The Issue

Financial reporting for Public Benefit Entities (PBEs) has got increasingly complex over the past few years.   This has been due to a variety of reasons:

 

New Financial Reporting Standards

The introduction of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) has significantly increased both the complexity and volume of financial reporting for PBEs. 

 

There is no doubt that NZ IFRS are of an extremely high quality standard.  However there have also been serious concerns voiced with regard to their applicability to some of the sector unique factors commonly faced in the Public Benefit Entity or wider not-for-profit sector.   IFRS were written primarily to provide accounting standards for large complex profit seeking corporations.  As such don’t always well suit our PBE sector financial reporting needs.

 

Economic Environment Challenges

Like most of the western world New Zealand has not been immune from suffering an economic recession in recent times.  This has had a number of implications such as:

 

 ®      Demands that more be done with less – this applies to both financial and other resources within organisations, such as its people

 ®      A decrease in additional available funding or funding opportunities

 ®      Increased competition in the not-for-profit sector amongst entities realising that they need to more proactively compete to secure funding and their own operating sustainability

 ®      An (understandable) rationalisation focus from Government regarding the number of entities required to provide services as well as who and how they will fund to ensure the most efficient and effective result from their funding

 ®      Conversely the tight financial environment has in some cases actually increased the financial reporting required of PBE’s to demonstrate that they are being efficient and effective with their funding

 

Charities Commission Impacts

Some PBEs are registered charities with the Charities Commission.  The establishment of the Charities Commission, and more specifically, the establishment of their register which freely allows anyone to search the financial statements of PBE’s filed with them as registered charities has impacted the market.  A public disclosure condition of a registered charity is that it must file its annual financial statements for anyone to view - the concept being that “sunlight is the best disinfectant”.   This anytime, easy to use, web search function allows and facilitates greater transparency of annual financial statements.

 

Public awareness of this search tool is increasing - partly due to the media starting to use it and with questions in the press beginning to be asked about some organisations from journalists reviewing financial statements.  Like the use of the web generally, this awareness and use is likely to snowball over time.

 

Also of relevance is that of all the information filed about a registered charity on the Charities Commission’s website, it is often the annual financial statements that contain the most information about the entity and therefore the most used by stakeholders to form opinions.  This makes it crucial that the financial statements tell a clear and complete story. 

 

The recent advanced search improvements and Open Data project released by the Charities Commission have just served to make it even easier to search a much greater range of financial and other information about registered charities. 

 

One of the most salient features in this public availability of data thanks to the Charities Commission online register is that financial reports are the main place that users tend to go for information about the entity.  Accordingly it is more important than ever that the information that is now readily available to the public is of high quality and comprehensive enough to assist the PBE in telling their story.

 

Added to this is the fact that the accountability relationship in a PBE context is generally much broader and more complex than the traditional private sector shareholder-manager type relationship.   The stakeholders of PBEs sometimes consist of that widest possible of groups – the general public.

 

All these issues combined means that there has been an increased focus on the financial reporting of many PBEs, and a pressure to ensure this financial reporting is as good as it can be.

 

Poor Financial Reporting - What Cost?

 The impact of poor financial reporting is generally misunderstanding by readers about the organisation.  If these readers are influential stakeholders this can translate to a loss of support from those stakeholders – whether that be directly financial support or other support.

 

Some organisations have also suffered, sometimes unfairly, at the hands of the media when the media have misunderstood financial information or perhaps have only been able to get part of the story from what was disclosed in the financial statements.   Our popular media has a habit of often just looking for a sound-bite or very brief report.  They also move on to the next hot story very quickly.  Hence if they get an incorrect picture of some aspect of an entity from its financial statements then it can be very hard to correct the reputational damage from that sound bite journalism.

 
 What Standards?

 At the time of writing this paper; NZ IFRS have mandatory application to many PBE reporting entities that prepare general purpose financial reports in New Zealand.  The External Reporting Board’s (XRB’s) Standard A1:  Application of Accounting Standards is now the place to go to find out the definitive answer to what applies.  Under this XRB A1 some small and medium sized PBE’s are able to apply an exemption and still apply NZ FRS and SSAPs.

