Our June webinar concentrated on the financial reporting requirements of Australia's charities. The webinar provided an overview of financial reporting requirements, as well as information on ACNC resources to help charities, on common errors the ACNC sees and on new accounting standards charities need to be aware of.
CHRIS RICHES: Hi everyone, how are you all. Hope you’re travelling okay. Welcome to the ACNC’s June webinar where we’re going to examine financial reporting and financial reporting requirements for charities. My name is Chris Riches. I’m part of the ACNC’s Education team. Joining us today is John Aitkin who is part of our hardworking Reporting team. Hi John, how are you going?
JOHN AITKIN: Hi Chris, I’m very well, thank you.
CHRIS RICHES: That’s good. A bit busy at the moment. It’s a busy time for Reporting and that sort of stuff, isn’t it?
JOHN AITKIN: That’s right. We’re coming up to the end of the financial year. Now it’s time for charities to think about - starting to prepare their financial reports and submitting their annual information statements to the ACNC. Those are generally due for submission to the ACNC at the latest six months after the end of the charity’s financial year unless the ACNC grants some extension of time to submit.
CHRIS RICHES: Yeah, and we’re going to – one of the things we’re going to cover in this webinar are due dates, AISs, applying for extensions, lodgements, all of those sorts of things. We’ll return to that as we get into things today. Before we start, we’ll just cover a few of our usual housekeeping points. If you’ve got any issues with the webinar audio, you can have a go of listening through your phone. If you call the number listed in the email you’ll have received upon sign-up, put in the access code and you can listen to the webinar that way. You can type a question at any time throughout the webinar. Today we have Eric and Kat from our reporting team helping us out as well as Matt from our education team. They’re going to be responding in the background to questions and also going to be sending links through to various relevant pages on the ACNC website that crop up during the proceedings today.
We’ll try and answer all the questions that come through. If your question isn’t answered, feel free to send us an email afterwards via firstname.lastname@example.org. We’ll get back to you. We’re recording this webinar too, and the recording as well as the presentation slides will be published on the ACNC website within the next day or so. As always, we’ll send an email with website links featured in this webinar out to everyone who’s registered. You don’t have to write everything down as we go along. We’ve also made available a couple of handouts today for people who are attending, and you can access them as well.
Finally, we really value your feedback. If you have any suggestions for ways we can improve our webinars, please let us know in the short survey at the end of proceedings today. Now let’s see, what’s on the agenda? It says, switching slides. There we go. What have we got on the agenda today, John?
JOHN AITKIN: Okay, well here’s a quick rundown of some of the general areas we’ll be covering. We’ll start with a quick overview of the financial information required from charities filling in their annual information statements or AIS as we call them. Now this is something all charities, regardless of size, have to do, small, medium or large. It is a good starting point when looking at financial reporting for charities. In doing so, we’ll have a quick look at the key records your charity should be keeping, not only to help with its AIS reporting and financial reporting, but also to comply with ACNC requirements.
CHRIS RICHES: Yeah. And of course, medium and large charities, they’re obligated to provide some greater detail and information in their financial reporting. This starts with the annual information statement. But really, it comes into focus through the greater detail required through medium and large charities annual financial reports. Some of the bits and pieces in that context that we’ll be covering today is looking at some of the information the financial reports need to cover. The idea of audits versus reviews; some of the new accounting standards that are relevant to the preparation of financial reports. A bit of a rundown and a look at the ACNC’s recently released report which is reviewed a charity’s annual financial reporting. It’s well worth noting some of the bits and pieces that have come out of that and also, just to mention about our best practice [buy/advice] 00:04:24 as well on disclosures in financial reports.
Just a quick note on the review that I just mentioned before, one thing it really highlights to us is some of the obstacles and some of the issues that charities can run into when preparing the reports. What it allows us to do is identify these issues and then we help charities address them and avoid them. Throughout the session today we’ll be mentioning some of those things and of course, this session overall is designed to try and help avoid some of these potholes in the road, I suppose. A bit of a deepdive into financial reporting. Let’s start with the annual information statement and the financial information you’ll need to cover there. Submitting an AIS is of course a compulsory obligation for the vast majority of charities registered with the ACNC contained within the AIS as a significant section that covers financial reporting and financial reporting requirements.
