Reviewing charities’ financial information and annual financial reports - 2019

Charities have different reporting dates depending on their financial year end date. The report examined AISs and AFRs submitted for the 2019 reporting period. The 2019 reporting period refers to 2019 AIS submissions between July 2019 and November 2020.

We selected 274 AISs and AFRs for review. We made the following observations:

Improvements compared to the previous year

• In the 2019 AIS, only 6% of the sampled charities incorrectly identified their individual charity AFR as a consolidated AFR. This compares to 17% that did so in the previous year.
• Only 4% of the sampled charities that submitted a consolidated AFR incorrectly provided financial information in their AIS for the consolidated group as a whole rather than financial information for the individual charity. This is a significant improvement on the 42% of the sampled charities that made this error in the previous year.

Increase in errors compared to the previous year

• In the 2019 AIS, 66% of the sampled charities selected the correct type of AFR to submit, down from the 68% that did so in the previous year.
• For the sampled charities not using a transitional reporting arrangement, 70% of AFRs we reviewed included a complete set of financial statements. This was down from 75% in the previous year.
  • Of the remaining 30%, the most common financial statements that were missing were the statement of other comprehensive income (29%), the statement of changes in equity (16%), and the statement of cash flows (12%).
• In a small decrease, 92% of the sampled charities attached an auditor’s or reviewer’s report. This was 94% in the previous year. Of these reports, 89% were signed, and 80% of the auditor’s reports complied with the new auditing standards.
  • For the sampled charities not using a transitional reporting arrangement, 70% of auditors’ or reviewers’ reports made the required reference to the ACNC Act.
• Compared to 95% in the previous year, 91% of the sampled charities attached a Responsible Persons' declaration with their AFR. And 70% of the sampled charities mentioned compliance with the ACNC Act, down from 71% in the previous year.
  • We found that 5% of the Responsible Persons’ declarations did not contain the solvency declaration stating the charity was able to pay all its debts when due and payable.

Similar observations compared to the previous year

• In the 2019 AIS, 4% of the sampled charities incorrectly transposed the information from their AFR to their AIS for the Total Revenue category. For Total assets, 5% of the sampled charities made transposition errors.
  • 3% of the sampled charities made transposition errors in the categories: revenue from government (including grants), revenue from donations and bequests, and employee expenses.
• Similar to the previous year, the most common disclosure issues were:
  • No disclosure on whether the charity was a not-for-profit entity for financial reporting purposes.
  • No mention of compliance with the ACNC Act in stating the statutory basis under which the financial report was prepared.
  • For the sampled charities that prepared general purpose financial statements (GPFS), no disclosure of related party transactions, including compensation for key management personnel.

New observations

• Of the sampled charities that reported revenue from government in their AIS, 20% did not provide any disclosures within the AFR about this revenue. We have recently finalised guidance which recommends charities that receive 10% or more of their total revenue from government (including grants) provide additional financial disclosures based on our best practice recommendations for disclosing government revenue. We encourage charities to review this guidance and adopt these disclosures.
• We also reviewed the AFRs of charities that report as groups to check their compliance with group reporting conditions. Of the groups we 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.

We will continue to review charities' AFRs to ensure they comply with ACNC reporting requirements. We intend to focus on ensuring the financial information charities provide in the AIS matches the financial information in the AFR.

What we checked for

We reviewed 274 2019 AIS and AFR submissions to ensure:

• each AFR contained a complete set of financial statements:
  • Statement of Profit or Loss and other comprehensive income
  • Statement of Financial Position
  • Statement of cash flows
  • Statement of changes in equity
  • Notes to the financial statements
  • A signed audit or review report
  • A signed Responsible Persons’ declaration.
• each charity had not made a material financial error when completing the financial information section of the 2019 AIS.

Specifically, we focused on revenue from government, revenue from goods or services, and donations and bequests to ensure:

• each charity reported the correct type of financial report in its AIS
• each charity complied with the minimum accounting standards as set out in the Australian Charities and Not-for-profits Regulations 2013 (Cth)
• each charity was eligible for transitional reporting arrangements in reporting to state or territory regulators
• each charity complied with related party disclosures required for GPFS
• each AIS did not include any financial information for non-registered entities (the ACNC can accept consolidated financial statements prepared by parent charities in accordance with AASB 10; however, the financial information in the AIS must relate only to the parent entity. For approved groups, the financial information in the Group AIS must relate only to the registered charities that are members of the reporting group).

We also reviewed charities’ adoption of the following new Australian Accounting Standards:

• AASB 1058 Income of Not-for-profit Entities (reporting period starting from 1 January 2019)
• AASB 15 Revenue from Contract with Customers (reporting period starting from 1 January 2019)
• AASB 16 Leases (reporting period starting from 1 January 2019)
• AASB 9 Financial Instruments (effective from 1 January 2018)

We focused our reviews of the 2019 AIS and AFRs on charities that made errors in the previous year. Doing this ensured the errors from the previous year had been rectified.

