Related party transactions
August 2023 | News | David Wells, Consultant
One of the changes introduced by the Australian Charities and Not-for-profit Commission Regulations 2022 is the application of Australian Accounting Standard AASB 124 to most registered charities.
The effect of AASB 124 is to require medium and large charities to disclose material related party transactions in their financial reports for the 2022/23 reporting year and subsequently. With the exception of Basic Religious Charities, all registered charities are also required to report material related party transactions in their Annual Information Statement (AIS) from the start of their 2023 reporting period.
What is a Related Party Transaction?
A related party transaction is a transfer of resources, services or obligations between a charity and a related party. Examples of such transfers include:
• Sales or purchases of goods, other property or services
The transfer does not have to involve a financial payment.
Who is a Related Party?
From the perspective of a registered charity, a related party includes not only a director, board member or senior executive of the charity but also a close family member of such a person.
Importantly, the definition of “related party” in AASB 124, applies to medium and large charities. This means that, for a medium or large charity, any organisation over which a director, board member or senior executive (or a close family member of such a person) has either control or significant influence, will be classed as a related party.
ABC Ltd is a medium sized charity operating from leased premises. Certain work that it wishes to do requires it to obtain planning permit and its landlord will consent to the application for the permit. Janice is a director and shareholder of Purposeful Planning Pty Ltd (PP), a planning consultancy. She is also on the board of ABC and makes an offer for PP to run the planning application at a fee of $4k, 50% of the typical cost. Janice declares a conflict of interest and absents herself from discussion on the topic. The board obtains two competitive quotes for the planning work. Both are for prices 100% more than the proposed fee of PP. The ABC board resolves, in the absence of Janice, to engage PP. ABC is obliged to disclose the transaction with PP in its financial report and report it in its AIS.
The ACNC has advised that only related party transactions which are “material” are required to be disclosed.
Related Party Transactions often have commercial, reputational or relational benefits. They are an example of Conflicts of Interest and should be carefully managed. Providing there is careful management, there may be very good reasons for a charity entering into such a transaction.
On top of the conflict management consideration, the law now requires more extensive disclosure on the part of charities. If the related party transaction is material, the obligation is to report it. Proper record keeping is therefore essential.
Please contact David Wells if you require any assistance with managing or reporting on related party transactions