Jul 27, 2023 / News

ACNC Activities / Compliance / Financial Reporting / Fundraising / NFP / Not for profit News

NFP Newsletter Edition 17 - Financial Reporting

Reporting related-party transactions

In 2023 annual information statements, all but basic religious charities will be required to report their related-party transactions to the ACNC due to changes announced in November 2021.

The commission has defined a ‘related party’ according to charity size – a simplified definition for small charities, and for medium and large charities the definition used in AASB 124 Related Party Disclosures.

For a small charity, a related party is a person or organisation that is connected to the charity and has significant influence over it. The definition includes:

• A charity’s responsible people and their close family members
• A charity’s senior management and their close family members, and
• Other people or organisations that can influence a charity’s decision-making.

ACNC commissioner Sue Woodward said: ‘The ACNC collecting information about related-party transactions is an important part of our work to support good governance and transparency by registered charities. Keeping a record of related party transactions is also part of how charities should manage any conflicts of interest’.

Reportable related-party transactions include:

• Fees paid to a related party for providing goods and services to the charity
• Loans from or to a related party
• Salary or wages paid to a related party’s relative
• Transfer of charity property or assets to a related party
• Charity goods or services provided at a discount to a related party
• Significant use of charity property by a related party, and
• Investment in a related party.

The commission recommends that each charity has a policy and procedure for dealing with related-party transactions. It would help ensure that the charity records and discloses related-party transactions appropriately.

It would also clarify who should be involved in making decisions about related-party transactions and what criteria should be met before entering into a related-party transaction. 

The policy should also clarify how a charity can demonstrate that entering a related-party transaction was the best decision, and how it managed the conflict of interest that accompanied the decision.

ACNC guidance on related-party transactions has been updated and outlines how the new obligations apply to charities of different sizes. The commission has also developed a template for related-party transactions.

 

ASIC highlights key reporting areas

The Australian Securities & Investments Commission has urged directors, preparers of financial reports, and auditors to assess the impact of uncertain market and economic conditions while reporting for full and half-years ending 30 June.

The commission has highlighted key areas for companies to get right. While NFPs have not been specifically mentioned, many of the focus areas are relevant to them.

ASIC has highlighted several areas for attention, in particular:

• Asset values
• Provisions
• Solvency and going-concern assessments, and
• Events occurring after year-end and before completing financial reports.

ASIC commissioner Danielle Press said: ‘Directors should ensure that investors are properly informed on the impact of changing and uncertain economic and market conditions, “net zero” targets and other developments on financial position and future performance. Impacts on asset values and provisions should be assessed, and uncertainties, key assumptions, business strategies, and risks disclosed’.

Companies will be affected differently according to their industry, where they operate, how their suppliers and customers are affected, and a range of other factors.

Directors and management should assess how their entity’s current and future performance, the value of its assets, and provisions and business strategies might be affected by changing circumstances, uncertainties, and risks such as:

• The availability of skilled staff and expertise, which can affect revenues and costs
• The impact of rising interest rates on future cash-flows and discount rates used in valuing assets and liabilities
• Inflationary impacts that may differ between costs and income
• Increases in energy and oil prices
• Geopolitical risks, including the Ukraine-Russia conflict
• Impacts of climate change, climate-related events, and transitioning to ‘net zero’
• Technological changes and innovation
• COVID-19 conditions and restrictions during the reporting period
• Changes in customer preferences and online purchasing trends
• The discontinuation of financial and other support from governments, lenders, and lessors
• Legislative and regulatory changes, and
• Other economic and market developments.

Several uncertainties and risks might affect asset values, liabilities, and assessments of solvency and going concern.
Some factors may also be relevant in assessing the ability of an entity’s borrowers, debtors, and lessees to meet their obligations, and the ability of key suppliers to continue to provide goods and services.

Uncertainties might lead to a wider range of valid judgements on asset values and other estimates. They might change from period to period. Disclosure of uncertainties, key assumptions, and sensitivity analysis are important to investors.

‘Assumptions underlying estimates and assessments for financial-reporting purposes should be reasonable and supportable’, said Ms Press.
 