The financial information the charities need to submit through the AIS differs to that required between small, medium and large charities. Generally speaking, medium and large charities have greater requirements when it comes to financial reporting. And those requirements we’re going to focus more heavily on in a few minutes. But what we’ll do, is we’ll just give a bit of a reminder as to the thresholds for small, medium and large charities. John if you wanted to give that bit of a reminder.
JOHN AITKIN: Sure. The reminder here is that the ACNC measures charity size, small, medium or large, based on a charity’s total revenue. Charities with the total revenue of less than $250,000 are designated as small. Charities with annual revenue, $250,000 or more but less than $1 million, are medium. And charities with annual revenue of $1 million or more are classed as large. Now sometimes a large request or a similar one-off event may mean that your charity size changes for just one reporting period. If your charity size changes and you think that your charity is likely to return to its previous size in future reporting periods, you can apply for your charity to keep its previous year size and therefore not have to meet the reporting obligations of a larger charity. [over talk]
CHRIS RICHES: ... available on the website too, isn’t there John.
JOHN AITKIN: That’s right Chris, yeah, and there’s an application form you can fill out to apply. It’s worth noting that a public consultation was completed earlier this year as part of a review of the ACNC legislation, with a proposal put forward to increase the size threshold. Now it’s not law yet but if the proposal does become law, the thresholds will become less than $500,000 for small charities and less than $3 million for medium charities for future financial years. Expecting an announcement about this to be made very soon, and we will publish the details of any announcement on our website and social media as soon as we have more details.
CHRIS RICHES: Yeah definitely. The old cliché, keep an eye on our website, on our social media, and we’ll make sure that the charities who need to know, which are all of them, know and know what the new thresholds are.Now small charities, they have to complete, as it says here, an income statement and a balance sheet by answering questions in the AIS. John, what do these questions actually cover?
JOHN AITKIN: Okay Chris, well the Income Statement covers the income earned and expenses incurred by the charity during the financial year, and the net profit or loss when the total expenses are subtracted from the total income. The balance sheet is a snapshot of the charity’s financial position at the end of the year, so includes questions about the charity’s assets and liabilities, generally what the charity owns and owes.
CHRIS RICHES: These sorts of things, this information, it’s stuff that charities should have pretty much at hand, isn’t it?
JOHN AITKIN: Yes, that’s right. Charities should be keeping track of all financial transactions. And there is in fact a legal requirement to keep financial records that correctly record and explain how the charity spends or receives its money or other assets, its transactions, and to correctly record and explain the charity’s financial position and performance. Those records will give the charity the information it needs to complete the AIS financial questions and if necessary, a financial report.
CHRIS RICHES: Okay. What are these records that need to be kept John, what are we talking here?
JOHN AITKIN: The records a charity will keep will depend on its specific financial affairs. However, some common records include general account books such as the general journal and general and subsidiary ledgers, cashbook records, banking records, including bank and credit card statements, deposit books and cheque butts, and possibly asset lists or registers. Now the ACNC has detailed information about the types of records a charity should keep and a recordkeeping checklist on our website.
CHRIS RICHES: Yeah. And as you can see here, we’ve got a couple of links here again. You don’t have to scribble them down straightaway. Some of them will be getting sent through the chat and obviously, we’re recording this session as well so you can refer back to them. We do have our annual information statement checklist. That helps you ensure that you have all the information and material, not just financial but other information as well, that you need to complete your AIS. We’ve got our AIS guide which helps in the responses to each question and the AIS helps guide you through them. And the recordkeeping checklist that John mentioned, that provides a great rundown on the records a charity needs to keep, as well as the method and form that your charity needs to retain them in.
Some key points to remember here when it comes to AIS lodgement; we mentioned in our introduction about it coming up towards the busy lodgement time with the June 30 due date. That due date is for charities to report on a January to December year, isn’t it John?
JOHN AITKIN: That’s right, Chris. The due date for charities that use a calendar year ending 31 December is 30 June and of course it’s fast approaching. Submitting your charity’s AIS and financial report before the due date will ensure that the latest information about your charity’s programs is available to potential donors, funding bodies, governments and the public, and it does demonstrate that your charity takes good governance seriously. Now having said that, if your charity is unable to submit its AIS by the due date because of circumstances beyond the charity’s control, the ACNC may approve an extension of time to submit. Your request for an extension must be in writing and come from an authorised person at your charity. In your request you should tell us the reasons for the delay and the new due date that you’re requesting. And you should send your request by email to email@example.com before the AIS due date.
