net surplus/ deficit Total income and expense (both recognised in the statement of financial performance and recognised directly in equity) Changes in accounting policies and corrections of errors Changes in retained earnings and other reserves Cash flows from: operating activities investing activities financing activities Explains the change in cash and cash equivalents in the period The notes include: compliance information accounting policies information on the primary financial statements other financial information, such as contingent liabilities and related party disclosures Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Statement of service performance 3.8 As discussed in Chapter 9, traditional financial statements provide information on aspects of a not-for-profit entity s financial performance but they are of limited use in assessing other aspects of a not-for-profit entity s performance. Not-for-profit entities require information on service performance in order to assess how well they have achieved their objectives with the resources available, and to demonstrate accountability to those who provide funds to the entity. A statement of service performance is one way of presenting service performance information. 3.9 A statement of service performance presents non-financial information on what an entity set out to achieve compared to what it did achieve. It may include some financial information such as the cost of individual services. 3.10 Not-for-profit entities are not generally required to present statements of service performance. However, they are encouraged to do so because of the statement s usefulness in demonstrating accountability to stakeholders. The statement is particularly useful if an entity receives funding (for example, from the government or the public) to provide services to others. A statement of service performance generally shows: desired outcomes; an explanation of the rationale on which the entity has based its selection of activities. This rationale also provides the basis for selecting the indicators that will best encourage and measure progress against the entity s objectives and specific priorities; and a comparison of planned outputs (including performance measures) to actual outputs (including performance measures). 3.11 Statements of service performance are discussed in more detail in Chapter 9. Reporting period 3.12 Financial statements for external users are generally prepared annually (NZ IAS 1 paragraph 49). The requirements of NZ IFRSs apply to annual general purpose financial statements. 3.13 If an entity chooses to produce general purpose financial statements more frequently than annually, NZ IAS 34 Interim Financial Reporting is relevant. It requires less detailed disclosures than full NZ IFRSs. Internal reports are not subject to the requirements of NZ IFRSs. Timeliness 3.14 The NZ Framework discusses the importance of timeliness and the need to balance prompt reporting and the reliability of information (paragraph 43). The Charities Commission allows a charity six months to file its annual return. Companies have six months to deliver their financial statements to the Registrar of Companies. It is suggested that not-for-profit entities should provide their financial statements no later than five months after the end of the financial year. Where members of not-for-profit organisations require information on a more frequent basis, interim financial statements may be prepared. 18 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Going concern 3.15 The financial statements are normally prepared on the assumption that the entity is a going concern. This means that it is assumed that the entity will continue to operate for an indefinite period in the future. If it is likely that an entity will cease to operate (possibly because its operations are being transferred to another entity or because it is experiencing financial difficulties) this fact must be stated in the financial report. The amounts at which assets and liabilities are reported will need to be reassessed and remeasured (NZ IAS 1 paragraphs 23 to NZ 24.2 and NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, paragraphs 15 to 25). Many not-for-profit entities are only a going concern by virtue of the continued funding of their main funding body, or the successful renegotiation of existing contracts for service. In such cases it is common for not-for-profit organisations to put a note to their financial statements to this effect and the governing body s opinion as to the likelihood of continuation. Accrual basis of accounting 3.16 Apart from the cash flow statement, the financial statements are prepared using the accrual basis of accounting (NZ IAS 1 paragraph 25). Under the accrual basis, revenues and expenses are recognised when they are earned or incurred rather than when cash is received or paid. Assets and liabilities are also recognised under the accrual basis. Materiality 3.17 Financial reporting standards frequently use the word material. An item is material if its inclusion or exclusion from the financial statements would be likely to change a user s judgements made on the basis of the statements. The concept of materiality is used to decide whether certain items need to be disclosed in the financial statements. An entity does not need to make disclosures specified by a financial reporting standard if the information is not material (NZ IAS 1 paragraphs 11, NZ 11.2, 12, and 29 to 31). In addition, the concept of materiality can be used to decide whether the application of a particular financial reporting treatment to a transaction or balance as opposed to an alternative treatment has a material impact on the financial statements. 3.18 Judgement is required in deciding whether an item is material. In general, the larger the item the more material it is likely to be. However, some items are more likely to be material because of their nature, such as amounts paid to related parties (for example, remuneration of trustees). Reporting against budget 3.19 Some not-for-profit entities release details of their budgets or forecasts at the beginning of the financial year. For example, an entity may include details of its budget in a published annual plan or table its budget at an annual general meeting. An entity wanting to present budgeted (prospective) financial statements that comply with GAAP should refer to FRS-42: Prospective Financial Statements. 3.20 If an entity has previously published budgets or forecasts for the same period as its annual financial statements, it is required to include a comparison of the budgets or forecasts and the actual figures, including an explanation of major variations, in its annual financial statements (NZ IAS 1 paragraph NZ 41.1). This allows users to compare the actual versus budgeted financial performance that is, whether the entity operated within its budget. General presentation requirements 3.21 There are a number of general requirements relating to the presentation of information in the financial statements. Each material class of similar items is presented separately in the financial statements. Items of a dissimilar nature or function are presented separately unless they are immaterial (NZ IAS 1 paragraph 29). Assets and liabilities, and income and expenses, are recorded at their gross amounts. Assets are not netted against liabilities (nor is income netted against expenses) unless this is specifically required or permitted by a standard (NZ IAS 1 paragraph 32). For example, NZ IAS 32 (paragraph 42) sets out the circumstances in which a financial asset and a financial liability (such as a bank balance and an overdraft) may be offset and only the net amount shown. This is discussed further in Chapter 4. Comparative information in respect of the previous period for all amounts reported in the financial statements is required. Comparative information is also included for narrative and descriptive information when it would assist in understanding the current period s financial statements (NZ IAS 1 paragraph 36). An exemption from producing comparatives is generally permitted only as a transitional arrangement on adoption of a new standard or as a result of changes to a standard. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 19

Additional disclosures are required when compliance with the specific requirements in NZ IFRSs does not fully explain the impact of particular transactions, other events and conditions on the entity s financial position and financial performance (NZ IAS 1 paragraph 15(c)). General disclosures 3.22 An entity is required to disclose: the name of the reporting entity; whether the financial statements cover the individual entity or a group of entities; whether the entity is a PBE or a profit-oriented entity; the reporting date; the presentation currency (for nearly all not-for-profit entities the presentation currency will be New Zealand dollars); and the level of rounding used, for example, to the nearest $100 dollars (NZ IAS 1 paragraphs NZ 13.1 and 44). 20 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Chapter 4 Assets and Liabilities: Statement of Financial Position Key points Introduction The definitions of assets, liabilities and equity, and the general rules for including assets and liabilities in the financial statements are set out in the NZ Framework. All monetary assets and liabilities are financial instruments (for example, receivables, payables, term loans). The way in which financial instruments are measured depends on the purpose for which they are held and the intention of the entity holding them. Assets The most common current assets are cash, inventories and short-term receivables. Most property, plant and equipment is initially measured at cost. Property, plant and equipment acquired at no cost or for a nominal cost is initially measured at fair value. Following initial recognition property, plant and equipment is subsequently measured at cost (the cost model) or at fair value (the revaluation model), less depreciation if the assets are depreciable. Generally property, plant and equipment other than land is depreciated. All property, plant and equipment must be regularly checked for impairment. Computer software is included as an asset in the statement of financial position only if it meets the criteria set out in NZ IAS 38. It is generally classified as an intangible asset. Following initial recognition, donated assets should be accounted for in the same way as other assets of the same type. Liabilities Current liabilities are generally recognised initially at fair value. Some obligations to pay grants or donations to others will give rise to liabilities. Borrowings are recognised initially at fair value. Where transactions are on normal commercial terms fair value is generally the same as the cash received less any transaction costs incurred. Entities with employees may have liabilities for annual leave and long-term benefits provided to employees. Entities which have received grants subject to conditions may have a liability to perform services or to return the grant. Equity Equity is the residual of assets less liabilities. Materiality An item is material if its inclusion or exclusion from the financial statements would be likely to change a user s judgements made on the basis of the statements. The concept of materiality is used to decide whether certain items need to be disclosed in the financial statements. An entity does not need to make disclosures specified by a financial reporting standard if the information is not material. In addition, the concept of materiality can be used to decide whether the application of a particular financial reporting treatment to a transaction or balance as opposed to an alternative treatment has a material impact on the financial statements. Introduction 4.1 This chapter provides an overview of financial reporting requirements in respect of assets and liabilities commonly held by not-for-profit entities, the presentation of assets, liabilities and equity in the statement of financial position, and associated note disclosures. The information here assumes that entities will use the differential reporting concessions available in New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs). For further guidance, particularly for more complex transactions, please refer directly to the standards. 4.2 The following table identifies the current financial reporting standards that provide guidance on accounting for the assets, liabilities and equity of not-for-profit entities. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 21

TABLE 2: FINANCIAL REPORTING STANDARDS ON ASSETS AND LIABILITIES OF NOT-FOR-PROFIT ENTITIES Elements General Standards Framework for Differential Reporting for Entities Applying the New Zealand Equivalents to International Financial Reporting Standards Reporting Regime NZ IAS 1 Presentation of Financial Statements NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Assets commonly held by not-for-profit entities Cash on hand and bank balances NZ IAS 32 Financial Instruments: Presentation 15 NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures Financial investments (including term deposits, debentures and shares) Loans and advances Inventories (trading inventories, other inventories and work-inprogress) Receivables (interest, subscription receivables, trade debtors, grants receivable) Prepayments Property, plant and equipment (such as land, buildings, furniture and fittings, office equipment, motor vehicles and heritage assets) Intangible assets (including computer software) NZ IAS 32 Financial Instruments: Presentation NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ IAS 32 Financial Instruments: Presentation NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ IAS 2 Inventories NZ IAS 32 Financial Instruments: Presentation NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ Framework NZ IAS 16 Property, Plant and Equipment NZ IAS 17 Leases NZ IAS 23 Borrowing Costs NZ IAS 36 Impairment of Assets NZ IAS 36 Impairment of Assets NZ IAS 38 Intangible Assets (in the case of software NZ IAS 16 Property, Plant and Equipment may also be applicable) Liabilities commonly held by not-for-profit entities Bank overdrafts Payables (trade creditors and other payables) Accrued expenses NZ IAS 32 Financial Instruments: Presentation NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ IAS 32 Financial Instruments: Presentation NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ Framework 15 The title of this standard was previously NZ IAS 32 Financial Instruments: Presentation and Disclosure. On adoption of NZ IFRS 7 by an entity the disclosure requirements in NZ IAS 32 are superseded by the disclosure requirements in NZ IFRS 7. 22 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Elements Borrowings (including term loans and mortgages) Employee-related liabilities (including pension and long-service leave obligations) Provisions for liabilities in respect of grants received when the entity still has an obligation to deliver services Provisions for liabilities in respect of grants received where the entity has an obligation to return the grant to the grantor Lease obligations Equity Standards NZ IAS 23 Borrowing Costs NZ IAS 32 Financial Instruments: Presentation NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ IAS 19 Employee Benefits NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (disclosure only) NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (disclosure only) NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets NZ IAS 17 Leases NZ IAS 1 Presentation of Financial Statements NZ IAS 32 Financial Instruments: Presentation 4.3 Asset and liability topics not covered in this Guide include the items shown in the table below, along with the specific standards which provide guidance on these items. TABLE 3: OTHER ASSETS AND LIABILITIES AND RELEVANT STANDARDS Elements Foreign currency assets and liabilities Investment properties Biological assets and agricultural produce at the point of harvest Non-software Intangibles (including goodwill) Derivatives Standards NZ IAS 21 The Effects of Changes in Foreign Exchange Rates deals with accounting for transactions and balances in foreign currencies, and foreign operations. NZ IAS 40 Investment Property prescribes the recognition and measurement of investment property and related disclosure requirements. However, not-for-profit entities which qualify for differential reporting concessions may account for investment properties in accordance with NZ IAS 40 or the cost model in NZ IAS 16 Property, Plant and Equipment. NZ IAS 41 Agriculture prescribes the accounting treatment, financial statement presentation, and disclosures related to agricultural activity. NZ IAS 36 Impairment of Assets NZ IAS 38 Intangible Assets NZ IFRS 3 Business Combinations Entities that enter into forward contracts to purchase items at a fixed price at a future date (to hedge against price movement due to changes in the price of the item or changes in foreign exchange rates) should account for the forward contracts in accordance with NZ IAS 39 Financial Instruments: Recognition and Measurement. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 23

Some important terms 4.4 An asset is a resource controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity (New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements (NZ Framework) paragraphs 49(a) and NZ 49.1) 16. 4.5 A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential (NZ Framework paragraphs 49(b) and NZ 49.1). 4.6 Assets and liabilities are recognised for financial reporting purposes when they meet the above definitions and they meet the criteria to be recognised as assets and liabilities in the financial statements. The recognition criteria are: (a) it is probable that any future economic benefit or service potential associated with the asset or liability will flow to, or from, the entity; and (b) the asset or liability has a cost or value that can be measured with reliability (NZ Framework paragraphs 83 and NZ 49.1). 4.7 Equity is the residual interest in the assets of the entity after deducting all its liabilities (NZ Framework paragraph NZ 49.1). Equity can be divided into retained surplus or various reserves. In a company, equity represents the shareholders interests and, if the company is liquidated, any remaining equity is distributed to shareholders. In a not-for-profit entity equity is not normally returned to members of the entity. Often the constitution or similar founding document of a not-for-profit entity will require that any surplus on liquidation be distributed to another entity with similar not-for-profit purposes. 4.8 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Preparing a statement of financial position 4.9 NZ IAS 1 Presentation of Financial Statements requires the preparation of a statement of financial position (also called a balance sheet). The statement of financial position reports the assets, liabilities and equity of the entity at a set point in time (the reporting date). 4.10 The content and disclosure requirements for a statement of financial position are stated in a number of different reporting standards but the principal one is NZ IAS 1. NZ IAS 1 requires an entity to: separately show current and non-current assets and current and non-current liabilities in the statement (see below); however, it also permits an entity to show assets in broad order of liquidity when this is reliable and more relevant than the current/non-current distinction (paragraph 51). Liquid assets are those that can be readily converted to cash; present certain items on separate lines (line items) in the statement (paragraph 68); separately show additional line items, headings and subtotals in the statement if they are relevant to an understanding of the entity s financial position (paragraph 69); show, either in the statement or in the notes, further subclassifications of items such as property, plant and equipment, or inventories (paragraph 74); and show details of each component of equity (paragraphs 76 and 77). Classification as current and non-current 4.11 Assets that are expected to be realised (used or sold) within twelve months of the end of the reporting period are classified as current assets. Cash and cash equivalents (discussed below) are also classified as current assets (NZ IAS 1 paragraph 57). 4.12 Liabilities expected to be settled in the entity s normal operating cycle (assumed to be 12 months where it is not clearly identifiable) are generally classified as current NZ IAS 1 paragraph 60). However, if the entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting date under an existing loan facility, it classifies the obligation as non-current even if it would otherwise be due (for example, if it were legally due) within a shorter period. When refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no agreement to refinance), the potential to refinance is not considered and the obligation is classified as current (NZ IAS 1 paragraph 64). 16 Paragraph NZ 49.1 of the NZ Framework states that the term future economic benefits is to be read as having the same meaning as the term service potential. The assets of not-for-profit entities will frequently be held for their ability to deliver goods and services in accordance with the entity s objectives (their service potential) rather than their ability to generate net cash inflows (economic benefits). 24 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Non-current assets held for sale and discontinued operations 4.13 NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations sets out how non-current assets held for sale and any income or expenses associated with these assets are to be classified, measured and shown in the financial statements. Qualifying entities are required to comply with the measurement requirements in NZ IFRS 5. 4.14 Assets or disposal groups that are classified as held for sale are shown at the lower of carrying amount and fair value less costs to sell. These assets are not depreciated. The scope of NZ IFRS 5 excludes a number of assets that are already measured at fair value with changes in fair value recognised as income or expense in the statement of financial performance applying NZ IFRS 5 to such assets would result in little change in their accounting treatment. Disclosure on the face of the statement of financial position 4.15 NZ IAS 1 and other standards use the phrase on the face of the statement of financial position. This means in the statement itself, rather than the notes. The minimum disclosures required on the face of the statement are: (a) property, plant and equipment; (b) investment property; (c) intangible assets; (d) financial assets (other than amounts shown under (e), (h) and (i)); (e) investments accounted for using the equity method; (f) biological assets; (g) inventories; (h) trade and other receivables; (i) cash and cash equivalents; (j) trade and other payables; (k) provisions; (l) financial liabilities (other than amounts shown under (j) and (k)); (m) liabilities and assets for current tax, as defined in NZ IAS 12 Income Taxes; (n) deferred tax liabilities and deferred tax assets, as defined in NZ IAS 12; (o) minority interest, presented within equity; and (p) issued capital and reserves attributable to equity holders of the parent. 4.16 Headings and subtotals are shown for each major grouping of items. Other standards such as NZ IAS 16 Property, Plant and Equipment and NZ IAS 38 Intangible Assets specify additional disclosures that can be made in the notes. An entity s first statement of financial position 4.17 If an entity has not previously prepared a statement of financial position the following steps may be a useful process for developing complete and accurate information on assets. Some of these steps are also identified in Chapter 1 in the context of first-time adoption of NZ IFRSs (see Chapter 1 paragraphs 1.42 to 1.49). Compile an accurate and complete asset register for the entity using appropriate classes of property, plant and equipment. Collect similar information on other assets. Check that all the assets meet the definition of an asset and the criteria to be recognised as assets under NZ IFRSs (see paragraphs 4.4 and 4.6). Determine the capitalisation threshold for assets (see paragraphs 4.73 to 4.74). Develop accounting policies for each category of assets in accordance with the relevant financial reporting standards. Determine appropriate useful lives and rates of depreciation for each class of property, plant and equipment. The rates of depreciation permitted for income tax purposes or those used by entities with similar activities can be a useful starting point. Determine opening and closing balances for each category of assets. If there are no records of the cost of the assets, an entity may, on first-time adoption of NZ IFRSs, bring an item into the financial statements at fair value, as deemed cost, and then depreciate the asset from that point onwards. However, valuations of property, plant and equipment must be in accordance with NZ IAS 16 (paragraphs NZ 35.1 to NZ 35.3). Check for impairment (see paragraphs 4.81 to 4.87). Set up a system to keep accurate records of all asset purchases and disposals. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 25

4.18 Similar steps would be required to develop complete and accurate information on liabilities. 4.19 The format and presentation of the statement of financial position is not set by any standard. Two common and equally acceptable approaches are to format the statement so that: equity is shown as the balance of total assets less total liabilities; or total assets are shown as the sum of equity and total liabilities. Financial instruments 4.20 Financial instruments (financial assets and financial liabilities) are accounted for in accordance with the following standards: NZ IAS 39 Financial Instruments: Recognition and Measurement; NZ IAS 32 Financial Instruments: Presentation; and NZ IFRS 7 Financial Instruments: Disclosures. 4.21 Financial assets include cash, receivables, loans and advances, investments and derivatives 17. Financial liabilities include bank overdrafts, payables, loans and derivatives. All financial assets and liabilities are initially measured at fair value (NZ IAS 39 paragraph 43). Where transactions giving rise to financial assets and liabilities are on normal commercial terms, the fair value at time of initial recognition is likely to be the same as cost. 4.22 NZ IAS 39 requires that financial assets be classified into one of four categories (paragraphs 9 and 45): financial assets at fair value through profit or loss 18, which includes those held for trading and any other financial asset that the entity assigns to this category (subject to restrictions); loans and receivables; held-to-maturity investments; and available-for-sale financial assets. 4.23 There are two categories of financial liabilities under NZ IAS 39: those at fair value through profit or loss (including trading liabilities) and other financial liabilities. 4.24 The categorisation of financial assets and financial liabilities determines whether they are carried at fair value and how changes in fair value are treated in an entity s financial statements. For example, the treatment of investments in listed securities depends on whether they are accounted for as financial assets at fair value through profit or loss or as available for sale financial assets. 19 Table 4 identifies the categories of financial instruments specified in NZ IAS 39 and the measurement of those categories subsequent to initial recognition. TABLE 4: CATEGORIES AND MEASUREMENT OF FINANCIAL INSTRUMENTS UNDER NZ IAS 39 Definition (NZ IAS 39 paragraph 9) Subsequent measurement (NZ IAS 39 paragraph 45) Assets Loans and receivables not held for trading Financial assets with fixed or determinable payments that are not quoted in an active market and are created by the entity by providing money, goods or services. For example, trade and long-term receivables; unlisted debt instruments. Amortised cost using the effective interest method (see explanation below). 17 Derivatives are financial products which can be used to reduce the risk associated with normal operations (for example, forward contracts to purchase currency at a specified rate at a future date). Not-for-profit entities will normally hold derivatives solely for the purpose of reducing their exposure to risk. The treatment of derivatives is addressed in NZ IAS 39. 18 The term financial asset or financial liability at fair value through profit or loss is a defined term in NZ IFRSs. Subsequent to initial recognition such financial assets are measured at fair value, with changes in fair value being recognised immediately as revenue or expense. 19 Held-to-maturity and available-for-sale are classifications used in NZ IAS 39. Refer to Table 4 for a description of these terms. 26 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Held-to-maturity investments Financial assets at fair value through profit or loss Definition (NZ IAS 39 paragraph 9) Financial assets with fixed or determinable payments that the entity has the positive intent and ability to hold to maturity. For example, debt securities that an entity intends and is able to hold to maturity. Subject to tainting rules refer below. Includes: financial assets held for trading financial assets that were acquired for the purpose of selling in the near term; and other financial assets that the entity designates as being held at fair value (the fair value option). Use of this option is restricted. Derivative assets are in this category unless they are financial guarantee contracts or designated and effective hedging instruments. Derivatives are a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate or other variable; (b) that requires no or relatively little initial net investment; and (c) that is settled at a future date. Subsequent measurement (NZ IAS 39 paragraph 45) Amortised cost using the effective interest method (see explanation below). At fair value. Changes in fair value are recognised immediately as revenue or expense. Available-for-sale financial assets All other financial assets. Fair value. Changes in fair value are generally recognised directly in equity until the asset is sold, then included in the calculation of gain/loss on disposal. Exceptions include impairment losses and foreign exchange gains and losses (see NZ IAS 39 paragraph 55(b)). Liabilities Financial liabilities at fair value through profit or loss (either held for trading or designated at fair value through profit or loss) Other liabilities Held for trading: (a) acquired or incurred principally for the purpose of selling or repurchasing in the near term; (b) as part of a portfolio for which there is a recent pattern of short-term profittaking; (c) a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument). All other liabilities, including non-trading liabilities. Fair value. Changes in fair value are recognised immediately as revenue or expense. Amortised cost (see explanation below). NOT FOR PROFIT FINANCIAL REPORTING GUIDE 27

Amortised cost 4.25 The amortised cost of a financial asset or a financial liability is the initial cost less the sum of principal repayments, cumulative amortisation of premiums/discounts and cumulative impairment write-downs. It is defined in NZ IAS 39 paragraph 9. Effective interest method 4.26 The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability. The effective interest method is defined in NZ IAS 39 paragraph 9. Tainting rules 4.27 If an entity sells any held-to-maturity investments (other than in exceptional circumstances), all of its other held-tomaturity investments must be reclassified as available-for-sale for the current and next two full financial reporting periods (NZ IAS 39 paragraphs 9, 51 and AG22). Assets Cash 4.28 Cash includes money an entity holds and money deposited with financial institutions that can be withdrawn without notice. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (NZ IAS 7 paragraph 6). An investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition (NZ IAS 7 paragraph 7). 4.29 Cash and cash equivalents are reported as a current asset on the face of the statement of financial position (NZ IAS 1 paragraph 68). Entities that choose to prepare a cash flow statement will show movements in cash and cash equivalents during the period. 4.30 The question sometimes arises as to whether overdrafts and positive cash balances can be offset against each other in the financial statements. The circumstances in which this is permitted are limited and are governed by NZ IAS 32. NZ IAS 32 (paragraph 42) permits a financial asset and a financial liability to be offset and the net amount shown only when an entity: (a) currently has a legally enforceable right to set off the recognised amounts 20 ; and (b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. 4.31 The NZ IAS 32 rules essentially identify situations where an entity has a single net asset or liability in substance. An overdraft can therefore be offset against a cash balance in the statement of financial position only when that offsetting represents the substance of the situation (for example, if an entity has an account with a positive cash balance and an overdraft with the same bank) and legally the accounts can be settled net. 4.32 Most cash balances are readily identifiable. Two issues that should be considered are: Do all the cash balances currently reported by the entity meet the definition of an asset that is, are they controlled by the entity? This can be an issue when an entity manages funds on behalf of others. Completeness are there any cash balances controlled by the entity which are not currently included in the entity s reported cash balances? 4.33 These issues are discussed further in Chapter 7. Inventories 4.34 NZ IAS 2 Accounting for Inventories provides guidance on accounting for the usual types of inventories held by profitoriented entities and, in the case of public benefit entities, inventories held for distribution. The nature and significance of inventories (also called stocks) will vary depending upon the nature of the entity s activities. For example: an entity whose principal activity is to distribute grants may not have any inventories; a sports club which operates a bar in its clubhouse may have snacks and liquor; a professional body may have branded goods and publications for sale; and a charity may have purchased or donated items for sale or to be distributed free of charge. 20 The previous requirements for New Zealand entities were found in FRS-27 Right of Set-off paragraphs 5.1 to 5.10. FRS-27 permitted assets and liabilities to be set off when there was a right of set off which was enforceable at law under either contract law or common law. 28 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Inventories held for sale 4.35 NZ IAS 2 defines inventories as assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies that are consumed in the production process or in providing services. 4.36 The recognition of consumable items (for example, stationery and office supplies) as inventories will depend upon the amounts involved. In many cases the amounts on hand at the end of the financial year are small (not material) and it is acceptable to expense the items as they are purchased. 4.37 A stock take is used to assess inventories at the end of the period. If the entity has kept an ongoing record of inventories throughout the period then the stock take is used to confirm the accuracy of these records. If the financial statements are to be audited and inventory is a material item, the external auditors will need to obtain evidence to verify the amount of inventory. They will review stock-taking procedures and will either attend the stock take or carry out other procedures to check the amount of inventory reported. 4.38 In order to make sure that inventories are not overvalued in the statement of financial position they are measured at the lower of cost and net realisable value (NZ IAS 2 paragraph 9). Net realisable value is the expected selling price less the estimated costs of completing the product and other costs of selling. There are two exceptions to this rule that are relevant to not-for-profit entities: inventories acquired at no cost or for nominal value are brought into the financial statements at the time of acquisition at current replacement cost (NZ IAS 2 paragraph NZ 10.1). Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date; and inventories held for distribution are measured at the lower of cost and current replacement cost (see below). 4.39 The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in getting the inventories to their current location and condition. NZ IAS 2 contains guidance on what is included in each of these costs (paragraphs 10 to 27). 4.40 The cost of services mainly includes labour and other costs of personnel who are directly engaged in providing the service (NZ IAS 2 paragraph 19). As most service revenues are recognised on the percentage-of-completion basis in accordance with NZ IAS 18 (paragraph 18), the amount of work in progress for services is not generally significant. Inventories held for distribution 4.41 The requirements in relation to inventories held for distribution apply only to public benefit entities 21. NZ IAS 2 defines inventories held for distribution as assets: (a) held for distribution at no or nominal consideration in the ordinary course of operations; (b) in the process of production for distribution at no or nominal consideration in the ordinary course of operations; or (c) in the form of material or supplies that are consumed in the production process or in providing services at no or nominal consideration (paragraph NZ 6.1). 4.42 There are three issues in accounting for inventories held for distribution: the initial recognition of inventories held for distribution; the subsequent distribution of such inventories; and reporting at year end on remaining balances of inventories held for distribution (and the recognition of any writedowns or losses). Each of these issues is discussed in turn. 4.43 At the time they are acquired, inventories held for distribution are measured at the lower of cost and current replacement cost (NZ IAS 2 paragraph NZ 9.1). In respect of purchased or manufactured inventories, cost is the costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition (NZ IAS 2 paragraph 10). In respect of donated inventories or inventories acquired for nominal consideration, cost is the current replacement cost as at the date of acquisition, after taking account of any obsolescence or other impairment (NZ IAS 2 paragraphs NZ 9.3 and NZ 10.1). 21 This Guide assumes that all not-for-profit entities are public benefit entities. Refer to Chapter 1. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 29

