26 July 2022

There’s a new Act in town. And some people aren’t happy, claiming that this could be an ‘extinction event’ for many small clubs. The 1908 Act was predictably relaxed, out of step with modern regulation and reporting, so an update was needed.

So what does the new Incorporated Societies Act entail for these entities, and for those who prepare and audit the financial statements? Is the fear justified?

Changes for entities

No Incorporated Societies can just carry on as normal. All will need to update their constitutions and re-register. Companies Office guidance suggests the final date to transition will be April 2026. They also provide a handy Constitution Building tool.

Regulations are currently being developed to support the new Act. These should be completed by September 2023 so that entities can start to transition.

What we do know from the Act, however, is that under section 74 a society must have at least 10 members to register. This is a decrease from the 15 members required under the old Act. Under section 45 of the new Act, a society must have a committee, but this only needs to comprise 3 or more qualified officers. This committee is the ”governing body of the society” – the responsible parties.

There is concern that the extra responsibility being laid upon mostly voluntary committee members may make the slots hard to fill. The obligations are much closer to a company director than the casual committee member of the past. Under section 51 an officer remains specifically liable for acts and omissions and decisions made while they were an officer even after they have resigned.

The Act takes into account that many small entities may not want to re-register, so it provides an amalgamation process to enable groups of small, similar entities to amalgamate under one umbrella. Whether this will be used much, we shall see.

How to report?

Charities Services report that “there are about 24,000 incorporated societies in New Zealand, and about 7,000 of those are registered as charities.” These 7,000, like all charities, will be reporting under the Public Benefit Entity (PBE) reporting regime, which is now well established.

For the other 17,000, reporting will depend mainly on size. At present these entities may be using special purpose reporting or generally accepted accounting practices (GAAP). Section 102 provides three categories:

  • specified not-for-profit entity
  • small society
  • other

An entity is defined as a specified not-for-profit entity in the Financial Reporting Act 2013 S46  if, in each of the 2 preceding accounting periods of the entity, the total operating payments of the entity are $140,000 or more. These are required to prepare financial statements that comply with GAAP. Our Tier 1 and 2 standards plus our Tier 3 PBE standard are GAAP. Tier 4 and Special Purpose are not GAAP.

A small society has total operating payments and total current assets of less than $50,000 in each of the 2 preceding accounting periods. It also may not be a donee organisation under section LD 3(2) of the Income Tax Act 2007. These include charitable entities entitled to issue tax-deductible receipts for donations received. Many small clubs would fall into the small category. These may choose to prepare either GAAP-compliant financial statements or a non-GAAP standard or the minimum requirements as set out in section 104 of the 2022 Act. The minimum requirements statements must contain the following information:

(i) the income and expenditure, or receipts and payments, of the society during the accounting period; and

(ii) the assets and liabilities of the society at the close of the accounting period; and

(iii) all mortgages, charges, and other security interests of any description affecting any of the property of the society at the close of the accounting period

Associations that don’t fit into either category – the “others” – will generally be those with expenditure over $50,000 and under $140,000 in the previous two periods. They may choose whether to apply GAAP or non-GAAP.

What about the requirement for audit?

Of course, any Incorporated Society may opt to be audited, but some must be audited under the Act.

These are classed as “large” (as defined by S45 of the Financial Reporting Act 2013) if as at the balance date of each of the 2 preceding accounting periods, the total assets of the entity and its subsidiaries (if any) exceed $66 million or in each of the 2 preceding accounting periods, the total revenue of the entity and its subsidiaries (if any) exceeds $33 million.

The end of Society?

So will this be an ‘extinction’ event for societies or provide momentum for a new burst of energy? Both outcomes are likely, depending on the state of the society. It will certainly drain the limited resources of struggling clubs to have to lift their game to a new level.

In this age of declining volunteerism and reliance on sponsorship, the change may lead to fewer societies, but adaptations will be made for more efficient operations and more professional style management in those who survive.

15 July 2020

For many auditors of smaller entities (small charities and clubs for example), a major difficulty is how to adhere to auditing standards which are designed primarily for larger entities.

Given the time and budget constraints that auditors face this can cause some auditors to go into autopilot and tick-off checklists rather than clearly identifying, assessing, and addressing audit risks. We have identified these issues in previous articles, and although at a global level nothing has yet emerged to tackle this problem, we have designed a new series of audit templates specifically addressing this.

