While COVID has brought uncertainty to the community and many business sectors, the charity sector has shown great resilience in weathering the storm, although we won’t know the full picture until next year’s Charities Report .
It is in times of upheaval that organisations think about their foundations and their capability.
It would have been relieving to receive the news in June 2021 when it was announced that financial reporting thresholds for small and medium charities registered with the Australian Charities and Not-for-profits Commission (ACNC) would be lifted.
Reportedly, this change will allow over 5,000 charities to redirect their resources to help vulnerable Australians .
However, with this change came some further financial reporting requirements, which include:
- From 1 July 2022, large charities with two or more key management personnel will be required to report remuneration paid to responsible persons (directors) and senior executives on an aggregated basis in their 2022 Annual Information Statement.
- From 1 July 2023 all charities will be required to report related party transactions in their annual reporting to the ACNC. This will increase transparency of transactions with related people or organisations that pose a higher risk of conflicts of interest.
Although ACNC says it will work with the charity sector to allow the sector to easily understand what this means, every new reporting requirement can become a source of worry.
Being able to fulfil financial reporting requirements is not only important to an organisation’s survival, but its growth and success.
Studies have shown that COVID-19 has not altered public expectations or views on the sector. The wider community continues to judge charities by their impact on the community, the specific services that are delivered, and the professionalism, or the capability of that professionalism to deliver .
Charities are often very focused on the people they are striving to protect and help, so it can be both frustrating and deflating when they experience reporting failures.
So, what are the common pitfalls for charities when it comes to financial reporting and how do we avoid them?
A recent review by the ACNC of charities’ financial records gives us some important takeaways.
Select the correct Annual Financial Report (AFR)
In 2019, one third of sampled charities did not select the correct type of AFR to submit.
Include a complete set of financial records
For charities not using a transitional reporting arrangement, 30% are not including a complete set of financial records.
Disclose revenue from government funding
One fifth of sampled charities that reported revenue from government in their AIS did not provide any disclosures within the AFR about this revenue.
The ACNC have recently finalised ‘best practice’ guidance which recommends charities that receive 10% or more of their total revenue from government (including grants) provide additional financial disclosures.
Charity groups need to report group members that are endorsed as DGR or that operate a DGR Fund
ACNC’s also reviewed the AFRs of charities that report as groups to check their compliance with group reporting conditions.
Of the groups they reviewed, 52% did not provide a disclosure within the AFR to identify the group members that are endorsed as a Deductible Gift Recipient (DGR) or that operate a DGR fund.
The way forward
Setting up systems for financial reporting success will assist charities to avoid ever having to face review from regulators.
The Birchgrove Legal NFP Team is committed to supporting charities succeed with their regulatory and financial reporting obligations so they can focus on supporting the Australian community. Our experienced team assist charities regularly in this space, and have helped dozens of organisations set up for success by being on top of their reporting and financial obligations.
 ACNC, Australian Charities Report (7th edition), (online, May 2021) <https://www.acnc.gov.au/tools/reports/australian-charities-report-7edition>.
 Michael Sukkar, ‘Cutting Red Tape for charities’ (Media Release, Treasury) <https://ministers.treasury.gov.au/ministers/michael-sukkar-2019/media-releases/cutting-red-tape-charities>.
 Luke Michael, ‘Charity Sector’s Reputation Stays Strong Amid Covid Crisis’, ProBono Australia (online, 21 December 2020) <https://probonoaustralia.com.au/news/2020/12/charity-sectors-reputation-remains-strong-amid-covid-crisis/>.
 ACNC, Reviewing Charities’ Financial Information and Annual Financial Reports (online, March 2021) <https://www.acnc.gov.au/tools/reports/reviewing-charities-financial-information-and-annual-financial-reports>