CHRIS RICHES: Indeed. Now it’s also important to highlight here that small charities also have the option to submit as part of their AIS, a financial report. Now that’s an option, it’s not a compulsion, isn’t it, John?
JOHN AITKIN: Yeah, correct. Medium and large charities have to submit a financial report alongside their AIS. But for small charities it is optional unless the charity is an incorporated association in [the] Northern Territory. Now these charities need to provide the ACNC with the financial report that they would normally prepare for licensing NT if they are participating in a streamlined reporting arrangement. So, I’m now only reporting to the ACNC.
CHRIS RICHES: Yeah. Something we really want to emphasize here is that whilst for the most part it’s optional, the ACNC, we definitely encourage smaller charities to submit an annual financial report. Again, we mentioned accountability and transparency John, they’re the key reasons why we ask for this sort of thing.
JOHN AITKIN: Yes. If a charity has already prepared a financial report, then submitting it to the ACNC is a great way to demonstrate a high-level of transparency and accountability. By submitting its financial report, a charity can provide more detailed information of interest to its stakeholders. For example, its specific sources of funding such as government grants as well as details of any significant assets or liabilities that would be of interest. Now it is worth noting Chris, that last year over 40% of all small charities voluntarily submitted a financial report with their annual information statement.
CHRIS RICHES: And that was a figure that, when you mentioned it to me a little while back John, I wasn’t aware of. That was one that came as a little bit of a surprise, a pleasant surprise I have to say. It strikes me as a pretty encouraging figure. To charities who have done this, well done, good on you, and continue to do so. Small charities also, when they’re preparing their financial reports, they can choose the type of accounting they use. Now they’ve got a choice between either cash or accrual. John, what are the differences or what is the difference between these two types of accounting?
JOHN AITKIN: Okay Chris, yeah, as you said, either method of accounting can be used by small charities. Cash accounting records revenue when money is actually received and expenses when money is actually paid out. Whereas accrual accounting records revenue when it is earned and expenses when they are incurred. Now the timing of these events is often not the same as the time the money is actually received or paid. One significant difference between the two methods is that cash accounting does not record payables and receivables while accrual accounting does. Cash accounting is most commonly used by very small charities with about 70% of all small charities using this method. And what we see is that as charity revenue increases, we tend to see more charities using accrual accounting and accrual-based software accounting systems.
CHRIS RICHES: Yeah. Now, we’ve had a bit of a look at the financial reporting information that charities, particularly small charities, have had to fill out and complete as part of their annual information statement. We’ve also had a quick look at our annual financial reporting with a bit of a reference to small charities registered with the ACNC. What we’re going to do now, we’re going to just shift our focus a little. We’re going to stay with the annual financial reports, but what we’re going to do, is we’re going to drill down a little bit deeper and in the context of medium and larger charities. As we’ve touched on already, annual financial reports provide the public with some extra information as well as an extra level of assurance, transparency, those types of things, about charity operations and financial affairs.
Preparing, submitting an annual financial report is a keyway of charities meeting their legislative – I always have trouble saying that word, requirements under the ACNC Act. But more importantly, it is actually a sign of good governance as well. I guess most charities are going to be preparing some type of financial statement or report as a matter of course each year, aren’t they, John?
JOHN AITKIN: That’s right, Chris. Many charities already have a requirement to prepare a financial report to be presented to their members, for example, at their annual general meeting, and that would be a requirement typically in their governing rules or governing document.
CHRIS RICHES: Yeah, definitely. When we talk about annual financial reports, what do they need to include? Let’s go through some of the inclusions. As a minimum, medium and large charities must provide the ACNC with the following information when submitting their annual financial report. Now you can see some of them up on the screen in the next couple of slides here. What have we got John, what do they have to cover?
JOHN AITKIN: Okay. Well, first of all, we have four compulsory financial statements. A statement of profit or loss and other comprehensive income, sometimes called an income statement. A statement of financial position. A statement of changes in equity and a statement of cash flows.
CHRIS RICHES: Definitely. And what about these three items here, John?
JOHN AITKIN: Yeah. To supplement the financial statements, charities also need to include notes to the financial statements, which we’ll discuss in more detail a bit later. A signed and dated responsible person’s declaration about the statements and notes. And for medium charities, either a signed and dated reviewers report or an auditor’s report. And for large charities a signed and dated auditors report.
