FAQs Tier 3 & 4
These FAQs are grouped into sections. We have included reference to the relevant Standard(s) and Explanatory Guide(s) where they apply.
The Charities Services website also provides general guidance information for Tier 3 and Tier 4 not-for-profit public benefit entities, including FAQs.
These FAQs provide general guidance only. They do not constitute, nor are a substitute for seeking professional advice. As such they have no legal effect.
Assessing and reporting on your entity’s ability to continue operatingThis series of FAQs will help the governing bodies of Tier 3 not-for-profit entities understand their responsibilities to assess and report on their entity’s ability to continue operating.
In periods of increased uncertainty (such as that caused by COVID-19), providing this information is an important part of helping readers to understand your performance report.
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Frequently Asked Questions - Tier 3 and 4 (NFP)
Under cash accounting, transactions and other events are recorded in the Performance Report only when cash is received or cash is paid. When cash accounting is used the Statement of Receipts and Payments is the main financial statement in the Performance Report.
Under accrual accounting, revenue and expenses are recorded when they are earned or incurred, rather than when the cash is received or paid. There are adjustments for the timing of revenue and expenses called accruals. These include debtors or accounts receivable (which is money owed to the charity), and creditors or accounts payable (which is money owed by the charity). Also under accrual accounting, depreciation of fixed assets is recorded to recognise the use of those assets. When accrual accounting is used the Performance Report includes three key financial statements: the Statement of Financial Performance (showing revenues and expenses), the Statement of Financial Position (showing assets and liabilities) and the Statement of Cash Flows (showing cash receipts and cash payments).
No. You may elect to report using the Tier 3 Standard if you wish. Please note that you will need to follow all of the requirements in that Standard if you elect to use it, including preparation of a Statement of Cash Flows.
No. You must elect the tier in which you will report, and follow all of the requirements for the standard for that tier. However, you are allowed to include relevant information that is additional to the requirements of the standard.
If you are reporting in accordance with the Tier 3 Standard and you have transactions that are not covered by that Standard, you may use the requirements of a Tier 2 Standard for that class of transactions.
No, depreciation is not a cash transaction. Therefore, it cannot be included in the Statement of Receipts and Payments.
Yes. However, the information provided in the Statement of Cash Flows in Tier 3 is similar to that provided in the Statement of Receipts and Payments in Tier 4.
The new Incorporated Societies Act 2022 means that some incorporated societies will need to apply XRB Standards. For more information, see our incorporated societies webpage.
If your incorporated society is a charity registered under the Charities Act 2005 you continue to be required to apply the XRB Standards.
This will depend on whether your charity is registered for GST. If your charity is GST-registered, you will prepare the charity’s financial statements on a GST-exclusive basis. If your charity is not GST-registered, you will prepare the charity’s financial statements on a GST-inclusive basis.
If part of your charity is registered for GST and the other parts are not registered for GST, you will prepare the charity’s financial statements on a mixed basis (partly GST-exclusive and partly GST-inclusive). Such a situation may occur in circumstances where the IRD permits a single registered charity that comprises a head office and branches to have the head office registered for GST and the branches not registered for GST. Transactions occurring in the GST-registered part of the charity will be recorded on a GST-exclusive basis and transactions occurring in the parts of the charity that are not GST-registered will be recorded on a GST-inclusive basis.
If your charity is not registered for GST, then GST is part of the operating expenditure/payments, so the threshold is GST-inclusive.
If your charity is registered for GST, you collect GST as an agent for Inland Revenue, and it is not part of your charity’s operating expenditure/payments. The threshold is then GST-exclusive.
If part of your charity is registered for GST and the other parts are not registered for GST, the threshold will comprise both GST-exclusive and GST-inclusive amounts. (See previous question).
Non-cash donations can include items that have a long term benefit to the charity, such as a vehicle or a computer. These types of items are referred to as donated assets. Non-cash donations can also include items that have a short term benefit to the charity, such as food donated to a food bank or clothes donated to a charity shop. These types of items are referred to as goods received in kind.
A significant donated asset is accounted for as revenue in the Statement of Financial Performance and as an asset in the Statement of Financial Position, unless the value of the donated asset is not readily obtainable. If the value is not readily obtainable a description of the donated asset is disclosed in the notes.
If there is a significant level of goods received in kind, at a minimum, a description of the goods received needs to be disclosed in the notes. This is likely to be the case for food banks and charity shops that rely on a significant level of donated items.
Non-cash donations can include items that have a long term benefit to the charity, such as a vehicle or a computer, and items that have a short term benefit to the charity, such as food donated to a food bank or clothes donated to a charity shop.