4.44 Not-for-profit entities sometimes receive donations of goods that are not suitable for use by the entity or for distribution to others. If such goods are disposed of rather than being held by the not-for-profit entity they would constitute assets of the entity only to the extent of any proceeds from their disposal and would be recognised in the financial statements only to that extent. 4.45 When inventories held for distribution are distributed, the carrying amount is recognised as an expense in that period. 4.46 Balances of inventories held for distribution at year end are measured at the lower of cost and current replacement cost as at the balance date (NZ IAS 2 paragraph NZ 9.1). Where inventories held for distribution were initially donated (for example, where a food bank distributes donated goods), the entity measures the goods at the lower of current replacement cost at the date of acquisition and current replacement cost at the reporting date. Write-downs or losses of such inventories are not common but where they occur they are recognised as an expense in the period the writedown or loss occurs (NZ IAS 2 paragraph NZ 34.1). If, at the end of the reporting period a not-for-profit entity decides to dispose of donated inventories that are no longer of use to the entity the inventories would be written-off at that point. 4.47 Not-for-profit entities applying these requirements will need to exercise judgement and consider the materiality of the inventories concerned. In measuring the amounts of donated inventories received and distributed an entity may be able to use estimating and averaging processes (for example, the estimated number of standard food parcels delivered). The extent to which estimation and averaging processes can be used will depend on the materiality of the items. If a food bank receives goods which have a limited remaining life or which have been damaged, the replacement costs as at the date of acquisition and at the reporting date would reflect this. 4.48 Journal entries to record the receipt of donated inventory and the subsequent distribution of such inventory are shown below. DR Donated inventory xx CR Revenue donated inventory xx To recognise donated goods at time of receipt. DR Expense cost of goods distributed xx CR Donated inventory xx To recognise the distribution of donated goods during the period. Inventories sold or distributed during the period 4.49 The value of inventories sold or distributed during the period is an expense, and is included in the statement of financial performance for the same period that the related revenue is recognised. Any write-down or loss associated with inventory is also recognised in the period in which the write-down or loss occurs (NZ IAS 2 paragraph 34). Inventories held for distribution are expensed when the goods are distributed or services provided (NZ IAS 2 paragraphs NZ 9.1 and NZ 34.1). 4.50 An entity determines the cost of inventory used or sold during the period as follows: the cost of items that are not interchangeable or that are set aside for a specific project is the specific cost of those items (referred to as specific identification) (NZ IAS 2 paragraph 23); and the cost of other items is determined using the first-in, first-out method or weighted average cost (NZ IAS 2 paragraph 25). Write-down of inventory 4.51 If the value of items of inventory falls, the carrying amount of inventory in the financial statements should be reduced. This may happen when inventory becomes obsolete, is damaged or the amount for which the inventory could be sold has gone down. 4.52 If the net realisable value (see paragraph 4.38) of inventories is less than cost (or in the case of inventories held for distribution, if the current replacement cost of the inventories is less than cost) the inventories are written down to the lower amount (NZ IAS 2 paragraphs 9 and NZ 9.1). Such write-downs are recognised as an expense (NZ IAS 2 paragraph 34). Inventory disclosures 4.53 NZ IAS 2 requires the following disclosures in respect of inventories: accounting policies adopted (refer Appendix 5 of this Guide); total carrying amount of inventory and the carrying amount of each subclassification of inventories. NZ IAS 2 does not specify the way in which inventories are to be subclassified. They can be classified by type (for example, items 30 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

held for resale, publications held for distribution) or by stage of completion (for example, raw materials, work in progress, finished goods). If inventories are not material only the total carrying amount of inventories is disclosed; the amount of inventories sold or distributed during the period that has been recognised as an expense; details of any write-down of inventories or reversal of write-downs, if material; and the amount of inventories pledged as security against specific liabilities. Receivables and loans 4.54 Receivables are amounts owed to the entity by others. Types of receivables include: interest due on deposits or loans made; amounts due in relation to goods and services provided to others (also referred to as trade debtors); amounts due in relation to subscriptions or registration fees; amounts due in relation to assets that have been leased to others (refer Figure 5); and amounts expected from bequests that have been recognised as income but which have not yet been received. 4.55 A not-for-profit entity may have grant receivables such as an enforceable legal right to a grant from another entity. 4.56 Receivables and loans are presented separately on the face of the statement of financial position (NZ IAS 1 paragraph 68(h)). 4.57 Receivables and loans are financial assets and are subject to the recognition and measurement requirements of NZ IAS 39 (lease receivables are an exception they are only partially covered by NZ IAS 39). Loans and receivables which were made by the not-for-profit entity are measured initially at fair value 22 (where transactions are on normal commercial terms fair value is likely to be the same as cost), and subsequently at amortised cost (refer to paragraph 4.25 for a description of amortised cost). If receivables are due within one year from the date of the transaction, the amount of the receivable at the time the transaction was entered into will generally be the same as the fair value at initial measurement and the amortised cost at reporting date. The amounts will differ if any repayments have been made or if the receivable is impaired (not expected to be received in full). 4.58 Entities commonly establish provisions for doubtful debts. Previously these could be general provisions which estimated the proportion of receivables that would not be recovered based on past experience. However, NZ IAS 39 (paragraph 58) now requires objective evidence that receivables will not be recovered in full before they can be written down. Assuming that the receivables are carried at amortised cost the amount of the impairment loss is immediately recognised and is reported in the statement of financial performance for that period. The receivable may be reduced either directly or through use of an allowance account (with the receivable being reported net of the allowance account). 4.59 In the unlikely event that a not-for-profit entity decides to transfer its receivables to another entity or to make them available for sale it would need to reconsider the classification and treatment of those items under NZ IAS 39. 4.60 Not-for-profit entities may make a variety of loans that are not at normal commercial rates or on normal commercial terms. Some common examples are: interest-free loans; loans to individuals or entities with a poor credit risk; and loans that are subject to conditions and if the conditions are met then part or all of the loan is written off (sometimes called suspensory loans). 4.61 Under NZ IFRSs such loans may need to be written down at the time they are made to reflect the fact that the full amount of the loan is unlikely to be repaid or that the entity is not being fully recompensed for the use of its funds. 4.62 Interest-free loans, or loans made at lower than commercial rates of interest, should be separately disclosed as a current or non-current asset as appropriate. Under NZ IAS 39 an entity giving an interest-free loan should initially record the loan at fair value. The difference between the amount loaned (the face value) and the fair value of the loan should be expensed immediately. The fair value of the loan will depend on when it is repayable. If the loan is repayable on demand and it is expected that the full amount will be repaid, the full amount of the loan should be recorded as an asset. If the loan is intended to be short term the amount loaned is likely to be a reasonable approximation of fair value. If the loan is intended to be available for some years but the timing is uncertain the fair value should be determined using the best estimate of the future cash flows, adjusted to take into account the time value of money. Interest should be accrued each year based on the effective interest rate method 23. 22 A number of financial reporting standards require that assets or liabilities be measured at fair value. The specific requirements in relation to fair value can vary slightly between standards. The IASB has released a discussion paper on the measurement of fair value with the aim of eventually issuing a standard which would establish a single source of guidance for all fair value measurements required by IFRSs and clarify the definition of fair value and related guidance. 23 The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability. The effective interest rate is similar to the yield to maturity of an investment. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 31

4.63 The entity should also check each year whether such loans are impaired, either individually or collectively in accordance with NZ IAS 39. Individual impairment occurs when there is objective evidence that the specific loan is impaired. A loan that has been individually assessed for impairment and found not to be individually impaired should still be assessed together with similar loans for evidence of impairment. 4.64 In determining the fair value of an interest-free loan (or a loan with an interest rate below market rates) and in considering whether such loans are impaired, an entity makes judgements based on the best information available to it at that time. For example, when a loan is first issued the entity may expect that the borrower will repay the loan in full and would account for it accordingly. If at some later date the governing body decides to forgive the outstanding balance of the loan, impairment would be recognised at that point. 4.65 The discussion of interest-free loans applies equally to suspensory loans. However, if it is likely that the conditions of the loan will be met and repayment is unlikely, then the substance of the arrangement may be closer to a grant and the amount advanced should be expensed. 4.66 Not-for-profit entities with financial assets other than cash receivables or short-term loans should refer to the requirements of NZ IAS 39. Prepayments 4.67 A prepayment is a payment in advance of the period it relates to (for example, insurance or rent paid in advance). Prepayments made by the entity are not receivables or other financial assets (they do not result in the receipt of cash). Because prepayments are generally immaterial they are often presented with receivables as a single item in the financial statements. In assessing materiality entities should have regard to the guidance in the NZ Framework (paragraphs 29 to NZ 30.1) and NZ IAS 1 (paragraphs 11, NZ 11.2, and 29 to 31). Property, plant and equipment 4.68 Property, plant and equipment are tangible assets that an entity holds for its own use or for rental to others and which the entity expects to use during more than one period (NZ IAS 16 paragraph 6). An item is recognised as property, plant and equipment only if it is probable that future economic benefits or service potential will flow to the entity and the cost 24 of the item can be reliably measured. An item of property, plant and equipment is no longer recognised when it is disposed of or when it is permanently withdrawn from use and there are no further probable future service potential or economic benefits. 4.69 Common classes of property, plant and equipment held by not-for-profit entities are: land; buildings; motor vehicles; furniture and fixtures; office equipment; and heritage assets (some heritage assets may be land and buildings). Initial measurement 4.70 Items of property, plant and equipment are generally measured at cost (NZ IAS 16 paragraph 15). The initial cost of an item comprises the purchase price, the costs directly attributable to bringing the asset to working condition (NZ IAS 16 paragraphs 16 to 22). The initial cost of self-constructed assets is determined in the same way. 4.71 As noted in the discussion of donated assets later in this chapter, donated property, plant and equipment is an exception to this rule. Donated items of property, plant and equipment, or items which are acquired at much less than their normal purchase price, are measured at their fair value at the date of acquisition (NZ IAS 16 paragraph NZ 15.1). The difference between the amount paid for the asset and its fair value at the date of acquisition is recorded as revenue. 4.72 Any capitalisation threshold adopted by the entity is applied to the initial measurement. Capitalisation threshold 4.73 It is common practice (although not required) to include only assets with a value above a certain limit (the capitalisation threshold) in the financial statements, so that low-value or immaterial assets are not shown. Capitalisation thresholds will vary between entities and between types of assets. In some cases it may be appropriate 24 There are some exceptions for donated assets as discussed later in the Chapter. 32 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

to use the low-value asset threshold used for income tax purposes subject to certain conditions, assets that cost $500 or less, are deductible (for income tax purposes) in the year they are acquired or created. If an entity has large numbers of a certain type of asset, which individually are below the capitalisation threshold, they are grouped and the total is compared to the threshold. This may apply, for example, to computers and office furniture. If adopting a particular threshold would result in material assets (or a material group total) being omitted from the financial statements, then the threshold is too high. 4.74 Whatever threshold is adopted it is likely that there will be a number of items that fall below the capitalisation threshold but which an entity wants to keep records of (for example, video recorders, scanners, fax machines, mobile telephones and some tools or equipment). These items are generally expensed on acquisition but details may be recorded in a separate register for internal control purposes. Measurement after initial recognition 4.75 After acquisition an entity can choose to measure items using the cost model or the revaluation model. The same model must be applied to an entire class of property, plant and equipment (NZ IAS 16 paragraphs 29 to 31). Under the cost model items are measured at cost less accumulated depreciation and any accumulated impairment losses. Under the revaluation model items are regularly revalued to fair value. They are measured at fair value less accumulated depreciation and any accumulated impairment losses. 4.76 Entities must meet a number of requirements if they choose the revaluation model. Revaluations must be conducted regularly. Unless the asset experiences significant or volatile changes in fair value, revaluations every three to five years should be sufficient (NZ IAS 16 paragraphs 31 and 34). If there is no market-based evidence of fair value, an entity may need to estimate fair value using an income or a depreciated replacement cost approach (NZ IAS 16 paragraph 33). Under the income approach a property may be valued as a fully equipped operational activity, based on operating cash flows and future profitability. NZ IAS 16 contains additional guidance for public benefit entities on determining depreciated replacement cost (NZ IAS 16 paragraphs NZ 33.1 to NZ 33.14). Valuations generally need to be conducted or reviewed by an independent valuer (NZ IAS 16 paragraphs NZ 35.1 to NZ 35.3). The exception is where there is an active market or readily available price indices. All items within a class should be valued at the same time. A rolling revaluation is permitted as long as the revaluation of the class of assets is completed within a short period and the revaluations are kept up to date (NZ IAS 16 paragraphs 36 and 38). Not-for-profit entities may account for revaluations on a class basis (NZ IAS 16 paragraphs NZ 39.1, NZ 40.1 to NZ 40.2) 25. Other entities are required to account for revaluations on an individual asset basis and should refer to NZ IAS 16 (paragraphs 39 and 40). Subsequent expenditure 4.77 The cost of regular repairs and maintenance is expensed. However, in some cases the cost of major upgrades or refurbishments can be added to the carrying amount of the item. The key judgement to be made is whether the work done has increased the service potential or economic benefits of the asset. It may have done so by increasing capacity, improving the quality of output or by allowing for a significant reduction of operating costs (NZ IAS 16 paragraphs 12 to 14). 4.78 The following diagram illustrates the decisions required in deciding whether to capitalise spending on existing assets. 25 This option is available only to public benefit entities. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 33

FIGURE 3: DECIDING WHETHER SPENDING ON EXISTING ASSETS IS CAPITALISED OR EXPENSED Significant spending on existing asset Has an asset or a component of an asset been replaced? Did the work constitute repairs and maintenance (bringing the asset back up to previous performance levels)? Did the work upgrade or improve the asset beyond its initial standard? Expense the spending. No No No Yes Yes Yes Record new item. Eliminate existing components. Recognise gain or loss on disposal. Expense the spending. Capitalise the spending. Depreciation 4.79 Depreciation spreads the carrying amount (cost less residual value) of an asset over its useful life. The carrying amount of the asset is reduced at the end of each year and the amount of reduction is expensed as depreciation. Depreciation provides a measure of the consumption of the asset. Items of property, plant and equipment must be depreciated over their useful lives. The entity must estimate the asset s useful life and then select a depreciation method and rate that will take the asset s carrying value to its residual value over its useful economic life. Where assets are accounted for using the cost model an entity may use the depreciation rates permitted for income tax purposes (NZ IAS 16 paragraph NZ 5.3) 26. The straight line and diminishing value methods are commonly used. The residual value and useful life of an asset and the depreciation method applied must be reviewed at the end of each reporting year (NZ IAS 16 paragraph 50 and 61). 4.80 Leased assets and donated assets are depreciated in the same way as other items of property, plant and equipment. Land is not depreciated. Depreciation is also discussed in Chapter 5. Impairment of property, plant and equipment 4.81 An asset is impaired if something has happened to reduce its value, for example damage in a flood or a change in technology that makes the asset obsolete. Restructuring can also cause impairment as the asset may no longer be needed or may be used in a lesser way. It is important to recognise impairment so that assets are not carried at more than they are worth. Not-for-profit entities are unlikely to have impaired assets on a regular basis. 4.82 The following diagram shows how to consider impairment of property, plant and equipment. FIGURE 4: RECOGNISING IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT Are there any indicators of impairment? Calculate recoverable amount. Is carrying amount higher than the recoverable amount? Asset is impaired Expense impairment loss Yes Yes No No No action required No action required 26 These rates are available in a booklet General Depreciation rates on the Inland Revenue Department s website (www.ird.govt.nz). 34 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

4.83 Items of property, plant and equipment must be regularly checked for indications of impairment (NZ IAS 16 and NZ IAS 36 Impairment of Assets). If indications of impairment exist, then, in accordance with NZ IAS 36, the asset s recoverable amount must be determined and compared with its carrying amount to assess the amount of any impairment. The difference is the impairment loss, which is expensed. 4.84 Possible indicators of impairment for not-for-profit entities include: Signs of physical damage or the asset wearing out earlier than expected. Significant changes have taken place during the period, or are expected to take place in the near future, that will affect the way the asset is used or is expected to be used. Such changes could include the not-for-profit entity planning to change the nature of its operations so that the asset is no longer required or dispose of an asset before the previously expected date. During the period, an asset s market value has declined significantly more than would be expected as a result of the passage of time or normal use. 4.85 Other possible indicators of impairment are listed in NZ IAS 36 (paragraph 12). 4.86 An asset is described as impaired if the asset s carrying amount exceeds its recoverable amount (as defined in NZ IAS 36). The carrying amount of an asset is the amount that it is recorded at in the financial statements this is the cost or revalued amount less any accumulated depreciation and earlier impairment losses. The recoverable amount is the higher of the item s fair value less costs to sell and its value in use. The determination of value in use depends on whether the asset is held for the purpose of delivering services or generating cash flows (for example, trading assets). When assets are held by not-for-profit entities to deliver services, the future service potential or economic benefit of an asset are not generally dependent on the asset s ability to generate net cash inflows and, if impaired, would normally be replaced by the entity. In such cases value in use is measured using depreciated replacement cost (NZ IAS 36 paragraph NZ 32.1). Guidance on the application of depreciated replacement cost can be found in NZ IAS 16. The value in use of trading assets is the present value of the future cash flows expected to be derived from that asset (NZ IAS 36 paragraph 6). 4.87 If there is evidence that assets are impaired an entity should refer to NZ IAS 36. Disclosure 4.88 An entity must disclose the total carrying amount of property, plant and equipment on the face of the statement of financial position. It must also disclose the subclassifications of property, plant and equipment, either on the face of the statement or in the notes (NZ IAS 1 paragraphs 68 and 74). 4.89 Property, plant and equipment disclosures required by NZ IAS 16 (paragraph 73) for each class of property, plant and equipment include: the measurement bases used; depreciation methods used; useful lives or depreciation rates used; the gross carrying amount and accumulated depreciation (and accumulated impairment losses); impairment losses recognised and reversed during the period. In addition, NZ IAS 36 requires disclosure of the circumstances leading to impairment losses; and depreciation expense for the period. 4.90 NZ IAS 16 (paragraphs 74 and 77) also requires the disclosure of: restrictions on title (for example, covenants or easements); contractual commitments for the purchase of property, plant and equipment; and details of revalued assets, including the date of the revaluation, the methods and significant assumptions used and the name and qualifications of the valuer (paragraphs 73 to 79). Disposals 4.91 The gain or loss on disposal of an item of property, plant and equipment is recognised as a gain or expense in the statement of financial performance. Gains must be shown separately from revenue (NZ IAS 16 paragraph 68). 4.92 If an asset that is disposed of or otherwise derecognised has previously been revalued, the portion of the revaluation reserve relating to the disposed asset may be transferred to retained earnings at the time of disposal. Alternatively, the revaluation surplus relating to that asset may be transferred directly to retained earnings as the asset is used by NOT FOR PROFIT FINANCIAL REPORTING GUIDE 35

Leased assets the entity (NZ IAS 16 paragraph 41). Transfers from revaluation surpluses to retained earnings do not go through the statement of financial performance. 4.93 Some entities lease assets such as photocopiers, vehicles, telephone systems and land and buildings. NZ IAS 17 Leases establishes the requirements in relation to accounting for leases. It requires leases to be classified as finance leases or operating leases. 4.94 Operating leases are like rental agreements and operating lease costs are expensed as incurred. 4.95 Finance leases are defined as leases that transfer substantially all the risks and rewards associated with ownership of an asset. Assets obtained by way of a finance lease are accounted for as property, plant and equipment of the entity (as if the entity had purchased them) and a liability is recognised in respect of future lease payments. The leased asset is depreciated in the usual way and the amount of the lease liability is reduced over time as lease payments are made. The finance charge component of the minimum lease payments are expensed in accordance with the requirements of NZ IAS 17 (paragraph 25). 4.96 Figure 5 explains how to decide if a lease is an operating lease or a finance lease and summarises the requirements in respect of finance leases. The flow chart summarises questions the entity needs to consider in determining whether a lease is an operating lease or a finance lease. FIGURE 5: CRITERIA FOR DETERMINING WHETHER A LEASE IS A FINANCE OR OPERATING LEASE Ownership transfer at end of lease? Yes No Bargain purchase option or retail? No Lease for majority of economic life? Yes Yes No Present value of minimum lease payments equals substantially all of fair value? Yes No Additional indicators Finance lease Cancellation losses borne by leasee? No Changes in fair value of residual borne by leasee? Yes Yes No Leased assets specialised? Yes No Operating lease Finance lease 36 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

4.97 A lease is classified as a finance lease if it transfers substantially all the risks and rewards of ownership to the lessee. A lease would normally be classified as a finance lease in these situations: the lease transfers title (ownership) of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the offered purchase date and when the lease begins it is reasonably certain that lessee will purchase the asset; the lease term is for the major part of the economic life of the asset, even if title (ownership) is not transferred; at the start of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and the lease assets are of a specialised nature so that only the lessee can use them without major modifications being made (NZ IAS 17 paragraph 10). 4.98 Other situations that can also lead to classification as a finance lease are set out in NZ IAS 17 (paragraph 11). 4.99 The land and buildings elements of a lease are normally classified separately. Leases of land are normally classified as operating leases unless title (ownership) is transferred. 4.100 An asset acquired under a finance lease is recorded at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entity s incremental borrowing rate) (NZ IAS 17 paragraph 20). 4.101 If it is not reasonably certain that the lessee will take ownership at the end of the lease, the asset is depreciated over the shorter of the lease term or the life of the asset. 4.102 In addition to recognising assets leased under finance leases, the entity also recognises a lease liability. The lease payment relating to a finance lease is split between a finance charge which is expensed in the statement of financial performance, and a reduction of the lease liability (NZ IAS 17 paragraph 25). Property which is subleased 4.103 Not-for-profit entities which have surplus space may lease that space to others. If the portion of the property which is leased to others meets the definition of investment properties under NZ IAS 40, it can be accounted for in accordance with: the fair value model in NZ IAS 40; or the cost model in NZ IAS 16 (this option is available only to qualifying entities). Heritage assets 4.104 Heritage assets include historical buildings and monuments, archaeological sites, conservation areas and nature reserves, and works of art. Heritage assets often have certain characteristics, including the following (although these characteristics are not exclusive to such assets). In the absence of a market for such assets a value based on a market price is unlikely to be available. Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by sale. They are often irreplaceable and their value may increase over time even if their physical condition deteriorates. It may be difficult to estimate their useful lives, which in some cases could be several hundred years. 4.105 NZ IAS 16 states that property, plant and equipment of public benefit entities may include artefacts of cultural or historical significance. Applying NZ IAS 16 to heritage assets which meet the definition of property, plant and equipment (that is, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes) means that such heritage assets: would be included in the statement of financial position as a class of property, plant and equipment (assuming that they also meet the definition of an asset and the asset recognition criteria in the NZ Framework); would be brought into the financial statements at cost or, where donated, at fair value; would be accounted for using either the cost model or the revaluation model permitted by NZ IAS 16 (these two models are discussed earlier in this chapter); would need to be regularly reviewed for indications of impairment in accordance with NZ IAS 36; and with a finite useful life would be depreciated. In practice, the useful life of a heritage asset is usually indeterminate, so heritage assets are frequently not depreciated. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 37

Intangible assets 4.106 An intangible asset is defined as an identifiable non-monetary asset without physical substance (NZ IAS 38 Intangible Assets paragraph 8). Computer software, patents and copyrights are all examples of intangible assets. 4.107 Not-for-profit entities are likely to have few intangible assets which meet the criteria for recognition in NZ IAS 38. Computer software will probably be the most common item. A common intangible asset for profit-oriented entities is goodwill on acquisition. Although it is possible for a not-for-profit entity to have goodwill, this is not common and it is not covered in this Guide. Not capitalised 4.108 Expenditure on an intangible item is generally expensed when it is incurred. For example, expenditure on the following items is expensed: research costs and development costs if the technical and commercial feasibility of the asset (that is, the intangible asset being created) for sale or use have not been established (NZ IAS 38 paragraphs 54 and 57); internally generated brands, mastheads, publishing titles, customer lists and similar items (NZ IAS 38 paragraph 63); and start-up costs, training activities, advertising and promotional activities, relocation or reorganisation of the entity (NZ IAS 38 paragraph 69). 4.109 If expenditure on an intangible asset is not capitalised because it does not meet the requirements in NZ IAS 38 for capitalisation, the entity may nevertheless choose to disclose information about the item, including the amount spent on the item, in the notes. 4.110 The guidance in NZ IAS 38 in respect of research and development costs is intended to provide guidance for all internally generated intangible assets (NZ IAS 38 paragraphs 51 and 52). Capitalised 4.111 Expenditure on intangible items is capitalised if certain conditions are met. The key conditions are that: the asset is identifiable; future service potential or economic benefits are probable; and the entity has the intent and ability to complete the asset. 4.112 If a not-for-profit entity acquires another entity it will have to recognise any identifiable intangible assets acquired as part of that transaction in accordance with NZ IFRS 3 Business Combinations. Computer software and websites 4.113 Computer software is generally classified as an intangible asset unless it is an integral part of hardware, such as an operating system, in which case it is classified as property, plant and equipment (NZ IAS 38 paragraph 4). In either case the requirements are similar. Software accounted for as an intangible asset is initially capitalised at cost and subsequently measured at amortised (depreciated) cost. However, in the unlikely event that the software has an active market, fair value revaluations are permitted. 4.114 Entities that qualify for differential reporting concessions may expense all research and development costs associated with internally developed software in the period they are incurred. If an entity applies this concession it is not required to comply with NZ IAS 38 paragraph 57, which requires an entity to recognise development costs when certain criteria are met. These criteria include technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost. 4.115 The costs of developing an entity s own website for internal or external access are expensed unless they meet the conditions (for recognition of internally generated intangible assets) set out in NZ IAS 38 and NZ SIC 32 Intangible Assets Web Site Costs. NZ SIC 32 clarifies the application of NZ IAS 38 paragraph 57 to web site developments by distinguishing between web sites which customers can use to purchase products, and therefore directly provide economic benefits (or service potential), and web sites that merely advertise products. 4.116 NZ SIC 32 (paragraphs 8 and 9) states that the following conditions must be satisfied for web site costs to be recognised as an internally generated intangible asset: the entity must be able to demonstrate that the conditions in NZ IAS 38 paragraph 57 will be met, including being able to demonstrate that the web site will generate probable future economic benefits (or service potential); the expenditure must relate to the application and infrastructure development stage, the graphical design stage or the content design stage; and the expenditure must not be related to advertising and promoting an entity s own products and services. 38 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

4.117 A web site that generates income for a not-for-profit entity (for example, by enabling people to make donations or bequests) may satisfy the requirement that the web site will generate probable future economic benefits (or service potential). However, a web site developed solely or primarily for promoting and advertising a not-for-profit entity s services would not satisfy this requirement and all expenditure on developing such a web site would be expensed when incurred. Measurement of intangible assets subsequent to acquisition 4.118 NZ IAS 38 permits an entity to revalue intangible assets only if it can do so by reference to prices available in an active market (NZ IAS 38 paragraph 72). Revaluation of intangible assets is therefore uncommon. 4.119 Annual impairment review of intangible assets is required, with more detailed testing required in certain circumstances (NZ IAS 38 paragraph 111 refers entities to the requirements in NZ IAS 36). NZ IAS 36 specifies the frequency and timing of impairment assessments and the method of measuring impairment for various categories of intangible assets. 4.120 The amortisation (depreciation) and impairment of intangible assets subsequent to acquisition is summarised in the Table 5. TABLE 5: AMORTISATION AND IMPAIRMENT OF INTANGIBLE ASSETS Category of intangible asset Amortise? Impairment Intangible assets with a finite useful life (common) Intangible assets with an indefinite useful life (uncommon) Intangible assets not yet available for use Goodwill acquired in a business combination Internally generated goodwill Amortise over the useful life. (NZ IAS 38 paragraphs 89 and 97) Do not amortise. (NZ IAS 38 paragraphs 89 and 107) Do not amortise. Amortisation begins when the asset is available for use. (NZ IAS 38 paragraph 97) Do not amortise. (NZ IFRS 3 paragraph 55) Do not recognise as an asset. (NZ IAS 38 paragraph 48) Review for indicators of impairment annually. Test for impairment only if indicators of impairment are present. (NZ IAS 36 paragraph 9) Test for impairment at least annually. (NZ IAS 36 paragraphs 10(a), 24, 59, 89) Test for impairment at least annually. (NZ IAS 36 paragraphs 10(a), 59, 89) Test for impairment at least annually. (NZ IAS 38 paragraph 55 and NZ IAS 36 paragraphs 6, 10(b), 80, 81, 88, 90, 96, 99) Disclosure of intangible assets 4.121 The disclosures required by NZ IAS 38 (paragraphs 118, 122 and 124) in respect of intangible assets include: useful life or amortisation rate; amortisation method; gross carrying amount; accumulated amortisation and impairment losses; line items in the statement of financial performance (that is, assets which are separately disclosed on the face of the statement) which include amortisation; a reconciliation of the carrying amount at the beginning and the end of the period; the basis for determining that an intangible asset has an indefinite life; a description and carrying amount of individually material intangible assets; certain special disclosures about intangible assets acquired by way of government grants; information about intangible assets whose title is restricted; commitments to acquire intangible assets; details of intangible assets carried at revalued amounts; and the amount of research and development expenditure recognised as an expense in the current period. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 39