We also selected charities that are incorporated associations in locations where the ACNC has streamlined reporting arrangements in place: the Australian Capital Territory (ACT), South Australia (SA), Tasmania (Tas), New South Wales (NSW), Northern Territory (NT) and Victoria (Vic).

These streamlined reporting arrangements allow incorporated associations that are registered with the ACNC to report solely to the ACNC. Previously they had to report to both the ACNC and their state regulator.

Charities in these states and territories were given a two-year transitional reporting relief period to allow them to switch over to ACNC reporting requirements.

The two-year transitional reporting period has now ended for charities in the ACT, SA and TAS. Charities in NSW and VIC that used the transitional reporting arrangements for the 2019 AIS will have to meet all ACNC reporting requirements from the 2020 AIS onwards.

We randomly selected AFRs from charities incorporated in these states and territories to ensure that they met the requirements of the two-year transitional reporting period or had fully transitioned to the ACNC’s requirements.

Finally, we randomly selected some charities to ensure their AIS and AFR complied with ACNC requirements.

We reviewed 274 AFRs submitted by medium and large charities, with 21 of those from charities that report to the ACNC as part of a reporting group.

The average total revenue and assets of the AFRs we reviewed:

A breakdown of the types of financial statements submitted by medium and large charities that we reviewed:

The chart below shows the locations of the charities whose financial reports were selected for review:

The chart below details the different legal structures of the charities whose reports we selected for review:

The chart below details the main activities of the charities whose reports we selected for review:

Selecting the type of financial statements

Overall, 66% of the sampled charities selected the correct type of financial statements in their AIS.

This is a slight decrease on the 68% of the sampled charities that did the same in the previous year.

Transposing financial information from AFRs to AISs

Each year the AIS requires charities to complete a summary income statement and balance sheet to cover specific financial data elements. We use the data to examine trends in the sector and its overall financial health.

We compared the financial information in the sampled charities’ AISs with the financial information in their AFRs to check the accuracy of data transposition. These comparisons covered:

• revenue from government including grants
• revenue from donations/bequests
• total revenue
• employee expenses
• total expenses
• net assets/liabilities

The results of the checks for all of the sampled charities:

^{* These charities did not submit an AFR or submitted an incomplete AFR, which meant we could not determine if the amounts in the AISs matched those of the AFRs.}

In reviewing the AFRs of the sampled charities that incorrectly transposed figures from their income statement and balance sheet to the AIS, we found, in some cases, that the error was due to the AFR not separately disclosing the same items required by the AIS (because it was not required by Australian Accounting Standards).

This meant some of the sampled charities had to decide how to aggregate or disaggregate the financial information in their AFR to allocate it to the AIS. This process increased the chances of making an error in transposing the figures.

Many of the sampled charities that receive funds from government made further disclosures of government revenue in their AFR. Only 20% of the sampled charities that reported revenue from government in the AIS did not provide information in their AFR that this revenue was from government.

Identifying consolidated financial statements

Charities that control one or more other entities (as a parent charity with at least one subsidiary) may be required to present consolidated financial statements in accordance with AASB 10 Consolidated Financial Statements.

For parent charities reporting to the ACNC as a single charity, we will accept a consolidated AFR. But the financial information the charity provides in its Annual Information Statement must relate only to that single charity, not the financial information of its consolidated group.

Charities approved to report to the ACNC as a group do so by providing a consolidated group AFR.

Although we accept consolidated or combined financial statements that may include information relating to non-registered entities, the financial information provided in the AIS must only relate to registered charities.

Of all the AFRs we reviewed, 13% were consolidated AFRs and 87% were single-charity AFRs.

Our reviews found that 94% of the sampled charities correctly identified their consolidated AFRs in their AIS. A small minority of 6% incorrectly identified their single-charity AFRs as consolidated AFRs.

We identified errors in the AISs for 4% of the sampled charities that submitted a consolidated AFR. In these cases, the charities incorrectly provided income statement and balance sheet figures for the consolidated group as a whole rather than the financial information for the single charity.

Providing complete sets of financial statements

A charity’s AFR must comply with accounting standard AASB 101 Presentation of Financial Statements, unless the charity is eligible to participate in an ACNC transitional or streamlined reporting arrangement.

This standard specifies that a complete set of financial statements comprises:

• a statement of profit or loss statement and other comprehensive income (this can be presented as a single statement or in separate statements),
• a statement of financial position,
• a statement of changes in equity,
• a statement of cash flows, and
• the notes to the financial statements

Of the sampled charities required to comply with all ACNC reporting requirements, 70% submitted a complete set of financial statements. The percentages of each financial statement included in the AFR:

Streamlined reporting arrangements

For the 2019 reporting period, charities that were incorporated associations in NSW and VIC were in the second year of their two-year transitional reporting relief period.