CHRIS RICHES: Okay. This might sound like a bit – it might sound a little bit involved. What we’ll do, we’ll offer a bit of an explanation of what some of these elements of an annual financial report are. And many of you might already be familiar with some of them as well, but we’ll have a bit of a look now at some of the context and some explanation. As we see here, what does it mean? What are some of these? John, what are some of the meanings or some of the definitions of some of these items?
JOHN AITKIN: Sure. Okay, perhaps we’ll start with the financial statements. The financial statements include a series of numbers giving important information about a charity’s financial affairs. The balance sheet shows a charity’s assets and liabilities. Assets are things that the charity owns or possibly things that charity has control over. And liabilities are amounts that the charity owes. For example, amounts owed to suppliers, GST payable and so on. Ideally, total assets will be more than total liabilities. Profit and loss or income statements, that shows the charity’s income and expenses for the year with material amounts shown individually as well as the net profit or loss for the year. The cashflow statement shows all the cash received and the cash given out by the charity during the year.
The cashflow statement is important because it shows how much cash is actually coming into and going out of the charity. Finally, the statement of changes of equity essentially shows the reserves available to the charity. Now, as I mentioned – sorry?
CHRIS RICHES: No that’s all right, I was going to say, I’ll just whizz back a couple of slides. I’ll go back to this next one here, so that’s all right, yeah.
JOHN AITKIN: Thank you, Chris. Regarding the notes to the statements, now these provide the important information to help readers understand the statements. For example, they explain the accounting policies used by the charity to prepare the financial statements. They can include a breakdown of more detailed financial information which supplements the financial statements. And the notes can also include other useful information, for example, a description of any related party transactions. As to the responsible person’s declaration, well this document is important. It’s a declaration signed by at least one of the charity’s responsible persons stating whether or not the charity’s financial report meets the ACNC requirements. And importantly, whether or not the charity is solvent. That is to say, whether it can pay its debts as they fall due.
CHRIS RICHES: Yeah. I’ll mention here that the ACNC actually has a template for that responsible person’s declaration. Charities can download it from our website, attach it to their financial report. It’s easily found on the website. Hopefully, it can come through on the chat. You can also search for it if you search for it under responsible person’s declaration; you’ll be able to access it through there. Also, just a reminder that a charity’s responsible persons or people, the management committee, all those sorts of people, they have a duty under the ACNC governance standards to ensure that the financial affairs and the charity are managed responsibly and should not allow the charity to operate while it is insolvent. Again, if you want to have a look and find out some more information about our governance standards of which you’re probably quite familiar, the website again, acnc.gov.au/governancestandards.
We go from one standard to another standard here. We’re going to look at some of the accounting standards here that might influence and might have a little bit of sway over the preparation of some annual financial reports. Medium and large-sized charities need to prepare financial statements and the notes that we’ve just spoken about, but they have to do it in accordance with Australian accounting standards. John, what are these standards and are you able to explain perhaps a little bit more about what they’re on about and some context?
JOHN AITKIN: Yes, Chris, you’re absolutely right. Those charities are required to prepare their financial reports in accordance with the Australian accounting standards. The accounting standards set out a range of requirements for how charities should record their financial transactions and how to report them in their financial statements. The specific type of financial statements and what they contain that a charity must prepare and which accounting standards they should apply, depend first and foremost on whether the charity’s classed as what’s called a ‘reporting entity.’ Charities that are reporting entities prepare general purpose financial statements. Other charities that aren’t reporting entities prepare special purpose financial statements.
CHRIS RICHES: All right, now I’m going to ask the dumb question here: what’s a reporting entity, John?
JOHN AITKIN: Okay, well a reporting entity, it’s a term formerly defined by the Australian Accounting Standards Board. We won’t recite the formal definition here. But generally speaking, if people use and rely on your charity’s financial statements to help them make decisions about how to allocate resources and they cannot have their information needs satisfied if your charity chose to prepare special purpose financial statements, then your charity is most likely a reporting entity. Now the ACNC website has more information about reporting entities and of course, your accountant or auditor can help you make the assessment of whether your charity is a reporting entity.
CHRIS RICHES: Okay. Now in that definition you’ve mentioned another couple of elements to financial reports, John: special purpose financial statements and general-purpose financial statements. What are these alternatives? How do they perhaps differ as well? What’s the difference between them?