Donated assets 4.122 Where a not-for-profit entity is gifted assets or is able to acquire assets for a nominal amount, two standards are relevant. NZ IAS 16 and NZ IAS 2 contain specific requirements for public benefit entities in respect of assets acquired at no or nominal cost. NZ IAS 16 requires that property, plant and equipment acquired at no cost or for a nominal cost is recognised initially at fair value and that the amount of the donation or subsidy is recognised in the statement of financial performance (NZ IAS 16 paragraph NZ 15.1). NZ IAS 2 requires that where inventories are acquired at no cost or for nominal value the cost of the inventory is the current replacement cost at the date of acquisition (NZ IAS 2 paragraph NZ 10.1) 27. 4.123 The intention of these requirements is to provide users with information on the extent of the resources available to the entity. If the assets were recorded at their actual cost, that would give a misleading impression of the entity s assets. 4.124 NZ IFRSs do not contain specific financial reporting requirements in relation to other donated assets. International Public Sector Accounting Standard 23 Revenue from Non-Exchange Transactions (Including Taxes and Transfers) requires that an inflow of resources that meets the definition of an asset be recognised as an asset when (a) it is probable that the future economic benefits or service potential associated with the asset will flow to the entity; and (b) the fair value of the asset can be measured reliably. IPSAS 23 requires such assets to be initially measured at their fair value as at the date of acquisition 28. 4.125 Following initial recognition, donated assets should be accounted for in the same way as other assets in that class. That is, they should be depreciated where appropriate and regularly checked for indications of impairment. 4.126 Donated assets may be subject to restriction or conditions. Accounting for restrictions and conditions on both cash provided for a specific purpose and other donated assets is discussed later in this chapter. 4.127 A pledge is a promise, either written or verbal, to make a contribution (of cash or other assets) at a later date. Some indicators that a pledge is valid include written evidence created by the donor using words such as I promise, I agree or whether the pledge appears to be legally enforceable. Pledges may be conditional or unconditional. Unconditional pledges give rise to receivables. Conditional pledges may give rise to receivables or contingent assets. A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity (NZ IAS 37 paragraph 10). Contingent assets are not included in the statement of financial position: where an inflow of economic benefits is probable they are disclosed in the notes. In determining whether a pledge to donate assets gives rise to a probable inflow of benefits the entity will need to assess the likelihood of the pledge being honoured. Assets held in trust for others 4.128 Not-for-profit entities may hold assets which they consider to be assets held in trust on behalf of others. For example: a not-for-profit entity collects money on behalf of another entity; a sports club collects money from members towards the costs of a team trip, although members retain personal liability for meeting their expenses; and an aged care facility holds cash on behalf of residents. 4.129 The above examples all refer to cash. However, any asset, including property, can be held on trust. Any not-for-profit entity holding such assets needs to decide if the assets should be included in its statement of financial position or reported as supplementary information in a separate statement of trust assets or trust money. In some cases it is clear that the assets in question are not controlled by the not-for-profit entity and the assets and any associated flows should not be included in its statement of financial position. If it is not clear who controls the asset, the definition of an asset in the NZ Framework should be applied. The NZ Framework (paragraph 57) notes that although many assets are associated with legal rights, this is not an essential condition for an entity to control the benefits that flow from an asset. The existence of restrictions over the use of an asset do not prevent an entity from controlling an asset for financial reporting purposes, but the existence of such restrictions must be disclosed. 4.130 Not-for-profit entities sometimes combine cash held on behalf of others with the entity s own cash balances. In this case, the cash held in trust is included in the not-for-profit entity s reported cash balances and a liability is recognised for the trust cash amount. If funds are held in a separate bank account the entity still needs to consider whether it controls those funds. The status of trust assets should be regularly reviewed. Where an entity holds funds in separate bank accounts in trust or for defined grants for specific purposes and the entity is legally restricted to using such funds for a specified purpose, then such cash balances may be separately classified as cash on hand restricted. 27 This is a public benefit entity requirement. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. 28 In IPSAS 23, in common with IPSASs, the term revenue means both gains and revenue from other activities. The definition of revenue in NZ IFRSs is limited to items that arise in the course of the ordinary activities of an entity. Depending upon the nature of an entity s activities, inflows associated with non-exchange transactions may be revenue or other income. 40 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

4.131 Some of the issues involved in determining whether funds or other assets are held in trust or are controlled by the reporting entity are similar to the issues associated with the recognition of bequests. Bequests are discussed in Chapter 5. 4.132 A possible format for a statement of trust money held is shown below. FIGURE 6: SAMPLE STATEMENT OF TRUST MONEY FORMAT STATEMENT OF TRUST MONIES HELD FOR THE YEAR ENDING [DATE] Name of Trust Opening Balance Contributions Distributions Revenue Expenses Closing Balance $ $ $ $ $ $ Accounting for restrictions and conditions on assets 4.133 Some assets held by an entity are subject to restrictions and conditions on their use. For example: an asset donated to the entity is to be used only for a specific purpose; or an entity has been given money to provide certain goods and services. This is likely to be the most common scenario. 4.134 Two standards require disclosure of restrictions. Disclosure of restrictions on the use of part or all of an entity s cash balances is required by NZ IAS 7 (paragraph NZ 49.1) 29. This requirement applies only to public benefit entities. Disclosure of restrictions on the title of property, plant and equipment is required by NZ IAS 16 (paragraph 74(a)). 4.135 However, there is currently no New Zealand financial reporting standard that covers whether a restriction or condition on an asset gives rise to a liability that should be recognised. Guidance on accounting for restrictions and conditions can be found in IPSAS 23. 4.136 This Guide uses the following definitions from IPSAS 23. Stipulations on transferred assets are terms, in laws or regulation, or a binding arrangement, imposed upon the use of a transferred asset by entities external to the reporting entity. Restrictions on transferred assets are stipulations that limit or direct the purposes for which a transferred asset may be used, but do not specify that future economic benefits or service potential is required to be returned to the transferor if not deployed as specified. Examples of restrictions are: (i) funds which have been raised for one of the specific purposes of the reporting entity are accounted for as cash of the reporting entity with the restrictions on its use disclosed; and (ii) a helicopter donated to a rescue service on the grounds that it be used solely for rescue work is accounted for as an asset of the entity, with the restrictions on its use disclosed. Conditions on transferred assets are stipulations that specify that the future economic benefits or service potential embodied in the asset is required to be consumed by the transferee as specified or future economic benefits or service potential must be returned to the transferor. 4.137 Under IPSAS 23 inflows of resources are recognised as (assets and) revenue unless the entity has a liability in respect of those inflows. IPSAS 23 argues that some conditions on transferred assets will give rise to liabilities in the financial statements but restrictions will not. 4.138 Although restrictions would not be recognised as liabilities under IPSAS 23, it still requires disclosure of the amount of assets recognised that are subject to restrictions, and the nature of those restrictions. In the not-for-profit context most transferred assets will be cash donations or grants. When a not-for-profit entity receives a grant which is subject to conditions it should recognise the asset received (generally cash) at fair value and a liability for the condition. As the condition is met the liability will be reduced and revenue recognised. Additional disclosure may be useful when surpluses and deficits have been significantly affected by grants received for capital purposes. Liabilities 4.139 Liabilities include financial liabilities (for example, bank overdrafts, payables, loans and derivatives) and non-financial liabilities (for example, provisions and deferred income). 29 This is a public benefit entity requirement. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 41

Measurement of liabilities 4.140 The measurement of financial liabilities is governed by NZ IAS 39. Financial liabilities are recognised initially at fair value and subsequently at fair value or amortised cost. 4.141 Current liabilities are generally recognised at the estimated obligation to pay. 4.142 Non-current liabilities should normally be recognised at their settlement value. In the case of provisions, this will be the amount that an entity would rationally pay to settle the obligation at the reporting date or to transfer it to a third party at that time. Non-current liabilities which do not have a current settlement value are discounted to obtain a present value. If interest is charged on a long-term loan at close to market rates the present value of the loan is likely to be the same as the initial amount borrowed (assuming that there have been no principal repayments). Bank overdrafts 4.143 Bank overdrafts are generally classified as current liabilities in the statement of financial position. If the entity has arranged a legal right of set off between its bank trading accounts, call deposit accounts and the bank overdraft, then it can offset these balances and disclose the net asset/liability in the statement of financial position. 4.144 If an entity presents a cash flow statement (this will be optional for most small to medium not-for-profit entities) bank overdrafts that are repayable on demand and form an integral part of the entity s cash management are classified as cash and cash equivalents in that statement. Payables 4.145 Most entities have trade creditors. Trade creditors occur when goods and services have been purchased on credit, and an invoice has been received (or the amount is payable under the terms of an ongoing contract or agreement) but has not been paid by the end of the period. Trade creditors are recognised at the amount owed less any allowance for trade discount. They are generally classified as current liabilities in the statement of financial position because they will be settled within 12 months. 4.146 Entities maintaining a cash book during the period can bring trade creditors and accrued expenses into the financial statements by way of an adjustment at the end of the period. This involves checking the accuracy and completeness of all recorded accounts payable and checking all expenses to see if there are likely to be accrued expenses associated with those items. 4.147 The recognition of grants and donations payable is discussed later in this Chapter (refer Liability of a Grantor for Grants and Donations paragraphs 4.163 to 4.165). Accrued expenses 4.148 Accrued expenses arise when goods and services have been purchased on credit from other parties during the period but an invoice has not been received by the end of the period or the amount is not yet due to be paid. Examples include accrued rent, accrued interest and accruals in respect of services provided by professional advisors. Because accrued expenses are not generally material, they are often aggregated with payables in the financial statements. In assessing materiality entities should have regard to the guidance in the NZ Framework (paragraphs 29 to NZ 30.1) and NZ IAS 1 (paragraphs 11, NZ 11.2, and 29 to 31). GST and GST payable 4.149 Where an entity is registered for goods and services tax (GST), all assets and liabilities are normally shown exclusive of GST, except for: (a) receivables and payables that are stated inclusive of GST; and (b) any assets where GST input tax is irrecoverable in this case GST is recognised as part of the asset or expense. 4.150 Entities that qualify for differential reporting concessions can show revenue and expense items either with GST included (gross) or with GST excluded (net), as long as they apply the method consistently and disclose the method in the statement of accounting policies. Grants and subsidies from the Crown or local authorities are considered to include GST if the recipient is registered for GST (there is an exception for grants intended for overseas use for international development). 4.151 GST payable is the net amount owed to the Inland Revenue Department at the reporting date. 4.152 If the entity is not registered for GST, then all transactions are normally shown inclusive of GST. 42 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Members subscriptions in advance 4.153 If the fee paid entitles the member to services or publications during the membership period, or to purchase goods or services at prices lower than those charged to non-members, it is recognised on a basis that reflects the timing, nature and value of the benefits provided (IAS 18 Revenue, Appendix A, Example 17). If services to members are provided evenly throughout the year, it is common practice to recognise one-twelfth of the annual subscription as revenue each month. 4.154 If the fee only provides membership, and all other services or products are paid for separately, or if there is a separate annual subscription, the fee is recognised as revenue when no significant uncertainty as to its collectibility exists (IAS 18, Appendix A, Example 17). This generally results in the entire subscription or membership fee being recognised when payment is due. There is no unearned revenue in respect of such annual membership fees. However, there could be unearned revenue if members have paid a lifetime membership (see below). 4.155 If an entity offers life subscriptions the recognition of a liability for unearned revenue depends on whether the fee is refundable and whether future services are to be provided. If no future services are to be provided and the fee is not refundable, no liability for unearned revenue should be recognised. If future services are to be provided or the fee is refundable, a liability for the unearned portion should be recognised. Generally an equal portion of the life membership would be recognised as revenue each year and the remainder would be recognised as unearned revenue. 30 Long-term borrowings 4.156 Borrowings are recognised initially at fair value (normally this is equal to the cash or other consideration received), less any transaction costs incurred. After initial recognition borrowings are measured at amortised cost. 4.157 Borrowings that are to be settled within 12 months of the reporting date are classified as current liabilities. 4.158 If an entity has received a loan that it will probably not have to repay (for example, a suspensory loan which is reduced as conditions are met and it is likely that all the conditions will be met) the entity should carefully consider whether the loan is really a liability and, if so, the fair value of that liability. In some cases the substance of the transaction will be that the loan is a grant, possibly subject to restrictions or conditions (see Chapter 5 for a discussion of grants subject to restrictions and conditions). Employee-related liabilities 4.159 All employee costs should be recognised as expenses in the period in which the service giving rise to the cost is provided. If an employee s service in the current period is to be paid for or rewarded in future periods then a liability is recognised. 4.160 NZ IAS 19 Employee Benefits sets out the accounting for and disclosure of employee-related liabilities. It states that employee liabilities may be contractual or constructive obligations (for example, NZ IAS 19 paragraphs 3(c) and 52). 4.161 Employee benefits that may give rise to an employee-related liability include annual leave, long-service leave and pensions. In many cases liabilities for items other than wages and salaries will not be material. 4.162 Table 6 describes some of the liabilities arising from some common employee benefits. TABLE 6: EMPLOYEE BENEFITS AND ASSOCIATED LIABILITIES Employee benefits Short-term benefits such as wages, salaries and annual leave Non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) Comment An entity should recognise a liability (current) and an expense for any amounts owed over and above what has already been paid to the employee. Accrued salaries and wages are determined by multiplying the average daily salary and wage bill by the number of working days between the last salary and wage payment and the end of the reporting period (less any working days that were paid in advance). An entity should record the cost of non-monetary benefits provided to employees as an employee expense. The amount of any liability for these benefits at the end of the period is generally small as they are usually consumed within the period. 30 If the life membership is for a fixed number of years the total life membership would be divided by the number of years. If the life membership applies until the member dies then a standard estimate of the membership period could be used. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 43

Employee benefits Long-service leave Accumulating sick leave Defined benefit plans Termination benefits Accident Compensation Corporation (ACC) levies fringe benefit tax (FBT) Comment An entity should recognise a liability for long-service leave based on an estimate of the number of employees likely to qualify for the leave, the amount of the entitlement (taking account of likely salary increases) and the estimated date of entitlement. If the amount of the future benefit is likely to be material, the entity s best estimate of the future amounts should be discounted to obtain the present value of the liability. Larger entities may need to obtain a valuation by an actuary of the expected liability. Changes in the liability are accounted for in the statement of financial performance. Sick leave in New Zealand is not generally vesting. For non-vesting sick leave a liability is recognised when it is probable the sick leave taken in the future will be greater than the benefits accruing in the future. This liability is calculated using current pay rates. An entity should recognise a liability for unpaid vesting sick leave accumulated during a reporting period. Few not-for-profit entities will have defined benefit plans. Those that do should refer to the requirements of NZ IAS 19. An entity should recognise termination benefits as a liability and an expense only when the entity is demonstrably committed to: (a) terminating the employment of an employee or group of employees before the normal retirement date; or (b) providing termination benefits as a result of an offer made in order to encourage voluntary redundancy (NZ IAS 19 paragraph 133). ACC levies and FBT are not employee benefits. An entity should account for ACC levies and FBT as an expense in the period to which they relate. Liability of a grantor for grants and donations 4.163 Non-exchange transfers (grants and donations), made by a not-for-profit entity to other entities or individuals can give rise to a liability to the entity making the transfer. A liability is recognised in the statement of financial position when the entity has an obligation that meets the definition of a liability and the recognition criteria set out in the NZ Framework. This is usually when the entity is under an obligation to make a transfer of economic benefits that is, the point at which the entity has a binding commitment to make the grant or donation. Determining the point at which the obligation exists will usually be a matter of judgement. 4.164 Appendix E of NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets (see below) includes examples of when to recognise a liability in respect of obligations to pay grants or donations 31. In some circumstances an entity may have a constructive obligation to pay a grant before it has notified an applicant of its decision. If an entity making grants has publicly notified criteria for obtaining grants and always makes grants to applicants meeting the criteria, the entity has a legal obligation to pay grants upon receipt of an application for a grant (NZ IAS 37 Appendix E, Example 1). An entity making discretionary grants which has communicated its decision to make a grant to an applicant has a constructive obligation to pay the grant. The constructive obligation exists because the entity has created a valid expectation on the part of the applicant that it will pay the grant (NZ IAS 37 Appendix E, Example 2). 4.165 However, agreements to make ongoing grants and donations to other entities are unlikely to meet the definition of a liability as there is unlikely to be a present obligation. Nor would they generally be regarded as a commitment, unless there is an existing contract binding the entity to make future payments. Even where there is an existing contract, disclosure of commitments is usually limited to items which are abnormal in relation to the entity s activities, or those that are required to understand the future cash requirements of the entity. 31 These examples are applicable to public benefit entities. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. 32 In some cases an entity can elect to apply NZ IAS 39 or NZ IFRS 4 Insurance Contracts. 44 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Guarantees 4.166 A not-for-profit entity may give a guarantee in respect of another entity s loans or obligations. At the point that it gives the guarantee the not-for-profit entity should account for the guarantee in accordance with NZ IAS 39. 32 Under NZ IAS 39, a financial guarantee contract is initially recognised at fair value and is subsequently measured at the higher of (a) the amount determined in accordance with NZ IAS 37 and (b) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with NZ IAS 18. Measurement of guarantees can be complex. Where guarantees are material, either in nature or amount, it may be necessary to seek specialist advice. Disclosure of contingent liabilities is discussed in Chapter 8. 4.167 If guarantees are made on behalf of related parties, details must be disclosed in accordance with NZ IAS 24. 4.168 If a not-for-profit entity discloses information on its maximum exposure to credit risk in accordance with NZ IFRS 7 paragraph 36(a) (this is optional for entities that qualify for differential reporting concessions) it would disclose the maximum amount that it could have to pay if the guarantee is called on. This amount may be significantly greater than any amount recognised as a liability. Commitments for future spending 4.169 Charitable commitments to be met from future revenue do not normally meet the definition of a liability. However, such commitments may be disclosed in the notes. Information on such commitments can help users to assess whether an entity has sufficient funds available to meet both its commitments and ongoing operations. 4.170 If an entity has earmarked some of its unrestricted funds for a particular future purpose, this intention is not recognised as a provision for a liability in the accounts. Such intentions may be disclosed in the notes. Equity 4.171 Equity is the residual of an entity s assets less its liabilities. For many entities equity represents the ownership interest in the entity. However, this concept of equity does not fit not-for-profit entities. Although there may be a number of individuals or entities with a legitimate interest in the financial position and performance of a not-for-profit entity, in most cases they do not have an ownership interest or any rights to the net assets of the entity. Financial statements can provide information on how the net resources of an entity have been built up and whether they represent realised or unrealised gains. The two most common components of equity for a not-for-profit entity are retained earnings and asset revaluation reserves. 4.172 Not-for-profit entities may also use restricted reserves or internal reserves (such as amounts that have been set aside by the governing body or management of the entity for future expenses or as a buffer against adverse events) to indicate that certain resources can be used only for a specific purpose. Because reserves subject to external restrictions and internally created reserves have a different nature, it is important that they are distinguished and reported separately within the equity portion of the statement of financial position. 4.173 Financial reporting standards require the disclosure of the components of equity and changes in the balance of those components. Chapter 6 discusses the requirements of a statement of changes in equity. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 45

Chapter 5 Income and Expenses: Statement of Financial Performance Key points Introduction NZ IAS 1 states the key presentation and disclosure requirements for a statement of financial performance. A number of other standards set out measurement or disclosure requirements for specific income or expense items. The definition of income includes both revenue from ordinary activities and gains. Similarly, expenses include expenses from ordinary activities and losses. Income and expenses may not be offset unless this is permitted by a standard or interpretation. Although all total revenue must be shown on the face of the statement of financial performance, a breakdown of revenue and expenses for each activity may be shown in the notes. The revenue and expense headings used should convey the nature of the entity s activities. Entities must provide an analysis of expenses by nature or function. Income The timing of recognition of revenue from membership or subscription fees depends on whether the entity has an obligation to provide goods and services in the reporting period. There is no single standard that deals with the recognition of revenue from donations, sponsorships and bequests. In some cases it is necessary to go back to the definition of income and the criteria for recognising income to determine when such items should be included in the financial statements. The concepts of control and reliable measurement guide these decisions. The treatment of grants depends upon whether they are donations or contracts for services which are subject to NZ IAS 18. Grants may also be subject to restrictions or conditions. Grants that are subject to restrictions are recognised when they are received by the entity. Grants that are subject to conditions are recognised as revenue as the conditions are fulfilled. NZ IAS 18 governs the recognition of revenue from providing services, selling goods, and interest and dividends. In summary: o revenue from providing services is recognised as the services are delivered; o revenue from selling goods is recognised when the risks and rewards of ownership are transferred; o revenue from interest is recognised on a time proportionate basis that takes into account the effective yield; and o revenue from dividends is recognised when the shareholder s right to receive payment is established. Expenses Grants and donations made by the entity are recognised as an expense when payment occurs or when the entity recognises a liability for the grant or donation if this is earlier. Property, plant and equipment assets are depreciated and reviewed for impairment. Revaluations of property, plant and equipment may give rise to gains or losses. Accounting policies Entities are required to disclose the significant accounting policies used for income and expenses. Materiality An item is material if its inclusion or exclusion from the financial statements would be likely to change a user s judgements made on the basis of the statements. The concept of materiality is used to decide whether certain items need to be disclosed in the financial statements. An entity does not need to make disclosures specified by a financial reporting standard if the information is not material. In addition, the concept of materiality can be used to decide whether the application of a particular financial reporting treatment to a transaction or balance as opposed to an alternative treatment has a material impact on the financial statements. 46 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Introduction 5.1 This chapter provides an overview of the financial reporting requirements for common income and expenses of not-forprofit entities. It assumes that entities will make use of the differential reporting concessions available in New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs). For further guidance, particularly for more complex transactions than those covered by this Guide, please refer directly to the standards. 5.2 Table 7 identifies financial reporting standards at the time of writing that provide guidance on accounting for the income and expenses common to not-for-profit entities. TABLE 7: STANDARDS RELATING TO COMMON INCOME AND EXPENSE ITEMS Elements General Standards Framework for Differential Reporting for Entities Applying the New Zealand Equivalents to International Financial Reporting Standards Reporting Regime NZ IAS 1 Presentation of Financial Statements NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Income commonly earned or received by not-forprofit entities Subscriptions or membership fees Donation and sponsorship income (including bequests, in-kind goods and services and fundraising proceeds) Grant income Trading income (including entrance fees, course registrations, publications, revenue from facilities and revenue from the sale of goods or services) Investment income (including interest, dividends and rent from investment properties) Gain (or loss) on sale of assets NZ IAS 18 Revenue IAS 18 Revenue Appendix (available in Applicable Financial Reporting Standards, published by the New Zealand Institute of Chartered Accountants) NZ Framework NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (This is a disclosure-only standard for public benefit entities.) NZ IAS 18 Revenue NZ IAS 18 Revenue NZ IAS 17 Leases NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IAS 16 Property, Plant and Equipment NZ IAS 39 Financial Instruments: Recognition and Measurement Expenses commonly incurred by not-for-profit entities Wages and salaries Cost of sales Depreciation Decreases in the fair value of assets and liabilities or impairment losses Rent, building costs, other expenses relating to facilities (including operating lease payments) NZ IAS 19 Employee Benefits NZ IAS 2 Inventories NZ IAS 16 Property, Plant and Equipment NZ IAS 16 Property, Plant and Equipment NZ IAS 36 Impairment of Assets NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IAS 17 Leases NOT FOR PROFIT FINANCIAL REPORTING GUIDE 47

Elements Other expenses (for example, communication costs, printing and stationery, general administration expenses, professional and legal fees, fees to auditors, committee expenses, officer honoraria) Bad and doubtful debts Interest Fundraising costs Grants and donations made Taxes Standards NZ Framework NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IAS 39 Financial Instruments: Recognition and Measurement NZ IFRS 7 Financial Instruments: Disclosures NZ IAS 23 Borrowing Costs NZ Framework NZ Framework NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets NZ IAS 12 Income Taxes 5.3 The treatment of assets and liabilities associated with these income and expense items is discussed in Chapter 4. 5.4 Income and expense topics not covered, or only briefly covered, in this Guide include: taxes NZ IAS 12 Income Taxes prescribes the accounting treatment for income taxes and the presentation and disclosure requirements; and changes in exchange rates NZ IAS 21 The Effects of Changes in Foreign Exchange Rates deals with accounting for transactions and balances in foreign currencies, and foreign operations. Some important terms: income, revenue and expenses Income and revenue 5.5 Income is an increase in economic benefits or service potential during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants (NZ Framework paragraphs NZ 49.1 and 70(a)). 5.6 This definition is broad it covers both revenue and gains. The definition of revenue is very similar to the definition of income but it refers to inflows arising in the course of the ordinary activities of an entity (NZ IAS 18 Revenue paragraph 7). The revenue of a not-for-profit entity would include items that arise in the ordinary course of the entity s activities, such as grants, donations and members fees or subscriptions. Revenue would also include any sales made by the entity and any fees, interest, dividends, royalties and rent received by the entity. 5.7 Gains represent other items that meet the definition of income, and may or may not arise in the course of the entity s ordinary activities (NZ Framework paragraph 75). The gains of a not-for-profit entity could include gains arising on the sale of a non-current asset and the revaluation of assets measured at fair value. Although gains are similar in nature to revenue they are usually reported separately in the statement of financial performance. Expenses 5.8 Expenses are decreases in economic benefits or service potential during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (NZ Framework paragraphs NZ 49.1 and 70(b)). 5.9 Expenses include losses as well as the various costs that arise in the course of the entity s ordinary activities. The types of expenses common to not-for-profit entities are shown in Table 7 above. Most expenses are settled in cash or are represented by a reduction in the value of an asset such as inventory or property, plant and equipment. 48 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Preparing a statement of financial performance 5.10 Income and expenses are reported in the statement of financial performance. NZ IAS 1 Presentation of Financial Statements requires the preparation of a statement of financial performance (also called an income statement). The statement of financial performance reports the entity s income and expenses for the period (including any gains or losses that are required to be recognised as income and expenses) and shows the resulting surplus or deficit for the period. 5.11 NZ IAS 1 contains the following requirements in respect of a statement of financial performance. 33 Note that the term on the face of the statement means that the item is shown in the statement itself, rather than in notes. Completeness 5.12 All items of income and expense recognised in a period are included in the surplus or deficit unless a standard or an interpretation requires otherwise (paragraph 78). There are some exceptions permitted by other standards: the correction of errors and the effect of changes in accounting policies (NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors); surplus on the revaluation of property, plant and equipment (NZ IAS 16 Property, Plant and Equipment); certain gains and losses arising on translating the financial statements of a foreign operation (NZ IAS 21); and gains or losses on remeasuring available-for-sale financial assets (NZ IAS 39 Financial Instruments: Recognition and Measurement). 5.13 Not-for-profit entities may need to consider some items that they have not previously included in the statement of financial performance. For example, most grants and donations received, including grants for capital purposes and donated assets, are likely to meet the definition of income and the recognition criteria. 5.14 In some circumstances income from assets held on trust may also be included in the statement of financial performance. If cash held on behalf of others is combined with the entity s own cash balances then the interest on those cash balances would be reported as interest income for the entity. However, an expense, and a liability, would be recognised for any interest owed to third parties. Offsetting of income and expenses 5.15 NZ IAS 1 states that income and expenses may not be offset unless this is permitted by another standard or interpretation (paragraph 32). 34 The statement of financial performance of a not-for-profit entity should therefore report gross income and gross expenses for all of its activities. 5.16 However, if an entity considers that showing gross income and expenses on the face of the statement of financial performance does not appropriately reflect the activities of the entity, it may provide additional information. For example, a not-for-profit entity must show total revenue in the statement of financial performance, but may also provide additional note disclosures showing the revenues, expenses and net surplus from different activities. The following example shows how an entity could indicate the contribution of its opportunity shop and fundraising activities to its total revenue. Example: Note disclosure of revenue and expenses for various activities Opportunity shop revenue xx Opportunity shop expenses xx Net revenue from opportunity shop xx Fundraising revenue xx Fundraising expenses xx Extraordinary items prohibited 5.17 NZ IAS 1 does not allow any items of income and expense to be shown as extraordinary items (paragraph 85). In the past, New Zealand GAAP allowed the disclosure of extraordinary items in rare circumstances. The prohibition in NZ IAS 1 on extraordinary activities is unlikely to have much impact on not-for-profit entities. 33 At the time of writing the IASB is close to finalising amendments to IAS 1 which will affect the presentation of the statement of financial performance. It is proposing to allow the presentation of income and expenses in a single statement of comprehensive income or in two statements (an income statement and a statement of comprehensive income). This Chapter is based on the requirements of NZ IAS 1 as at 1 June 2007. 34 Chapter 4 discussed the circumstances in which overdrafts and positive cash balances can be offset against each other in the financial statements. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 49

