Originally Published on 24 Aug 2021, Latest Update 21 Mar 2022
While COVID has brought uncertainty to the community and business sectors, the charity sector has shown great resilience in overcoming these difficulties.
However, we will only get the full picture in next year’s Charities Report [1] as the real picture emerges.
In June 2021, the Australian Charities and Not-for-Profits Commission announced that financial reporting thresholds for small and medium charities would be lifted.
This means that reporting requirements on charities will be relaxed.
In turn, this means that over 5,000 Australian charities will be able to direct more resources to help vulnerable people [2] rather than in detailed reporting.
However, with this change came some further financial reporting requirements, which include:
- From 1 July 2022, large charities with 2 or more key management personnel will be required to report payments to “responsible persons” (directors) and senior executives in their 2022 Annual Information Statements.
- From 1 July 2023 all charities will be required to report related party transactions in their annual reporting to the ACNC. This will increase clarity of transactions with related people or organisations that pose a higher risk of conflicts of interest.
Every new reporting requirement can become worrying. It adds complexity and requires time and resources to execute.
However, it is important for the survival, growth and success of non-profit-organisations.
This is because the community judges charities based on their impact on the community, on the specific services they deliver, and the overall professionalism with which they do so [3].
Some common pitfalls for Australian charities when it comes to financial reporting
A review by the ACNC of charities’ financial records gives us some important takeaways [4] when it comes to the problems and pitfalls they face.
The following are some of the key ones in this respect.
Select the correct Annual Financial Report (AFR). In 2019, one third of 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% do not include a complete set of financial records.
Disclose revenue from government funding. 20% of sampled charities that reported revenue from the government in their AIS did not provide any disclosures within the AFR about this revenue. The ACNC recommends that 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 also reviewed the AFRs of charities that reported as groups. They found that 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.
Financial reporting: The way forward for non-profit-organisations
Setting up systems for financial reporting success will assist charities to avoid ever having to face review from regulators.
The new ACNC requirements for financial reporting are part of a broader set of issues that charity boards should be mindful of. Australian law imposes several obligations on the “responsible entities” for registered charities. Boards can take several measures to improve their processes and execute their obligations, as we’ve previously written about here.
Further, these processes should be part of a mature business plan that should be documented at the outset of a charity’s formation and regularly updated. In our view, a mature system of policies, procedures and record keeping as well as regular reporting is one of the five things you simply have to do to stay in business as a charity.
For the ACNC’s full financial reporting checklist, visit here.
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.
[1] ACNC, Australian Charities Report (7th edition), (online, May 2021) <https://www.acnc.gov.au/tools/reports/australian-charities-report-7th-edition>.
[2] 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>.
[3] 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/>.
[4] 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>