JOHN AITKIN: Okay, well perhaps first we’ll talk about reporting entities and then we’ll talk about the contrast. If a charity is a reporting entity, it must submit general purpose financial statements. Those must comply with all applicable Australian accounting standards when they submit those statements to the ACNC. These charities can prepare full – the reporting entities charities can prepare full general purpose financial statements that include all disclosure notes that’s required by the accounting standards. Or they do have the option to include a simplified or reduced set of disclosures in a general-purpose financial report. On the other hand, if the charity is not –
CHRIS RICHES: And when is the special purpose – I was just going to say, the special purpose financial statements, they differ a little bit again, don’t they?
JOHN AITKIN: That’s right. For charities that aren’t reporting entities, they can submit special purpose financial statements to the ACNC, but there are specific requirements for these. Special purpose financial statements must comply as a minimum with the following five accounting standards to the extent they are relevant. The standards are, AASB101 Presentation of Financial Statements, AASB107 Statement of Cash Flows. AASB108 Accounting Policies, Changes in Accounting Estimates and Errors. AASB1048 Interpretation of Standards. And AASB1054 Australian Additional Disclosures. Now I should also mention that the ACNC Act requires a charity’s financial report to provide a true and fair view of the charity’s financial affairs.
This means the charity should think about whether they also need to apply other relevant accounting standards when preparing their financial statements. Because generally, financial reports will satisfy the true and fair view requirement where all applicable accounting standards are applied. One good example of a potentially relevant accounting standard is the fairly new accounting standard, AASB1058 Income of Not-For-Profit Entities.
CHRIS RICHES: And again, we’ll just mention here, there’s again further information on these different types of financial statements on the ACNC website. You can see the link there. Go have a look and a little bit of a perusal of the differences. Again, just as a reassurance, we are also recording this, you don’t have to stress about scribbling down all the AASB standards. It will be included in the recording obviously, and you’ll be able to go back at your leisure and refer to them. John, you just also put a mention in just a second ago of that new standard, 1058. Are you able to tell us if there’s any other recent changes to some of the accounting standards that charities should be aware of or need to be aware of?
JOHN AITKIN: Okay, well there are three new standards charities need to be aware of. These standards all apply to reporting periods ending 31 December 2019 and later. The first one is AASB15 Revenue from Contracts with Customers. This standard replaces AASB118 Revenue and has a five-step model for recognising revenue from contracts. The second standard is AASB16 Leases. This standard also has a new approach to leases. What we now see is that most operating leases will be recognised in the charity’s balance sheet. Most operating leases will be recognised in the charity’s balance sheet. And finally, the one I mentioned before, AASB1058 Income of Not-For-Profit Entities, this accounting standard replaces the previous standard AASB1004 Contributions.
These new standards are compulsory where relevant for charities preparing general purpose financial statements. And charities preparing special purpose financial statements should also consider whether they need to apply these standards to ensure the statements meet the ACNC true and fair view requirement.
CHRIS RICHES: Okay. Now there’s one more thing too. There’s a couple of new requirements as part AASB1054, is there, John?
JOHN AITKIN: That’s right. There has been a change to one of the – to this standard, AASB1054, which is a compulsory standard for special purpose financial statements. For reporting periods ending 30 June 2020 onwards, AASB1054 now requires additional notes in charity financial reports which provide information about compliance with the recognition and measurement requirements in the accounting standards, and application of the consolidation and equity accounting requirements in the accounting standards.
CHRIS RICHES: Okay. Now there’s again more on the ACNC website. Our standards and financial reporting webpage include some answers too, some frequently asked questions about accounting standards and about new accounting standards. That’s one good place to go and have a look, go check out that page. There’s the address again. And if you’re unsure how to apply the new accounting standard requirements in regard to your charity, we would recommend that you discuss this sort of thing with your accountant or your auditor just to seek out their advice and their expertise. Now earlier in the webinar we mentioned the need for charities to have their financial reports audited or reviewed. This is a general requirement for an independent professional to provide assurance that a charity’s financial report meets ACNC requirements.
Medium charities need to have their reports either reviewed or audited. Large charities must have their reports audited. Auditing and reviewing those reports is vital and ensuring that the reports that are submitted to the ACNC are proper and accurate and they comply with all the standards that are set in place. The standards that we’ve spent a bit of time talking about today already. What happens John, if things aren’t quite right, and if say a review or audit finds the financial report doesn’t meet requirements as required, I suppose?