All significant non-cash donated items that the charity has at year end should be disclosed as a resource in the Statement of Resources and Commitments. In the case of a food bank’s donated food or a charity shop’s donated clothes, although each item separately may be insignificant, collectively the items at year end are likely to be significant, and there should be disclosure about the group of items.
If the value of any non-cash donations is readily obtainable, it is helpful for the value to be disclosed. However, disclosing a value isn’t required by the Tier 4 Standard.
Frequently Asked Questions - Specific to Tier 3 (NFP)
If the Tier 3 Standard does not provide specific guidance for a transaction or event, you can follow the decision-making hierarchy outlined in paragraph 8 of the Tier 3 NFP Standard.
You will need to use your judgement and refer to the following sources, in this order:
- Guidance on similar transactions within the Tier 3 NFP Standard – Look for how the Standard handles similar or related transactions.
- Tier 2 PBE Standards – Check if Tier 2 PBE Standards offer guidance for the same or similar transactions.
- PBE Conceptual Framework – Use definitions and concepts from the PBE Conceptual Framework, as long as they don’t conflict with Tier 3 NFP Standard.
These items can generally be treated as ‘cash and short-term deposits’ under the Tier 3 NFP Standard. However, it is important to use your judgement to determine whether this treatment is appropriate for your organisation. We suggest using the guidance on similar transactions in the Standard to help make your assessment.
Accordingly, you may assess whether these items are ‘cash and short-term deposits’ based on their features, and whether these features are similar to the items that are explicitly included in ‘cash and short-term deposits’ in the Standard (paragraph A109 says that ‘cash and short-term deposits includes petty cash, cheque or savings accounts, and deposits held at call or with a maturity of three months or less from the date of commencement).
Consider whether the account:
· Is used to facilitate transactions, like a bank account
· Can be used on demand to make cash payments
· Has no specified maturity date, i.e. the money can be transferred to the entity’s bank account on demand
· Is not held as an investment (i.e. the account is held to facilitate transactions, rather to generate a return on the account itself)
While the classification in the Statement of Financial Position might seem minor, it can affect the Statement of Cash Flows. If the account is not reflected as ‘cash and short-term deposits’ any movements in the account will not be reflected as a cash movement in the Statement of Cash Flows. For example, if you have paid invoices out of this account, the Statement of Cash Flows would not reflect this movement as a cash payment for the associated expense/purchase of assets. This may affect the usefulness and understandability of your performance report.
When preparing your Statement of Financial Performance your society must classify revenue using the categories outlined in the Tier 3 NFP Standard.
· Revenue categories – See Paragraph A60 in the Tier 3 NFP Standard
Key rules for revenue classification
· Do not combine or split categories in the Statement of Financial Performance. If needed, you can provide more detail in the notes to the performance report.
· Names of the categories can be changed, provided that the separate categories are still maintained.
· Some judgement may be required in selecting the appropriate categories and in deciding whether to rename them.
If you are unsure which category applies, aim for the most appropriate option rather than a precise match. Some revenue generating activities may reflect features of multiple categories outlined in the Tier 3 NFP Standard. Use your best judgement and apply the classification consistently from year to year. You can always provide further information in the notes to the performance report to explain your judgements.
This situation may arise for societies where revenue does not neatly fit into either the fundraising or commercial revenue categories. In these cases, it may also be appropriate to consider whether the revenue could be categorised in the service delivery category. To help you apply judgement, we have noted key features of the commercial, fundraising and service delivery revenue categories in the table below:
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Category |
May cover |
Key Features |
Examples |
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Donations, koha, bequests and other general fundraising activities |
One-off or discrete events to raise funds for day-to-day operations |
· Not ongoing · Primary goal is fundraising · No intention to operate commercially |
· One-off tournaments or competitions · Food/drink stalls at events |
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Revenue from commercial activities |
Ongoing activities aimed at generating a surplus |
· Ongoing · Run at commercial rates · Typically does not directly achieve society’s purpose |
· Professional coaching for the public at commercial rates · Café/bar operated commercially · Selling kit or clothing at commercial prices |
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Non-government service delivery grants/contracts |
Activities that directly contribute to achieving the society’s purpose – reflects what the society exists to do |
· Aligns with society’s purpose · Separate from membership fees · Not primarily fundraising or commercial |
· Regular series of competitions/events aligned with purpose · Operating café/bar as core purpose of society · Special member events aligned with purpose |
Depreciation is an expense recorded in the Statement of Financial Performance. It is defined in the Tier 3 Standard as the allocation of an asset’s cost over its useful life using a method such as straight-line or diminishing value. For your performance report, you will need to determine an appropriate depreciation rate based on the asset’s expected useful life for your organisation.
