Part 8: Changes to schools' financial reporting
8.1
In Education sector: Results of the 2011 audits, we commented on strategic changes to New Zealand's financial reporting framework, and proposed changes to New Zealand's financial reporting standards and their effect on the education sector.
8.2
In this Part, we highlight the new financial reporting standards applicable to schools that will apply to financial statements for the year ending 31 December 2015. The current financial reporting standards will continue to apply to the financial statements of schools for 2013 and 2014.
New financial reporting standards for schools
8.3
In keeping with its "multi-standards approach", the External Reporting Board (the XRB) has issued new financial reporting standards for public benefit entities in the public sector.9 Public benefit entities will report under one of four categories, depending on the nature and size of the entity. The categories are:
- full reporting (tier 1);
- reduced disclosure reporting (tier 2);
- simple format accrual reporting (tier 3); and
- simple format cash reporting (tier 4).
8.4 Size will dictate the minimum category of reporting that schools will be required to comply with. Schools are allocated to tiers as follows:
- tier 1 – operating expenditure of more than $30 million;
- tier 2 – operating expenditure between $2 million and $30 million;
- tier 3 – operating expenditure of less than $2 million; and
- tier 4 – only if permitted by legislation.
8.5
Apart from Te Aho o Te Kura Pounamu, The Correspondence School, no schools have operating expenditure of more than $30 million and no legislation allows schools to apply simple format cash reporting. Therefore, schools will report in keeping with either reduced disclosure reporting (tier 2) or simple format accrual reporting (tier 3). About 1100 schools are likely to be tier 2 and about 1400 are likely to be tier 3.
8.6
Reduced disclosure reporting uses the same standards as full reporting, but will require significantly fewer disclosures in the notes to schools' financial statements than full reporting. Importantly, the number of required disclosures is expected to be less than what schools must comply with currently.
8.7
However, under reduced disclosure reporting, schools will be required to include a statement of cash flows as part of their financial statements. Although a statement of cash flows is not currently a requirement for most schools, we consider that its inclusion will help readers to better understand schools' financial statements. We also expect that fewer disclosures being needed will partly offset the extra effort needed to meet this requirement.
8.8
Other than these changes, the new tier 2 standards are generally in line with the current standards for schools.
8.9
Simple format accrual reporting for tier 3 public benefit entities is expected to be more straightforward than reduced disclosure reporting for tier 2 public benefit entities. Where reduced disclosure reporting is based on a full set of standards, only one standard of about 50 pages needs to be followed for simple format accrual reporting.
8.10
As the name suggests, simple format accrual reporting requires qualifying entities to follow the accrual basis of accounting, as used for tier 1 and tier 2 reporting. However, simple format accrual reporting incorporates some simplifications to the way transactions are accounted for, when compared to tier 1 and tier 2 reporting. Such simplifications include accounting for all leases as operating leases, such as information technology equipment leases.
8.11
Simple format accrual reporting requires entities to provide a minimum amount of information in their financial statements, and to add to that minimum amount, as necessary, to make it easier for readers to understand the financial statements.
8.12
Like reduced disclosure reporting, schools using simple format accrual reporting will be required to include a statement of cash flows as part of their financial statements. As noted in paragraph 8.7, we consider that a statement of cash flows will help readers to better understand schools' financial statements. Therefore, we support the new requirement for all schools.
8.13
We are aware that most schools report in a similar way, and that, in general, the Ministry is satisfied that schools report consistently. The new financial reporting standards offer an opportunity for change, and for schools with less than $2 million of operating expenditure to report more simply than those schools whose operating expenditure is more than $2 million. In general, we support public entities reporting in keeping with the standards relevant to their tier of reporting.
8.14
We understand that the Ministry is considering whether to allow schools with operating expenditure of less than $2 million to use simple format accrual reporting (tier 3), or whether to require all schools to use reduced disclosure reporting (tier 2), to maintain consistency of schools' reporting. In line with this, the Ministry is considering making its "Kiwi Park" model financial statements mandatory for all schools from 2015.
8.15
We will work with the Ministry about matters affecting schools' transition to the new financial reporting standards that are to be used in preparing their financial statements for 2015.
9: The XRB has responsibility for preparing and issuing financial reporting standards under the Financial Reporting Act 1993 and the Financial Reporting Act 2013.