JOHN AITKIN: Okay. If as a result of the review or audit process the reviewer or the auditor finds that the financial report doesn’t meet the requirements of the ACNC Act, or that there were problems identified during the review or audit process, then the review or audit report will include information about these issues.
CHRIS RICHES: Okay. Now, we’ve got a nice sort of diagram here. What are we seeing on our screen here? This is a bit of a flowchart, isn’t it, John?
JOHN AITKIN: Yeah. I think it’s worth discussing for medium-sized charities just briefly to talk about the difference between a review and an audit. And there are two main differences. Actually, I think if you could move onto the next slide.
CHRIS RICHES: Yeah, absolutely. Beauty, there we go.
JOHN AITKIN: Yeah. The two main differences are the level of assurance provided and who can actually conduct a review or an audit. First to talk about the process, the level of assurance, the review process would generally be less detailed than an audit and it provides a lower level of assurance. In regard to who can conduct an audit or review, well an audit or review can be conducted by a registered company auditor, an audit firm or an authorised audit company. Having said that, a review can also be conducted by a qualified current member of a relevant professional body. That is CPA Australia, Chartered Accountants Australia and New Zealand or the Institute of Public Accountants. For a review there is a broader scope of potential reviewers.
CHRIS RICHES: Yeah. And again, there’s more information on audit and reviews at the site there that you, or the link that you see on the screen. Now our website also has some review and audit report templates that can be downloaded for use as well. There are some handy resources there for you to be able to download and for your charity to be able to use. We’ve gone through details of financial reporting from an AIS process perspective, but also through the annual financial reporting process. We’ve also looked at what needs to be in annual financial reports. The ideas of audits and reviews and some of the standards that underpin this process. Now we know that there’s a bit here. Again, an opportune time to remind everyone that this session is being recorded. You can rewatch it at your leisure when we upload it onto our webinar page, acnc.gov.au/webinars.
Another important part of the process, and this is an important part of the ACNC’s educational role here, is how we are able and how we are trying to help charities learn from things that maybe haven’t quite gone to plan in the past. This is where our annual review of charity financial reports comes into play. Now each year the ACNC analyses a sample of medium and large charities financial reports. We examine some of the issues that have caused some problems in the past as well as I guess, in the present. And as well, we’ve looked at some of the common mistakes that charities have made and make. There are a few reasons why the ACNC conducts these reviews. We’ve got them here up on the screen at the moment in these lovely looking hexagons.
Obviously, we do it to check charities compliance. That’s the basic sort of thing. To check the accuracy of the information they provide us, and that information ends up on the ACNC’s charity register. That’s important too. But importantly, it also helps us identify some errors and some trends in financial reporting, and that in turn shapes some of our guidance material, some of the other activities we undertake like this webinar for example, to improve the quality and accuracy of charities financial reporting. Now, we have – there we go, that’s the latest report there, isn’t it John?
JOHN AITKIN: Yeah, that’s right, Chris. Each year, we publish a report on our findings from the annual reviews of the charity financial reports on our website. You can actually view earlier years reports too if you’re interested.
CHRIS RICHES: Oh, yes, that’s right, of course.
JOHN AITKIN: Yeah. But the most recent one was published in March this year and you can read it using the link that you’ve displayed on the screen there. Each year we have a specific focus. We’re looking for particular issues in our reviews. For the most recent review, some of the main things that we were focusing on were first of all confirming that charities provided a complete set of financial statements, which we already talked about earlier. Also, there was a signed audit or review report attached and a signed responsible person’s declaration. We also had a look to see whether charities had made errors transposing the information from their financial reports into the financial section of the annual information statement as well as making sure that the financial reports included specific disclosures as required by the Australian Accounting Standards.
And we also took a bit of a look at disclosures of government revenue and financial reports which is relevant to some other guidance we’ve released recently that I’ll talk about a bit later.
CHRIS RICHES: Yeah. What were some of the learnings that came from this, John? What were some of the takeaways that charities with us today and charities in general, can grab and run with so they can avoid errors and they can look to ensure that their financial reporting is correct and on the mark?
