Our regulatory environment is constantly changing, the not-for-profit (NFP) sector is not immune. The recent revisions to the Tier 3 (NFP) Standard, effective from April 1, 2024, will impact many small to medium NFPs and charities in New Zealand and will likely be adopted voluntarily by many entities that qualify to use the Tier 4 standard but who prefer to report on an accrual basis.
Background and purpose of the new Tier 3 Standard
The Tier 3 (NFP) Standard governs the reporting requirements for not-for-profit entities with annual expenses between $140,000 and $2 million. This standard is accrual-based, ensuring that entities provide comprehensive information about their financial position and performance. The primary goal of these updates is to balance the costs and benefits of reporting, making it easier for Tier 3 entities to prepare accurate and relevant performance reports while meeting the needs of their stakeholders.
More about Tier 3 financial statements
Key changes in the Standard
Service performance reporting:
The new standard simplifies the service performance reporting process by removing the terms “outcomes” and “outputs.” These have been replaced with terminology more aligned with the Tier 2 Standard.
Additional guidance has been provided to help entities select significant activities and achievements and choose appropriate and meaningful measures. This change is intended to assist entities in reporting their service performance consistently from year to year, enhancing the comparability of reports.
Asset valuation:
The standard now permits certain assets to be revalued without requiring entities to opt up to Tier 2 Standards. These assets include property, plant, and equipment (based on independent valuation or rateable value), investment property (optionally presented as a separate class), and publicly traded financial investments (valued based on market price).
Entities that choose to revalue their financial investments must now include additional disclosures in the notes to the performance report.
Revenue recognition:
A significant change in the standard is the introduction of a new model for recognising revenue based on “documented expectations.” This replaces the previous model, which was based on “use or return” conditions.
Under the new model, significant grants, donations, bequests, or pledges with documented expectations are recognised as revenue over time as the expectations are satisfied. This change requires entities to exercise judgment in determining when and how revenue should be recognised, providing greater flexibility while ensuring accurate reflection of the entity’s financial performance.
Categories of revenue and expenses:
The standard introduces clearer categories for classifying revenue and expenses, making it easier for entities to aggregate financial data. While further disaggregation on the statement of financial performance is no longer allowed, entities can still provide detailed information in the notes to the performance report.
Increased transparency over reserves:
Entities are now required to disclose how they manage their reserves, including a description of each reserve’s purpose, plans for its application, and the expected timeframe for its use. This requirement aims to enhance transparency and provide stakeholders with a clearer understanding of an entity’s financial strategy.
Implementation timeline
The new Tier 3 (NFP) Standard is mandatory for accounting periods beginning on or after April 1, 2024. However, entities may choose to adopt the standard earlier for periods ending after June 15, 2023.
Conclusion
These updates to the Tier 3 (NFP) Standard reflect the ongoing efforts to refine financial reporting practices within the NFP sector, ensuring that reports are both useful and relevant to users. As accountants, understanding these changes will enable us to better serve our NFP clients, helping them navigate the new requirements and maintain their commitment to transparency and accountability.
For more detailed guidance or assistance in applying these changes, feel free to reach out to our team of experts who are well-versed in the nuances of NFP financial reporting.
