The New Zealand accounting standard setter is in the process of developing a service performance accounting standard for Public Benefit Entities. In mid-2016 they issued their first cut of a proposed accounting standard seeking feedback. Based on this exposure draft feedback they have made some fairly significant changes to their proposed standard. Hence fast forward to mid-2017 and it looks like we are getting close to a final accounting standard being issued later this year. The final step that is currently under way is a “fatal flaw” exposure of the revised standard for any unintended consequences.
This article looks at what has changed and why, and what this means for larger registered charities and other entities that will have to apply this new standard once it is passed and effective.
Service performance reporting is seen as a key feature of Public Benefit Entity (PBE) reporting going forward in New Zealand.
Conceptually this type of reporting significantly assists readers gain a much more holistic view of the performance of a charitable, not-for-profit or other type of publicly accountable entity. Such reporting can significantly assist in providing context to the financial statements and hence enable a better understanding of the PBE’s operations and performance.
For that reason, our financial reporting standard setter, the External Reporting Board (XRB) has decided that all PBEs should in future be required to present a service performance report as part of their annual reporting. As is the approach with our new multi-tier accounting standards, the reporting should be of an appropriate complexity according to the size and nature of the entity
As the reporting standards for smaller PBEs were written in New Zealand from scratch, the requirement for some simple service performance reporting was able to be easily written into the Tier 3 & 4 reporting standards. As such this requirement is already in place being effective and mandatory for smaller charities from 2016.
However, for larger PBEs the XRB has based its new financial reporting standards on an international standard suite: International Public Sector Accounting Standards (IPSAS). The rationale is so that we are, and are seen to be, adopting global best practice for larger, more complex entities. This makes good sense. As regards statements of service performance though, the IPSAS suite of standards does not yet include a service performance reporting standard. Hence the NZ Accounting Standards Board of the XRB have been busy developing one from scratch in NZ.
The initial Exposure Draft and rationale
Exposure Draft ED NZASB 2016-6 Service Performance Reporting was released in early 2016 and confirmed the XRB’s intention to require that not-for-profit entities reporting under either Tier 1 or Tier 2 financial reporting frameworks have a mandatory service performance reporting requirement.
The NZASB’s aim was to ensure that any standard could be applied by a wide range of PBEs in reporting on their service performance. They were very aware of the considerable variety in the sector and didn’t want to impose unrealistic reporting requirements on certain types of entities.
The requirements in the original 2016 ED were based on the following three dimensions of service performance.
- What did the entity do?
- Why did the entity do it?
- What impact did the entity have?
These dimensions were described using the terms outputs, outcomes and impacts.
That all sounded good and straightforward, until that is, you get into the detail and especially definitions of requirements, and as we all know, the devil is often in the detail.
While the initial ED was generally seen as sensible and noble in its aims, practical application issues were raised. Comments from respondents centred around the following issues.
- Entities may be subject to a range of other service performance reporting requirements, including legislative requirements. Entities should be able to comply with both the proposed standard and those other requirements without restating or duplicating information.
- Legislative requirements continue to evolve. For example, the terms outputs and outcomes have recently been removed from some legislation.
- Differing views about whether the term “impacts” should be used to describe what an entity is seeking to influence or its ultimate outcomes. Not-for-profit entities and public-sector entities indicated that they used the term impact in differing ways.
- The difficulty of attributing changes or impacts to an entity’s actions, particularly when a number of entities have been working together.
- A lack of clarity about when an entity was required to report on impacts.
Other common suggestions were to generalise language, use fewer defined terms and develop higher-level requirements.
Exposure Draft Mk 2 - The Resulting Revision
The NZASB listened and has responded with a revised and simpler proposed standard.
In essence, they have lifted the terminology and requirements higher i.e. focusing on high-level principles and using more general terms. The aim of this is to better allow the standard to be applied more broadly to both the not-for-profit and public sectors. This lifting to a more principles based standard should give larger PBEs much more flexibility in how they report on their service performance.
The other key change is the introduction of the requirement for the entity to disclose the critical judgements made in the selection and aggregation of its service performance information.
This makes good sense. As a consequence of changes to be less prescriptive around the information to be reported, and thereby provide more flexibility for entities to make judgements about how best to ‘tell their story’, the judgement disclosure requirements provide a necessary counterbalance, so users can understand how those judgements were made.
The revised ED is now undergoing a “fatal flaw” type exposure – this means that the standard setter is largely happy that they have listened to the feedback from respondents to their initial draft and made the appropriate changes but are just concerned to double check that there are no unintended consequences from the revised changes. The revised exposure draft can be found on the XRB’s website www.xrb.govt.nz and the closing date for submissions on the ED is 29 July 2016.
By taking it up to a higher more principles based approach we think that the proposed standard should:
- be well received by preparers
- allow increased flexibility in how entities tell their service performance story
And hopefully by not being overly prescriptive we expect it should foster innovation in how entities best communicate their performance story to their stakeholders.
Importantly, for entities with an audit requirement, the statement of service performance forms part of their general purpose financial report – and thus will be required to be audited.
While there is nothing wrong with this conceptually, the revised principles based proposed accounting standard is potentially likely to be more challenging for auditors to audit against. This is due to the much reduced specific nature of the accounting standard requirements and framework for reporting service performance when compared with most accounting framework requirements that auditors are used to auditing against. The auditor may find it more challenging to gain comfort that there have been no omissions of material information (eg when an entity may wish to be silent on poor performance achievement).
For that matter, deciding what is “material” (i.e. significant or important) to readers will also be an interesting challenge for many PBEs to determine in the first place.
However, as long as the reporting entity has good disclosure of their judgements in the selecting and reporting of their service performance measures and results, as well as good systems so that this information is verifiable, then competent auditing should be achievable.
Timeframe for implementation?
All going well the revised proposed accounting standard should be approved later in 2017. However, suggestions are that it may not be mandatorily effective until periods on or after 1 January 2021. i.e. for December 2021 year-ends.
While early adoption should be available once the standard is issued we think this likely mandatory date is too far away. And as such, this is a lost opportunity to improve the quality of PBE reporting in NZ earlier. We have already seen some significant positives in improved stakeholder communication, clearer organisational focus, and a positive response from many funders to the Tier 3 and 4 PBE requirement for service performance reporting.
What do you need to do now?
No matter when it is mandatory, the bottom line is that the requirement for mandatory service performance is coming for larger PBEs in New Zealand.
Good quality service performance reporting will firstly require focused engagement from governing bodies and senior management to determine what should be reported on and how your story should be told. It will likely entail some systems and process development to ensure that your reporting on such non-financial measures will be able to be efficiently compiled and effectively audited in future. Accordingly, we recommend early consideration is given to your development of your service performance reporting, to the specific types of information that you will report in future, and to any information capture systems that may be required.
For more information, please visit our website www.rsmnz.co.nz and search “service performance”. In addition, we would be happy to further discuss this requirement with you if of value.