Level three check – detailed annual financial report review
The ACNC’s selection focused on medium and large charities that prepared either general or special purpose financial reports. A total of 150 charities were selected for reviews. An analysis of the accounting policies provided in the ‘basis of preparation’ section of each charity’s annual financial reports indicated that 101 were General Purpose Financial Reports (GPFR) and 49 were Special Purpose Financial Reports (SPFR).
Figure I – basis of annual financial report preparation
What the ACNC looked for
This check involved reviewing a charity’s 2015 AIS submission and annual financial report to confirm:
- that the annual financial report was the correct report type and the information matched the financial information in the charity’s 2015 AIS submission
- that the annual financial report contained a reference to the ACNC Act
- that an audit/review report and responsible entity declaration were attached and signed
- that the charity complied with the minimum accounting standards required under the Australian Charities and Not-for-profits Commission Regulation 2013 (Cth) (the ACNC Regulations)
- that, if applicable, the charity complied with related party disclosures required for general purpose financial reports, and
- that, if the charity submitted the same annual financial report it submitted to its state/territory regulator, it did so as part of the ACNC’s transitional arrangement and was done correctly and appropriately.
Material errors in the annual financial reports
Of the 150 charities reviewed with this check, the ACNC identified 50 as having a material error in their annual financial reports or 2015 AIS. The errors in the annual financial reports were split evenly between GPFRs and SPFRs.
1. Not all the financial statements included within the annual financial report
A charity’s annual financial report must comply with Australian Accounting Standards Board (AASB) 101 Presentation of Financial Statements
. This AASB standard specifies that a complete set of financial statements comprises:
- a statement of profit and loss and other comprehensive income
- a statement of financial position
- a statement of changes in equity
- a statement of cash flows, and
- the notes to the financial statements.
The ACNC Act requires medium and large charities to submit a full version of their annual financial report, including an audit or review report (the annual financial reports of medium charities can be reviewed or audited, and the annual financial reports of large charities must be audited).
Thirty-six per cent of the charities that made material errors did not provide a full annual financial report that included the complete set of financial statements.2 Five per cent of charities within this category submitted a concise or summarised version of the financial statements.
2. Accounting policy notes
Fifty-two per cent of charities that had material errors in their annual financial reports did not make reference to the ACNC Act or to the mandatory accounting standards in their basis of preparation note as required by the ACNC Act. Thirty-two per cent also did not disclose, for the purpose of preparing the financial statements, whether they were a for-profit or not-for-profit entity as required by AASB standard 1054.3
In addition, the ACNC reviewed the notes in the financial statements for each balance sheet item of material significance. The ACNC found that, in many instances, the financial statements did not contain adequate details for each item or even a simple policy of revenue accounting. In one case, there were references to revenue items that the ACNC could not identify anywhere in the financial statements.
The ACNC also found 32 per cent of charities did not provide adequate accounting policy note disclosures on significant judgements and estimates (for example, the depreciation methods used for items of property, plant and equipment), as required by AASB standard 101.4
3. Audit or review reports
Section 60.10 of the ACNC Act requires the submission of an audit report for large charities and an audit or review report for medium charities as part of the annual financial report. Twenty-six per cent of charities with material errors in their annual financial report attached an unsigned or incomplete audit or review report. In some cases, no audit or review report was attached. Of the audit or review reports submitted, the ACNC found that omission of a reference to the ACNC Act was a common error.
4. Responsible person declaration
Twenty-two per cent of charities did not include a complete or signed responsible entities’ declaration as required by section 60.15 of the ACNC Regulations. Similar to the 2014 AIS submissions, the most common errors in the responsible entities’ declarations in the 2015 AIS submissions were:
- omission of solvency declarations, and
- no reference to the requirements of the ACNC Act.
The ACNC has a template responsible entities’ declaration that charities can download and refer to when preparing their financial statements.
5. Related party transactions
Twelve per cent of charities that prepared GPFRs with material errors did not adopt the AASB standard 124 Related Party Disclosures. The ACNC considered these inadequate because the disclosure provided was simply a note stating that ‘related party transactions have occurred at normal terms and conditions’.
The AASB standard 124 is a mandatory requirement of GPFRs and the relevant disclosures include the key management personnel (KMP) compensation disclosures. Transaction disclosures should include the nature of the transaction and the amounts and balances outstanding by the related party category.
2 This review excluded charities that are lodging their annual financial report under the specific state and territory transitional reporting provisions. For more, see http://www.acnc.gov.au/transitionalreporting.
3 Australian Accounting Standards Board [AASB] 1054 Australian Additional Disclosures, paragraph 8.
4 Australian Accounting Standards Board [AASB] 101 Presentation of Financial Statements.