JOHN AITKIN: Well, the most recent review of the 2019 charity financial reports we looked at, we did see a few issues coming up. For example, some charities didn’t include all of the required financial statements in their financial report. In particular, sometimes the statement of cashflows and the statement of changes in equity were missing. We also saw a small minority of charities that had failed to submit an auditors or reviewer’s report. Some charities didn’t include an appropriate responsible person’s declaration with their financial report. As far as disclosures go, we did see some charities, not including all of the disclosures we expected to see that are required by the accounting standards. One example would be disclosures about related party transactions.
CHRIS RICHES: Can I just jump in here for a second, John. We mentioned the related party here. Are you able to just give perhaps a very quick definition? It’s one that I know that a number of charities look at the words ‘related party transaction’ and go, “Hold on, what’s that?” What is a related party, what is a related party transaction?
JOHN AITKIN: Okay, Chris, well, the general idea of a related party transaction is first of all a concept of a related party. A related party is for example, another organisation that has some connection to the charity. A related party, first and foremost, is someone connected to the charity who has control or joint control of the charity. Or it might be someone who has significant influence or control over the charity. And a related party transaction would be something like a transfer of resources or services between a charity and a related party. For example, a company that has a director, who’s also a board member of the charity.
CHRIS RICHES: Okay. And when we talk about related parties, related party transaction, is it fair to say that they may be – this sort of wanders into the area of concepts like conflicts of interest and that sort of stuff. Is that fair to say?
JOHN AITKIN: Yeah, that’s exactly it. It’s not necessarily inappropriate for there to be a related party transaction. But it needs to be clear that the conflicts of interest are being managed. For example, the board member who’s involved with another – who’s involved, may need to step aside from decision-making in relation to those transactions.
CHRIS RICHES: Yeah, just the old – and I know that we had a webinar a couple months back on conflicts of interest. The whole idea of transparency and accountability, declaring these things, ensuring that processes are fine and all of that sort of stuff. Sorry, I’ve side-tracked here, John. There was one more point that you were looking to make in regard to the lessons learned.
JOHN AITKIN: Yeah. I think I would just mention that there’s a fair bit of guidance on the ACNC website on the topic. If you’re not sure what a related party is, what a related party transaction is, check out our website. Okay, the only other issue that I was going to mention is that there are for some charities that are approved to report as a group. There’s a group of charities reporting on a single annual information statement. There are special conditions for those charities, and we did see that in some cases those group reporting conditions weren’t complied with.
CHRIS RICHES: Yeah. These points of concern, if you want to call them that, they’re what we’ve noticed in the review. They’re also, it goes without saying but we’d say it anyway, there are many areas where the charities financial reporting has really improved. And the numbers and the improvements have been market over the times where we’ve run the review over preceding years. And that’s really positive. But even so, the message is pretty clear that charities still definitely need to be careful and to ensure that they’re meeting all of the ACNCs requirements when they prepare their annual financial reports. Again, and we’ll refer to some links here on the site, we have all manner of tools and guidance to help charities. One of them is the ACNC’s annual financial report checklist. That takes charities in a step-by-step way through the requirements.
There’s where it can be downloaded. We highly recommend you download this checklist and have a look at it. It is continually updated to ensure that it’s up to date and accurate. We’ve also got a guide that covers disclosures in these reports that are recommended by the ACNC too, haven’t we, John?
JOHN AITKIN: Yeah, that’s right. The ACNC recently published a best practice guide for charities on financial report disclosures. The link’s up there on the screen. The aim of this new guidance is to encourage charities to disclose information about government revenue received by the charities. This is something that’s of great interest to donors, funders, supporters and the public. The guidance gives detailed instructions on how the ACNC recommends charities should disclose information about sources of a charity’s government revenue at the extent of a charity’s economic dependency on government revenue and the funding received from government but not yet recognised as revenue.
CHRIS RICHES: Okay. Definitely go and have a look at that new resource as well and draw the information from it that you need. What we’ll do – he’s just looking at his watch. Probably time just to draw a few things together and to wrap up with a couple of quick tips to remember which we’ve got here. The first one, way back at the start of the webinar we emphasized how important recordkeeping is. Our recordkeeping checklist can help charities out here. When you’re keeping records, ensure that you’re keeping the right records. You’re keeping them in the right way. That you’re adhering to the requirements and by doing that, you’re going to have those records on hand to help you with your financial reporting. So, sort of double benefits there, I suppose. A second point, the size of charity determines whether a charity has to prepare a financial report.
