Charities preparing special purpose financial statements (SPFS) under the requirements of the Australian Charities and Not-for-Profits Commission (ACNC) need to be mindful of the new related party disclosures required in their 30 June 2023 financial reports.
A charity that is not a reporting entity (as defined in Statement of Accounting Concepts 1: Definition of a Reporting Entity) may still prepare SPFS. This is because the reforms that ended SPFS as an option for a number of for-profit private sector entities with effect from 1 July 2021 did not apply to not-for-profit entities.
While the recognition and measurement requirements of Australian Accounting Standards are generally applied in SPFS, entities have some discretion as to what they disclose, being required only to comply with the disclosure requirements of the ‘mandatory standards’, namely:
- AASB 101 Presentation of Financial Statements
- AASB 107 Statement of Cash Flows
- AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
- AASB 1048 Interpretation of Standards
- AASB 1054 Australian Additional Disclosures
The result of this is that the disclosure around related parties and associated transactions has historically been light or missing altogether.
It is commonplace for charities to work with people and organisations with whom they are familiar or have a common interest. However, these interactions may create conflicts of interest, whether actual or perceived, and may allow related parties to receive personal benefits from charity operations. Such transactions must therefore be managed properly. This includes being transparent about the nature and extent of related party transactions by disclosing them appropriately in financial reports.
In response to certain recommendations that stemmed from the ACNC Legislative Review undertaken a few years ago, the disclosure requirements relating to related party transactions (including Key Management Personnel (KMP) remuneration) have been enhanced for charities preparing SPFS.
KMP in a charity context are those senior decision makers within the organisation, excluding team leaders and operational managers. Judgement may be required to identify who the KMP are, but common examples include board members and trustees (as the Responsible People), and senior staff such as the CEO, CFO and COO.
KMP can either be employed directly by a charity or they can be provided to a charity via a separate management entity such as an accounting firm. For reporting periods ended 30 June 2022 and later, large charities that prepare SPFS must disclose KMP remuneration, either in total or on a disaggregated basis. A large charity is one with annual revenue exceeding $3 million.
Where a large charity only has one remunerated KMP at any given time during the reporting period, the charity is exempt from making the new disclosures.
Amounts paid for KMP services provided by a separate management entity (as explained above) must be disclosed separately in the financial statements.
While large charities making these KMP remuneration disclosures for the first time in their SPFS for 30 June 2022 did not have to provide comparative information, they will be required to do so in their 30 June 2023 special purpose financial reports.
Related party transactions
For financial years ending on or after 30 June 2023, charities preparing SPFS to meet their ACNC reporting obligations will need to disclose related party transactions.
AASB 124 Related Party Disclosures has been added as a ‘mandatory standard’ for disclosure purposes in special purpose reporting, meaning there are now six ‘mandatory’ standards.
Charities that prepare SPFS have the choice to apply either:
- The six ‘mandatory’ standards (as listed above, plus AASB 124); or
- The equivalent disclosures for the six mandatory standards contained in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities
The definition of a related party depends on charity size.
For medium and large charities preparing SPFS, the definition in AASB 124 is used when identifying related parties and disclosing associated transactions.
For small charities (i.e. annual revenue is less than $500,000), a related party is defined as “a person or organisation that is connected to the charity and has significant influence over the charity.”
- Responsible Persons and their close family members
- Senior management and their close family members
- Other people or organisations that can influence the charity’s decision-making.
Small charities are not required to prepare financial reports. If they choose to do so for whatever reason, they are not required to make the new related party disclosures discussed in this article. Small charities are, however, required to disclose reportable related party transactions in their Annual Information Statements for 2023 and later.
The ACNC Commissioner has relieved charities from the requirement to provide comparative information in the first year that the related party disclosures are made, whether applying AASB 124 or AASB 1060. Consequently, for 30 June 2023, comparative information for related party transactions is not required in SPFS. This concession will not be available for 30 June 2024 (i.e. the second year the disclosures are made) so charities are encouraged to ensure the appropriate systems and procedures are implemented now to ensure the relevant information is readily accessible going forward.