Focus area	Where to focus
Impairment of non-financial assets	Goodwill, indefinite useful life intangible assets and intangible assets not yet available for use must be tested annually for impairment. Entities adversely impacted in the current environment may have new or continuing indicators of impairment that require impairment testing for other non-financial assets. The appropriateness of key assumptions supporting the recoverable amount of non-financial assets. The valuation method used for impairment testing should be appropriate, use reasonable and supportable assumptions, and be cross-checked for reliability using other relevant methods. Disclosure of estimation uncertainties, changing key assumptions, and sensitivity analysis or information on probability-weighted scenarios. Key assumptions may include assumptions relating to the factors previously noted.
Values of property assets	Factors that could adversely affect commercial and retail property values should be considered such as changes in tenants’ office-space requirements, on-line shopping trends, future economic or industry impacts on tenants, the financial condition of tenants, and restructured lease agreements. The lease accounting requirements, the treatment of rental concessions by lessors and lessees, and the impairment of lessee right-of-use assets.
Expected credit losses on loans and receivables	Whether key assumptions used in determining expected credit losses are reasonable and supportable. Any need for more reliable and up-to-date information about the circumstances of borrowers and debtors. Short-term liquidity issues, financial condition and earning capacity of borrowers and debtors. Ensuring the accuracy of ageing of receivables. Using forward-looking assumptions and not assuming that recent debts will all be collectible. The extent to which history of credit losses remains relevant in assessing expected credit losses. Whether possible future losses have been adequately factored in using probability weighted scenarios as necessary. Disclosure of estimation uncertainties and key assumptions.
Financial asset classification	Financial assets are appropriately measured at amortised cost, fair value through other comprehensive income or fair value through profit and loss. Criteria for using amortised cost include whether both assets are held in a business model whose objective is to hold the assets to collect contractual cash flows, and contractual terms give rise on specific dates to cash flows that are solely payments of principal and interest on the principal outstanding.
Value of other assets	The net realisable value of inventories, including whether all estimated costs of completion necessary to make the sale have been considered in determining net realisable value. The value of investments in unlisted entities.
Provisions	Consideration should be given to the need for and adequacy of provisions for matters such as onerous contracts, leased property make-good, financial guarantees given and restructuring.
Subsequent events	Events occurring after year-end and before completing the financial report should be reviewed as to whether they affect assets, liabilities, income, or expenses at year-end or relate to new conditions requiring disclosure.
General disclosure considerations	When considering the information that should be disclosed in the financial report, directors and preparers should put themselves in the shoes of users and consider what information users would want to know. Disclosures should be specific to the circumstances of the entity and its operations, assets, financial position and performance. Changes from the previous period should be considered and disclosed.
Disclosures in the financial report	Uncertainties may lead to a wider range of valid judgements on asset values and estimates. The financial report should disclose uncertainties, changing key assumptions and sensitivities. This will assist users in understanding the approach taken, understanding potential future impacts and making comparisons among entities. Entities should also explain where uncertainties have changed since the previous full-year financial reports. The appropriate classification of assets and liabilities between current and non-current categories on the statement of financial position should be considered. That may have regard to matters such as maturity dates, payment terms, and compliance with debt covenants.
Other	Consideration of whether off-balance-sheet exposures should be recognised on the balance sheet, such as interests in non-consolidated entities.

 

Common financial-statement items of smaller charities revealed

The Australian Accounting Standards Board has published research report 19 Common Financial Statement Items: Charities with $0.5–$3 million in revenue. 

Its findings provide input for the AASB’s development of a new reporting project; Tier 3 general purpose financial statements. The project aims to provide simpler accounting requirements for smaller not-for-profit private-sector entities.

The report identifies the common financial line items from 260 financial statements of charities registered with the ACNC and with revenue ranging from $0.5 million to $3 million. 

The analyses show that most (78 per cent) of their financial statements were of the special-purpose variety and only a few prepared consolidated statements. 

The analyses indicated that the most commonly reported items were:

• Interest income, donation income, revenue from goods and services, grants, and government subsidies
• Cash and cash equivalents, trade and other receivables, fixed assets, and prepayments
• Trade and other payables, long-service leave provisions, annual-leave provisions, and revenues received in advance, and
• Retained earnings.

The least-common items identified were rebates, impairment loss, revaluation of property, plant and equipment, prior-period adjustments, other types of comprehensive income, intangible assets, lease receivables, investment property, other types of assets, and other types of liabilities.

The research also found that most of the sampled charities presented statements of changes in equity and cash flows.

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The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.