Related party transactions are of interest as they have the potential to impact a responsible person’s ability to act in the best interests of the charity.
In conjunction with the increased charity thresholds incorporated into the Australian Charities and Not-for-profits Commission Regulation 2013 (Regulations) on 13 November 2021, the Regulations also contain more disclosure requirements for those charities preparing special purpose financial statements (SPFS) regarding related party transactions. This will enable the regulator, members and the broader public to scrutinise these arrangements in the future.
These Regulations do not impact charities preparing general purpose financial statements (GPFS) since they are already required to disclose related party transactions in accordance with Australian Accounting Standards.
Key management personnel compensation disclosures for SPFS
All large registered charities with financial reporting obligations under the Australian Charities and Not-for-profits Commission Act 2012 (“ACNC Act’) with two or more key management personnel being compensated will be required to disclose this compensation amount on an aggregated basis for their 2021/22 and later financial years.
This requirement will impact large registered charities (annual revenues of $3 million or more) that currently prepare SPFS and will first apply for their 2021/22 financial year.
Determining who are the entity’s key management personnel may be difficult and one must refer to the definition in Australian Accounting Standards, as follows:
‘Key management personnel are the people with authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.’
Therefore, key management personnel will include responsible persons and senior executives. They may be employed direct by a charity or by a separate ‘management entity’.
This information will need to be included in a large charity’s annual financial report (and be audited) and it is likely it will also be required information for the annual information statement.
Related party transactions for SPFS
All charities with financial reporting obligations under the ACNC Act (will need to include related party disclosures in their financial reports for the 2022/23 and later financial years.
This requirement will predominantly impact medium (annual revenues from $500,000 to less than $3m) and large (annual revenues of $3 million or more) registered charities that currently prepare SPFS and will first apply for their 2022/23 financial year.
Determining who related parties are and what related party transactions need to be disclosed are not defined in the ACNC Act, they are defined in Australian Accounting Standards.
Related parties of a registered charity can include:
- A person connected to the charity, such as a responsible person or a close member of their family that has control or joint control of the charity
- An organisation that is connected to the charity and has control or significant influence over the charity
- An organisation that the charity has control or significant influence over
- An organisation and the charity are members of the same group
- A member, or a close member of their family, of the key management personnel of the charity
- An associate or joint venture of the charity.
Related party transactions are defined in Australian Accounting Standards as ‘a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged’. Therefore, the type of transactions requiring disclosure involving those related parties identified above can include:
- Purchases, sales donations
- Receipt of goods, services or property
- Transfer of property
- Provision of employees on a paid or complementary basis.
This information will need to be included in a medium and large charity’s annual financial report (and be audited) and it is likely it will also be required information for the annual information statement.
How to prepare for these requirements
Those entities that currently prepare general purpose financial statements will already be disclosing key management personnel compensation and related party transactions as required by Australian Accounting Standards.
For those entities currently preparing special purpose financial statements it is unlikely this type of information has been collated previously.
For related party relationships and transactions, it may be appropriate for an entity to have an appropriate related party policy and procedures in place – perhaps involving the identification of transactions on a register. Further an annual process of confirming such transactions with the responsible persons is likely to be required to support the disclosure of such transactions in future.