A charity registered with the Australian Charities and Not-for-Profits Commission (ACNC) is required to prepare either general purpose financial statements (GPFS) or special purpose financial statements (SPFS). The reforms that were effective from 1 July 2021 that saw the end of SPFS for many for-profit private sector entities did not extend to not-for-profit (NFP) entities. For this reason, where a charity is not considered to be a reporting entity under Statement of Accounting Concepts 1: Definition of a Reporting Entity, it may still prepare SPFS.

In response to the ACNC Legislative  Review that was completed in 2018, and to give effect to certain recommendations coming out of that review, the disclosure requirements of charities preparing SPFS were enhanced. These new disclosure requirements relate specifically to Key Management Personnel (KMP) remuneration and related party transactions.

KMP remuneration

For financial years ending on or after 30 June 2022, large charities (i.e., charities with annual revenue greater than $3 million) that prepare SPFS must disclose KMP remuneration, either in aggregate or on a disaggregated basis. According to guidance published by the ACNC, KMP are the senior decision makers in a charity and do not include team leaders or operational managers. Examples of KMP are Responsible Persons (e.g., board or committee members, and trustees) and senior staff (e.g., the CEO, CFO and COO). Judgement may be needed to identify a charity’s KMP.

Large charities that have only one remunerated KMP at any given moment during the reporting period are exempt from making the required disclosures. 

KMP services are often provided by a separate management entity, such as an accounting firm, to a charity.

In this case, the amounts paid to the separate management entity for KMP services must be disclosed separately. Where the management entity provides KMP services as well as other services, judgement will be required to reasonably apportion the cost between KMP and non-KMP services.

Related party transactions

For reporting periods ending on or after 30 June 2023, charities that prepare SPFS have the option to apply either:

1. The six ‘mandatory standards’ for special purpose reporting, being:

• AASB 101 Presentation of Financial Statements
• AASB 107 Statement of Cash Flows
• AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
• AASB 124 Related Party Disclosures (now also a ‘mandatory standard’)
• AASB 1048 Interpretation of Standards
• AASB 1054 Australian Additional Disclosures.

or

2. The recognition and measurement requirements of the above standards but the equivalent disclosures for these standards contained in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2.

This means that a medium or large charity preparing SPFS that has had related party transactions during the reporting period will have to disclose the nature of the related party relationship, as well as information about transactions with those related parties and any associated outstanding balances at reporting date.

A related party is defined differently according to charity size. 

For small charities (i.e., charities with annual revenue less than $500,000), the ACNC defines a related party as “a person or organisation that is connected to the charity and has significant influence over the charity.”

This includes:

• Responsible Persons and their close family members
• Senior management and their close family members
• Other people or organisations that can influence the charity’s decision-making. 

As the ACNC points out in the guidance it has published, a person is not a related party simply by virtue of being an employee or volunteer. The person or organisation must have significant influence over the charity’s strategic and financial decisions to be a related party.

While small charities are not required to prepare financial statements, they will need to disclose reportable related party transactions in their 2023 and later Annual Information Statements.

For medium and large charities preparing SPFS, the definition of related party in AASB 124 must be applied when disclosing related party transactions.

In terms of comparatives for the new related party disclosures, the ACNC Commissioner has relieved charities from the need to provide comparative information in the first year that these disclosures are made, whether applying AASB 124 or AASB 1060. This means that charities making the new related party disclosures in their 30 June 2023 SPFS will not have to provide the related comparative numbers. Comparative information will, however, be required in the 30 June 2024 SPFS.

Please contact your local PKF team for guidance.