In some cases, depreciation based on the expected useful life of an asset may align with the relevant IRD tax depreciation rate, but there could also be instances where they do not.
Land should not be depreciated under the Tier 3 NFP Standard (see Table 3, Paragraph A121 of the Tier 3 NFP Standard), while buildings should be depreciated under the Tier 3 NFP Standard.
For example, if the IRD tax depreciation rate is zero for buildings, this depreciation rate is not considered appropriate for accounting purposes because buildings generally have a finite useful life and as such its cost can be spread over that finite life.
The Tier 3 NFP Standard is an accrual-based standard. It requires you to record transactions as they occur, not necessarily when money comes in/out of your bank account. This will mean recording items such as debtors (accounts receivable), creditors (accounts payable) and other non-cash items like depreciation.
You will need to prepare the following components:
· Statement of Service Performance
· Statement of Financial Performance
· Statement of Financial Position
· Statement of Accounting Policies
· Notes to the Performance Report
In addition, there are general format and presentation requirements.
For instance, there are prescribed categories for revenue, expenses, assets, liabilities, cash receipts and cash payments – where you must present your items in line with the categories of the Standard in each of the respective Statements.
If you are applying the Tier 3 NFP Standard for the first time, it is important to understand the transition requirements. These requirements set out the options for when the Tier 3 NFP Standard is applied from (i.e. whether to apply it to both the current year and previous year or just to the current year).
Where to Start
Refer to Appendix C of the Tier 3 NFP Standard for full transition requirements.
Two Transition Approaches
You can typically choose between two main approaches when preparing your first set of financial statements under the Tier 3 NFP Standard:
1. General Provisions (Paragraphs C3–C6)
· Apply the Tier 3 NFP Standard to both the current and prior year.
· Comparative information is included.
· This approach provides consistency across years.
2. Special Provisions (Paragraphs C7–C10)
· Apply the Tier 3 Standard to the current year only.
· No comparative information is required (unless you are transitioning from Tier 2 PBE Standards – see paragraph C9).).
· You must attach your previous year’s financial statements and accounting policies (unless you are transitioning from Tier 2 PBE Standards – see paragraph C9).
· This approach can simplify first-time application
Choosing the Right Approach
Your choice may depend on your organisation’s specific circumstances and the preferences of the readers of your performance report.
Interests in other entities
When applying the Tier 3 NFP Standard, you are required to identify your organisation’s interests in other entities (i.e. whether your organisation controls, jointly controls or has significant influence over other entities) and assess whether any of those interests result in you needing to consolidate controlled entities or account for an investment in an associate or a joint arrangement.
If you have these interests, you will need to use the relevant Tier 2 PBE Standards.
• Consolidation (where you control other entities) – Consolidation is the process of combining financial information across all entities within a group to present a single set of financial statements. Your society will be required to consolidate if it ‘controls’ any other entities. Refer to the applicable Tier 2 accounting standard (PBE IPSAS 35).
• Joint arrangements – A joint arrangement is an arrangement of which two or more parties have “joint control”. Refer to the applicable Tier 2 accounting standard (PBE IPSAS 37).
• Investments in Associates – An associate is an entity you have significant influence over by way of your investment. Refer to the applicable Tier 2 accounting standard (PBE IPSAS 36).
For further information on joint arrangements, investments in associates and consolidation, we recommend viewing Explanatory Guide A8 and Explanatory Guide A9.
Principal vs Agent transactions
If your society collects revenue and incurs expenses on behalf of another party, you must consider whether you are acting as the principal or as an agent in the transaction.
- The principal is the organisation that is responsible for providing or purchasing the goods or services. They own the product or service and take the main risk in fulfilling the agreement with the other party in the transaction.
- The agent is the organisation that helps arrange the sale or purchase of the goods or services on behalf of the principal. They don’t own the goods or services and usually earn a fee or commission for helping.
Example:
If a sports club sells uniforms:
- If the club buys the uniforms and sells them, they would be considered the principal.
- If the club takes orders for uniforms and passes the order on to a supplier to provide, earning a small fee, they would be considered the agent for the supplier.
If you are acting as an agent, you should not record the amounts collected or paid on behalf of another party in your Statement of Financial Performance or Cash Flows.
• Any amount collected on behalf of another party and not yet returned to the other party should be recorded in the Statement of Financial Position as a payable.
• If you earn a margin while acting as an agent, the margin earned should be recorded as a single item in revenue.
• The same approach should be taken in the Statement of Cash Flows.
For further information, see sections Paragraphs A101-104 in section 5, paragraphs A58 and A88 in Section 4 and Paragraph A230 in section 9 of the Tier 3 NFP Standard.