Presentation/Disclosure 5.18 Various standards specify disclosures for items of income and expense. The income and expense disclosures required to comply with NZ IFRSs are set out below. Some of these disclosures must be made on the face of the statement. 5.19 Disclosure of additional line items, headings and subtotals is required if this would be helpful to users in understanding the entity s financial performance (NZ IAS 1 paragraph 83). 5.20 Separate disclosure is required for all material categories of revenue or expense. For example, if fundraising revenues and expenses are material for a particular entity, then they should be separately disclosed. As a minimum the headings should reflect the categories required by standards. Revenues and expenses should be classified in a consistent way. 5.21 All material items of income must be disclosed (NZ IAS 1 paragraph 86). Entities qualifying for differential reporting are not required to provide a breakdown of types of revenue. However, an entity may wish to provide more information, and if so must comply with NZ IAS 18. NZ IAS 18 requires disclosure of the amount of each significant category of revenue recognised during the period, including revenue arising from selling goods, providing services, interest, royalties and dividends (NZ IAS 18 paragraph 35(b)). The method of accounting for revenue must be disclosed in the statement of accounting policies (NZ IAS 18 paragraph 35(a)). 5.22 Expense disclosures include: items of expense that are material (NZ IAS 1 paragraph 86); an analysis of expenses by nature or function 35, as explained in paragraph 5.23 (NZ IAS 1 paragraphs 88 to 94); finance costs, on the face of the statement (NZ IAS 1 paragraph 81). The main component of finance costs will be interest. However, finance costs can also include items such as changes in provisions due solely to the passing of time (this is referred to as the unwinding of the discount). If an entity chooses to provide more detail on finance costs it could separately disclose the finance costs for loans, leases and overdrafts; fees to auditors (NZ IAS 1 paragraph NZ 94(a)); donations made (NZ IAS 1 paragraph NZ 94(b)); tax expense, on the face of the statement (NZ IAS 1 paragraph 81); and surplus or deficit, on the face of the statement (NZ IAS 1 paragraph 81). Analysis of expenses 5.23 Entities are required to present an analysis of expenses by either nature or function, whichever they consider provides the most reliable and relevant information. Entities that use a simple accounting system may find it easier to present expenses by their nature, because no allocation of expenses to functional categories is required. Whichever method is used, a range of standards require that certain expenses such as depreciation and personnel costs must be disclosed. Not-for-profit entities using the function of expense method may disclose expenses classified by output (NZ IAS 1 paragraph NZ 92.1). Tables 8 and 9 illustrate the categories that could be used by not-for-profit entities in their expense analysis. TABLE 8: EXAMPLES OF EXPENSE DISCLOSURES: NATURE AND FUNCTION Analysis of expenses by nature Personnel Rent Travel Depreciation Impairment losses Donations and grants made Analysis of expenses by function Fundraising Administration Charitable services Services to members Advocacy Promotion Other expenses 35 Table 8 illustrates the classification of expenses by nature and function. 50 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

TABLE 9: EXAMPLES OF EXPENSE DISCLOSURES: OUTPUT The analysis of expenses by output will be unique to each not-for-profit entity. The analysis shown is merely illustrative. Analysis of expenses by output Direct services to clients Advocacy Grant payments Publications Disclosure of financial interests in other entities 5.24 If a not-for-profit entity has subsidiaries, associates or joint ventures, NZ IAS 1 requires additional disclosures in the statement of financial performance: its share of the surplus or deficit of associates or joint ventures accounted for using the equity method (NZ IAS 1 paragraph 82); the surplus or deficit attributable to the minority interest, on the face of the statement (NZ IAS 1 paragraph 82); and the surplus or deficit attributable to equity holders of the parent (that is, the not-for-profit entity), on the face of the statement (NZ IAS 1 paragraph 82). Income 5.25 Generally income is measured at the fair value of the consideration received or receivable. Usually this is the inflow of cash. Discounting is needed if the inflow of cash is significantly deferred without interest or if interest is less than market rates. If dissimilar goods or services are exchanged (as in barter transactions), revenue is the fair value of the goods or services received or, if this is not reliably measurable, the fair value of the goods or services given up. Subscriptions or membership fees 5.26 NZ IAS 18 (and more specifically the Appendix to IAS 18 Revenue, the international standard on which NZ IAS 18 is based) provides some guidance on the recognition of subscriptions or membership fees. Example 17 of the Appendix to IAS 18 deals with initiation, entrance and membership fees. It states that Revenue recognition depends on the nature of the services provided. If the fee permits only membership, and all other services or products are paid for separately, or if there is a separate annual subscription, the fee is recognised as revenue when no significant uncertainty as to its collectibility exists. If the fee entitles the member to services or publications to be provided during the membership period, or to purchase goods or services at prices lower than those charged to non-members, it is recognised on a basis that reflects the timing, nature and value of the benefits provided. 5.27 If an entity provides goods or services to members in return for receiving subscriptions or membership fees and it has an obligation to provide those goods and services during the reporting period, then the revenue is usually recognised on a time proportionate basis once the entity has an entitlement to collect monies from members. For example, in the case of an annual fee the entity could recognise one twelfth of the fees each month. 5.28 If the entity does not have an obligation to provide goods and services throughout the reporting period the entire subscription or membership fee should be recognised when there is no significant uncertainty as to its collectibility that is, when payment is due. 5.29 If an entity offers life subscriptions the same principles apply. If a portion of the fee is refundable if the member resigns this may be an indication that there is an obligation to provide goods or services. 5.30 Chapter 4 discussed the recognition of liabilities for subscriptions in advance. 5.31 If an entity has objective evidence that it will not be able to collect all of its invoiced subscription revenue, it should recognise an impairment loss in respect of the amount that is not expected to be received. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 51

Donations and sponsorship 5.32 Donations received include donations of cash, donated assets, bequests, in-kind goods and services and fundraising proceeds. Many not-for-profit entities receive gifts in kind, including free or reduced-price professional goods and services. In addition, members of not-for-profit organisations commonly provide extensive amounts of voluntary time to their organisations. Both goods and services from non-members and members time are resources used by such entities in producing their outputs and carrying out their activities. 5.33 Although grants are frequently donations they may also be tied to the provision of goods or services. Grants are discussed in paragraphs 5.58 to 5.61. 5.34 Sources of guidance for the recognition of revenue in relation to revenue from non-exchange transactions such as donations, volunteer services, sponsorships or bequests include the NZ Framework, NZ IAS 18, NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance and IPSAS 23 Revenue from Non-Exchange Transactions (Including Taxes and Transfers). 5.35 Donations and similar income received by the reporting entity should be recognised at the point that it is probable that the future economic benefits or service potential will flow to the entity and the fair value of the assets can be measured reliably. As donations are usually discretionary on the part of the donor, the most appropriate recognition point will normally be when a cash donation is received, or in the case of other donated assets, when the entity takes control of the asset (for example, when title is transferred or at the time of receipt). The donation or sponsorship will result in an increase in assets and, unless there is a related liability, an increase in income. Donated assets and liabilities associated with donations are discussed in Chapter 4. Any liability usually decreases over time with the amount of the decrease being recognised as income at that time. 5.36 An entity should disclose the nature and type of major classes of gifts, donations and bequests it has received, whether they have been recognised or not. It should also disclose the accounting policies adopted in respect of donations. Volunteer services 5.37 Services provided free of charge by volunteers (volunteer services or in-kind services) are similar to donated goods. NZ IFRSs do not specifically require that volunteer services be recognised in the financial statements. Where it is difficult to identify the amount of volunteers time or to measure the value of the services provided, it may be appropriate not to place a financial value on volunteer services. 5.38 However, including the value of volunteer services in the statement of financial performance (as both a revenue and an expense) is helpful to users because it provides more complete information on the resources used by the entity and that are required by the entity in providing its services. 5.39 Regardless of whether volunteer services have been recognised in the financial statements, an entity that receives volunteer services should explain how it has accounted for these services (in the summary of accounting policies) and describe the nature and amount of volunteer services in the notes. Bequests 5.40 A bequest or legacy is a transfer of value or assets made under the provisions of a deceased person s will 36. There are different types of bequests including the following: Specific: Specific bequests may be gifts of a fixed sum of money or a particular asset. These bequests are paid after all claims against the estate have been met and before the residual beneficiaries are paid. Percentage of estate: A gift that is stated as a percentage of the entire estate. Residual: These bequests are paid after specific bequests, taxes and expenses have been paid. A partial distribution may be made once the residual interest is finalised, pending realisation of all the assets in the estate. Contingent (or conditional): These bequests are contingent on a future event such as the death of a primary beneficiary, or the death(s) of surviving heir(s). Deferred (also referred to as Life interest): A bequest is left to a relative or friend (life tenant) for them to benefit from during their lifetime. This can be in the form of a house, or the interest on a trust fund (life interest). After the life tenant s death, the residual interest is then passed on to the final beneficiary. (i) Example: A house is left to a relative/friend to inhabit during their lifetime. Upon the life tenant s death, the proceeds from the sale of the house go to the not-for-profit entity as residuary beneficiary. (ii) Example: The residue of an estate is left in a trust fund and the interest is payable to the life tenant until death. Upon death, the capital (or a percentage of the capital) passes to the not-for-profit entity as residuary beneficiary. 36 An endowment can be made prior to death. Similar issues will often arise with respect to accounting for endowments. 52 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

(iii) Example: The residue of an estate is left in a trust fund and the interest is payable to the life tenant until death. The trustees have access to the capital if required to provide an adequate standard of living to the life tenant. Upon death, the remaining capital (or a percentage of that capital) passes to the not-for-profit entity as residuary beneficiary. 5.41 New Zealand does not currently have a financial reporting standard that deals with accounting for bequests. In determining an accounting policy for bequests an entity should therefore have regard to the requirements of NZ IAS 8 (paragraphs 10 to 12). These requirements are discussed more fully in Chapter 8. The objective is to select an accounting policy that results in relevant and reliable financial information (NZ IAS 8 paragraph 10). 5.42 NZ IAS 8 specifies the following guidance for an entity s management to use when selecting accounting policies, in descending order of authority: requirements of standards and interpretations dealing with similar matters; the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the NZ Framework: the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, other accounting literature and accepted industry practices, to the extent that these do not conflict with standards, interpretations or the NZ Framework (NZ IAS 8 paragraphs 11 and 12). 5.43 Currently it is common practice for a not-for-profit entity to wait until funds are distributed or there is notification of a distribution from an estate before recognising bequest revenue. The adoption of NZ IFRSs provides a timely opportunity to reconsider current policies and to ensure that policies are consistent with the NZ Framework. In some cases it will be relatively simple for a not-for-profit entity to determine exactly when a bequest to the entity bequest should be recognised as income by that entity. However in many cases it will not be clear. In such circumstances an entity will need to consider carefully the circumstances of the bequest and apply the guidance in the NZ Framework. The key issues are: entitlement is the not-for-profit entity entitled to the legacy; probability at what point is it probable that the legacy will be received; and measurement is the amount measurable and how should it be measured? 5.44 In applying the guidance in the NZ Framework a not-for-profit entity would recognise a bequest (as income and an asset) when all of the following conditions are met: the bequest meets the definition of an asset in the NZ Framework 37. That is, is the bequest controlled by the entity as a result of past events from which future economic benefits or service potential are expected to flow to the entity? The critical part of the definition is whether the not-for-profit entity controls the benefits associated with the bequest (NZ Framework paragraph 49(a)). Control includes the ability to obtain or protect future economic benefits and deny others access to those benefits; the bequest meets the criteria for assets and income to be recognised in the financial statements (NZ Framework paragraph 83). There are two conditions that must be met before a bequest is recognised in the financial statements: (i) it is probable that the future economic benefits or service potential associated with the bequest will flow to the entity; and (ii) the cost or fair value of the bequest can be measured with reliability. In the case of a bequest, cost is not relevant. Bequeathed assets are measured initially at their fair value, which may be ascertained by reference to an active market, or by appraisal. Valuations obtained by the executor as at the date of death may be useful in determining fair value. 5.45 The likelihood of receiving benefits as a result of a bequest will depend partly upon whether there are any claims challenging the provisions of a will. Claims may be brought under legislation such as the Family Protection Act. The executors may distribute an estate six months after the grant of administration if no notice of a claim has been received. If a claim is made against the provisions of a will or the court is requested to assist in interpreting a will, distribution will be delayed until the court has heard the case. Where a beneficiary is entitled to a life interest in an asset (that is, use of certain property or income from assets for the rest of their life) the estate cannot be wound up until the life interest beneficiary has died and the assets can pass to the final beneficiary. Sometimes a beneficiary may be entitled to enjoy the use of an asset, or the income from it, for a defined period for example, 20 years, or until remarriage. In these cases the same principles apply. 5.46 Table 10 illustrates the treatment of some common bequest scenarios in accordance with the definition of an asset and the recognition criteria for assets in the NZ Framework. These scenarios are illustrative only there are a large number of possible variations. An entity must consider the specific facts of its own situation. In all cases it is assumed that the person making the bequest has died and the entity has been notified of the bequest by the executor or trustee. 37 Because the definition of income builds on the definition of an asset, an entity will first need to consider whether a bequest meets the definition of an asset in the NZ Framework. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 53

TABLE 10: ACCOUNTING TREATMENT OF SOME COMMON TYPES OF BEQUEST Example Is the bequest an asset of the NFP entity? Should the asset and income be recognised: (a) probable? (b) reliably measurable? Accounting Treatment 1. The bequest is to be managed in perpetual trust by trustees appointed by the NFP. The NFP is the single beneficiary of the trust. The NFP is entitled to all distributions from the trust. The funds of the trust are held separately from the funds of the NFP. Yes. There has been a past event the death of the bequestor. The NFP has control of the bequest because it will obtain the benefits from the bequest. (a) Yes. The benefits are probable. (b) Yes. The fair value of the bequest is able to be reliably measured Recognise the bequest by recognising its interest in the trust as an asset and income. The interest in the trust would be recognised when the trust is created. Disclose any restrictions on the use of the bequest. If the NFP prepares consolidated financial statements it would need to consolidate the trust as a controlled entity in accordance with NZ IAS 27. Example Is the bequest an asset of the NFP entity? Should the asset and income be recognised: (a) probable? (b) reliably measurable? Accounting Treatment 2. As in example 1 (above), but the funds of the trust are invested with the funds of the NFP. The purposes of the trust are consistent with the NFP s activities. It is unlikely that the NFP would be required to return funds to any party. Yes. There has been a past event the death of the bequestor. The assets held by the trust will give rise to benefits to the NFP. Because the funds of the trust and the funds of the NFP have been invested together the NFP controls the funds of the trust. (a) Yes. The benefits are probable. (b) Yes. The funds of the trust are held by the NFP and are able to be reliably measured. Recognise the bequest as an asset (investment) (and income) of the NFP. Disclose any restrictions associated with the funds. Recognise ongoing income from the trust funds as the income is earned. 3. The bequest is held in a permanent trust by external trustees. The trust is not controlled by the NFP. The trustees have investment powers but must distribute all, or a fixed proportion, of the trust income to the NFP each year. The fair value of the future income of the trust is assumed to be reliably measurable. Yes. There has been a past event the death of the bequestor. The assets held by the trust will give rise to benefits to the NFP. The NFP can enforce distributions of income from the trust, it controls an asset, represented by that stream of income. (a) Yes. The benefits are assumed to be probable. (b) The fair value of the future income of the trust is assumed to be reliably measurable. In most cases the present value of the income stream will be equal to the fair value of the assets. The NFP recognises the future trust income as a bequest receivable (and income) in its financial statements. The income from the trust is recognised on an ongoing basis when the trust advises that a distribution will be made. 4. The bequest is held in a permanent trust by a group of external trustees. The NFP is the single beneficiary of the trust. The NFP does not have sufficient information to reliably measure the fair value of the future income from the trust. Yes. There has been a past event the death of the bequestor. The NFP has rights over the future income of the trust. (a) Yes. The benefits are probable. (b) No. The NFP does not have sufficient information to reliably measure the fair value of the future income from the trust. Do not recognise an asset (nor any income) as a result of the bequest. Disclose details of the bequest as a contingent asset (being an asset which does not meet the criteria for recognition in the financial statements). The income from the trust is recognised on an ongoing basis when the trust advises that a distribution will be made. 54 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Example Is the bequest an asset of the NFP entity? Should the asset and income be recognised: (a) probable? (b) reliably measurable? Accounting Treatment 5. The bequest is for the residual amount of an estate. At reporting date there are still unresolved claims (or it is not yet known if claims will be lodged). The estate is large and the claims are likely to be for only a portion of the estate. Yes There has been a past event the death of the bequestor. The NFP controls the right to the residual amount of the estate. (a) Yes. Because it is expected that there will still be a residual estate after any after claims after have been resolved the benefits are probable. If the claims were large relative to the size of the estate then the benefits may not be probable. (b) No. The residual amount cannot be reliably estimated. Do not recognise the bequest until any or all claims are resolved. Disclose the bequest as a contingent asset. 6. As for example 5 above but the claims have been resolved and the entitlement is certain. Yes There has been a past event the death of the bequestor. As the NFP can enforce its claim against the estate it has control of an asset. (a) Yes. The benefits are probable. (b) Yes. The amount can be reliably measured. Recognise the bequest as a receivable (and as income). When the assets from the bequest (cash or other assets) are received they would be recognised and the bequest receivable would be derecognised. 7. The bequest involves a life interest, where a surviving family member has the use of a house. On the death of that person, the NFP has full rights to the residual estate. Yes There has been a past event the death of the bequestor. The residual future economic benefits of the house are an asset for which the NFP has current right. (a) Yes. The benefits are probable. (b) Yes. The amount can be reliably measured. The fair value of the residual estate can be estimated having regard to the life expectancy of the family member (actuarial tables can provide estimates of life expectancy), the expected fair value of the house in the future, and the time value of money. Recognise the bequest as a receivable (and as income). When the assets from the bequest (cash or other assets) are received they would be recognised and the bequest receivable would be derecognised. 8. The bequest involves a life interest. A surviving family member has the use of a house and the income from the estate. The trustees of the estate also have access to the capital of the estate for the benefit of the life tenant. On the death of the life tenant the NFP has full rights to the residual estate. Yes. There has been a past event the death of the bequestor. The residual future economic benefits of the house are an asset for which the NFP has current right. (a) No. The benefits are not probable the estate could be used for the benefit of the life tenant. (b) No. The benefits are not measurable it is not clear how much of the estate will remain. Do not recognise the bequest in the financial statements. Disclose the bequest as a contingent asset. 5.47 The above discussion has considered the initial recognition of bequeathed assets. Changes in the fair value of bequeathed assets from one reporting date to the next would generally be recognised in the statement of financial performance. 38 38 An exception would be a bequest receivable accounted for as a held-to-maturity investment in accordance with NZ IAS 39. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 55

Fundraising income and expenses 5.48 Not-for-profit entities employ a variety of methods of fundraising. Some of the methods of fundraising employed by notfor-profit entities are described in Table 11. TABLE 11: COMMON FUNDRAISING METHODS FUNDRAISING METHOD In-house fundraising Telemarketing Sales on behalf Concerts and similar events Pledges Sales by the entity Depending on type of records kept the entity may not be able to separately identify fundraising costs from the cost of its other activities. A telemarketer, which may or may not be owned by the entity, may be used to collect funds. The telemarketer may pass the gross amount collected to the not-for-profit entity and then receive a set fee in return for their services. Alternatively the telemarketer may deduct expenses or charges before transferring the money to the not-for-profit entity. Goods or services may be sold by another organisation in the name of a charity. The charity may receive a percentage of sales or a percentage of profit. In some cases the seller of the goods or services may not be able to honour its agreement to the charity. A fundraising activity, such as a concert, may be organised by a third party with net proceeds going to a charity. Pledges are unenforceable undertakings to transfer cash or other assets to the entity. An entity may purchase goods for resale, auction or raffle. 5.49 Because of the range of fundraising methods used, it is important that entities describe the fundraising method used and disclose the accounting policy used to recognise fundraising income and expenses. As noted in Chapter 8, entities are required to disclose the accounting policies used that will help users understand the financial statements (NZ IAS 1 paragraph 108). The following paragraphs discuss some of the common fundraising methods listed in the table. In-house fundraising 5.50 Although NZ IFRSs includes a general requirement to disclose material items and limits the extent to which income can be netted with related expenses. The disclosure concession in respect of NZ IAS 18 paragraph 35(b) means that not-for-profit entities that qualify for differential reporting concessions are not required to disclose gross fundraising income and fundraising costs. However, because this information demonstrates accountability to donors, not-for-profit entities are encouraged to disclose gross fundraising income, direct fundraising costs and the policies used to identify direct fundraising costs. The costs of in-house fundraising include wages and salaries and an appropriate portion of other operating costs. Whether this information is disclosed on the face of the statement of financial performance or in the notes will depend on whether the entity has chosen to analyse expenses by nature or function. Telemarketing 5.51 Telemarketing may be used as form of fundraising. Telemarketing arrangements are frequently similar to an agency relationship in that the telemarketer may be authorised by a not-for-profit entity to act on its behalf. In deciding whether funds raised by a telemarketer should be recognised as revenue of the not-for-profit entity, the not-for-profit entity needs to consider whether it controls the funds. 5.52 If a not-for-profit entity s arrangement with a telemarketer is similar to an agency relationship, it is appropriate for the not-for-profit entity to recognise the gross amount of funds raised as an asset and income in its financial statements at the time the funds are collected. The telemarketer operating under such an arrangement would not recognise the gross 56 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

revenue (NZ IAS 18 paragraph 8). This treatment is subject to the amounts collected meeting the probability criterion and being able to be reliably measured. The not-for-profit entity would also recognise the fundraising expenses, such as a fee paid to the telemarketer. However, the nature of the arrangements with telemarketers needs to be carefully considered when determining the appropriate accounting treatment. Sales on behalf 5.53 If a not-for-profit entity does not control goods and services sold on its behalf by other entities it does not normally have control of the funds raised until it receives them. Concerts and similar events 5.54 Funds from activities organised by third parties should be accounted for in the same way as goods or services sold on behalf of the not-for-profit entity. Pledges 5.55 Pledges are not normally recognised as revenue (or assets) until cash is received because up until this point the pledge may be cancelled. As noted in Chapter 4, pledges may meet the definition of a contingent asset. Contingent assets are disclosed in the notes. Sales by the entity 5.56 If an entity purchases goods for resale, auction or raffle the gross revenue raised must be disclosed in the statement of financial performance. However, the net amount raised could be disclosed in the notes. Disclosure 5.57 Entities should describe the nature of fundraising activities and the accounting policies for fundraising income and expenses. Grant revenue 5.58 Grants are a common source of financing for not-for-profit entities. New Zealand does not currently have a financial reporting standard that deals with grant revenue and entities should have regard to the guidance in NZ IAS 8 in determining an appropriate accounting policy. In addition to the NZ Framework, IPSAS 23 is one possible source of guidance. However, some transactions that are called grants are actually contracts for services. Such transactions should be accounted for in accordance with NZ IAS 18. 5.59 Grants may be subject to restrictions or conditions. The recognition of liabilities associated with grants is discussed in Chapter 4. To recap, this Guide uses the terms restrictions and conditions as follows. Restrictions on donated assets are binding terms, imposed by an external party, that limit or direct the purposes for which a donated asset may be used, but do not specify that the recipient has to return the asset (or a sum of money) to the donor if the asset is not used as specified. Grants that are subject to restrictions are recognised when they are received by the entity. Restrictions on the use of assets are disclosed in the notes. Conditions on donated assets are binding terms, imposed by an external party, that require the asset to be used by the recipient as specified, or the asset (or a sum of money) must be returned to the donor. Grants that are subject to conditions are recognised as revenue when the conditions are fulfilled. As discussed in Chapter 4, an entity that has received grant funds in advance of fulfilling conditions would recognise a liability for performance or return obligations. 5.60 Not-for profit entities must also comply with the disclosure requirements of NZ IAS 20 for any grants from a local authority or the Government which meet the definition of a government grant. 39 This definition excludes transactions with government which cannot be distinguished from the normal trading transactions of the entity. NZ IAS 20 (paragraph 39) requires that entities disclose: the accounting policy adopted for government grants; the nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited; and unfilled conditions and other contingencies attaching to government assistance that has been recognised. 40 5.61 At the time of writing the IASB plans to review IAS 20. 39 Due to the potentially inappropriate impact of this Standard on the financial statements of public benefit entities, public benefit entities are currently prohibited from applying the recognition, measurement and presentation requirements set out in NZ IAS 20. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. 40 Profit-oriented entities are require to make additional disclosures (NZ IAS 21 paragraph NZ 39.1). NOT FOR PROFIT FINANCIAL REPORTING GUIDE 57

Revenue from the sale of goods 5.62 Revenue from the sale of goods is recognised when: significant risks and rewards of ownership are transferred to the buyer; managerial involvement and control have passed; the amount of revenue can be measured reliably; it is probable that economic benefits will flow to the entity; and the costs of the transaction (including future costs) can be measured reliably (NZ IAS 18 paragraph 14). Revenue from providing services 5.63 If all of the following criteria are met, revenue from providing services is recognised by reference to the stage of completion of the transaction at the balance sheet (reporting) date (the percentage-of-completion method): it is probable that the economic benefits will flow to the seller; the amount of revenue can be measured reliably; the stage of completion at the reporting date can be measured reliably; and the costs incurred, or to be incurred, in respect of the transaction can be measured reliably (NZ IAS 18 paragraph 20). 5.64 If the above criteria are not met, revenue from providing services should be recognised only to the extent of the expenses recognised that are recoverable (a cost-recovery approach (NZ IAS 18 paragraph 26). Interest and dividend revenue 5.65 If it is probable that the economic benefits will flow to the entity and the amount of revenue can be measured reliably, NZ IAS 18 states that revenue from interest, royalties and dividends should be recognised as follows: interest: on a time proportion basis that takes into account the effective yield; royalties: on an accruals basis in accordance with the substance of the relevant agreement; and dividends: when the entity s right to receive payment is established (NZ IAS 18 paragraphs 29 and 30). 5.66 Dividends declared after the reporting date are not assets of the entity receiving the dividend at reporting date, because they are not present obligations of the entity making the dividend at reporting date. They are non-adjusting events in terms of NZ IAS 10 Events After the Balance Sheet Date and, if material, would be disclosed in the notes (NZ IAS 10 paragraphs 10,12 and 24). Gains and losses on sale or disposal of property, plant and equipment 5.67 Gains or losses arising from the sale or disposal of an item of property, plant or equipment (also called gains or losses arising on derecognition) must be included in the surplus or deficit for the period. Expenses Grants and donations expense 5.68 Grants or donations made by a not-for-profit entity to another party are recognised as an expense at the point at which the payment is made, or at the point that there is a liability meeting the recognition criteria for liabilities if this is earlier. This may be the point at which the not-for-profit entity makes a binding commitment to make the grant or donation. 5.69 If providing grants or donations is a significant part of the reporting entity s activity then the total amount of the grants and donations expense should be disclosed as a separate item on the face of the statement of financial performance. 5.70 Although not currently required by GAAP, for accountability purposes the entity should also consider providing supplementary information on grants and donations made in the notes. This could include information about the name of recipients and the aggregate amount of the grants made to each recipient in the reporting period. In making any such disclosures not-for-profit entities would need to consider any confidentiality obligations to individual recipients. Operating leases 5.71 An operating lease is treated in the same way as a rental agreement. The total cost of the lease is an expense in the financial statements of the lessee. The total cost of the lease is generally recognised on a straight-line basis over the term of the lease (NZ IAS 17 Leases paragraph 33). Lease incentives such as rent-free periods which are provided on a normal 58 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

commercial basis are recognised as a reduction of the lease expense over the lease term (NZ SIC-15 Operating Leases Incentives paragraph 5). 5.72 NZ IAS 17 (paragraph 35) requires the disclosure of future lease payments broken down into the following periods: under one year; one to five years; and later than five years. Property, plant and equipment expenses 5.73 NZ IAS 16 establishes requirements in relation to property, plant and equipment. It allows an entity to revalue items and requires that an entity depreciate assets and regularly check for indicators of impairment. These requirements are discussed in Chapter 4. 5.74 The majority of assets are consumed over their useful life. This consumption spreads the asset s cost or valuation over the asset s useful life, and is called depreciation. The purpose of showing depreciation in the financial statements is to represent the use of the asset, as a resource, during the period. It is not a method of funding the replacement of assets. Depreciation is required even if an asset is rising in value or is regularly revalued. Only assets with an indefinite useful life, such as land, do not have to be depreciated. 5.75 Depreciation disclosures required in the statement of financial performance include: total depreciation expense for the period (NZ IAS 1 paragraphs 91 and 93); depreciation expense for each class of assets (NZ IAS 16); and impairment losses and reversals recognised in profit or loss during the period and those recognised directly in equity during the period (NZ IAS 36 Impairment of Assets paragraph 126). Inventories sold or used 5.76 NZ IAS 2 Inventories (paragraph 34) requires that: the carrying amount of inventories sold is recognised as an expense in the period in which the related revenue is recognised; and the amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. 5.77 It also specifies that entities with inventories held for distribution must recognise the carrying amount of the inventories as an expense in the period in which the goods are distributed or the services provided (NZ IAS 2 paragraph NZ 34.1). 41 5.78 Entities qualifying for differential reporting concessions do not have to make all the disclosures required by NZ IAS 2 paragraph 36. However, they may choose to disclose the following items: the amount of inventories recognised as an expense during the period; the amount of any write-down of inventories recognised as an expense in the period; reversals of write-downs recognised as an expense in the period. 5.79 Similar disclosures are required for inventories held for distribution (NZ IAS 2 paragraph NZ 36.1). Impairment loss on receivables 5.80 An entity must look for objective evidence of impairment (that is, that the entity will not be able to collect all amounts due under the original terms of the receivable) before it reduces the carrying amount of a receivable (NZ IAS 39 paragraph 58). The receivable may be reduced either directly or through use of an allowance account. If receivables are carried at amortised cost the amount of the impairment loss is immediately recognised as an expense and is included in the statement of financial performance for that period. Borrowing costs 5.81 Borrowing costs should be expensed as they are incurred. Entities that wish to can capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use) during the period of time that is required to complete and prepare the asset for its intended use (NZ IAS 23 paragraphs 10 and 11). The carrying amount of the qualifying asset (costs plus capitalised borrowing costs) cannot be more than the recoverable amount or net realisable value of the asset (NZ IAS 23 paragraph 19). 41 This is a public benefit entity requirement. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 59

