Charity reporting burden set to ease

Financial reporting thresholds have been raised for charities registered with the Australian Charities and Not-for-profits Commission (ACNC), which should see many smaller charities exempted from the obligation to prepare and lodge financial reports with the ACNC.

The changes were introduced by The Australian Charities and Not-for-profits Commission Amendments (2021 Measures No. 3) Regulations 2021 (the regulations) and will affect financial reporting periods ending 30 June 2022 onwards.

In addition to the increase in thresholds for financial reporting, new reporting requirements have been introduced for some charities that prepare and lodge special purpose financial statements (SPFS). They are the disclosure of remuneration paid to key management personnel (KMP) and related-party transactions.

KMP remuneration

For accounting periods ending 30 June 2022 onwards, large charities with two or more KMP must disclose KMP remuneration in accordance with the requirements in either AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-profit Tier 2 Entities or AASB 124 Related Party Disclosures.

If a large charity has only one KMP who is an individual, disclosure of remuneration paid to that individual is not required. However, if amounts are paid to obtain KMP services from another entity (a management entity), then disclosure of remuneration paid to the management entity is required, as that entity is not considered an “individual” for the purposes of the regulations.

Related-party transactions

From the year ending 30 June 2023 onwards, both medium-sized and large charities will also be required to disclose transactions with related parties, in accordance with either AASB 1060 or AASB 124.

Mel Yates FCPA, director for reporting, red tape reduction and ACNC corporate services, notes that the regulations provide no transitional relief from the disclosure of comparatives for KMP remuneration and related-party transactions.

However, to avoid any unnecessary burden on charities subject to the new disclosure requirements, the ACNC commissioner has exercised discretion within his powers to not require comparative disclosures for these items in the first year of disclosure.

“It is unreasonable to require charities to report comparative information from the 2021-2022 reporting period without having had in place the systems, processes and controls to record and report the transactions during that time” says Yates.

This concession will mean that large charities required to disclose remuneration paid to KMP in the first year to 30 June 2022 will not be required to disclose comparative information for the year to 30 June 2021. Similarly, medium and large charities will only need to disclose related-party transactions in the first applicable year, that is, to 30 June 2023, and will not have to disclose the related-party transactions for the comparative year to 30 June 2022.

Although small charities (annual revenue below A$500,000) are not required to prepare and lodge financial reports, the ACNC will require some simplified disclosure of related-party transactions in the Annual Information Statement (AIS) from periods ending 30 June 2023.

Details of what disclosures should be made and guidance to assist with compliance have been developed by the ACNC for key management personnel remuneration disclosures and considerations on standards and financial reporting.

Yates observes that “the requirement will be set out in plain English, sufficiently simplified and tailored for small charities with accompanying guidance on how to comply as well”.

Definition of revenue

Since charity size is determined by annual revenue, charities will have to refer to Australian Accounting Standards in determining what constitutes revenue.

“Recently, there has been some confusion around how charities should be classifying revenue,” says Yates. “The regulations are clear, all relevant accounting standards should be applied including AASB 15 and AASB 1058 in determining a charity’s annual revenue”.

Revenue is defined in AASB 15 Revenue from Contracts with Customers as “Income arising in the course of an entity’s ordinary activities”. Revenue that meets this definition can arise not just from income transactions relevant to AASB 15, but other accounting standards such as AASB 1058 Income of Not-for-profit Entities and AASB 9 Financial Instruments as well. For example, grant income that is recognised under AASB 1058 or interest income recognised under AASB 9 may “arise in the course of an entity’s ordinary activities” and therefore need to be considered as revenue for both accounting and size determination purposes.

“Accounting professionals supporting charities should assist them in applying all relevant accounting standards to identify revenue for size determination purposes” says Yates. The ACNC has developed guidance to assist charities and their advisors.

Program information

The regulations also bring in a new reporting feature that allows charities to voluntarily disclose information to the ACNC for the purpose of being included on the ACNC Charity Register.

Currently charities provide program information annually in the AIS, but this new feature will allow charities to more frequently update their web page on the ACNC Charity Register with any new information relating to program activities they undertake during the year.

“A charity organising efforts to assist with bushfire recovery or responding to flood damage can provide information on their activities so that donors seeking to assist with such natural disasters can make an informed decision based on what’s disclosed on the ACNC Register” says Yates.

Red tape reduction agenda

The new thresholds and reporting requirements were established following recommendations made by an independent panel tasked by the Australian government with reviewing the ACNC legislation. Although the independent review panel recommended higher thresholds (annual revenue above A$1 million for medium charities and above A$5 million for large charities), the final size thresholds were arrived at following negotiations with states and territories through the Council on Federal Financial Relations.

The buy-in from states and territories has meant that charities currently exempt from other state/territory or Commonwealth financial reporting requirements under streamlined reporting arrangements can continue to enjoy those exemptions provided they continue to comply with the ACNC financial reporting requirements.

Notably however, there have been no corresponding changes in financial reporting thresholds or requirements for not-for-profits that are not ACNC registered charities, including companies limited by guarantee and incorporated associations.

Yates notes that the states, territories and the Commonwealth have worked together to arrive at these new thresholds.

“The independent review recommendations were higher, but this was the middle ground reached based on the CFFR negotiations between all jurisdictions and will benefit charities while maintaining transparency.”