- Under the extant Act, incorporated societies have reporting requirements but there are currently no assurance requirements
- Under the proposed Bill, incorporated societies would be required to prepare their financial statements in accordance with the External Reporting Board (XRB) accounting standards, except the very smallest provided they are not a donee organisation
- Only the very largest societies would be required to have their financial statements audited
It has been a long time in making; over a decade after the review was initiated – the Incorporated Societies Bill (NZ) has finally made it into the House. It will repeal and replace the Incorporated Societies Act 1908 which, at over a century old, is vastly out of date. There are approximately 24,000 incorporated societies in New Zealand, and we know many of our members are involved with this sector in some capacity, such as advisors, employees or volunteers. Whilst a whole raft of changes is proposed to promote high-quality governance, this article focuses on the reporting and assurance related provisions.
The law currently requires incorporated societies (that are not registered charities) to prepare special purpose financial reports (SPFR), but there is no statutory requirement to get them audited or reviewed (their founding documents may require more than the law though). The extant Act sets out that the SPFR must contain:
- The income and expenditure during the accounting period
- The assets and liabilities at the close of the accounting period
- All mortgages, charges, and other security interests at the close of the accounting period.
Under the proposed Bill, the majority of incorporated societies would be required to prepare general purpose financial reports (GPFR) – that is financial statements prepared in accordance with the accounting standards issued by the External Reporting Board (XRB). This is no change for about a third of incorporated societies (8,000) that are also registered charities, as they have been required to use the XRB accounting standards since 2016.
"Small" societies are still required to prepare financial statements but would have the option of GPFR or SPFR. Societies are "small" if they are not a donee organisation for tax purposes and, for the previous two years, they have:
- Total operating payments under $10,000; and
- Total assets under $30,000.
The Bill carries forward the current minimum requirements for SPFR (see above). It is estimated that around 40% (6,500) of incorporated societies (that are not registered charities) would meet this definition.
There is a principle-based justification for why this sub-set of incorporated societies (that are not registered charities) should be allowed to have lower levels of accountability than equivalent registered charities – they do not receive a complete and automatic exemption from income tax. They have primary accountability to their members rather than the broader public in the way that registered charities do. It follows that the society's members should be in a position to demand the financial information they require.
The Bill proposes that every society that is "large" must get their financial statements audited by a qualified auditor. Societies are "large" if, for the previous two years, they have:
- Total assets over $60 million; or
- Total revenue over $30 million
This is taken from section 45 of the Financial Reporting Act 2013.
The Cabinet Paper recommended the audit threshold be set at annual expenditure over $2 million or total assets over $4 million. At these levels it was estimated that fewer than 5% (800) of incorporated societies (that are not registered charities) would be required to have their financial statements audited. However, there does not appear to be a revised impact assessment for the amended thresholds, but inference would suggest vastly less.
Other related proposals
Financial statements must be prepared, audited (if required) and filed with the Companies Office within 6 months after the end of the accounting period. In addition, an annual return must be completed and filed. An Annual General Meeting (AGM) must be held within 6 months of balance date, where the financial statements and an annual report on the operation and affairs of the society must be presented.
In 2010, the then Minister of Justice asked the Law Commission to undertake a review of the 1908 Act. The Law Commission subsequently recommended in its final report of 2013 that the 1908 Act be replaced with a modern statute. In February 2014, the Government responded to the Law Commission report, agreeing to 101 of the Law Commission's 102 recommendations in full or in principle.
In November 2015, the Ministry of Business, Innovation and Employment (MBIE) released a Draft Bill for public consultation which closed in June 2016. MBIE received 114 submissions on the Draft Bill, which demonstrated a high level of support for the reforms. However, resource constraints meant that work on the Bill had to be put on hold.
The Bill was introduced into Parliament in March and received its first reading in April. It has now gone to Select Committee stage and are due to back in October. The Economic Development, Science and Innovation Committee is seeking submissions by 28 May, and we will be making a submission.
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