Income tax expense 5.82 Some not-for-profit entities have taxable operations or may control entities that are taxable entities. Not-for-profit entities that qualify for differential reporting may choose to account for income tax in accordance with NZ IAS 12 Income Taxes (which requires the recognition of deferred tax assets or liabilities) or they may use the taxes payable method. Under the taxes payable method, the income tax expense for the current period is equal to the income tax payable for the same period. The income tax effects of temporary differences under NZ IAS 12 are not recognised but may be disclosed in the notes. 5.83 Entities using the taxes payable method are required to disclose the major components of income tax expense in accordance with NZ IAS 12 paragraph 80(a), (b), (e) and (f). These components may include: current tax expense; any adjustments recognised in the period for current tax of prior periods; the amount of the benefit arising from a previously unrecognised tax loss or tax credit that is used to reduce current tax expense; and the amount of tax expense relating to changes in accounting policy that are included as income or expenses in the statement of financial performance in accordance with NZ IAS 8, because they cannot be accounted for retrospectively. 5.84 Entities that qualify for differential reporting concessions and that elect to use the taxes payable method of accounting for income tax are required to make other disclosures in accordance with NZ IAS 12 paragraph 81. 5.85 If the entity voluntarily makes disclosures from which it is exempt, these disclosures must be made in accordance with NZ IAS 12. In all instances, the entity must disclose the accounting policy adopted for income tax, in accordance with NZ IAS 1. 60 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Chapter 6 Statement of Changes in Equity Key points Equity is the amount left over when total liabilities are subtracted from total assets. A statement of changes in equity highlights changes in equity during the period. The statement of changes in equity helps readers see the effect of income and expenses: o recognised in the statement of financial performance; and o recognised directly in equity. NZ IAS 1 Presentation of Financial Statements does not prescribe the format of the statement. An entity has some discretion as to how much information it presents on the face of the statement and how much in the notes. An item is material if its inclusion or exclusion from the financial statements would be likely to change a user s judgements made on the basis of the statements. The concept of materiality is used to decide whether certain items need to be disclosed in the financial statements. An entity does not need to make disclosures specified by a financial reporting standard if the information is not material. In addition, the concept of materiality can be used to decide whether the application of a particular financial reporting treatment to a transaction or balance as opposed to an alternative treatment has a material impact on the financial statements. Introduction 6.1 This chapter considers the nature of equity in a not-for-profit entity and outlines the minimum disclosures required in a statement of changes of equity. What is equity? 6.2 Equity is the amount left over when total liabilities are subtracted from total assets. It is defined as the residual interest in the assets of the entity after deducting all its liabilities (NZ Framework paragraph 49(c)). 42 Equity is sometimes referred to as net assets or members funds. It is frequently analysed into separate components such as accumulated surpluses and reserves. 6.3 For many entities equity represents the ownership interest in the entity. However, this concept of equity does not work well for not-for-profit entities. Although there may be a number of individuals or entities with a legitimate interest in the financial position and performance of a not-for-profit entity, in most cases they do not have an ownership interest or any rights to the net assets of the entity. Instead the equity of a not-for-profit entity represents the net resources that have been built up by the entity and are available to the entity in pursuing its goals. Financial statements can provide information on how these net resources have been built up and whether they represent realised or unrealised gains. Minimum disclosures 6.4 All entities presenting general purpose financial statements are required to present a statement of changes in equity (NZ IAS 1 paragraph 8). 6.5 The statement reconciles the equity at the beginning of the period with the equity at the end of the period. It combines information about the net surplus or deficit of the entity with other changes in the carrying amount of assets or liabilities which have not been recognised in the statement of financial performance. 6.6 The content and disclosure requirements for a statement of changes in equity are set out in NZ IAS 1 paragraphs 96 and 97. Some items are required on the face of the statement while others may be disclosed in the notes. The disclosures are intended to show readers the changes in each component of equity during the period. Most not-for-profit entities will have few items that need to be disclosed in a statement of changes in equity. 6.7 Disclosures by a not-for-profit entity in a statement of changes in equity may include: the opening and closing balances of retained earnings and changes in retained earnings during the period; net surplus or deficit for the period; revaluation gains or losses recognised directly in equity; a reconciliation between the carrying amount of each reserve at the beginning and the end of the period; and for each component of equity, the effects of changes in accounting policies and corrections of errors recognised under NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. 42 In rare circumstances an entity may have no equity. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 61

6.8 Other disclosures which are less likely to be relevant for a not-for-profit entity are: distributions to equity holders, acting in their capacity as equity holders; contributions by equity holders, acting in their capacity as equity holders; currency translation differences recognised directly in equity; and a reconciliation between the carrying amount of each class of contributed equity at the beginning and the end of the period. 6.9 Disclosures about an entity s equity can provide users with information on the level of resources available to continue to provide services at the current level, the financial stability of the entity (including the ability to continue as a going concern) and restrictions on the use of those resources. Objectives for managing capital 6.10 A not-for-profit entity is required to disclose, whether it has complied with any externally imposed capital requirements during the period and the consequences of any non-compliance with such requirements (NZ IAS 1 paragraph 124B(d) and (e)). 6.11 Not-for-profit entities that qualify for differential reporting concessions are not required to comply with the remainder of the capital disclosures in NZ IAS 1 but may choose to do so. The additional capital disclosures include: a description of what it an entity manages as capital 43. For the purposes of this disclosure, capital will often be the same as equity as defined in the NZ Framework (assets less liabilities), but it might also include or exclude some components (for example some reserves could be excluded); its objectives for managing capital and how it is meeting those objectives; and summary quantitative data about what it manages as capital. 6.12 Although some of these capital disclosures are not mandatory for entities that qualify for differential reporting, a not-forprofit entity may decide to provide this information to help external users of financial statements assess the risk profile of the entity and its ability to withstand unexpected adverse events. For example, a charitable trust might report that its objective is to have sufficient reserves to continue operating despite adverse financial events and to provide it with the flexibility to take advantage of opportunities that will advance its charitable purposes. To this end, it could disclose it has resolved to maintain accumulated funds above a certain amount, of which a certain amount should be available to be readily utilised in the form of uncommitted liquid investments. Application to not-for-profit entities Distributions to/contributions by equity holders 6.13 Most not-for-profit entities do not have equity instruments. The requirements to disclose contributions by and distributions to equity holders acting in their capacity as equity holders are therefore not generally relevant. 6.14 Not-for-profit entities may have transactions with members but these do not generally constitute contributions by or distributions to equity holders. For example, subscriptions or fees paid by members, bequests or donations made by members, and money lent by members to the not-for-profit entity do not generally result in the member having a direct financial ownership interest in the entity and do not constitute contributions. Movements in asset revaluation reserves 6.15 As discussed in Chapter 4, entities may measure property, plant and equipment using the cost or revaluation models. If an entity uses the revaluation model then changes in asset revaluation reserves need to be separately disclosed. Statement format 6.16 NZ IAS 1 does not prescribe a format for the statement of changes in equity. If the equity of an entity consists of both general (or unrestricted) and restricted equity (see Chapter 4 for a discussion of this issue) the statement of changes in equity should report only the changes in total equity. The breakdown of changes in restricted and unrestricted equity is shown in the notes. 43 Although equity is a defined term, capital is not. The use of the term capital in this requirement was deliberate and was intended to give entities the opportunity to describe how they view the components of capital they manage. 62 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Chapter 7 Cash Flow Statement Key points Not-for-profit entities that qualify for differential reporting concessions are not required to present a cash flow statement but may wish to do so to help readers of the financial statements. All other entities are required to present a cash flow statement. The cash flow statement explains the movement between the opening and closing balances of cash and cash equivalents. The cash flow statement presents cash flows under three headings: operating, investing and financing. An entity must also present a reconciliation of operating surplus/deficit with the net cash flow from operating activities. An item is material if its inclusion or exclusion from the financial statements would be likely to change a user s judgements made on the basis of the statements. The concept of materiality is used to decide whether certain items need to be disclosed in the financial statements. An entity does not need to make disclosures specified by a financial reporting standard if the information is not material. In addition, the concept of materiality can be used to decide whether the application of a particular financial reporting treatment to a transaction or balance as opposed to an alternative treatment has a material impact on the financial statements. Introduction 7.1 This chapter identifies reasons for presenting a cash flow statement, identifies typical items in a not-for-profit cash flow statement and lists the key disclosures required in relation to a cash flow statement. Why present a cash flow statement? 7.2 Most not-for-profit entities are not required to present a cash flow statement because the entire statement is subject to a differential reporting concession (NZ IAS 7 Cash Flow Statements paragraph NZ 5.1). However, given that users of smaller entities frequently understand cash flow information more readily than accrual information, not-for-profit entities may want to provide a cash flow statement. 7.3 Regardless of the nature of an entity s activities it needs cash to conduct its operations and meet its obligations. Readers are therefore interested in how an entity generates and uses cash. The cash flow statement provides information that allows readers to evaluate changes in the net assets of the entity, its financial structure (including liquidity and solvency) and its ability to adapt to changing circumstances and opportunities. Changes in cash and cash equivalents 7.4 NZ IAS 7 requires that an entity reconcile the opening and closing balances of cash and cash equivalents reported in the statement of financial position (paragraph 45). NZ IAS 7 defines cash and cash equivalents as follows. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (paragraph 6). 7.5 When presenting cash and cash equivalents it is not necessary to separately list all the bank accounts and cash investments of the entity. Only the aggregate amount of cash and cash equivalents is reported. These amounts must reconcile to the relevant items in the statement of financial position. If desired, a listing of individual bank account balances could be provided in the notes. Cash balances which are reported in a separate statement of trust monies, as discussed in Chapter 4, are not controlled by the entity and are not included in the statement of cash flows. Categories of cash flows 7.6 The cash flow statement must report all of the cash flows for the entity for the reporting period (NZ IAS 7 paragraph 10). This includes flows relating to restricted equity and bequests. However, the statement should not include cash flows which relate to transactions or balances reported in a statement of trust money or trust assets. 7.7 The cash flows must be classified as into three categories, each of which is defined in the Standard: operating activities; investing activities; and financing activities. The Standard gives examples of each of these types of cash flows. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 63

7.8 Examples of the items that could be shown in each category of cash flows by a not-for-profit entity are listed here. Cash flows from operating activities Membership subscriptions Trading activities Public donations Project grants Interest received Other income Payments to suppliers and employees Interest paid Cash flows from investing activities Sale of plant and equipment Sale or realisation of investments Purchase of plant and equipment Purchase of investments Cash flows from financing activities Increase in term loan Repayment of term loan Other requirements 7.9 Listed below are the other key requirements of NZ IAS 7 44. Operating cash flows must disclose major classes of gross cash receipts and gross cash payments (paragraph 18). This is referred to as the direct method of presenting operating cash flows. An entity must present a reconciliation of the after-tax surplus or deficit with the net cash flow from operating activities (paragraph NZ 20.1). This reconciliation may be presented alongside the statement or in the notes. Cash flows are presented on a gross basis except in the limited circumstances in which netting is permitted (paragraph 22). Netting is permitted in the case of: o cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; o cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short. If an entity nets cash flows the reason for doing so must be disclosed (paragraph NZ 24.1). Interest received and paid, and dividends received may be classified in any one of the three categories. However, they must be separately disclosed and classified consistently between reporting periods (paragraph 31). Cash flows arising from income taxes must be separately disclosed within operating activities unless they can be specifically identified with financing or investing activities (paragraph 35). Non-cash transactions are not included in the statement (paragraph 43). If a transaction is partially settled in cash only the cash component is included in the statement. Additional information on the transaction could be included in the notes. Disclosure of balances not available for use by the entity is required (paragraph 48). Disclosure of restrictions on the use of cash balances is required (paragraph NZ 49.1). 45 GST 7.10 There is no specific financial reporting standard which deals with the treatment of goods and services tax (GST) in financial statements. Common practice is to report: 44 This Chapter does not address a number of matters covered by NZ IAS 7 on the grounds that they are not relevant for the majority of small to medium not-for-profit entities. These matters include foreign currency cashflows, investments in subsidiaries, and acquisitions and disposals of subsidiaries and other business units. 45 This is a public benefit entity requirement. This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. 64 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

revenue and expense items net of GST; assets and liabilities, other than receivables and payables, net of GST, if the GST is recoverable; receivables and payables inclusive of GST; irrecoverable input GST as a part of the related expense or as part of the cost of an asset, whichever is applicable; and cash flows on a consistent basis with the other financial statements (i.e. net of GST or on a gross basis). 7.11 In common with most entities, not-for-profit entities generally prepare their financial statements on a GST-exclusive basis. Entities which qualify for differential reporting concessions may recognise revenue and expense items on either a gross or net basis, subject to certain requirements set out in NZ IAS 18 Revenue (paragraph NZ 6.1). Entities should disclose whether they have presented their gross cash flows as inclusive or exclusive of GST. 7.12 The above discussion assumes that entities are registered for GST and do not make exempt supplies. If an entity is not registered, or liable to be registered, for GST it should recognise expenses inclusive of GST. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 65

Chapter 8 Notes Key points The notes are an integral part of the financial statements. The notes provide: o information about the significant accounting policies applied by the entity; o additional information about items included in the primary financial statements (for example, a breakdown of classes of property, plant and equipment); and o information about transactions or events that is not apparent from the primary financial statements (for example, transactions with related parties). An item is material if its inclusion or exclusion from the financial statements would be likely to change a user s judgements made on the basis of the statements. The concept of materiality is used to decide whether certain items need to be disclosed in the financial statements. A not-for-profit entity does not need to make disclosures specified by a financial reporting standard if the information is not material. In addition, the concept of materiality can be used to decide whether the application of a particular financial reporting treatment to a transaction or balance as opposed to an alternative treatment has a material impact on the financial statements. Introduction 8.1 This chapter covers the following issues: the reason for notes; the financial reporting standards a not-for-profit entity must comply with; how a not-for-profit entity selects an accounting policy if there is no specific standard or interpretation; the types of accounting policy disclosures required; what a not-for-profit entity needs to do if it changes its accounting policies; whether there is an easy way to identify the disclosures required by New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs); note disclosures that are likely to be specific to not-for-profit entities; and disclosures required in respect of changes in accounting estimates, prior period errors, judgements, key sources of estimation uncertainty, contingent assets and liabilities, commitments and financial risk management. 8.2 General purpose financial statements prepared in accordance with NZ IFRSs must contain notes. NZ IAS 1 Presentation of Financial Statements sets out requirements for the layout and content of the notes. 8.3 NZ IAS 1 states that the notes must (NZ IAS 1 paragraphs NZ 13.1, 105 and NZ 105.1): present information on the financial reporting standards (the accounting policies) applied by the entity; present information about the basis of preparation of the financial statements and the specific accounting policies; disclose information that is required but which is not presented on the face of individual statements; and provide additional information that is relevant to an understanding of the individual statements. 8.4 This information is usually presented in the order shown above. The notes should be presented in a systematic manner. Each item on the face of the financial statements should be cross-referenced to any related information in the notes. Accounting policies 8.5 Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. 8.6 The objective of a summary of accounting policies is to help readers of the not-for-profit entity s financial statements understand the material principles, bases and rules used to report the entity s financial and non-financial performance, financial position and cash flows. Such information is essential for readers to interpret the financial statements and is usually presented as a separate statement or as the first note to the financial statements. 8.7 NZ IAS 1 specifies the general requirements regarding disclosure of accounting policies, while NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains more detailed requirements regarding changes in accounting policies. 66 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

8.8 The summary of accounting policies includes: a statement of compliance; general accounting policies, including a description of the reporting entity; specific accounting policies; and changes in accounting policies (if applicable). 8.9 Each of these topics is discussed below. Statement of compliance 8.10 A not-for-profit entity is required to disclose the following information regarding compliance with financial reporting standards: the statutory base (that is, the legislation), if any, under which the financial statements are prepared; whether, for the purposes of complying with generally accepted accounting practice in New Zealand (NZ GAAP), it is a profit-oriented or public benefit entity 46 ; where applicable, the criteria which establish the not-for-profit entity as a qualifying entity for differential reporting and the extent to which the entity has applied available differential reporting concessions; and a statement that the financial statements have been prepared in accordance with NZ GAAP, together with a description of the financial reporting standards applied by the not-for-profit entity. 8.11 For example, a not-for-profit entity applying differential reporting concessions could state: The financial statements have been prepared in accordance with New Zealand GAAP. They comply with New Zealand equivalents to International Financial Reporting Standards, and other applicable Financial Reporting Standards, as appropriate for public benefit entities that qualify for and apply differential reporting concessions. As long as all the requirements of NZ IAS 1 are met these assertions could be made in different ways. General accounting policies 8.12 Although the exact location of information within the summary of accounting policies is up to the not-for-profit entity, the general accounting policies usually include: a description of the reporting entity (NZ IAS 1 paragraph 126) 47 ; the fact that the financial statements have been prepared on the accrual basis; a statement that the not-for-profit entity is a going concern; a description of the measurement bases used (NZ IAS 1 paragraph 108); the presentation currency (NZ IAS 1 paragraph 46(d)); and where applicable, reference to the location of the disclosures and reconciliations required on first-time adoption of NZ IFRSs. Reporting entity 8.13 A description of the not-for-profit reporting entity will include the following information: the name of the not-for-profit entity (and, if the entity is part of a group the name of the entity s parent and the ultimate parent of the group); the legal form of the not-for-profit entity, whether it is incorporated and where it is domiciled; the nature of the not-for-profit entity s operations and its principal activities; a statement that the not-for-profit entity is a public benefit entity 48 ; the names of any subsidiaries and associates; and the registered office (or principal place of business, if different from the registered office). Going concern 8.14 If the financial statements are prepared on a going concern basis but there is significant doubt about the entity s ability to continue as a going concern, the reasons for the doubt must be disclosed (NZ IAS 1 paragraph 22). Where a not-for-profit entity is a going concern by virtue of the continued funding of the main funding body, or the successful 46 This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. 47 This information may be disclosed elsewhere in information published with the financial statements. 48 This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 67

renegotiation of existing contracts for service, it is common for the entity to put a note to its financial statements to this effect and the governing body s opinion as to the likelihood of continuation. If the going concern basis has not been used in preparing the financial statements, this must be disclosed, along with the reasons and a description of the basis that has been used (NZ IAS 1 paragraph 23). Measurement bases 8.15 Measurement bases include historical cost, current cost, net realisable value, fair value and recoverable amount. If more than one measurement base is used in the financial statements an entity indicates the categories of assets and liabilities to which each measurement basis is applied. Usually a summary of the measurement bases is given in the general accounting policies and the measurement basis used for each class of assets or liabilities is repeated in the specific accounting policy section. 8.16 A description of the measurement bases used could be: The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: foreign exchange contracts, shares held for trading, shares classified as available-for-sale, and land and buildings. Non-current assets held for sale are valued at the lower of carrying amount and fair value less costs to sell. Selection and application of accounting policies 8.17 If the method of accounting for a transaction or event is covered by a New Zealand financial reporting standard, that standard should be used (NZ IAS 8 paragraph 7). However, if there is no standard that specifically applies to a transaction, event or condition, NZ IAS 8 (paragraphs 10 to 12) provides guidance on selecting an appropriate accounting policy. The objective is to select an accounting policy that results in relevant and reliable financial information (NZ IAS 8 paragraph 10). 8.18 NZ IAS 8 specifies the following guidance for an entity s management to use when selecting accounting policies, in descending order of authority: requirements of standards and interpretations dealing with similar matters; the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements (NZ Framework); the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, other accounting literature and accepted industry practices, to the extent that these do not conflict with standards, interpretations or the NZ Framework (NZ IAS 8 paragraphs 11 and 12). 8.19 The process of selecting accounting policies requires judgement. The qualitative characteristics of reliability and relevance are used to guide management in making this judgement. 8.20 The NZ Preface (paragraph 39) gives examples of sources of authoritative support. Technical Practice Aids issued by the Financial Reporting Standards Board are an example of pronouncements of a recognised standard setting body and therefore are a source of guidance that may be used in developing and applying accounting policies. Other examples of pronouncements of standard-setting bodies include: International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC); financial reporting standards issued by the Australian Accounting Standards Board (AASB); and financial reporting standards issued by well-recognised bodies with the authority to promulgate financial reporting standards in jurisdictions such as Canada, the United Kingdom and the United States of America. 8.21 Not-for-profit entities frequently have transactions and events that are not specifically covered by New Zealand financial reporting standards. The most common problem is how to account for non-exchange transactions, which are not covered in NZ IFRSs. In discussing such transactions this Guide has made reference to IPSAS 23 Revenue from Non-Exchange Transactions (Including Taxes and Transfers). The disclosure of accounting policies is particularly important when there is no relevant New Zealand standard. 8.22 Once selected, accounting policies should be consistently applied, unless a standard permits otherwise. Specific accounting policies 8.23 In addition to the measurement bases used, NZ IAS 1 requires that an entity disclose the other accounting policies used that are relevant to an understanding of the financial statements (NZ IAS 1 paragraph 108). However, NZ IAS 1 does not specify which accounting policies must be disclosed. It suggests that disclosure is particularly useful when alternatives exist (NZ IAS 1 paragraphs 110 to 112). 68 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

8.24 Examples of accounting policies disclosed by not-for-profit entities because they are relevant to an understanding of the financial statements include the following. Statement of financial position Property, plant and equipment (including heritage assets) disclose: o whether using cost or revaluation models; o components of cost; o subsequent costs; o the policies used for leased assets if applicable; o the methods and rates of depreciation; o the basis of impairment; and o the treatment of restrictions and conditions on property, plant and equipment. Intangible assets disclose the policy in respect of software and any research and development costs (note that some differential reporting exemptions are available). Investments disclose the nature of investments, the NZ IAS 39 designations used for financial assets and the justification for using those designations. Trade and other receivables disclose the measurement basis and basis of impairment. Inventories disclose the measurement of inventories, including the method of determining cost of inventories. Explain the treatment of any inventories held for distribution at no or nominal value. Impairment disclose how frequently impairment reviews are conducted, the policy for recognition of impairment losses, the method of determining estimated recoverable amount, and the policy regarding reversals of impairment losses (if applicable). Borrowings disclose the measurement basis used. Employee benefits disclose the policy for the recognition of liabilities/expenses in relation to defined contribution pension plans and long-service leave. Provisions disclose the policy for the recognition and measurement of provisions and any onerous contracts. Trade and other payables disclose the measurement basis used. Statement of financial performance Membership fees disclose the policy for the recognition of fees, including the treatment of any life membership fees. Grant and donation income disclose the policies for the recognition of grants and donated goods and services and the circumstances in which any conditions or restrictions are recognised as liabilities or otherwise highlighted in the financial statements. Fundraising income and expenses disclose the types of fundraising methods used, the policies used for recognising fundraising income and expenses, including the policy used to estimate cash collected and held by others at the end of the reporting period. Investment income disclose the policy for recognition and measurement of investment income. Trading revenue disclose the policy for recognition and measurement of trading income. Grant and donations expense disclose the policy for the point at which grants and donations are recognised as an expense. Operating and finance leases disclose the policy for the recognition and measurement of expenses associated with lease payments. Financing costs describe items classified as financing costs (including gains and losses on financial instruments), and the policy for the recognition and measurement of each type. Income tax disclose if tax exempt. If not tax exempt disclose a description of the method adopted in accounting for income tax (some differential reporting exemptions are available). Cash flow statement Cash flows disclose the nature of items classified as cash, operating activities, investing activities and financing activities. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 69

Other GST disclose the method of accounting for GST (some differential reporting concessions are available). Business combinations disclose the methods by which individual subsidiaries, associates and joint ventures have been accounted for. Disclose the policies used for measuring goodwill (see also intangible assets) and minority interest. 8.25 In relation to the statement of service performance, the summary of accounting policies should disclose: the basis of aggregation of individual outputs; and the basis by which costs are allocated to outputs. Changes in accounting policies 8.26 If there have been no changes in accounting policies an entity states this fact in the summary of accounting policies. An entity is permitted to change an accounting policy only if the change: is required by a standard or interpretation; or results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance, or cash flows (NZ IAS 8 paragraph 14). 8.27 The adoption of an accounting policy for new transactions or events is not a change in accounting policy (NZ IAS 8 paragraph 16). An entity will not have any accounting policy changes in its first year of adoption of NZ IFRSs. This is because an entity is required to use the same accounting policies in its opening NZ IFRS statement of financial position and throughout all periods presented in its first NZ IFRS financial statements (NZ IFRS 1 paragraph 7). 8.28 If a change in accounting policy is required by a standard or interpretation, the change is accounted for in accordance with that standard or interpretation. Generally this involves retrospective application (restating comparative amounts as if the policy had always been applied) but there are occasionally transitional provisions that do not require retrospective application (NZ IAS 8 paragraphs 19 and 22). 8.29 If a change in accounting policy is voluntary NZ IAS 8 requires retrospective application of the policy. However, it does allow an exception in cases where it is impracticable to determine the effects of the change (NZ IAS 8 paragraphs 24 and 25). 8.30 When a not-for-profit entity changes accounting policies in accordance with a standard or interpretation it must provide a number of disclosures, including (NZ IAS 8 paragraph 28): the title of the standard or interpretation causing the change; the nature of the change in accounting policy; a description of the transitional provisions, including those that might have an effect on future periods; and the amount of the adjustment for the current period and each prior period presented, to the extent practicable. 8.31 Similar disclosures are required in respect of voluntary changes in accounting policies. In addition a not-for-profit entity must justify the reason for making the change (NZ IAS 8 paragraph 29). Additional information about the primary financial statements 8.32 As well as the information required to be disclosed on the face of the financial statements, financial reporting standards often require additional information about transactions and events to be disclosed in the notes. Some of these disclosures have been discussed in previous chapters. For example, NZ IAS 16 requires additional information on revalued assets (NZ IAS 16 paragraphs NZ 77.2 and NZ 77.3). 8.33 Differential reporting concessions significantly reduce the amount of information required to be disclosed in the notes 49. Not-for-profit entities applying differential reporting concessions are still encouraged to consider whether such disclosures would help readers fully interpret the entity s financial reports. Some disclosures which are not required but could be helpful include: revenue from subscriptions and membership fees; revenue from grants, donations, legacies and endowments; donations of in-kind goods and services; details of restricted versus unrestricted equity; a breakdown of debtors (subscriptions, trading and other); 49 Please refer to each Standard for a description of the differential reporting concessions in that Standard. 70 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

details of grants and donations made (such as aggregate amounts of grants made to major recipients, taking privacy concerns into account) and intended to be made from future income; loans on concessionary terms; and restrictions or conditions on donated assets. 8.34 A number of financial reporting standards require a not-for-profit entity to disclose details of the changes between opening and closing balances of asset and liability accounts. Although there are some concessions for small to medium sized entities, where applicable, such not-for-profit entities must disclose: a reconciliation between the carrying amount at the beginning and the end of the period of each component of equity (NZ IAS 1 paragraph 97) by each class of property, plant and equipment, details of impairment losses recognised, impairment losses reversed and depreciation (NZ IAS 16 paragraphs 73(e)(v) to 73(e)(vii)); a reconciliation of the carrying amount of goodwill at the beginning and end of the period (NZ IFRS 3 paragraphs 74 and 75); a reconciliation of the net exchange differences classified in a separate component of equity (NZ IAS 21 paragraph 52); a reconciliation between the carrying amounts of investment property at the beginning and end of the period (NZ IAS 40 paragraph 76); and by lessees in respect of finance leases, a reconciliation between the total of minimum lease payments at the balance sheet date, and their present value (NZ IAS 17 paragraph 31). Changes in accounting estimates and prior period errors 8.35 Changes in accounting estimates must be disclosed (NZ IAS 8 paragraphs 32 to 40). The carrying amounts of assets and liabilities are reassessed periodically in accordance with financial reporting standards. These changes to carrying amounts result from new information and are not errors. The effect of these changes is recognised by adjusting the carrying amount of the relevant item and by recognising the adjustment as income or expense in the statement of financial performance. 8.36 A prior period error is something left out or incorrectly stated in financial statements for one or more earlier periods, and which was caused by misusing or not using reliable information that: was available when the financial statements for those periods were authorised for issue; and could reasonably be expected to have been taken into account in preparing those financial statements. 8.37 Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud (NZ IAS 8 paragraph 5). 8.38 An entity must correct material prior period errors as soon as possible after discovery. The correction is made to the relevant prior period comparatives, or if the error occurred in an earlier period, to the opening balances of the relevant items (NZ IAS 8 paragraph 42). Some exceptions are allowed if restatement is impracticable (NZ IAS 8 paragraphs 43 to 48). 8.39 Details of material prior period errors must be disclosed (NZ IAS 8 paragraph 49). Additional financial information 8.40 Financial reporting standards also require disclosure of information about transactions or events that is not apparent from the primary financial statements. Such disclosures include: related party transactions and events; contingent assets and liabilities; commitments; and objectives for managing capital (refer Chapter 6). Related party disclosures 8.41 The objective of related party disclosures is to make sure that users of the financial statements are aware that an entity s financial performance or position may have been affected by transactions with related parties that are on terms and conditions more or less favourable than transactions with other parties. Related party disclosures are as relevant for notfor-profit entities as they are for other entities. 8.42 Related parties are defined in NZ IAS 24 Related Party Disclosures (paragraph 9). The definition states that a party is related to an entity if: NOT FOR PROFIT FINANCIAL REPORTING GUIDE 71