With our templates for less complicated entities (LCEs), we have set out to reduce the compliance burden that the current ISAs create and to focus on what is relevant to smaller organisations. We have done this in part by referencing the suggested application material for small entities within the existing standards, and leaving out the content that will only be relevant in larger entities (e.g. internal audit).

We also aim to improve audit quality, evidence and documentation by reducing the number of pages and work items, and instead we ask questions that prompt qualitative answers with solid evidence, rather than ticking “yes” or “no” answers. We have also tried to reduce the heavy and complex language of the standards to use brief, plain English wherever possible to ensure auditors can understand the true essence of the requirements laid out by ISAs. To carry on the aircraft metaphor – to spend more energy on looking at the view (the client) and less time fiddling with the controls.

Use of the new LCE series templates

While many standards have specific clauses for considerations for smaller entities (we refer to these in the new LCE templates), the standards do not define what “small entities” are. This is left to the auditor’s judgement. We would suggest as a rule of thumb that in most cases in NZ non-Tier 1 and 2 entities will probably be classed as small, and so they will fit our LCE templates unless they have controls that must be tested due to non-transparent processes or have complex operations or ownership structures.

We made the templates primarily with locally owned entities in mind, however often with smaller companies, the trigger for audit is that they have some overseas ownership. When these companies themselves are small and simple, the LCE template will be entirely adequate. We will try to give some guidance around this in future articles, but it is our estimate that 80% of the jobs carried out using Audit Assistant will probably be LCE, either not-for-profit or for-profit entities.

What key changes are included in the LCE templates?

We have conducted an in-depth update of the whole audit process incorporating overall usability review and user suggestions. Based on these changes have been made that include the following.

  • Move from a checklist-style that has mainly yes/no or multi-choice answers to a narrative style that prompts descriptions and attachments of work performed to ensure that the auditor is documenting what they have done and why – designed to get the job done in a thorough but not over-the-top way.
  • Rather than including every detail of the requirements of the standards, complex and detailed points of the standards are summarised and deliberately made into plain English (we are assuming that the auditor has a good grasp of the standards, and will refer to the actual standards by hyperlink to XRB website if required).
  • ISA application material has been chosen so that the template focuses on requirements that are the most applicable to small entities.
  • Remove detailed compliance testing – templates assume a substantive-based approach, without reliance on systems testing.
  • Leave out detailed checklists for what is unlikely to apply to small entities, for example, internal auditors.
  • Make the process more transparent by bringing important work “to the top”, removing duplication and streamlining workflow.
  • Add hyperlink references to specific work performed in other parts of the workbook that is relevant to another section e.g. E1-1.2 of the Entity and Environment.

What auditing standards are not included?

  • ISA 600 – Special Considerations – Audits of Group Financial Statements (limited mention)
  • ISA 610 – Internal Auditor
  • ISA 701 – Communicating Key Audit Matters in the Independent Auditor’s Report (limited mention)
  • ISA 805  – Audits of Single Financial Statements and Specific Element, Account or Item of a Financial Statement 
  • ISA 800 – Reporting Considerations for Special Purpose Framework (no specific mention as the requirements are met by other standards)

New standards included in LCE templates

  • NZ AS1 – The Audit of Service Performance Information (although effective for periods beginning on or after 1 Jan 2021 we have included this content in the new Tier 3 and 4 PBE LCE templates)
  • ISA 540 – Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures (workpapers based on the substantially updated version are included)

Templates available

The following are available for use now, or will be released by the end of July 2020:

  • Audit – Special Purpose Reporting (LCEA-SP-2020)
  • Audit – NZICA SPFR for FPE (LCEA-NZSP-2020)
  • Audit – Tier 3 Charity (LCEA-T3-2020)
  • Audit – Tier 4 Charity (LCEA-T4-2020)

Review and feedback

As the LCE templates are new, we are welcoming feedback on the content. To create a job, go to the “new job” area and select the appropriate version. Note that jobs can be switched from existing templates, but we recommend that this is only done after the annual rollover to avoid loss of work.

We have created a dummy client (“Little and Quick Ltd”) to test the basic special-purpose version. We have been sharing this job with interested users to review. If you would like to have a copy please contact us and we can send through a PDF of the completed job, and/or attach the live job to your account. Happy flying!