 

This entire situation is about to change though with the XRB’s proposal for two separate reporting frameworks in New Zealand to cater for the needs of users of both profit-oriented and public benefit entities.   While the detail of that change is not yet clear, including differences for entity size and type, the intention to use International Public Sector Accounting Standards, possibly modified for New Zealand, will mean that the PBE sector will need to learn, understand and apply a new set of financial reporting standards. 

 

So What Can a PBE Do?

 Get the financial hygiene stuff right! - Apply the relevant current financial reporting standards fully and thoughtfully so that you comply with the requirements but also keep materiality in mind.

 

Take a blank sheet of paper approach and think about what your stakeholders want to know about your organisation.  Or even better actively find out from some of them.  Then consider your financial statements and whether these facts can be included or better communicated.  The annual financial statements will not be a natural home for much of the information.  However in some cases it will be. 

 

In many ways its actually not about the numbers!....a scary statement coming from an accountant. Whether your organisation is rich or poor is actually not the issue.  Instead, the fundamental issue is how well the PBE is communicating with your stakeholders such as your funding bodies and the general public.

 

We believe the key messages you want to share through your annual report are:

 

1. A clear message of why your organisation exists and what it stands for – your

reason for being or “rasion d’etre”

 

2. Who you help and how – stories, testimonials, and pictures are great here

 

3. What you set out to do for the year and how you went – this is where some well chosen key performance indicators (KPI’s) and reporting against these can be really powerful.  Don’t over-complicate and don’t overload with these.  It is a lot more powerful to give a few key ones than to overwhelm people with too many.  In our view the ideal is a one page summary.

 

4. How you govern and manage - who is involved, processes you have put in place, and why this means you are a soundly run organisation.  The message you are trying to get across is that funders and donors can trust you with their money

 

5. What your intentions are – and hence why you need ongoing support so that you can achieve even more as a worthwhile organisation.

 

This comes from our observations that at a basic level funding bodies primarily want assurance regarding who the organisation is, what it does, why it needs their assistance, and reasons they should have confidence in you.

 

The simplest way to kick this off is to include a succinct Chairperson’s report, or report from the board.  This should generally be the first thing in your annual report.  Effort into making this easily readable, attractive, informative etc, helps consign the financial statements more to being a “hygiene component” of your annual report, rather than being the main event.   

 

Never underestimate the power of pictures, especially of people and of achievement.

 

You’ll note we talk about your annual report rather than just your financial statements.  Many PBEs have focused primarily on their annual financial statements in the past.  They have done this because of history, because they have to prepare these, and because funding providers request them.  Please note that we are not saying your financial statements are not important – they are.  They need to be accurate, timely, and in accordance with generally accepted accounting practice so readers can easily understand and compare them.   However they are often not the most important thing in helping your organisation get your message across to key stakeholders.

 

Your financial statements are only part of your annual report.  The reality is that numbers bore and confuse many people (including, from our experience, some in grant funding bodies).  Sad as it may seem to us accountants; numbers are also intrinsically not exciting. (I know; go figure!  But there you have it).  To tell your story successfully you need to do just that; tell stories.  Make it interesting, make it about people, share the struggle, the successes, and what you have yet to achieve in the future.

 

There are a number of commonly recognised statements that some not-for-profit and public sector entities have prepared in the past to try and better tell their stories.  Examples are a “Statement of Objectives and Outcomes” or a “Statement of Community Contribution” or a “Statement of Social Responsibility”.  These are often best at the front of the financial report with the actual “numbers” pushed further back and possibly summarised and reformatted.

 

These statements are all in use and worthy.  From a marketing or communications view these need to be clear, concise, and interesting to read.  It makes them more accessible.  You can even possibly play with their titles along the lines of;

• Who we are
• What we do
• This year’s successes
• The year ahead and how you can help.

 

Remember your annual report is fundamentally a communication document and hence needs to communicate to your audiences easily.