(a) directly, or indirectly through one or more intermediaries, the party: (i) controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries); (ii) has an interest in the entity that gives it significant influence over the entity; or (iii) has joint control over the entity; (b) the party is an associate (as defined in NZ IAS 28 Investments in Associates) of the entity; (c) the party is a joint venture in which the entity is a venturer (see NZ IAS 31 Interests in Joint Ventures); (d) the party is a member of the key management personnel of the entity or its parent; (e) the party is a close member of the family of any individual referred to in (a) or (d); (f) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or (g) the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity. 8.43 For not-for-profit entities, related parties are likely to be members of the governing body and persons with a family or business connection with them. Related parties may also be entities controlled by the same governing body. Key management personnel is defined in NZ IAS 24 as Those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The key management personnel of a not-or-profit entity would generally include the Board and the senior manager of the entity (where such a position exists). 8.44 The requirements for related party disclosures are set out in NZ IAS 24. The disclosures made by a not-for-profit entity with no controlled entities and that qualifies for differential reporting concessions, would include: the nature of the related party relationship; the amount of the transaction; the amount of outstanding balances and information on the terms and conditions and any guarantees given or received (an entity can claim that the terms of a related party transaction were the same as those in an arm s length transaction only if they can provide proof). A common disclosure by not-for-profit entities is that Services are provided to members of the Board on the same terms and conditions as they are provided to other recipients of the entity s services ; provisions for doubtful debts in relation to outstanding balances; and any bad or doubtful debts expense in respect of related party transactions (NZ IAS 24 paragraphs 17 and 21). 8.45 These disclosures do not need to be made in respect of each individual transaction they may be aggregated by type of related party (NZ IAS 24 paragraph 18). For example, loans and payments to members of the governing body could be disclosed as one category. Any material transactions should be separately disclosed. 8.46 Entities with controlled entities (subsidiaries) would need to make additional disclosures in accordance with NZ IAS 24. 8.47 Entities that qualify for differential reporting concessions do not need to disclose compensation to key management personnel as required by NZ IAS 24. However, such entities must still disclose other transactions with key management personnel. If a not-or-profit entity chooses to disclose compensation to key management personnel in accordance with NZ IAS 24 it must disclose the total compensation and a breakdown by type of compensation. The definition of compensation in NZ IAS 24 is broad it includes the types of remuneration covered by NZ IAS 19 Employee Benefits and NZ IFRS 2 Share-based Payment. Contingent assets and liabilities 8.48 The notes present information on any contingent assets or liabilities. Examples of transactions or events giving rise to contingent assets or liabilities are bequests where there is insufficient information to reliably measure the fair value of the bequest, claims, pending or threatened litigation, and guarantees of others debt. 8.49 The definitions of these items and the accounting treatment required are shown in Table 12. The standard covering these items is NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 72 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

TABLE 12: DEFINITIONS AND TREATMENT OF CONTINGENT ASSETS AND LIABILITIES Definition Recognition Contingent liability A contingent liability is: (a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability. (NZ IAS 37 paragraph 10) Do not include contingent liabilities as liabilities in the statement of financial position. (NZ IAS 37 paragraph 27) The exception is contingent liabilities assumed as part of a business combination. (NZ IFRS 3 paragraph 36) Contingent asset A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. (NZ IAS 37 paragraph 10) Do not include contingent assets as assets in the statement of financial position. (NZ IAS 37 paragraph 31) Measurement NZ IAS 37 contains guidance on measurement. NZ IAS 37 contains guidance on measurement. Disclosure Unless the possibility of any outflow in settlement is remote, an entity must disclose for each class of contingent liability at the reporting date a brief description of the nature of the contingent liability and, if practicable: (a) an estimate of its financial effect; (b) an indication of the uncertainties relating to the amount or timing of any outflow; and (c) the possibility of any reimbursement. If it is not practicable to make one or more of these disclosures, that fact must be stated. (NZ IAS 37 paragraphs 86 and 92) If an inflow of economic benefits is probable, an entity must disclose a brief description of the nature of the contingent assets at the reporting date, and, if practicable, an estimate of their financial effect. If it is not practicable to make this disclosure, that fact must be stated. (NZ IAS 37 paragraphs 89 and 92) Commitments 8.50 Disclosure of contractual commitments for the acquisition of property, plant and equipment is required by NZ IAS 16 Property, Plant and Equipment (paragraph 74). Such commitments represent a firm intention at the end of the reporting period to incur capital expenditure in the future. The commitments referred to by NZ IAS 16 are items which do not yet meet the recognition criteria for liabilities. A commitment generally arises when an order is placed or a contract signed. The subsequent liability generally arises when the services are complete or when the goods have been received. 8.51 NZ IAS 17 Leases requires the disclosure of future minimum lease payments in relation to finance leases and noncancellable operating leases (NZ IAS 17 paragraphs 31 and 35). The finance lease commitments are recognised as liabilities in the statement of financial position and the purpose of the note disclosure is to provide more information about those liabilities. Operating lease commitments are not recognised as liabilities. Non-cancellable operating leases often relate to property or office equipment. Risk management 8.52 NZ IFRS 7 Financial Instruments: Disclosures governs the disclosure of financial instruments. One of its key requirements is that an entity must disclose information that enables readers of its financial statements to evaluate the nature and extent of risks arising from financial instruments. This would include disclosure of its financial risk management objectives and policies (NZ IAS 1 paragraph 105(d)(ii)). An explanation of the reasons for the use of any derivatives should be provided as part of the discussion of risk. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 73

Chapter 9 Statement of Service Performance Key points An entity uses a statement of service performance to provide information (predominantly non-financial) on its outputs. Outputs are the goods and services produced by the entity and provided to external parties. Although they are unlikely to be required to present a statement of service performance, not-for-profit entities are strongly encouraged to do so. This is because outputs are often funded by one party but provided to others. Also, outputs may be funded by members but determined largely by the entity itself. Although the statement focuses on outputs, information on the rationale for selecting those outputs and their contribution to the entity s broader objectives should also be provided. General readers can be overwhelmed by too much information focus on significant aspects of performance. Reporting on service performance 9.1 Traditional financial statements provide information on aspects of a not-for-profit entity s financial performance but they are of limited use in assessing other aspects of a not-for-profit entity s performance. Generating a surplus is not generally a key objective for not-for-profit entities. In contrast with profit-oriented entities, not-for-profit entities often provide goods and services to constituents free of charge and seek resources from people and organisations that do not expect economic benefits in exchange. Their objectives vary but it is common for not-for-profit entities to seek to provide an optimal level of service within the level of resources available, or to provide goods and services that impact positively on members or groups within the community. 9.2 Not-for-profit entities require information on service performance in order to assess how well they have achieved their objectives with the resources available, and to demonstrate accountability to those who provide funds to the entity. Because a not-for-profit entity s objectives are not primarily about increasing net worth, the entity s non-financial information is often of higher interest than the financial statements. 9.3 Service performance reporting usually evolves over time. First an entity needs to consider some key questions such as: what are the entity s products and services; who is the entity providing these products and services to; what is the entity trying to achieve; what processes does the entity use to produce its goods and services; what type and level of information do users want; and what are the key performance messages that the entity wants to communicate? 9.4 Initial measures may be fairly basic using the data that is currently available. However, performance indicators are likely to become more sophisticated over time as an entity refines its views on what it wants to measure and gradually works on generating the data it wants. Methods of assessing performance include benchmarking, indicators such as success in meeting stakeholder expectations and expert assessments. Whatever stage of development an entity is at, focusing on key measures is critical. Information overload is a common problem in service performance reporting. 9.5 A statement of service performance is one way of presenting service performance information. This Chapter provides guidance on presenting a statement of service performance. 50 What is a statement of service performance? 9.6 An entity uses a statement of service performance to report on the goods or services that it has supplied. The statement reports predominantly non-financial information. The statement provides: narrative and statistics on an entity s performance in supplying goods and services; and information on how the entity s existence and operations affect the community. 9.7 NZ IAS 1 Presentation of Financial Statements (paragraphs NZ 126.1 to NZ 126.10) sets the presentation and disclosure requirements for a statement of service performance. Technical Practice Aid 9 Service Performance Reporting (TPA-9) (2002) 51 provides guidance on the specification, measurement and reporting of service performance. Although some of 50 The Office for the Community and Voluntary Sector also provides guidance on performance measurement in the context of government funding of non-government organisations. Information provided in this context is usually more detailed than the information in general purpose financial reports. 51 Technical practice aids are issued by the Financial Reporting Standards Board of the New Zealand Institute of Chartered Accountants for the general information and guidance of members and other interested parties. TPA-9 was published before the adoption of NZ IFRSs but is still a useful source of guidance. TPA-9 is available on the Institute s website at http://www.nzica.com 74 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

the guidance in these documents is more oriented to public sector entities, which may have a legal obligation to report service performance, it is also relevant to not-for-profit entities. Which entities are required to prepare a statement of service performance? 9.8 Although not-for-profit entities are rarely required to prepare a statement of service performance, they are strongly encouraged to do so. The statement of service performance can be used by not-for-profit entities to demonstrate accountability for the use of resources or compliance with legislation, regulations or contractual arrangements. 9.9 NZ IAS 1 (paragraph NZ 126.3) encourages an entity to prepare and present a statement of service performance if: the entity receives significant revenue intended to benefit third parties without giving reciprocal benefit or consideration to the party providing the revenue; or the entity has non-financial objectives of such importance that non-financial performance reporting is significant to readers of the financial statements. 9.10 A common situation is that members of a not-for-profit entity will pay a subscription or registration fee but the governing body of an entity will decide what outputs the entity will produce with that revenue. In such cases a statement of service performance provides members with important information on the services provided. This information is not available in the financial statements but is necessary to understand the financial performance of the entity. 9.11 Similarly, a statement of service performance is important in fulfilling the accountability obligations of an entity which receives grants or contracts with the government or other bodies to provide services to others. 9.12 A statement of service performance is therefore likely to be a relevant and important accountability statement for many of not-for-profit entities. Accountability and inputs, outputs and outcomes 9.13 In order to demonstrate accountability to external users such as funding providers, a not-for-profit entity needs to report on how well it met agreed service performance levels and obligations during the period. Service performance reporting is most effective in demonstrating accountability when there are clear service performance expectations at the start of the period which can be reported against at the end of the period. Focus on outputs 9.14 The statement of service performance should focus on reporting performance in terms of the goods and services produced by the entity (delivery of outputs). 9.15 Examples of outputs produced by not-for-profit entities include: services to members (for example, information and advice, library services, clubhouse services, making submissions on legislation); distribution of grants; and provision of goods and services to third parties (for example, advocacy, training, counselling, housing, specialised equipment). 9.16 The criteria for outputs may be specified in contracts or agreements with external parties such as members or funding providers. If this is not the case, it can be helpful to think how the goods and services of the entity would be described in a contract and what the terms and conditions of such a contract would be. 9.17 Outputs and the basis of aggregating outputs must be clearly and accurately specified at the start of the reporting period. 9.18 It is important to distinguish outputs from: inputs; outcomes; management systems; internal outputs; and processes. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 75

Inputs 9.19 Inputs are the resources used to produce the goods and services (outputs) of the entity. They include personnel, travel, motor vehicles, and land and buildings. Input information provides information about what an entity has spent money on but not what the entity has produced. Statements of service performance do not therefore focus on inputs. 9.20 Some entities may have to report on inputs to demonstrate to external funding providers that resources provided to the entity have been spent in accordance with certain conditions. Outcomes 9.21 Outcomes are the impacts on, or consequences for, the community resulting from the existence and operations of the entity. The statement of service performance should explain how the entity s outputs and other activities contributed to the entity s broader objectives such as outcomes. 9.22 It is important to distinguish between an entity s outputs and other activities and the outcomes that an entity is seeking to influence because: it can be difficult to measure the contribution that particular outputs make to an outcome; more than one entity may be involved in the same types of activities, making it very difficult to hold any single entity accountable for a particular outcome; there are often a number of other influences, such as government policy or regulations, that may impact on the extent to which an entity s output can influence outcomes; and the impact of an output on an outcome may take a long time to emerge. Management systems, internal outputs and processes 9.23 Management systems are the supporting systems and policies used by an entity in conducting its business. Processes are the way the entity converts inputs into outputs. 9.24 Internal outputs (also referred to as intermediate or management outputs) are: goods or services processed by one part of the entity and delivered to another part of the same entity; or steps along the way in the entity s processes which contribute directly to the delivery of another output. 9.25 Management systems, internal outputs and processes are needed to support the delivery of outputs to external parties. Although they are not outputs, information on them is needed for internal management purposes and may be useful for readers of general purpose financial statements. What is required in a statement of service performance? 9.26 The requirements for a statement of service performance are set out in NZ IAS 1. It requires that: the statement should describe and disclose the quantity, quality, timeliness, locations and cost of outputs produced by the entity during the reporting period (similar individual outputs may be aggregated); and the statement should present both planned and actual service performance. Unlike other statements, comparatives with the preceding period are not required. 9.27 The statement should also identify the outcomes or strategic goals the outputs are intended to contribute to. However, the predominant focus should be on the outputs produced. 9.28 Although not required by NZ IAS 1, it is helpful for readers if the statement of service performance indicates the formal process by which the entity s outputs were selected and specified. For example, outputs may be determined by an entity s governing body, a government agency, another external funding provider or a mix of all three. 9.29 Ideally, a statement of service performance would include the following information in respect of each output, or group of similar outputs: a description of the goods or services actually delivered; measure(s) of the quantity of output units delivered; measure(s) of the quality of output delivered; a measure of the time and place of delivery, if this is important to the receiver of the output; and the cost of the outputs delivered. 9.30 In practice an entity may begin by developing a simplified statement of service performance and gradually provide more information over time. 76 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

9.31 The NZ Framework also requires that non-financial and supplementary information must be understandable, relevant, reliable and comparable (paragraph NZ 101.3). Statement format 9.32 The format of a statement of service performance is not prescribed. Different organisations are likely to use various formats, depending on the nature and scope of their outputs. When establishing a format for the statement a not-forprofit entity should choose a presentation which best allows the reader to understand what services were delivered. Focus on key aspects of performance 9.33 In preparing a statement of service performance for inclusion in a general purpose financial report, judgement is needed in selecting the information that is of most interest to external users and ensuring that users are not overwhelmed with too much information. Judgement is needed in respect of: the aggregation of similar outputs. Aggregation should be at a level that conveys a meaningful understanding of the outputs purchased without obscuring what is being purchased and/or burying the reader in detail; and the level of detail that is provide in reporting variances between projected and actual performance. Although any variations between projected and actual performance may be relevant within the entity, external users will generally be most interested in major variances or variances which have possible adverse consequences for the entity. The concept of materiality is relevant when deciding which variances to report. If information reported on a particular variance could affect the user s decision-making, then that variance should be reported, together with the reason for the variance. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 77

Glossary This glossary explains some of the technical terms used in this Guide. Unless otherwise indicated the explanation of terms in this glossary is based on definitions in New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs). However, the terms in this glossary are defined in the context of not-forprofit entities. The technical definitions of terms used in NZ IFRSs are available in the Glossary to the Applicable Financial Reporting Standards (NZICA, published regularly) and in each standard (available at http://www.nzica.com). Term account payable account receivable accounting policies accrual basis of accounting amortisation (depreciation) amortised cost of a financial asset or financial liability asset associate audit bequest borrowing costs capitalisation Explanation Amount owed to a creditor for delivered goods or completed services. Also referred to as creditors. (Not a defined term in NZ IFRSs) Claim against a debtor for an uncollected amount, generally from a completed transaction of sales or services rendered. Also referred to as debtors. A not-for-profit entity may also have grants receivable. (Not a defined term in NZ IFRSs) The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are included in the accounting records and reported in the financial statements of the periods to which they relate. The systematic allocation of the depreciable amount of an intangible asset over its useful life. (As defined in NZ IFRSs) Amortisation results in an annual reduction in the carrying value of an intangible asset over its useful life to reflect the consumption of an intangible asset over its useful life. Amortisation is shown as an expense and a corresponding reduction in total assets. Amortisation is generally used in relation to intangible assets and goodwill; depreciation is used for other assets. Both terms have the same meaning. The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility. A resource: (a) controlled by an entity as a result of past events; and (b) from which future economic benefits or service potential is expected to flow to the entity. An entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. An audit is a professional engagement designed to enable an independent auditor to provide a high, but not absolute, level of assurance to users through: the issuance of a positive expression of an opinion that enhances the credibility of a written assertion, or set of assertions, about a matter of accountability ( attest audit ); or the provision of relevant and reliable information and a positive expression of opinion about a matter of accountability where the party responsible for the matter of accountability does not make a written assertion, or set of assertions ( direct reporting audit ). (Not a defined term in NZ IFRSs) A gift of personal property made in a will. (Not a defined term in NZ IFRSs) Interest and other costs incurred by an entity in connection with the borrowing of funds. Recognising a cost as part of the cost of an asset. 78 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Term carrying amount cash cash equivalents cash flows class of assets charity charitable entity charitable trust company consolidated financial statements contingent asset contingent liability control (of an entity) cost current cost current replacement cost date of transition to New Zealand equivalents to IFRSs deemed cost Explanation The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. (This definition is applicable to NZ IAS 16, NZ IAS 36 and NZ IAS 38). Cash on hand and demand deposits. Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Inflows and outflows of cash and cash equivalents. A grouping of assets of a similar nature and use in an entity s operations. Any organisation having exclusively charitable purposes under New Zealand law. (Not a defined term in NZ IFRSs) Charitable entity means a society, an institution, or the trustees of a trust that is or are registered as a charitable entity under the Charities Act 2005. (Not a defined term in NZ IFRSs) Any trust having exclusively charitable purposes under New Zealand law. (Not a defined term in NZ IFRSs) A company includes any organisation incorporated under any legislation allowing for incorporation. (Not a defined term in NZ IFRSs) The financial statements of a group presented as those of a single economic entity. A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. (a) A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability. The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other standards. The amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. The undiscounted amount of cash or cash equivalents that would be required to settle an obligation currently. The cost the entity would incur to acquire the asset on the reporting date. The beginning of the earliest period for which an entity presents full comparative information under New Zealand equivalents to IFRSs in its first New Zealand equivalents to IFRSs financial statements. An amount used as a surrogate for cost or depreciated cost at a given date. Subsequent depreciation or amortisation assumes that the entity had initially recognised the asset or liability at the given date and that its cost was equal to the deemed cost. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 79

Term depreciable amount depreciated replacement cost depreciation (amortisation) derivatives disposal group economic benefits economic life effective interest method Explanation The cost of an asset, or other amount substituted for cost (in the financial statements), less its residual value. A method of valuation that is based on an estimate of: (a) in the case of property: (i) the fair value of land; plus (ii) the current gross replacement costs of improvements less allowances for physical deterioration, and optimisation for obsolescence and relevant surplus capacity; and (b) in the case of plant and equipment, the current gross replacement cost less allowances for physical deterioration, and optimisation for obsolescence and relevant surplus capacity. (Not a defined term in NZ IFRSs) This term is used in the context of NZ IAS 16 Property, Plant and Equipment and in relation to public benefit entities only. Refer to NZ IAS 16 for further discussion of depreciated replacement cost. The systematic allocation of the depreciable amount of an asset over its useful life. It results in an annual reduction in the carrying value of an asset over its useful life to reflect its loss in value and use as a resource of the entity. Depreciation is shown as an expense and a corresponding reduction in total assets. For intangible assets and goodwill, the term amortisation is generally used instead of depreciation. Both terms have the same meaning. Financial instruments whose value varies with the value of an underlying asset (such as a share, bond, commodity or currency) or index such as interest rates. (This is a general explanation it is not the defined term included in NZ IFRSs. NZ IAS 39 includes a more detailed definition of derivatives to be used when applying that Standard). A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated in accordance with the requirements of paragraphs 80 87 of NZ IAS 36 or if it is an operation within such a cash-generating unit. The future economic benefit embodied in an asset is the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. The potential may be a productive one that is part of the operating activities of the entity. It may also take the form of convertibility into cash or cash equivalents or a capability to reduce cash outflows, such as when an alternative manufacturing process lowers the costs of production. (Not a defined term in NZ IFRSs. Refer NZ Framework paragraph 53) See also service potential. Either: (a) the period over which an asset is expected to be economically usable by one or more users; or (b) the number of production or similar units expected to be obtained from the asset by one or more users. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but shall not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see NZ IAS 18), transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments). 80 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Term entity equity equity method expenses events after the balance sheet (reporting) date fair value FIFO (first-in, first-out) finance lease financial asset financial instrument financial liability Explanation See also reporting entity. A legal entity is an organisation which is legally permitted to enter into a contract, and can be sued if it fails to meet its contractual obligations. (Not a defined term in NZ IFRSs) The residual interest in the assets of the entity after deducting all its liabilities. A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor s share of net assets of the investee. The profit or loss (or surplus or deficit) of the investor includes the investor s share of the profit or loss (or surplus or deficit) of the investee. Decreases in economic benefits (or service potential) during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Those events, favourable and unfavourable, that occur between the balance sheet (reporting) date and the date when the financial statements are authorised for issue. Two types of events can be identified: (a) those that provide evidence of conditions that existed at the balance sheet (reporting) date (adjusting events after the balance sheet (reporting) date); and (b) those that are indicative of conditions that arose after the balance sheet (reporting) date (non-adjusting events after the balance sheet (reporting) date). The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. The assumption that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. A lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right: (i) to receive cash or another financial asset from another entity; or (ii) to exchange financial instruments with another entity under conditions that are potentially favourable; or (d) a contract that will or may be settled in the entity s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity s own equity instruments. For this purpose the entity s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity s own equity instruments. Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Any liability that is: (a) a contractual obligation: (i) to deliver cash or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or (b) a contract that will or may be settled in the entity s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity s own equity instruments. For this purpose the entity s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity s own equity instruments. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 81

Term financial report financial statements financing activities first New Zealand equivalents to IFRSs financial statements first New Zealand equivalents to IFRSs reporting period first-time adopter general purpose financial reports general purpose prospective financial information general purpose prospective financial statements going concern government grants group historical cost impairment loss income Explanation Financial statements may be published as part of a financial report which includes financial statements, non-financial statements such as statements of service performance, and supplementary information. (Not a defined term in NZ IFRSs) A complete set of financial statements comprises: (a) a balance sheet (statement of financial position); (b) an income statement (statement of financial performance); (c) a statement of changes in equity showing either: (i) all changes in equity, or (ii) changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders; (d) a cash flow statement; and (e) notes, comprising a summary of significant accounting policies and other explanatory notes. Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. The first annual financial statements in which an entity adopts New Zealand equivalents to International Financial Reporting Standards (IFRSs), by an explicit and unreserved statement of compliance with New Zealand equivalents to IFRSs. The reporting period ending on the reporting date of an entity s first New Zealand equivalents to IFRSs financial statements. An entity that presents its first New Zealand equivalents to IFRSs financial statements. Financial reports which are intended to provide information to meet the needs of external users who are unable to require, or contract for, the preparation of special reports to meet their specific information needs. One or more future-oriented financial statements prepared for external users who are unable to require, or contract for, the preparation of special reports to meet their specific information needs. (As defined in FRS-42) Future-oriented financial statements prepared for external users who are unable to require, or contract for, the preparation of special reports to meet their specific information needs. (As defined in FRS-42) The entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations. Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity. A parent and all its subsidiaries. A measurement basis according to which assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. The amount by which the carrying amount of an asset exceeds its recoverable amount. Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. 82 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Term intangible asset inputs interim financial report interim period International Financial Reporting Standards (IFRSs) IPSAS IPSASB inventories inventories held for distribution investment property investing activities investor in a joint venture joint control joint venture jointly controlled assets Explanation An identifiable non-monetary asset without physical substance. The resources used to produce the goods and services which are the outputs of the entity. A financial report containing either a complete set of financial statements (as described in NZ IAS 1 Presentation of Financial Statements) or a set of condensed financial statements (as described in NZ IAS 34 Interim Financial Reporting) for an interim period. A financial reporting period shorter than a full financial year. Standards and Interpretations adopted by the International Accounting Standards Board (IASB). They comprise: (a) International Financial Reporting Standards; (b) International Accounting Standards; and (c) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC). International Public Sector Accounting Standards issued by the International Public Sector Accounting Standards Board. (Not a defined term in NZ IFRSs) International Public Sector Accounting Standards Board. (Not a defined term in NZ IFRSs) Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories held for distribution are assets: (a) held for distribution at no or nominal consideration in the ordinary course of operations; (b) in the process of production for distribution at no or nominal consideration in the ordinary course of operations; or (c) in the form of material or supplies to be consumed in the production process or in the rendering of services at no or nominal consideration. Property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. The acquisition and disposal of long-term assets and other investments not included in cash equivalents. A party to a joint venture and does not have joint control over that joint venture. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). A contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. (As defined in NZ IFRSs) Joint ventures take many different forms and structures. NZ IAS 31 identifies three broad types jointly controlled operations, jointly controlled assets and jointly controlled entities that are commonly described as, and meet the definition of, joint ventures. (Additional explanation to support definition in NZ IFRSs) A joint venture which involves the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of that joint venture. The assets are used to provide benefits to the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. No separate entity is established. (Not a defined term in NZ IFRSs. Based on NZ IAS 31 paragraphs 18 and 19) NOT FOR PROFIT FINANCIAL REPORTING GUIDE 83

Term jointly controlled operations liability liquidity material net realisable value New Zealand equivalents to IFRSs not-for-profit entity notes obligating event offsetting operating activities operating lease outcomes Explanation A joint venture which involves the use of the assets and other resources of the venturers rather than the establishment of a separate entity. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture activities may be carried out by the venturer s employees alongside the venturer s similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in common are shared among the venturers. (Not a defined term in NZ IFRSs. Based on NZ IAS 31 paragraph 13) A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. The availability of cash in the near future after taking account of financial commitments over this period. Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. (As defined in NZ IFRSs. NZ IAS 1 paragraph 11) In addition, information relating to not-for-profit entities may be material if its non-disclosure could influence the decision-making and evaluations of users about the allocation and stewardship of resources, and the performance of the entity, made on the basis of the financial statements. (Based on NZ IAS 1 paragraph NZ 11.2) The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell. Standards and Interpretations approved by the Accounting Standards Review Board (ASRB) comprising New Zealand equivalents to: (a) International Financial Reporting Standards; (b) International Accounting Standards; and (c) International Interpretations. In this Guide it is assumed that all not-for-profit entities are also public benefit entities. In New Zealand the term public benefit entities refers to both public sector entities and other not-forprofit entities. (Not a defined term in NZ IFRSs) Notes contain information in addition to that presented in the balance sheet (statement of financial position), income statement (statement of financial performance), statement of changes in equity and cash flow statement. Notes provide narrative descriptions or disaggregations of items disclosed in those statements and information about items that do not qualify for recognition in those statements. An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. See set off, legal right of. (Not a defined term in NZ IFRSs) The principal revenue-producing activities of an entity and other activities that are not investing or financing activities. A lease other than a finance lease. The impacts on, or consequences for, the community resulting from the existence and operations of the entity. (As defined in NZ IFRSs, NZ IAS 1 paragraph NZ 11.1) 84 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Term outputs parent performance measure post-employment benefits post-employment benefit plans presentation currency previous GAAP probable property, plant and equipment prospective financial information provision public benefit entities recognition recoverable amount relevance reliability reporting date reporting entity Explanation The goods and services produced by the entity. (As defined in NZ IFRSs, NZ IAS 1 paragraph NZ 11.1) An entity that has one or more subsidiaries. A quantifiable indicator of progress, achievement and efficiency that includes outcome, output, input, efficiency, and explanatory indicators. (Not a defined term in NZ IFRSs) Employee benefits (other than termination benefits) which are payable after the completion of employment. Formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. The currency in which the financial statements are presented. The basis of accounting that a first-time adopter used immediately before adopting New Zealand equivalents to IFRSs. More likely than not. Tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. See also general purpose financial information and general purpose prospective financial statements. A liability of uncertain timing or amount. Reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders. The process of incorporating in the balance sheet (statement of financial position) or income statement (statement of financial performance) an item that meets the definition of an element and satisfies the following criteria for recognition: (a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and (b) the item has a cost or value that can be measured with reliability. The higher of an asset s (or cash-generating unit s) fair value less costs to sell and its value in use. (As defined in NZ IAS 36 paragraph 6 and NZ IFRS 5 Appendix A) The higher of an asset s net selling price and its value in use. (As defined in NZ IAS 16 paragraph 6) Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. In addition to making economic decisions, users of financial statements of New Zealand entities may also be interested in how well an entity has demonstrated its accountability in relation to a range of obligations, including the entity s compliance with legislation, regulations, common law and contractual arrangements. (NZ Framework paragraph NZ 14.1) Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. The end of the latest period covered by financial statements or by an interim financial report. An entity for which there are users who rely on the entity s general purpose financial statements for information that will be useful to them for making decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries. (As defined in NZ IFRS 3) NOT FOR PROFIT FINANCIAL REPORTING GUIDE 85

