Related party transactions
Charities sometimes undertake transactions with related parties. It is good governance for charities to carefully manage these transactions and ensure that they transparent and appropriately recorded. This document provides general guidance for charities on developing policies or processes on related party transactions.
A charity’s policy or process in relation to related party transactions can be a stand-alone document or be part of its policy for managing the material conflicts of interest of its responsible persons, or they may be part of the charity’s constitution.
Any policy or process for managing related party transactions should define ‘related party’.
Who are related parties?
Related parties are not defined in the ACNC legislation. The term related party is defined in Australian Accounting
Standards (AASB) 124 Related Party Disclosures refers to the following are related parties in relation to a registered charity:
- a person that is 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 that has control or significant influence over the charity, such as a parent-entity of the charity
- an organisation that the charity has control or significant influence over, such as a subsidiary-entity.
- any organisation and the charity that are members of the same group (e.g. fellow subsidiaries)
- a member or a close member of their family of the key management personnel of the charity i.e. those persons or individuals having authority and responsibility for planning, directing and controlling the activities of the charity, directly or indirectly, such as CEO, CFO or treasurers.
- An associate (an entity over which the charity has significant influence) or joint venture (a joint arrangement whereby the charity with another entity/ies have joint control of the arrangements have rights to the net assets of the arrangement)
Refer to AASB 124 Related Party Disclosure for more information.
What are related party transactions?
Related party transactions are also not defined in the ACNC legislation. A related party transaction is defined in AASB 124. The definition is a transfer of resources, services or obligations between a charity and a related party regardless of whether a price is charged.
Related party transactions can include:
- purchases, sales, donations: e.g. responsible persons’ donation to a charity
- receipt of goods, services or property
- transfers of property including intellectual property
- provision of employees on a paid or complementary basis
Refer to AASB 124 Related Party Disclosure for more information.
What does my charity need to do?
The ACNC Act requires charities (unless they are a basic religious charity) to comply with the ACNC governance standards in order to maintain their eligibility for registration. Under governance standard 5 a charity must take reasonable steps to make sure its responsible persons meet certain duties, including:
- to act honestly and fairly in the best interests of the charity and for its charitable purposes;
- not to misuse their position;
- to disclose any actual or perceived conflict of interest; and
- ensure that the charity’s financial affairs are managed responsibly.
Additionally, one of the conditions for entitlement to registration is that the entity must be a not-for-profit entity.
Conflict of interest (whether perceived or actual) may arise where a related party has an interest that may conflict with what is in the best interests of the charity. Where a responsible person has a perceived or actual interest with a related party, it may be difficult to demonstrate that you are meeting your responsible persons’ duty to act in the best interest of a charity.
By having a related party policy and/or procedure in place, charities reduce the risk that their decisions may be influenced by the interests of others, rather than the best interests of the charity. It may also help to ensure the transactions do not take place without approval by the charity’s responsible persons.
Transparency about these transactions helps to maintain and build trust and confidence in charities.
Example of a related party transaction
A charity is planning to launch a new website. One of the companies being considered to create the website is managed by the daughter of a director of the charity. The rendering of this service has been identified as a potential related party transaction and conflict of interest, so the charity follows its conflict of interest and related party transaction policy. Such an approach ensures:
- all board members are aware of the relationship between the board member and the web design company.
- if that company does undertake the contract, the related party transaction is recorded in the charity’s register of interests and related party transactions.
- the board member declares the conflict and this is recorded in the charity’s conflict of interest register.
- to address the potential conflict of interest, the board member is not involved in the charity’s decision on which company it should award the contract to do the work.
- in deciding which company it should award the contract to, the board is mindful of acting in the best interests of the charity and therefore obtains quotes from a few companies before making its decision in order to gauge whether it is paying a fair market value.
Related party disclosures for financial statements
In addition to complying with the governance standards, charities that are required to submit annual financial reports to the ACNC and that are ‘reporting entities’ must submit a general purpose financial statement that complies with all applicable Australian Accounting Standards. One of the standards that reporting entities need to comply with is the standard issued by Australian Accounting Standards Board (AASB) on related party transactions, AASB 124 Related Party Disclosures.
It is also best practice for charities that prepare special purpose financial statements to disclose related party transactions in their financial reports.
The full AASB standard is available from the Australian Accounting Standards Board: AASB standard
The information on this page is for general guidance only. It does not constitute legal or other professional advice. Charities should consider obtaining independent advice from an accountant if they have any specific concern.
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