Blog

Many not-for-profit organisations fall under the Tier 3 standard which is a specific set of accounting standards designed for smaller entities, usually organisations with relatively simple financial structures and limited resources. 

These standards are issued by the External Reporting Board (XRB) which is a Government Agency. The Tier-3 standard applies to Public Benefit Entities (PBEs) that do not have public accountability and have expenses less than or equal to $2 million. As many New Zealand charities and not for profits are this size then many organisations fit into this category.

There is a Tier 4 standard which can be used for PBEs with less than $140,000 in annual operating payments (expenses) but many of those elect to use the Tier 3 standard too, as the Tier 4 standard is cash based, and even very small organisations often use accounting software such as Xero which can easily report on an accrual basis (accounts receivable and payable are sometimes the only adjustments made in a small organisation to move from a cash basis to an accrual basis).

Often the board and other stakeholders in Tier 3 not for profits have limited financial expertise, so understanding financial statements can be a daunting task. This guide aims to demystify Tier 3 financial statements, breaking down complex components to empower organisations with a clearer understanding. 

Understanding the Tier 3 standard

Charities and other Public Benefit Entities with annual operating expenditure under $2 million that do not have public accountability can choose to use the Tier 3 standard. These organisations typically have modest financial complexities and limited resources. The Tier 3 standard seeks to simplify reporting while ensuring transparency.  

Tier 3 annual reporting

Here we break down the main components of the annual financial statements (Performance Report) for Tier 3 non-profits:  

1. Statement of financial performance (income statement): shows the organisation’s revenues and expenses over a specific period. Revenue includes donations, grants, fundraising and other income sources. Expenses cover program costs, administrative expenses and fundraising expenses. The result is either a surplus (revenue exceeds expenses) or a deficit (expenses exceed revenue). 
2. Statement of financial position (balance sheet): provides a snapshot of the organisation’s financial health at a specific point in time. It consists of assets, liabilities and net assets (or equity). Assets are what the organisation owns, liabilities are what it owes and net assets represent total equity. 
3. Statement of cash flows: details how cash is generated and used by the organisation over time. It is divided into three categories: operating activities, investing activities and financing activities. Understanding the cash flow is crucial for assessing an organisation’s liquidity and ability to meet its financial obligations. 
4. Statement of accounting policies & notes to the financial statements: often overlooked but essential, the notes provide additional information about the organisation’s financial health. They explain accounting policies, disclose contingent liabilities and offer insights that enhance the overall understanding of the financial statements. 

Service performance reporting

Not normally included in financial statements for businesses, but required for not-for-profits using these standards is the Statement of Service Performance. 

The aim of this report is to show how an organisation has achieved some of its goals in the past financial year, eg, a charity that’s aim is to support new mothers may include some details around the number of visits to new mothers that year and/or the number of coffee groups it has facilitated etc.  

This report also plays a pivotal role in attracting new funding sources by showcasing the organisation’s credibility and impact. 

Educate and simplify

For organisations with limited accounting expertise, navigating nonprofit financial statements can be challenging. To address this, consider the following steps: 

1. Simplify layouts: streamline the layout of financial statements to enhance clarity. Use clear headings, subtotals and concise language to make it more accessible for individuals who may not have an accounting background. 
2. Educational resources: provide educational resources or workshops to enhance the accounting knowledge of staff and stakeholders. This can include basic accounting principles, financial statement interpretation and the specific nuances of the Tier 3 standard. 
3. Engage with Professionals: collaborate with accounting professionals who specialise in the not for profit sector. Their expertise can help in developing user-friendly financial statements and provide guidance on compliance with accounting standards. 

Conclusion

In the world of not for profit financial statements, simplicity and transparency are key. Even if your organisation has limited financial expertise, through education and collaboration with accounting professionals, you can confidently navigate the financial landscape, ensuring the continued success and impact of your endeavours. 

The Accounting Hub specialises in accounting for not-for-profits, get in touch for more information.

More about accounting for not-for-profits