Term residual value (of an asset) retrospective application revalued amount of an asset revenue service potential set-off, legal right of significant influence special purpose financial report subsidiary trust unincorporated society useful life value in use weighted average cost method Explanation The net amount which an entity expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal. Applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. The fair value of an asset at the date of a revaluation less any subsequent accumulated depreciation and accumulated impairment losses. The gross inflow of economic benefits (or service potential) during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. The term future economic benefits is to be read as having the same meaning as the term service potential. Assets that are used to deliver goods and services in accordance with an entity s objectives but which do not directly generate net cash inflows are often described as having service potential. Assets that are used to generate net cash inflows are often described as providing future economic benefits. (NZ Framework paragraph NZ 49.1) A debtor s legal right, by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor. Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. (Significant influence may be gained by share ownership, statute or agreement.) Special purpose financial reports are financial reports tailored to meet the specific information needs of a particular user. An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). Trust is an obligation imposed on a person known as the trustee to account for property they control for the benefit of persons known as beneficiaries. A trust must be accounted for separately from the trustees own property but it is not, strictly speaking, a separate legal entity. However the trustees of many charitable trusts are incorporated and have no property of their own to account for. (Not a defined term in NZ IFRSs) Unincorporated society means an organisation that does not have a separate legal identity from its members. (Not a defined term in NZ IFRSs) Either: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by the entity. The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. (NZ IFRS 5 Appendix A) The present value of the future cash flows expected to be derived from an asset or cashgenerating unit. (NZ IAS 36 paragraph 6) The depreciated replacement cost of an asset when the future economic benefits of the asset are not primarily dependent on the asset s ability to generate net cash inflows and where the entity would, if deprived of the asset, replace its remaining future economic benefits. (NZ IAS 36 paragraph NZ 6.1) Under this formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity. 86 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Appendix 1: List of Pronouncements This Appendix lists the pronouncements in force as at 1 June 2007, their relevance to not-for-profit entities and whether they are discussed in this Guide. General New Zealand Preface (NZ Preface) New Zealand Equivalent to IASB Framework for the Preparation and Presentation of Financial Statements (NZ Framework) Relevance and extent of coverage in this Guide The NZ Preface includes a discussion of GAAP and obligations of members of the Institute. Briefly referred to in Chapter 1. Chapters 4 and 5 discuss the recognition and measurement of assets, liabilities, income and expenses in the NZ Framework. NZ IFRSs Standards Framework for Differential Reporting for Entities Applying the New Zealand Equivalents to International Financial Reporting Standards Reporting Regime NZ IAS 1 Presentation of Financial Statements Discussed in Chapter 1 and Appendix 2. This Guide is written for small to medium not-for-profit entities which are assumed to qualify for differential reporting concessions. Entities that do not qualify for differential reporting concessions should refer directly to the standards. Chapter 3 summarises some of the general presentation requirements in NZ IAS 1. Chapters 4, 5 and 6 outline the specific disclosure requirements applicable to not-for-profit entities that qualify for differential reporting concessions. NZ IAS 2 Inventories Chapter 4 NZ IAS 7 Cash Flow Statements NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors Entities that qualify for differential reporting concessions are not required to prepare a cash flow statement but are encouraged to do so. Chapter 7 Chapters 3-5 Chapter 8 NZ IAS 10 Events after the Balance Sheet Date Chapter 8 NZ IAS 11 Construction Contracts NZ IAS 12 Income Taxes NZ IAS 14 Segment Reporting Industry specific. Not covered. Not generally relevant to not-for-profit entities. Not covered apart from a brief mention in Chapter 5. Public benefit entities are not required to comply with this Standard. Not covered. See also NZ IFRS 8 which supersedes NZ IAS 14. NZ IAS 16 Property, Plant and Equipment Chapter 4 NZ IAS 17 Leases Chapter 4 NZ IAS 18 Revenue Chapter 5 NZ IAS 19 Employee Benefits Chapter 4 NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance NZ IAS 21 The Effects of Changes in Foreign Exchange Rates Covered very briefly in Chapter 5 the application of this standard to public benefit entities is limited. Not covered NZ IAS 23 Borrowing Costs Chapter 4 NZ IAS 24 Related Party Disclosures Chapter 8 NOT FOR PROFIT FINANCIAL REPORTING GUIDE 87

NZ IFRSs Standards NZ IAS 26 Accounting and Reporting by Retirement Benefit Plans Not covered NZ IAS 27 Consolidated and Separate Financial Statements Chapter 2 NZ IAS 28 Investments in Associates Chapter 2 NZ IAS 29 Financial Reporting in Hyperinflationary Economies NZ IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions Not covered Industry specific. Not covered NZ IAS 31 Interests in Joint Ventures Chapter 2 NZ IAS 32 Financial Instruments: Presentation NZ IAS 33 Earnings per Share NZ IAS 34 Interim Financial Reporting Not covered Categories of financial instruments discussed Chapter 4 Not covered Not covered NZ IAS 36 Impairment of Assets Chapters 4 and 5 NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets Chapter 4 Chapter 8 NZ IAS 38 Intangible Assets Chapter 4 NZ IAS 39 Financial Instruments: Recognition and Measurement Not covered Categories of financial instruments discussed Chapter 4 NZ IAS 40 Investment Property Chapter 4 NZ IAS 41 Agriculture NZ IFRS 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards NZ IFRS 2 Share-based Payment NZ IFRS 3 Business Combinations NZ IFRS 4 Insurance Contracts Industry specific. Not covered Chapter 1 Not covered. Not covered Industry specific. Not covered NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Chapter 4 Chapter 5 NZ IFRS 6 Exploration for and Evaluation of Mineral Resources NZ IFRS 7 Financial Instruments: Disclosures NZ IFRS 8 Operating Segments Industry specific. Not covered Not covered Public benefit entities are not required to comply with this Standard. Not covered. NZ IFRS 8 supersedes NZ IAS 14. NZ IFRSs Interpretations NZ SIC-7 Introduction of the Euro NZ SIC-10 Government Assistance No Specific Relation to Operating Activities NZ SIC-12 Consolidation Special Purpose Entities NZ SIC-13 Jointly Controlled Entities Non-Monetary Contributions by Venturers NZ SIC-15 Operating Leases Incentives NZ SIC-21 Income Taxes Recovery of Revalued Non-Depreciable Assets NZ SIC-25 Income Taxes Changes in the Tax Status of an Entity or its Shareholders NZ SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease Not covered Not covered Not covered Not covered Not covered Not covered Not covered Not covered 88 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

NZ IFRSs Interpretations NZ SIC-29 Disclosure Service Concession Arrangements NZ SIC-31 Revenue Barter Transactions Involving Advertising Services Not covered Not covered NZ SIC-32 Intangible Assets Web Site Costs Chapter 4 NZ IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities NZ IFRIC 2 Members Shares in Co-operative Entities and Similar Instruments NZ IFRIC 4 Determining whether an Arrangement contains a Lease NZ IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds NZ IFRIC 6 Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment NZ IFRIC 7 Applying the Restatement Approach under NZ IAS 29 Financial Reporting in Hyperinflationary Economies NZ IFRIC 8 Scope of NZ IFRS 2 NZ IFRIC 9 Reassessment of Embedded Derivatives NZ IFRIC 10 Interim Financial Reporting and Impairment NZ IFRIC 11 Group and Treasury Share Transactions NZ IFRIC 12 Service Concession Arrangements Not covered Not covered Not covered Not covered Not covered Not covered Not covered Not covered Not covered Not covered Not covered New Zealand Financial Reporting Standards relevant to entities that have adopted NZ IFRSs FRS-42 Prospective Financial Statements Chapter 3 FRS-43 Summary Financial Statements Not covered Technical Practice Aids TPA-9 Service Performance Reporting Chapter 9 NOT FOR PROFIT FINANCIAL REPORTING GUIDE 89

Appendix 2: Framework for Differential Reporting This Appendix describes the criteria required for an entity to qualify for differential reporting and the application of those criteria to not-for-profit entities. Figure 7 is taken from the Framework for Differential Reporting. An entity qualifies for differential reporting exemptions when the entity does not have public accountability (as defined in the Framework for Differential Reporting) and: at balance date, all of its owners are members of the entity s governing body; or the entity is not large (as defined in the Framework for Differential Reporting). In the vast majority of cases not-for-profit entities that qualify for differential reporting concessions will do so because: they are not publicly accountable for the purposes of the Framework for Differential Reporting (the definition of public accountability in the Framework for Differential Reporting focuses on issuers and entities with the ability to tax or rate); and they are not large (as defined in the Framework for Differential Reporting). Qualifying entities electing to apply differential reporting concessions will not be able to assert compliance with IFRSs. FIGURE 7: DECIDING WHETHER AN ENTITY QUALIFIES FOR DIFFERENTIAL REPORTING 1. Is the entity an exempt company? Yes Reference Framework for Differential Reporting No No 2. Does the entity produce general purpose financial statements? Yes 3. Is the entity publicly accountable? No Yes Paras 3.2-3.4 4. Are the owners and governing body separated? Paras 3.5-3.7 No No 5. Does the parent or ultimate controlling entity have coercive power to tax, rate or levy? Yes Paras 3.8 Yes No 6. Is the entity large? Yes Paras 3.9 Special purpose financial reports tailored to the specific requirements of the user Some exemptions from requirements of standards and interpretations Differential reporting exemptions apply Full compliance with applicable standards and interpretations Differential reporting exemptions do not apply Refer to the specific requirements of the Financial Reporting Act 1993 for exempt companies 90 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Size Although the size of an entity is the final issue considered in the above diagram it is considered first in this Appendix because in the vast majority of cases the size of a not-for-profit entity determines whether it is eligible for differential reporting. An entity is large for the purpose of the Framework for Differential Reporting if it exceeds any two of the following: total income of $20 million; total assets of $10 million; 50 (full-time equivalent) employees. Presenting these criteria another way, an entity is small to medium sized if it meets any two of the following: total income of less than $20 million; total assets of less than $10 million; fewer than 50 (full-time equivalent) employees. The terms total income, total assets and employees are defined in the Framework for Differential Reporting. Total income and assets are determined using the figures from the financial statements at the end of the reporting period. In assessing the number of employees volunteers are not included. The number of employees refers to full-time equivalents in the paid employment of the entity. Not-for-profit entities that prepare financial statements for a group entity should refer directly to the Framework for Differential Reporting to decide whether the exemptions apply to the group and individual entities within the group. Public accountability Lack of public accountability is a pre-requisite for qualifying for differential reporting concessions. The term public accountability is used in a narrow sense within the Framework for Differential Reporting. It is defined as existing if: at any time during the current or the preceding reporting period, the entity (whether in the public or the private sector) was an issuer as defined in the Financial Reporting Act 1993; or the entity has the coercive power to tax, rate or levy to obtain public funds. Most not-for-profit entities will not be publicly accountable under this definition. Soliciting or receiving funds from the public, providing services to the public, or producing reports for issue to the public, do not constitute public accountability under this definition. Nor does an entity have public accountability solely by reason of receiving public funds from another entity which has the coercive power to tax, rate or levy to obtain public funds. Owners and governing body not separate Lack of separation between the owners and the governing body (that is, every owner of an entity is also a member of the entity s governing body) is one of the criteria for qualifying for differential reporting concessions. If the owners are also members of the governing body, they can directly obtain any information that they require and do not rely on general purpose financial statements to meet their information needs. Identifying the owners of a not-for-profit entity can be difficult. An owner is defined by the Framework for Differential Reporting as a party which has: an equitable or beneficial interest in the residual value of an entity s assets; or the right to participate in the election or appointment of an entity s governing body. In the not-for-profit context owners could include members of incorporated societies who pay subscriptions or levies and have the right to elect the governing body. The governing body referred to in the Framework for Differential Reporting is the board or committee that is responsible for setting operational policy and overseeing the operations of the entity. It is the equivalent of the board of directors in a corporate setting. Some not-for-profit entities also have a representative body made up of elected or appointed representatives of the membership as a whole which elects or appoints the governing body and approves constitutional changes and other strategic policy matters. This type of representative body is not the governing body referred to in the Framework for Differential Reporting. When the entity preparing the financial statements is a trust, all beneficiaries must be trustees in order to meet the requirement that there is no separation between the owners and the governing body. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 91

If one owner of an entity is a trust and the trust appoints a representative to the governing body of the entity, that representative is considered to be an owner for the purposes of the Framework for Differential Reporting. Not-for-profit entities will not commonly use this criterion to qualify for differential reporting. Generally the governing body (for example, the trustees, board, committee) will be distinct from the owners (the beneficiaries or members). Coercive power to tax, rate or levy If the parent or ultimate controlling entity has the coercive power to tax, rate or levy to obtain public funds, the entity is not permitted to use a lack of separation between the owners and the governing body as a basis for qualifying for differential reporting exemptions. Not-for-profit entities are unlikely to have coercive powers. The powers of an entity to levy its members does not qualify as meeting this criterion. An entity cannot usually coerce its members to be members, nor are the funds raised public funds. 92 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Appendix 3: Review Engagements This article was written by Craig Fisher CA. The article has been reprinted with permission from the Chartered Accountants Journal of New Zealand, July 1998 issue. At the time the article was written Craig was an audit partner with Bowden, Impey, & Sage in Auckland. That firm merged and changed its name to Hayes Knight where Craig is currently a director. INTRODUCTION The review engagement is an under-utilised tool in the Chartered Accountant s tool box. However, it is an excellent, cost-effective means of providing assurance on financial statements and potentially also other information. Many clients seek some form of assurance on their financial statements, but balk at the cost of the high (but not absolute) level of assurance provided by an audit. Alternatively, they may simply require an overall review of the financial statements that also focuses on a specific area or areas in more detail for say a grant-funding body or a bank. In such circumstances, a review engagement may be the appropriate service to provide this assurance. Difference from audit In an audit, the independent Chartered Accountant s objective is to provide a high (but not absolute) level of assurance on the reliability of financial statements. An audit is designed to result in the accountant providing a positive opinion which essentially states that based on the work performed, the financial statements comply with generally accepted accounting principles (GAAP) and give a true an fair view. The level of testing procedures to obtain the evidence necessary to support such an opinion is high. In contrast, a review is designed to provide a negative assurance report giving only a moderate level of assurance to readers on the reliability of the financial information. The report essentially states that nothing has come to the reviewer s attention to indicate that the financial information does not give a true and fair view. Review engagements are designed as a limited review of financial statements; therefore the risk of mistakes, omissions or incorrect disclosures is considerably greater than with an audit. However, because the level of assurance provided by a review is lower, less work is required and consequently the cost is often significantly less. Both review engagements and audits require the financial statements to be prepared in full compliance with GAAP. Procedures The procedures to be performed will vary depending on the specific requirements of the engagement. Review engagement procedures are generally based on: gaining an understanding of the client s activities, including knowledge of the accounting practices of the industry or area in which the client operates; and inquiry and analytical review. A review engagement does not normally involve a study and evaluation of internal accounting controls, detailed tests of accounting records, or corroborative evidence through inspection, observation and confirmation. These are all features of an audit. Chartered Accountants are provided with good guidance on such engagements by RS-1, Statement of Review Engagement Standards and RG-1: Guideline on Performance of a Review Engagement Financial Statements. Examples of engagement letters and review reports can be found in the appendices to the guideline. Appendix II also contains a comprehensive list of procedures which may be performed in a review engagement. Summary Review engagements are generally underutilised by Chartered Accountants. Reviews provide less assurance than audits, but can be very cost-effective. Reviews can generally be performed more quickly than audits. Reviews must be explained to clients. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 93

Review engagements also require clear planning, agreement of terms of engagement and good documentation. Excellent detailed guidance is provided in the form of the Review Standard, RS-1, and the Review Guideline, RG-1. This is an excellent starting point from which to formulate a detailed review work program. Crucial Steps The following are the crucial steps for a successful engagement: Assess whether a review is appropriate The source of the requirement for assurance will determine whether a review is appropriate. If the entity is specifically required by legislation or its constitution to obtain an audit, a review would be unacceptable. However, if a full audit is judged inappropriate, the constitution can be changed. If the entity is obtaining assurance only for members or a third party such as a funding body, a review may be an appropriate, costeffective option. In such cases the Chartered Accountant needs to explain the options in order to help their clients: determine the level of assurance they would find satisfactory; and ensure they are authorised to do so either by their members or by the third party specifying the review. Planning Clearly define the scope of the engagement. Because reviews can vary considerably in nature and extent, there must be a clear understanding between the Chartered Accountant and the client in terms of what the review will involve. As protection for all parties, this understanding must be recorded in an engagement letter. The letter should cover the following points: that the client is responsible for the contents and accuracy of the financial statements; the nature of the review services to be performed; that the review will not constitute an audit or result in an audit opinion; and that the review cannot be relied on to prevent or detect fraud or error. It is also very useful for the proposed form of the review report to be included in the engagement letter, because this can help clarify any misunderstanding before the field work is started. As is the case with audit engagements, time and effort invested in obtaining a clear understanding at the planning stage generally results in significant time-savings in the performance of the review work. Documentation The procedures performed by the Chartered Accountant must be clearly documented to support the review report. This documentation should encompass: the planning; the nature, timing and extent of procedures performed; and the results of procedures performed, and conclusions drawn from evidence obtained. As is the case with an audit, this documentation should be at such a level that another suitably skilled professional could obtain an overall understanding of the work performed to support the conclusion reached. Reporting Clearly report what has been found. Care must be taken to title the report as a review engagement report and to refer to review procedures. No reference must be made to an audit. Readers must be clear that it is not an audit report. To be in a position to give an unqualified review report, the Chartered Accountant must conclude from the work performed that nothing has come to their attention to cause them not to believe that: the financial statements have been prepared using acceptable accounting principles, consistently applied; the financial statements comply with relevant statutory and regulatory requirements; the financial statements appear consistent with the accountant s knowledge of the entity and its operations; and adequate disclosure has been made of all matters relevant to proper presentation in the financial statements. 94 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

If the Chartered Accountant encounters circumstances which could indicate concern about any of the above items, the materiality of the circumstances must be considered in deciding whether to give something other than an unqualified report. Alternative possible reports are as follows: An except for report if the accountant disagrees with certain matters. A subject to report if there is uncertainty about an item. An adverse report if, in the accountant s opinion, the financial statements are not plausible. A disclaimer of opinion report whereby the accountant is unable to determine whether the financial statements give a true and fair view. Examples Here are two examples in which a review engagement may work well. Example 1 The Shuffles Bridge Club approaches you to perform an audit of its annual financial statements. The club is an incorporated society. The treasurer, Mrs Trump, advises you that We need an audit because we always have one but we don t have very much money to pay you. Is there any way you can make it cheaper? Like many incorporated societies. Shuffles is required by its constitution to have its annual financial statements audited. This is advisable for the members of such organisations, who deserve some assurance that the club s financial affairs are being appropriately handled. However, nothing in the Incorporated Societies Act 1908 requires an audit to be performed. This means that if the members agree that they do not require the high level of assurance of an audit, they could amend the constitution. To do so, they would need to vote and record this. You would be required to explain to the executive committee the differences between a review and an audit so they understand and could explain this to their members. If the members agree that a review would be appropriate, Shuffles constitution could be amended to state that An audit or review shall be performed annually in accordance with the relevant standards of the Institute of Chartered Accountants of New Zealand. This would give the members scope to vary the degree of assurance they obtain from year to year. For small organisations where funds are limited, a rotation plan that allows a full audit in one year and some form of review in, say, the next two years may be an effective way to balance the costs and benefits of assurance. However, this presents the Chartered Accountant with the problem of dealing with the opening balances when performing the full audit. Accountant s report to Shuffles Bridge Club Inc Members I have reviewed the financial statements of Shuffles Bridge Club for the year ended 31 December 1997 in accordance with the Review Engagement Standards issued by the Institute of Chartered Accountants of New Zealand. A review is limited primarily to inquiries of the club s personnel and analytical review procedures applied to the financial data, and thus provides less assurance than an audit. I have not performed an audit, and accordingly I do not express an audit opinion. Based on my review, nothing has come to my attention that causes me to believe that the accompanying financial statements do not give a true and fair view. J Bloggs CA Example 2 A retail business that produces its own financial statements but retains a Chartered Accountant for tax returns and other accounting advice is planning to open a new store. To do so it needs to increase its existing lending facility and approach its bank with a proposal for additional funding. The bank, which has been receiving quarterly financial statements, now looks very closely at the business current financial position. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 95

It requests that the most recent financial statements be audited and requires the client to pay. The business owner is unhappy with the cost of a full audit. When the bank manager is queried by the Chartered Accountant, the latter discovers that the former is in fact happy with the client s financial position and financial statements that are regularly provided to support the bank s continued lending. However, before agreeing to increase the lending facility the bank manager needs greater assurance that the financial statements are reasonably accurate. She also expresses some concern about the current level of stock held and the accuracy of the creditors balance reported in the most recent financial statements. The Chartered Accountant proposes a review engagement that looks at the financial statements overall and covers creditors and stock in greater detail. The result is that the bank is happy with the focused nature of the review and the level of assurance over the financial statements, and provides the additional funding. The business owner is happy with the lower cost than the full audit alternative. The Chartered Accountant has impressed both the client and the bank with a practical, cost-effective solution, and subsequently gains further referral business from both parties. Conclusion Review engagements are a good opportunity for a win-win situation. The client wins by gaining a quicker and less costly service than an audit. However, they still receive the level of assurance they require. The Chartered Accountant wins by probably achieving a better financial return (club audits particularly seldom support a commercial fee) and earning the client s gratitude for constructive cost-saving advice. 96 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Appendix 4: New Zealand Application Guidance: When is an Entity a Public Benefit Entity? This Application Guidance is published as an Appendix to NZ IAS 1 and is an integral part of NZ IAS 1. INTRODUCTION NZ AG 1 With the introduction of the New Zealand equivalents to International Financial Reporting Standards (IFRSs) reporting entities will designate themselves as either profit-oriented entities or public benefit entities (PBEs). NZ IAS 1, paragraph NZ 13.1, requires each reporting entity to disclose in the notes whether, for the purposes of complying with Generally Accepted Accounting Practice in New Zealand (NZ GAAP), it is a profit-oriented entity or a PBE. NZ AG 2 PBEs are defined as: reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders. NZ AG3 Profit-oriented entities are not defined. Rather, the term profit-oriented entities encompass all entities other than PBEs. An entity must assess whether it is either a PBE or a profit-oriented entity, by considering whether or not it meets the definition of a PBE. Assessing whether an entity meets the definition of a PBE requires an entity to determine its primary objective. NZ AG 3 The form of an entity is unlikely to be a conclusive factor in determining whether or not an entity is a PBE. PBEs are constituted in many different forms such as incorporated societies, trusts, statutory bodies and even companies. PBEs include a wide range of entity types, including charities, clubs, and non-commercial public sector entities. They exist in the private sector and in the public sector and may be small or large. In determining the designation of an entity which is a group, it is necessary to consider the characteristics of the group. NZ AG 4 IFRSs are developed by the IASB for application by profit-oriented entities. New Zealand equivalents to IFRSs, however, apply to the general purpose financial statements of all New Zealand reporting entities. Because New Zealand equivalents to IFRSs apply to PBEs as well as profit-oriented entities the Accounting Standards Review Board (ASRB) agreed that amendments to the requirements of certain IFRSs should be made to ensure that: the NZ IFRSs are relevant to and can be applied by PBEs; and the financial information provided by all entities in New Zealand remains useful to users. NZ AG 5 The ASRB has, therefore, set out the criteria for developing NZ IFRSs in ASRB Release 8 The Role of the Accounting Standards Review Board and the Nature of Approved Financial Reporting Standards. NZ AG 6 Developing NZ IFRSs in accordance with the criteria in ASRB Release 8 ensures that where a profit-oriented entity not applying differential reporting concessions prepares its financial report in compliance with NZ IFRSs, the financial statements will also comply with IFRSs. However, where a PBE prepares its financial report in compliance with NZ IFRSs it may not be appropriate to assert compliance with IFRSs if: the PBE has transactions for which the measurement or recognition requirements in the New Zealand equivalent to an IFRS differ from those in the IFRS on which they are based; or the PBE elects to take advantage of concessions provided by the New Zealand equivalent to an IFRS. NZ AG 7 As application of certain provisions in New Zealand equivalents to IFRSs will mean that an entity will not be able to assert compliance with IFRSs, it is necessary to limit application of these provisions to PBEs. For this purpose, it is also necessary to define PBEs and provide guidance to assist in determining if an entity is a PBE. NZ AG 8 NZ IAS 1, paragraph 13.1, requires reporting entities to disclose in the notes to the financial statements: a statement that the financial statements have been prepared in accordance with NZ GAAP, together with a description of the financial reporting standards applied by the entity NZ AG 9 A public benefit entity not applying differential reporting concessions would state: The financial statements have been prepared in accordance with NZ GAAP. They comply with New Zealand equivalents to IFRSs, and other applicable Financial Reporting Standards, as appropriate for public benefit entities. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 97

PURPOSE NZ AG 10 The purpose of this New Zealand Application Guidance is to assist entities preparing general purpose financial statements to determine whether or not they are a PBE. NZ AG 11 In many situations whether an entity is a profit-oriented entity or a PBE is important because it will affect accounting policies that have a material effect on the preparation and presentation of financial statements. Inappropriate classification may result in adoption of inappropriate accounting policies and failure to provide users with information appropriate to assessing the financial performance and position of an entity. NZ AG 12 Whilst there are relatively few differences in accounting requirements for profit-oriented entities and PBEs, application by an entity of a single requirement that is not in accordance with IFRSs will mean that entity is not in compliance with IFRSs. In certain cases, depending on the nature of the activities of the entity, designation as a PBE or as a profit-oriented entity will not have a material impact on the selection of accounting policies, or on the ability of an entity to assert compliance with IFRSs. DETERMINING THE PRIMARY OBJECTIVE OF AN ENTITY NZ AG 13 Whether an entity is a PBE is determined by the primary objective of an entity. In identifying the primary objective of an entity it is necessary to consider the substance of the entity s purpose and whether the goods or services are provided for community or social benefit. NZ AG 14 Although in general terms PBEs exist to provide goods and services for the community or social benefit, this does not necessarily imply that such entities exist for the benefit of the public as a whole. Many PBEs exist for the direct benefit of a particular group of people, although it is also possible that society as a whole benefits indirectly. For example, a football club exists to promote and encourage football for the direct benefit of its members. However, society as a whole may benefit through a healthier population and through the provision of organised activities for its youth. NZ AG 15 In many cases it will be intuitively obvious whether an entity is a PBE or not. However, objectively determining the primary objective of an entity can be difficult where an entity has multiple objectives and such objectives are not ranked, or where the objectives are not clearly stated. NZ AG 16 Paragraphs NZ AG 17 to NZ AG 30 discuss indicators that aim to focus on the substance of an entity s purpose and which should be considered in determining whether an entity is a PBE. These indicators are: the entity s founding documents; the nature of the benefits; the quantum of expected financial surplus; the nature of the equity interest; and the nature of an entity s funding. Founding documents NZ AG 17 For many entities the governing legislation, a constitution, a trust deed, or other founding documents will specify the objectives of an entity, including for whom the benefits generated by the entity are intended. For example, the State-Owned Enterprises Act 1986 states that the principal objective of every State enterprise is to operate as a successful business and to this end, to be (a) As profitable and efficient as comparable businesses that are not owned by the Crown; and (b) A good employer; and (c) An organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so. NZAG 18 The founding documents of an entity may also specify the objective of an entity in terms of the nature of the benefits the entity provides. For example, one of the objectives of District Health Boards is to improve, promote and protect the health of people and communities. NZ AG 19 Many entities are established with multiple objectives. For example, CRIs are required by the Crown Research Institutes Act 1992 to: undertake research for the benefit of New Zealand; comply with any applicable ethical standards; promote and facilitate application of the results of research and technological developments; 98 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

be a good employer and exhibit a sense of social responsibility; and operate in a financially responsible manner and generate an adequate rate of return. NZ AG 20 Where an entity s founding documents indicate that an entity has multiple objectives, determining which of these objectives is the primary objective will depend on an assessment of the substance of the purpose of the entity. NZ AG 21 The founding documents may require an entity to be financially viable or to generate an adequate rate of return. However, being financially viable is not in itself conclusive in distinguishing a profit-oriented entity from a PBE. There exists a clear community expectation that PBEs be financially viable and operate to ensure that the limited resources at their disposal are used effectively. Nature of the benefits NZ AG 22 The nature of the benefits provided by an entity will usually indicate whether an entity is a PBE. For example, if the entity produces goods or services that are not provided at market prices, but are provided to consumers at no cost or for nominal consideration, the entity is likely to be a PBE. NZ AG 23 PBEs do not exist to generate benefit in the form of a financial return to equity-holders. That is not to imply that PBEs never generate, or aim to generate, a financial surplus on the net assets employed. However, where a PBE does generate a financial surplus, it may be required or expected to be used to support the entity s primary objective of providing goods or services for the community or for social benefit. NZ AG 24 PBEs may establish subsidiaries or discrete business units which operate to generate a return that can be used to support the primary activities of the parent entity. Such entities or business units may be profit-oriented. This fact does not affect the classification of the parent or group entity*. Quantum of expected financial surplus NZ AG 25 Many entities aim to generate revenues in excess of the expenses incurred. In order to continue operating all entities need to at least break even over the long term. The quantum of the expected surplus will provide a strong indication whether an entity is a PBE. NZ AG 26 The objective of profit-oriented entities is to generate a commercial or market return that is, to maximise the financial return commensurate with the relative risks of operating. NZ AG 27 PBEs do not operate to maximise financial return in this way. PBEs may plan to generate a financial surplus. However, the quantum of the expected financial surplus is not expressed in relation to a market return or other measure of commercial success. NZ AG 28 PBEs may not quantify the expected financial surplus, or may do so in qualitative or general terms only. For example, an entity may specify that it aims to generate an adequate rate of return, or a financial surplus sufficient to remain solvent, or generate a financial surplus sufficient to repay any debts within a certain time period. Nature of equity interest NZ AG 29 Where an entity is established to generate a financial return for the benefit of the equity-holders the ownership instrument is usually clearly defined. This is important for profit-oriented entities because it determines the level of benefits such as dividends and rights to the residual net assets. If an entity does not have any clear equity-holders or the nature of the equity instrument is unclear, the entity is likely to be a PBE. NZ AG 30 The absence of clear equity holders may manifest itself in a number of ways, including: the absence of an individual or entity having a right to participate in any financial return or in the net assets of the entity were it to be wound up or otherwise cease to operate; or a requirement that in the event the entity ceases operating any residual net assets are to be applied to another entity with a similar purpose or to revert to another PBE. That is, the use of the assets is effectively restricted to providing goods or services for the benefit of the community or part thereof. Nature of funding NZ AG 31 If an entity is funded wholly or primarily through the sale of goods and services it may not be a PBE. If an entity relies wholly or primarily on donations or other contributions that do not establish a financial interest in the entity, or which do not reflect a sale and purchase transaction, the entity is likely to be a PBE. *If a subsidiary or business unit is required to prepare general purpose financial reports its designation is determined by its own primary objective and not that of the parent of the group reporting entity. NZ IAS 27 Consolidated and Separate Financial Statements provides guidance on consistency of accounting policies to be adopted in the preparation of group financial statements. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 99

