New regulations on Related Party Transactions that have been designed to prevent private benefit and conflict of interest are now in place. Understand the specific actions your charity needs to take and use this opportunity to review your organisation’s policies.
Reporting on Related Party Transactions (RPTs) will now apply to all Australian charities in their 2023 and later Annual Information Statements. A related party is a person or organisation that is connected to the charity and has significant influence over the charity.
Charities preparing Special Purpose Financial Statements (SPFS) have a new mandatory accounting standard.
It is wise to ensure that your charity has updated its reporting processes for 2023:
- An end of financial year AIS must report RPTs from 1 July 2022
- An end of calendar year AIS must report RPTs from 1 January 2023.
In preparing the report, it is a good idea to review some of the wider implications of Related Party Transactions and how your organisation should manage RPTs going forward.
Australian RPT regulations for different organisations
Disclosure obligations vary for different organisations. Related party disclosures for charities of different sizes are detailed in the Australian Accounting Standards (AASB 124 Related Party Disclosures).
NFPs and charities:
Disclosure is now required regardless of whether you prepare general purpose or special financial statements. The charity’s auditors have to state within their report if material-related party transactions are not disclosed. Basic Religious Charities are an exception, but those Basic Religious Charities that choose the option of submitting a 2023 Annual Information Statement would disclose RPTs.
NFPs established as a company:
Directors of NFPs established as a company should exercise particular caution as the rules are complex when it comes to transactions of with a person of influence.
Public companies:
For public companies, Related Party Transactions require shareholder/member approval but exceptions can include arm’s length transactions; small amounts eg under $5000; and reasonable remuneration of officers and expenses of related parties.
Underlying principles
Initially, complying with regulations for Related Party Transactions may seem difficult. For the director of a long-established NFP that has served the community well by managing its connections in good faith so very modest resources stretch a long way, the change of approach could appear daunting – or, if you come from a family business background or operate in a regional or isolated area where nearly everyone and every business is connected. However, the underlying principle of the regulations is to ensure actions are in the best interest of the organisation.
RPTs represent a risk, so it is good business and good governance to minimise this risk through careful management.
Charities especially must avoid RPTs that use publicly donated funds to provide a benefit to a private individual, as this would erode their philanthropic mission.
Key steps in reducing RPT risks
In daily life and business, related party interactions may be unavoidable, but any transactions can be managed through the following key steps.
1: Disclosure
Disclose related parties in the accounts. Note that some information may be personal or sensitive so will need to be managed properly when disclosed.
To aid disclosure, good record-keeping is important. Internal records should include a register of all related parties. There should also be a system to identify and record all transactions with related parties.
CPA Australia provides a factsheet on Related Party Disclosures that includes a disclosure checklist.
2. Safeguard the organisation’s interests
An organisation can introduce numerous checks and balances to prevent future RPT issues from escalating or even potential fraudulent activity. A few examples include:
- Obtain additional quotes before major purchases to establish that a payment to a related party would not be excessive.
- Undertake a tender process for major provision of services or contracts.
- Establish rules for awarding grants or gifts to avoid transactions involving undisclosed related parties or conflicts of interest.
- Clarify when related parties cannot take part in discussions (such as at a board meeting) to avoid a conflict of interest.
- Review recruitment and hiring procedures. For example, ensure roles are adequately advertised and an independent panel assesses candidates. Any candidate should have experience and qualifications suited to the role, not just connections.
Consult the ACNC website for more guidance on managing conflicts of interest.
3. Communicate expectations
The ACNC points out on its website that “Related Party Transactions are common and not necessarily a problem”. Clear communications can resolve many potential issues.
Ensure your directors, staff, contractors, volunteers and other stakeholders understand the organisation’s expectations regarding Related Party Transactions by:
- Developing a policy and procedures document covering Related Party Transactions for your organisation.
- Educating staff and encouraging them to flag issues relating to potential RPTs.
Public trust and confidence are vital for NFPs. Taking a transparent and proactive approach to Related Party Transactions can minimise the financial and reputational risks to your organisation.
The team at Next Dimension Accounting can work with you to put in place systems and processes to ensure compliance and also assist with the new reporting requirements. Contact us today to find out more.
