The Australian Charities and Not-for-profits Commission (ACNC) is focusing on the exchange of goods, services, or obligations between related parties. Groups registered with the ACNC must have started reporting these transactions from the beginning of 2023. For many groups, this started on 1 July 2022.
What is a related party?
The ACNC uses the definition of a related party from Australian Accounting Standards (AASB) 124. According to this, if an organisation makes more than $500,000 per year, a related party could be:
- A person or an organisation that is connected to the charity and has some control over it
- An organisation that the charity controls or has a significant influence over
- Any organisation and the charity that are part of the same group
- A member of the charity’s key management team or a close family member
- An associate or joint venture, which is an organisation the charity has significant influence over or shares control of.
What is a related party transaction?
A related party transaction is when resources, services, or obligations are exchanged between related parties. It doesn’t have to involve money. Some examples of related party transactions include:
- Buying, selling, or donating
- Receiving goods, services, or property
- Transferring property, including intellectual property
- A person responsible for the organisation providing professional services for free or at a discount.
While these transactions are common and not necessarily bad, they can lead to damaging conflicts of interest. This means the transaction might not be in the organisation’s best interest.
Organisations must carefully handle these transactions to make sure they are:
- In the organisation’s best interest.
Keeping good records is crucial for managing these transactions. This means organisations must understand their record-keeping duties when reporting these transactions.
Reporting requirements on related party transactions
Medium and large organisations must report ‘material’ related party transactions in their annual statements and financial reports. They don’t have to report ‘immaterial’ transactions.
What are material related party transactions?
A financial report considers information ‘material’ if leaving it out, misstating it, or hiding it could influence someone’s decision. Whether a related party transaction is ‘material’ depends on its size, nature, and circumstances.
When reporting, an organisation should consider whether leaving out information about a transaction would affect someone’s understanding of its operations or its financial performance and position.
Examples of generally ‘material’ related party transactions may include:
- A loan to a related party by the organisation
- The sale of assets to another organisation controlled by a committee/board member of the organisation
- Sales of goods or services to the organisation by another organisation controlled by a close relative of one of the organisation’s committee/board members
- Transactions that have a significant effect on the organisation’s financial statement
- Lease agreements between related parties.
Immaterial related party transactions
A related party transaction is considered immaterial if it:
- Doesn’t significantly influence the organisation’s decisions or activities
- Doesn’t affect someone’s understanding of the organisation or its finances.
The organisation doesn’t need to report an immaterial related party transaction.
Examples of generally immaterial related party transactions include:
- A gift of a box of chocolates to the committee/board members as a thank you
- Donations received by the organisation from a related party
- Reimbursement of reasonable expenses incurred by a related party in their duties for the organisation
- A related party buying goods from the organisation on the same terms offered to the public.
Reporting in the Annual Statement
If a medium or large organisation didn’t have any related party transactions during the reporting period, it should answer ‘No’ to the question in the 2023 Annual Statement which asks: ‘Did your charity have any reportable related party transactions in the 2023 reporting period’.
Alternatively, medium and large organisations who did have material related party transactions must select one or more applicable types of related party transaction in the 2023 Annual Statement according to the related party transaction disclosure note in the financial report.
- Fees paid to a related party for providing goods or services to the organisation
- Loans from/to a related party
- Transfer of charity property or assets to a related party
- Goods or services provided at a discount to a related party.
Medium and large organisations can describe the related party transaction, if ‘Other’ is selected. They can also provide additional information about their related party transactions in the optional question – ‘Include any other relevant details’.
For example, the organisation could list the page number of the financial report containing the related party transaction disclosure.
Financial statement inclusions
Medium and large organisations must provide details of related party transactions in their financial statements according to the requirements of AASB 124 or AASB 1060. These reports must include, at least, details about:
- The nature of the relationships with related parties
- The amount of the related party transactions
- The amount of outstanding balances, including commitments, and:
- Their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement and
- Details of any guarantees given or received.
- Provisions for doubtful debts related to the amount of outstanding balances
- The expense recognised during the period in respect of bad or doubtful debts due from related parties.
This applies whether the organisation prepares Special Purpose Financial Statements (SPFS) or General Purpose Financial Statements (GPFS).
Managing related party transactions
Organisations should take several steps to properly manage their related party transactions. These steps are based around keeping records, proper disclosure, and effective policies and procedures.
Maintain a register
For each related party transaction, the register should keep enough information about the related party and the transaction. This will help charities meet the reporting requirements in the Annual Information Statement or for the relevant disclosure note in the financial statement.
Policies and procedures
Each organisation should have a policy and procedure for dealing with related party transactions. This will help ensure that the organisation records and discloses related party transactions properly.
A policy and procedure will 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. It should also clarify how the organisation can show:
- that entering a related party transaction was the best decision, and
- how it managed the conflict of interest that came with the decision.
A good policy and procedure will reduce the risk that the organisation’s decisions are influenced by the interests of others.
Manage conflicts of interest
Related party transactions can lead to a perceived, potential, or actual conflict of interest.
ACNC Governance Standard 5: Duties of Responsible People requires the organisation to take reasonable steps to make sure its Responsible People meet certain duties, including:
- to act honestly and fairly in the best interests of the organisation and for its charitable purposes
- to not misuse their position
- to disclose any actual or perceived conflict of interest
- to ensure that the organisation’s financial affairs are managed responsibly.
Conflicts of interest may arise when a related party has an interest that may conflict with the best interests of the organisation. If a Responsible Person has an interest with a related party, it may be difficult to prove that they are acting in the best interests of the organisation.
Responsible People should declare any potential conflicts of interest and the organisation should record these in a register. When it is time for the organisation to make a decision, anyone with a conflict should not be involved in the decision-making process.