CONFLICTING INDICATORS NZ AG 32 In some cases the above indicators may conflict with each other in respect of a single entity and the primary purpose or objective of the entity may not be obvious. Some indicators may indicate that an entity should be classified as profit-oriented and others may indicate the entity should be classified as a public benefit entity. In this situation professional judgment is required. CHANGING CLASSIFICATION NZ AG 33 In certain situations, changing circumstances may lead to a change in an entity s classification. For example, a change in government policy may require that entities previously classified as public benefit entities are now to operate on a commercial basis, or vice versa. NZ AG 34 Where an entity s classification changes from public benefit entity to profit-oriented entity, the entity may need to apply IFRS 1 First-time Adoption of International Financial Reporting Standards, in order to assert compliance with IFRSs. Where an entity s classification changes and, as a result the entity s accounting policies change, the entity will need to ensure it complies with the requirements of NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. ILLUSTRATIVE EXAMPLES NZ AG 35 These following examples aim to illustrate application of the guidance When is an Entity a Public Benefit Entity? The examples are illustrative only and do not establish requirements. NZ AG 36 While specific types of entity are referred to in the examples, the circumstances in relation to individual entities may vary significantly, and therefore the examples do not conclude as to whether the entity in question is or is not a public benefit entity. Rather, the examples illustrate characteristics to be considered by preparers in reaching a conclusion regarding the nature of an entity s purpose. In assessing the nature of an entity appropriate weighting needs to be given to each individual indicator. Depending on the circumstances some indicators will provide a stronger indication than others about the underlying nature of the entity. The entity will need to consider each indicator against the other indicators and make an overall assessment of whether or not the entity is a public benefit entity. ILLUSTRATIVE EXAMPLES: DETERMINING THE NATURE OF AN ENTITY S PURPOSE Scenario 1: Crown Research Institute Entity A is a company established under section 11 of the Crown Research Institutes Act 1992. Founding documents The Crown Research Institutes Act 1992 The Crown Research Institutes Act 1992 (CRI Act) states that the purpose of every Crown Research Institute is to undertake research (section 4) and sets out the principles of operation CRIs are expected to follow in fulfilling this purpose. These principles are set out in section 5 of the Act and include, for example, that a CRI should undertake research for the benefit of New Zealand, operate in a financially responsible manner and be a good employer. The CRI Act establishes a broad framework for the operation of CRIs. The primary objective (purpose) of CRIs is clearly stated in the CRI Act. The principles set out in section 5 are detailed, but they are not ranked and their implementation can be achieved in a number of ways. CRIs, therefore, appear to have discretion as to how they can achieve their purpose. Nature of the benefits The key benefit of establishing CRIs is the production of research that will benefit New Zealand. In one sense the CRIs undertake research for community or social benefit. The New Zealand economy and entities operating in New Zealand can benefit from the research undertaken. However, there may be discretion as to how research findings are distributed and in determining the nature of the research to be undertaken. Whether or not the Entity A is a public benefit entity may depend on whether Entity A distributes or undertakes research on a commercial fee-for-service basis, or whether it makes its research findings available free of charge or for a nominal charge. Quantum of the expected financial surplus The CRI Act requires CRIs to operate in a financially responsible manner so that they maintain their financial viability. On its own maintaining financial viability is a general requirement and allows discretion as to what the financial targets should be. 100 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Entity A has in place an operating agreement with the Shareholding Minister. If the operating agreement specified that Entity should aim to generate an expected financial surplus equivalent to a market return, this would indicate that Entity A is a profitoriented entity. If the operating agreement specified a target rate of return, it would be necessary to consider how that rate of return was determined. If, for example, it was determined after benchmarking against commercial entities, this would indicate that Entity A was profit-oriented. If the rate of return was determined based on ensuring that Entity A covered its variable costs only, this may indicate that it is a public benefit entity. Nature of equity interest Entity A is a company. The equity interest is in the form of shares owned by the Shareholding Minister. In the case of Entity A, the nature of the equity interest is clear. In addition, there is no restriction on the use of assets in the event a CRI is sold, wound up or ceases to operate. However, in this case, neither of these factors would appear to affect the nature of the purpose of the entity. Nature of funding Entity A competes for funding from government and private sources. Revenue is derived through selling research services in a competitive environment. This may indicate that Entity A is a profit-oriented entity. If Entity A relied on donations and grants from government and other organisations and such funds were provided on a nonexchange basis, this may indicate that Entity A is a public benefit entity. Scenario 2: Charity Shop A charitable trust is established with objective of providing health services to the homeless. The trust receives an annual grant from the Government. The grant is sufficient to cover operating costs necessary to provide basic health care services to a limited number of people. To meet the increasing demand for its services and to fund an expanded range of services, the trust establishes a charity shop (Company 1). Company 1 sells second hand bicycles and runs a successful bicycle hire service. All profits from Company 1 are returned to the trust to support the primary objective of providing health services to the homeless. Founding documents Constitution Company 1 s constitution specifies that its objective is to raise funds to support the charitable trust. Nature of the benefits The benefits derived from Company 1 are the funds generated through the sale and hire of bicycles. This may indicate that the shop is a profit-oriented entity. If on the other hand the shop is used primarily as a vehicle to promote and publicise the objective of the trust or to provide employment to homeless people, then Company 1 may, subject to consideration of other factors, be a public benefit entity. Quantum of the expected financial surplus The directors carefully manage Company 1 to ensure it meets its financial targets. The directors are experienced business people who donate their time to manage and guide the operation of Company 1. The directors aim to ensure that the return on the net assets invested in the shop is at least equivalent to a market return. If Company 1 does not generate adequate return the directors may recommend that the trust invest its funds in another activity. This may indicate that Company 1 is by nature an investment and therefore profit oriented. If Company 1 was operated with the objective of generating a positive financial return and the level of the return was not determined with reference to market returns, the shop may be a public benefit entity. Nature of equity interest In the situation described Company 1 is a company 100% owned and controlled by the trust. As such the ownership instrument is clear. In the event Company 1 ceases trading the trust is able to determine how to use any residual assets. This may indicate that Company 1 is profit oriented. Nature of funding Company 1 raises revenue through the sale and hire of bicycles. Company 1 also serves as a collection point for donations to the trust. Such donations are not the property of the shop and are banked into a separate trust account controlled by the trust. Given the objective of Company 1 is to maximise return, the sale and hire of bicycles must be at market rates. This would indicate that the entity is a profit-oriented entity. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 101

Scenario 3: Private Education Organisation Entity Q is a private organisation dedicated to providing low-cost high quality education to children who immigrated to New Zealand from poverty stricken countries. Entity Q was established as a trust with an initial endowment of $5M from the estate of a wealthy businessperson. In order to supplement its income Entity Q accepts a limited number of fee paying students. The fees for such students were determined after market research into the pricing of such services. All fee revenue is applied by Entity Q to its objective of providing high quality education to children who immigrated to New Zealand from poverty stricken countries. The revenue from fee paying students has enabled Entity Q to expand the range of services it offers and to expand its roll of immigrant children. Founding documents The trust deed establishing Entity Q states that the purpose of Entity Q is to provide high quality education to children who immigrated to New Zealand from poverty stricken countries. The trust deed also provides Trustees with broad powers as to how best to achieve this objective. The trust deed also requires that, in the event the trust is wound up, any residual assets are to be applied to an organisation with similar objectives. Nature of the benefits The nature of the benefits provided by Entity Q are the educational services delivered to the recipient children. The equity provided to Entity Q was done so for the benefit of immigrant children and not for the generation of a financial return. This would indicate that the entity is a public benefit entity. The fact that Entity Q also sells education services to fee paying students at market rates does not necessarily change the objective of the entity. If Entity Q established a subsidiary entity through which it ran its commercial education operations, that subsidiary may be a profit oriented entity. In this case it would also be necessary to consider whether the group reporting entity is a public benefit entity in its own right. Quantum of the expected financial surplus The trustees carefully manage the resources of Entity Q in order to maximise the number of immigrant children it can accept and to maintain a high quality educational service. The trustees have a clear operational plan and have established clear financial targets in order to achieve its objectives. The financial targets are not expressed in terms of return on equity, but rather in terms of meeting the development targets set out in the operational plan. This may indicate that the entity is a public benefit entity. Nature of equity interest The trust deed requires that in the event Entity Q ceases operating any residual assets are to be applied to another entity with a similar purpose. The use of the assets is restricted and no individual can benefit privately from the assets. This may indicate that the entity is a public benefit entity. Nature of funding Entity Q receives funding from a number of sources: (i) investment income from the initial endowment; (ii) fee income from fee paying students; and (iii) donations from other fund raising activities. The relative levels of funding from each of these sources may indicate whether Entity Q is a profit-oriented entity or a public benefit entity. If the majority of funding is raised from investment income or donations and applied to the provision of the education services, then the entity may be a public benefit entity. If the majority of the funding is raised through the sale of education services, it may indicate that the entity is a profit-oriented entity. Scenario 4: Sports Club Club AFC is a football club established in a suburb of a large city. Club AFC is part of a regional group of clubs that co-operate together to organise competitions, coaching and training for a wide range of age-groups, from 5 year-olds through to senior grade football and representative grades. 102 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Founding documents Constitution Club AFC is established as a charitable trust. Its constitution states that it is a non-profit entity established to foster participation and to promote football in its suburb. This indicates that Club AFC is likely to be a public benefit entity. Nature of the benefits The benefits provided by Club AFC arise from the coordination of football competitions and the provision of football coaching, training and other facilities to the community. Hence, Club AFC provides benefits directly to a particular section of the public, and society as a whole may benefit indirectly. No individual person has a right to the equity or to any net surplus generated by the Club. This may indicate that the Club AFC is a public benefit entity. On the other hand, if Club AFC were to sell its coaching and training services (eg to schools, other football clubs, or individuals) at normal market rates, this may indicate that Club AFC is a profit-oriented entity. Quantum of the expected financial surplus The Club manages its finances carefully. Its financial targets are driven by its plans to develop its facilities and the services it offers. This may indicate that the Club is a public benefit entity. If the Club set financial targets with the objective of generating a commercial rate of return, this may indicate that Club AFC is a profit-oriented entity. Nature of equity interest There is no clear equity instrument. The Constitution states that in the event the Club is wound up or ceases operating, any residual assets are to be applied to an organisation with a similar purpose as Club AFC. This may indicate that the Club is a public benefit entity. Nature of funding Club AFC receives funding from various sources: (i) Membership fees; (ii) Sponsorship; (iii) Bar and food sales; and (iv) Community grants. Membership fees are set at a level to cover the Club s costs, after taking into account the funding expected to be received from other sources. This may indicate that Club AFC is a public benefit entity. If Club AFC received the majority of its funding from the sale of football coaching or training services, or from ticket sales at football matches, this may indicate that Club AFC is a profit-oriented entity. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 103

Appendix 5: Accounting policies This Appendix illustrates examples of accounting policies for selected assets and liabilities that might be developed by a not-forprofit entity with relatively simple transactions. The policies are consistent with the requirements of NZ IFRSs for public benefit benefits 52. However, it is possible that other policies that are consistent with these standards could also be developed. An entity may not require all of these policies. NZ IAS 1 (paragraph 108) requires disclosure of (i) the measurement basis (or bases) used in preparing the financial statements and (ii) the other accounting policies used that are relevant to an understanding of the financial statements. The main choice available to entities under NZ IAS 16 is whether to measure assets at depreciated historic cost or at fair value. The policy illustrated uses depreciated historic cost for most assets and fair value for land and buildings. Bequests Bequests are recognised as income when probate of the will has been granted, receipt of the bequest is probable and the amount of the bequest can be measured reliably. Non-current bequests are initially recognised at the present value of their expected future cash flows, discounted at the current market rate of return for a similar asset/investment. They are regularly reviewed for impairment. Cash and cash equivalents [The statement of cash flows is optional for most small to medium not-for-profit entities]. Cash and cash equivalents comprise deposits with banks and bank and cash balances, net of bank overdrafts. Deposits are included when they have a maturity of no more than three months from the date of acquisition. In the statement of financial position, bank overdrafts are included in current financial liabilities. Inventories Inventory held for sale is measured at the lower of cost and net realisable value. Inventory held for distribution at no or nominal consideration is measured at the lower of cost and current replacement cost. Cost is determined on a first in, first out basis. If inventories are acquired at no cost, or for nominal consideration, cost is the current replacement cost at the date of acquisition. Where necessary, provision is made for obsolete, slow-moving and defective stocks. Receivables Receivables are recognised at the original invoice amount less impairment losses. Property, plant and equipment Owned assets Land and buildings have been revalued, by class, to fair value as determined by an independent registered valuer. Land and buildings are revalued to fair value with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Heritage assets have been revalued, by class, to fair value as determined by an independent registered valuer. They are revalued to fair value with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Because the useful life of the heritage assets is indeterminate they are not depreciated. They are regularly reviewed for impairment. 52 This Guide assumes that all not-for-profit entities are public benefit entities. Refer Chapter 1. 104 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Except for land and buildings and heritage assets, items of property, plant and equipment are stated at cost, less accumulated depreciation and any impairment losses. The cost of property, plant and equipment is generally the purchase cost, together with any incidental costs of acquisition. The cost of donated items of property, plant and equipment is the fair value at the date of acquisition. Subsequent costs Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probably that future economic benefits or service potential associated with the item will flow to the entity and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of financial performance during the financial period in which they are incurred. Impairment of property, plant and equipment Property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. Depreciation Depreciation is calculated so as to write off the cost or revalued amounts of property, plant and equipment, to their estimated residual value, on a straight-line basis over the expected useful economic lives of the assets concerned. The estimated useful lives of assets are as follows: Freehold buildings 25 to 50 years Furniture and equipment 10 years Leasehold improvements 10 years Motor vehicles 3 years Office equipment 3 to 5 years Computer equipment 3 to 5 years Leasehold premises are amortised over the period of the lease. Freehold land is not depreciated. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Intangible assets Computer software The costs of acquiring and bringing computer software licences into use are capitalised. Computer software licences are held at cost and amortised over their expected useful economic lives. Investments Available-for-sale Shares held by the entity which are classified as available-for-sale 53 are stated at fair value, with any resulting gain or loss recognised directly in equity, except for impairment losses. When these investments are derecognised (for example, when they are sold), the cumulative gain or loss previously recognised directly in equity is recognised in net surplus or deficit. The fair value of the shares is their quoted bid price at the reporting date. Held to maturity Shares and debentures that are to be held to maturity 54 are stated at cost after adjustments for: a) interest accrued. b) premiums or discounts. These adjustments are amortised over the term of the investment. 53 Available-for-sale is a classification used in NZ IAS 39. Refer to Chapter 4. 54 Held to maturity is a classification used in NZ IAS 39. Refer to Chapter 4. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 105

Leased assets If the entity assumes substantially all the risks and rewards of ownership under a lease, the lease is classified as a finance lease. The asset acquired by way of the finance lease is recorded at the fair value of the leased asset less accumulated depreciation and impairment losses. Payables Trade and other payables represent liabilities for goods and services provided to the entity prior to the end of the financial year that are unpaid. These amounts are usually settled in 30 days. The notional amount of the creditors and payables is deemed to reflect fair value. Employee entitlements Short-term benefits Employee benefits that the entity expects to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay. These include salaries and wages accrued up to balance date, annual leave earned to, but not yet taken at balance date, retiring and long service leave entitlements expected to be settled within 12 months, and sick leave. The entity recognises a liability for sick leave to the extent that absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that the entity anticipates it will be used by staff to cover those future absences. Long-term benefits Entitlements that are payable beyond 12 months, such as long service leave and retiring leave, have been calculated on an actuarial basis. The calculations are based on: likely future entitlements accruing to staff, based on years of service, years to entitlement, the likelihood that staff will reach the point of entitlement and contractual entitlements information; and the present value of the estimated future cash flows. Borrowings Borrowings are initially recognised at their fair value. After initial recognition, all borrowings are measured at amortised cost using the effective interest method. Donations (including volunteer services) Cash donations that are not subject to restrictions or condition are accounted for at the time of receipt. Income relating to appeal donations is recognised only when cash is received in the entity s bank account. Volunteer services which are reliably measurable are recognised at fair value. Other volunteer services are not recognised. Grants and donations subject to conditions and restrictions Grants and donations that are subject to restrictions, but which are not required to be returned to the donor are recognised as income when they are received. Details of restrictions are disclosed in the notes. Grants and donations that are subject to conditions (that is, that are subject to binding terms imposed by an external party, such as funding for a particular activity) are recognised as income when it is likely that the entity will comply with the terms of the grant or donation. If the entity is unable to comply with the terms of the grant or donation and this is a condition of keeping the grant or donation, the grant or donation is recognised as a short-term liability until it is returned to the donor or the conditions are fulfilled. Monies donated for special purposes are invested separately. Movements in these balances are shown in the notes. 106 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

Members fees Income received from members fees is allocated proportionally over the period to which they relate. The unearned portion of fees is shown under current liabilities. Grant expenditure The entity makes discretionary grants. The grants are recognised as expenditure when a successful applicant has been notified of the entity s decision to award the applicant a grant. Goods and services tax Entities registered for GST: All items in the financial statements are stated exclusive of GST except for receivables and payables, which are stated on a GST inclusive basis. Where GST is not recoverable as input tax then it is recognised as part of the related asset or expense. The net amount of GST recoverable from, or payable to, the Inland Revenue Department (IRD) is included as part of receivables or payables in the statement of financial position. The net GST paid to, or received from the IRD, including the GST relating to investing and financing activities, is classified as an operating cash flow in the statement of cash flows. Commitments and contingencies are disclosed exclusive of GST. Entities not registered for GST: The [entity] is not registered for GST. All amounts are stated inclusive of GST. Cash flows The cash flow statement is prepared exclusive of GST, which is consistent with the method used in the statement of financial performance. The following are the definitions of the terms used in the cash flow statement: (a) Operating activities include all transactions and other events that are not investing or financing activities. (b) Investing activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment and of investments. Investments include securities not falling within the definition of cash. (c) Financing activities are those activities that result in changes in the size and composition of the capital structure. This includes both equity and debt not falling within the definition of cash. (d) For the purposes of the cash flow statement, cash and cash equivalents comprise deposits with banks and bank and cash balances, net of bank overdrafts. Deposits are included when they have a maturity of no more than three months from date of acquisition. NOT FOR PROFIT FINANCIAL REPORTING GUIDE 107

Index account(s) payable 4.146, glossary account receivable glossary accounting policies 1.12, 1.14, 1.46, 1.48, 3.6, 4.17, 5.12, 5.21, 5.36, 5.39, 5.42, 5.49, 5.57, 6.7, 8.1, 8.3, 8.5-8.31, 8.37, glossary, Appendix 4, Appendix 5 accounting standards refer financial reporting standards Accounting Standards Review Board (ASRB) 1.16, 1.17 accrual basis of accounting 3.16, glossary accrued expenses 4.146, 4.148 amortisation Table 5 (4.120), 4.121, 4.166, glossary amortised cost Table 4 (4.24), 4.25, 4.57, 4.58, 4.140, 4.156, 5.80, glossary, Appendix 5 annual report(s) 2.1, 3.2-3.4 asset(s) 3.21, Chapter 4 Key points, Table 2 (4.2), Table 3 (4.3), 4.4, 4.6, 4.10, 4.11, 4.17, 4.28-4.138, 8.24, glossary, Appendix 5 associate(s) 2.29-2.30, 8.42, glossary audit glossary audit requirements 1.38-1.39, Appendix 3 available-for-sale financial assets 4.22, Table 4 (4.24), Appendix 5 bequest 5.40-5.47, glossary borrowing costs 5.81, glossary branch 2.4, 2.7, 2.10, 2.15-2.20, 2.22, Chapter 2: Examples 2 and 3 budgets 3.19-3.20 business combinations 2.6, 4.112, 8.24 capital 4.15, 6.1-6.12 capital expenditure 8.50 capitalisation 4.73-4.74, Figure 3 (4.78), glossary cash 4.15, 4.21, 4.28-4.33, 4.130, 4.134, 4.144, 7.4-7.5, glossary cash equivalents 4.15, 4.28-4.33, 4.144, 7.4-7.5, glossary cash flow statement 3.6, Table 1 (3.7), Chapter 7 changes in accounting estimates 8.35 Charities Commission, requirements 1.28, 1.41, 2.36, 3.14 commitments 4.90, 4.121, 4.165, 4.169-4.170, 8.50-8.51 conditions 4.60, 4.65, 4.133-4.138, 4.158, 5.59, 8.24, 8.33, Appendix 5 consolidated financial statements 2.24-2.26, 2.34, glossary contingent asset 4.127, Table 10 (5.46), 5.55, 8.48-8.49, Table 12 (8.49), glossary contingent liability 4.164, 8.48-8.49, Table 12(8.49), glossary control (of an entity) 2.8-2.11, 2.24-2.28, glossary current, non-current 4.10, 4.11-4.12 depreciation 4.79-4.80, 4.89, glossary derivatives Table 3 (4.3), 4.21, Table 4 (4.24), 8.52, glossary differential reporting concessions 1.19-1.23, 8.10-8.11, 8.33, Appendix 2 dividends 5.21, 5.65-5.66 donated assets, donations 4.71, 4.122-4.127, 5.13, 5.32-5.47 effective interest method 4.26, 4.62, glossary employee benefits 4.159-4.162, Table 6 (4.162), 8.47 employee related liabilities 4.159-4.162, Table 6 (4.162) equity 4.7, 4.171-4.173, Chapter 6, glossary ethical obligations of NZICA members 1.8-1.9 events after the balance sheet (reporting) date 5.66, glossary expenses Table 7 (5.2), 5.8-5.9, 5.68-5.85, 8.24 expenses, analysis by nature or function 5.23, Table 8 (5.23), Table 9 (5.23) extraordinary items 5.17 federations 2.22 finance costs 5.22 finance lease 4.93-4.102, glossary financial asset 4.20-4.27, Table 4 (4.24), 4.30, 8.24, glossary 108 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

financial instrument(s) 4.20-4.27, Table 4 (4.24), 8.52, glossary financial liability 4.20-4.27, Table 4 (4.24), 4.139, 4.140, glossary financial report(s) 1.10, 1.12, Chapter 3, glossary financial statements 1.10-1.11, 1.12, 3.5-3.7, Table 1 (3.7), glossary financial reporting standards Chapter 1 (some important terms), 1.17 financial risk management 8.52 first-time adoption of NZ IFRSs 1.42-1.49 foreign currency (transactions) 1.5, Table 3 (4.3) fundraising 5.16, 5.20, 5.48-5.57, Table 11 (5.48) general purpose financial reports 3.15, 8.14, glossary general purpose financial statements Chapter 1 (some important terms), 1.10-1.11 generally accepted accounting practice (GAAP) Chapter 1 (some important terms), 1.13-1.18 going concern Chapter 1 (some important terms), glossary goods and services tax (GST) 4.149-4.152, 7.10-7.12, Appendix 5 grants received, grant revenue 4.138, 5.58-5.61, Appendix 5 grants made, grant expense 4.163-4.165, 5.68-5.70, Appendix 5 group accounting (including subsidiaries, associates and joint ventures) 2.7-2.36, 5.24, 8.24 guarantees and indemnities 4.166-4.168 heritage assets 4.104-4.105, Appendix 5 identifying relevant reporting requirements 1.26-1.37 impairment of assets 4.51-4.52, 4.57-4.58, 4.63-4.64, 4.81-4.87, 4.119-4.120, 5.31, 5.75, 5.80, 8.24, Appendix 5 income Table 7 (5.2), 5.5-5.7, 8.24, glossary, Appendix 5 income taxes 5.4, 5.82-5.85, 8.24 intangible asset(s) 4.106-4.121, glossary interest 4.26, 5.65, Appendix 5 International Financial Reporting Standards (IFRSs) 1.17, glossary inventory 4.34-4.53, 5.76-5.79, glossary, Appendix 5 inventory held for distribution 4.41-4.48, glossary, Appendix 5 investments 4.20-4.27, Appendix 5 investments in associates 2.12-2.14, 2.29-2.30 joint venture 2.23, 2.31-2.33, glossary leases, leased assets 4.80, 4.93-4.102 liability, liabilities Table 2 (4.2), Table 3 (4.3), 4.5, 4.139-4.165, glossary loans receivable Table 4 (4.24), 4.54-4.66 material, materiality 3.17-3.18, glossary members subscriptions 4.153-4.155, 5.6 net assets 4.171, 6.2, 7.3 New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs) 1.14-1.18, glossary non-current refer current non-exchange revenue 5.34, 5.35-5.36, 8.21 not-for-profit entity Chapter 1 (some important terms), glossary notes 3.6, Table 1 (3.7), Chapter 8, glossary offsetting 4.30-4.31, 5.15-5.16, glossary operating lease 5.71-5.72, 8.51, glossary outcomes 9.21-9.22, glossary outputs 9.14-9.18, glossary overdrafts 4.21, 4.30, 4.139, 4.143-4.144 payables 4.145-4.147, 4.149, 7.10, 8.24, Appendix 5 prepayments 4.67 prior period errors 8.35-8.39 property, plant and equipment 4.68-4.92, glossary provision(s) 4.142, 4.164, 4.170, 5.22, 8.24, glossary public benefit entity, public benefit entities Chapter 1 (some important terms), 1.18, NOT FOR PROFIT FINANCIAL REPORTING GUIDE 109

glossary, Appendix 4 receivable(s) Table 2 (4.2), 4.15, 4.21, 4.22, Table 4 (4.24), 4.54-4.66, Table 10 (5.46), 7.10, 8.24, Appendix 5 registered charities refer Charities Commission related-party disclosures 8.41-8.47 remeasurements refer revaluation reporting entity Chapter 2, 8.8, 8.13, glossary, Appendix 5 reporting period 3.12-3.13 reserves 4.7, 4.171-4.173, 6.2, 6.11 restricted equity, restricted reserves 4.172, 6.16, 7.6, 8.33 restrictions (on assets) 4.133-4.138 revaluation 4.75-4.76, 4.90, 4.92, 4.118 revenue Chapter 5 (key points), glossary, Table 7 (5.2), 5.5-5.6 revenue recognition 5.25-5.66 segment reporting Appendix 1 service performance 3.8-3.11, 9.1-9.5 service potential 4.4-4.6, 5.5, 5.8, glossary significant influence 2.12-2.14, 2.29-2.30, glossary small to medium entity Chapter 1 (some important terms) special purpose financial report(s) Chapter 1 (some important terms), glossary sponsorship Chapter 5 (key points), 5.32-5.36 statement of changes in equity 3.6, Chapter 6 statement of financial performance 3.6, 5.10-5.24 statement of financial position 3.6, 4.9-4.19 statement of service performance 3.8-3.11, 8.25, Chapter 9 subsequent expenditure 4.77-4.78 subsidiary 2.11, 2.24-2.28, glossary timeliness 3.14 trade payables refer payables trade receivables refer receivables trust money 4.128-4.132, 7.6 volunteer services 5.37-5.39, Appendix 5 110 NEW ZEALAND INSTITUTE OF CHARTERED ACCOUNTANTS

NOT FOR PROFIT FINANCIAL REPORTING GUIDE 111