Again, while small charities aren’t compelled to do so for the most part, the ACNC does recommend that they do. And as we heard earlier on from you John, the number of small charities that are doing this, is increasing and that’s wonderful and it’s something we recommend. What are a couple of the other key takeaways here, John?
JOHN AITKIN: Okay, I would certainly recommend that charities review some of the resources we have available on the website. In particular, have a look at the ACNC’s annual financial report checklist because it’s a step-by-step checklist of the ACNC requirements and things that charities should be considering when preparing their financial report. Also, have a look at the ACNC’s standards and financial reporting webpage. As we mentioned there’s quite a lot of FAQs on there, Frequently Asked Questions about accounting standards, especially the new ones. And finally, the ACNC’s best practice disclosure guide. And finally, don’t forget our templates. As we’ve mentioned before, we’ve got the responsible person’s declaration template and we’ve actually got review and audit report templates. They’re full templates for the reviewer or the auditor to use when preparing the audit report or the reviewer’s report.
CHRIS RICHES: Yeah look, if you want to – I was going to say, if you need them, please download them and please make use of the resources on the site. We’ve just about reached the end of our formal presentation today. And we’re getting close to our hour; we’ll not linger too long here on this slide or questions. Again, just a reminder we’re recording this webinar. Recording the presentation slides. They’re going to be available on our website. We’re also going to send out an email to everyone who registered with some important links; some of the links you’ve seen here. Some of the links that have been sent through during the webinar as well. Some of the references as well the link to the recording. We did have one point that came up. It has come up throughout today as we’ve been speaking but also came up as a pointer, a question that was raised by a few people as they registered for this webinar.
And it’s one that is of probably some level of real general importance here and maybe John wishes to speak about it. I know I’d probably emphasize it too that the role of the committee of responsible persons I guess, in understanding finances, especially an understanding or at least having the jest of some of the new accounting standards and the accounting standards under which these reports need to be prepared. John, would it be fair and reasonable to say that the idea of the responsible persons here, they do have to have some good, decent awareness of the conditions under which and the standards that overarch the preparation of financial reports, don’t they?
JOHN AITKIN: That’s right, Chris, and I think that’s really illustrated by the fact that charities have to submit that responsible person’s declaration. There is an expectation that the responsible persons of the charity have reviewed the financial reports; the charity’s financial report and that they determine whether or not the financial report meets the ACNC’s requirements, and just importantly as I mentioned earlier that the charity is solvent. The charity’s responsible persons are expected to be involved in making that assessment.
CHRIS RICHES: Yeah, and obviously, there are ways and means for responsible people to do this. One of them I’m guessing, would be the simple discussion and approval of financial statements and those sorts of things at a meeting, be it just a normal meeting or even at an AGM. Would that be correct?
JOHN AITKIN: Well, it would depend - a lot of it would depend on the size of the charity. A larger charity may well actually have a separate audit committee that actually looks very closely at these issues. Or it may be the board as a whole that looks at it. But I think generally the audit would already be completed before the financial reports are presented to the annual general meeting. And often, there would be a requirement that charities rules that the auditor does attend or is allowed to attend the AGM as well either to answer questions or to discuss issues.
CHRIS RICHES: Okay. That was one that like I said, had come up a little bit in some of the questions before this webinar and has come up throughout as well. Important to emphasize the role and the importance that responsible persons, responsible people have in this process to ensure that things are done right. Sorry to use the phrase, but also to ensure that there is proper oversight and knowledge about what’s being put forward and presented in these reports. What we’ll do now, we’ll probably bring thing to a conclusion. Again, thank you for joining us today. Thank you for registering. Thank you for attending and asking questions. Here’s some of the ways you can stay in touch with us through our website, webinars, podcasts, a charitable purpose, all that sort of stuff. Thanks to John for joining us today. Thank you, John.
JOHN AITKIN: No problem at all Chris, thank you.
CHRIS RICHES: And thank you to Eric and to Matt and to Cat for all their work behind the scenes, answering questions and queries and all of that sort of stuff. Again, as it says here, if you want to look at previous webinars or register for future ones, visit our webinars page. And again, if there’s any questions or comments or feedback, there’s the email address for you. Thank you very much again, and we will let you go. It almost lunchtime here and it might be almost morning teatime elsewhere. Have a great day and enjoy yourselves. Thank you very much, bye.