Out with annual financial reports and in with the more comprehensive performance reports. Why this mandatory change for registered charities and what does it mean?
Hopefully by now most involved with registered charities in New Zealand will be aware that, thanks to legislative change and the initiatives of the External Reporting Board, for periods beginning 1 April 2015 registered charities will be required to follow new reporting standards.
However it is in the detail of these new reporting standards for Public Benefit Entities that the magic happens. (At least for tier 3 & 4 entities). Changes are however also coming for tiers 1 & 2 PBEs) Rather than just requiring entities to provide an annual financial report with details of their income and expenditure and assets and liabilities, they are instead also required to provide information about the entity, why it exists, what it set out to achieve, and what it actually achieved.
This makes great sense. Unlike a profit seeking company, the success of a PBE is not easily measured by whether it made a surplus or a deficit. While a statement of financial performance is important hygiene information that can be a measure of activity and sometimes financial efficiency, it doesn’t help assess whether a PBE organisation is actually delivering on its purpose.
Hence the changed requirement for PBEs to provide a more comprehensive Performance Report instead of just an annual financial report.
What is a performance report?
It is designed for those users who cannot require the entity to disclose the information needed for accountability and decision making. Most users of a PBEs performance report will fall into two groups:
- providers of resources to the entity i.e. funders, donors etc
- recipients of services from the entity
While the performance report will still contain much of the accounting information that annual reports used to contain, it goes further in that it also requires some crucial entity information explaining what the entity is, and why it exists. It will also require performance information which will generally be a mix of qualitative and quantitative reporting.
The fundamental aims of this new style of reporting is to enable stakeholders to better assess an entity’s performance and to improve the quality and consistency of reporting.
Benefits of performance reporting;
There is a saying that you get more of what you focus on. Performance reporting is designed to help focus the entity on reporting on its raison d’etre, it’s reason for being. As anyone who has ever been to a meeting where financial reports are discussed and heard some minor amount like the telephone expenses queried will attest – giving people lots of financial detail often is counterproductive to focusing on the important matters. Rather than focusing on a lot of the detail the performance report essentially requests PBEs to report on their KPIs (key performance indicators). That is, those key measures that show whether the organisation is achieving its aims or not.
An organisation with a clear vision and mission that is then further expanded into a strategic plan with KPIs or other milestone targets should have little difficulty in providing a valuable performance report. And hopefully by forcing entities to consider their outputs and outcomes we should see better focus on the things that really matter towards achieving their purpose.
Read the original blog post here which includes what challenges there are likely to be and audit considerations. This article originally appeared on RSM Hayes Audit.