Charities incorporated in the NT entered their first year of the transitional reporting relief period.

For incorporated associations and charitable fundraising charities in ACT, SA, TAS, the two-year transitional reporting relief period no longer applies. The percentages of each financial statement included in the AFR by states and territories:

Presenting expenses

The accounting standards require a charity to present expenses recognised in its profit or loss statement using a classification based on:

• their nature, or
• their function within the charity.

A charity’s decision to present expenses by their nature or function depends on historical and industry factors, as well as the nature of the charity itself. Presenting expenses by both nature and function is not permitted.

Of the sampled charities that submitted an AFR, 77% reported expenses using the nature of expense method, while 7% used the function of expense method. The remaining 16% of the sampled charities incorrectly reported using a mixture of nature and function of expenses.

The type of AFR medium and large charities prepare depends on whether the charity is a reporting entity.
If a charity is a reporting entity, it must submit general purpose financial statements (GPFS) that comply with all applicable Australian Accounting Standards. The accounting standards issued by the AASB include standards for recognition, measurement and disclosure requirements.

When preparing GPFS, charities can choose to prepare either full GFPS, or GPFS-Reduced Disclosure Requirements (RDR).

If a charity is not a reporting entity, it may prepare special purpose financial statements (SPFS) that must meet the minimum reporting requirements set out in the ACNC Regulations.

Below are our observations of whether the financial statements included in our reviews met selected GPFS and SPFS disclosure requirements:

A significant percentage of the sampled charities that prepared GPFS (13%) did not clearly provide disclosures of the appropriate accounting estimates and judgements that their management made when applying the charity’s accounting policies. The notes for the basis of preparation often did not disclose that the statutory basis for the financial report was the ACNC Act.

One-third (33%) of GPFS did not include disclosures of key management personnel remuneration or related party transactions as required by AASB 124.

Of the SPFS we reviewed, 62% lacked the disclosure about the charity being a for-profit or not-for-profit entity for the purposes of preparing financial statements. Additionally, 41% of SPFS did not disclose the fees paid to each auditor for the audit or review of the financial statements.

A large percentage of the sampled charities that prepared SPFS (43%) did not clearly provide disclosures of the appropriate accounting estimates and judgements that their management made when applying the charity’s accounting policies. While it is not mandatory for SPFS to provide related party disclosures, we observed that 20% provided a disclosure note on related party transactions.

Adopting new Australian Accounting Standards

A number of new Australian Accounting Standards applied to annual reporting periods beginning on or after 1 January 2019, including AASB 1058 Income of Not-for-profit Entities and AASB 15 Revenue from Contracts with Customers.

These two standards replaced the previous revenue standard AASB 118 Revenue.

A new leasing standard, AASB 16 Leases, also came into effect for annual reporting periods beginning on or after 1 January 2019, while AASB 9 Financial Instruments was effective for annual reporting periods from 1 January 2018.

Below are the numbers of sampled charities that provided disclosures in the AFR regarding the adoption of the new accounting standards:

Auditor/reviewer report requirements

New auditing standards applied to financial reporting periods ending on or after 15 December 2016. We developed new audit and review report templates which applied these revised standards.

Of the AFRs we examined, 92% had an auditor or reviewer report attached. Of these, 91% had an auditor's report and 9% had a reviewer’s report attached. The audit reports we reviewed complied with the new auditing standards in 80% of cases and 89% of them were signed.

Excluding the sampled charities using transitional reporting arrangements, 70% of auditor/reviewer reports we reviewed provided an opinion about whether the AFR complied with the ACNC Act.

In 11% of cases, the sampled charities’ auditor/reviewer reports contained a modified opinion/conclusion. The most common modification to the opinion related to cash donations received.

This is common in the not-for-profit sector due to difficulties for auditors and reviewers in gathering sufficient evidence about the completeness of the income received from cash donations; that is, an impracticability to establish control over the collection of cash donations.
Only 3% of the sampled charities’ auditor/reviewer reports contained an emphasis of matter other than the basis of accounting being SPFS. A common emphasis of matter we observed concerned material uncertainties regarding the charity's concerns about the effects of the COVID-19 pandemic.

Responsible Persons’ declaration

Of the AFRs we reviewed, 91% included a Responsible Persons’ declaration.

Of the Responsible Persons’ declarations provided, 93% were signed and 95% included a statement that the charity was able to pay all its debts when they became due and payable.
For the sampled charities that did not use transitional reporting arrangements, 70% referred to the ACNC Act.

Compliance with group reporting conditions

We separately reviewed all the AFRs of medium and large group reporters to ensure their compliance with the reporting conditions.

Overview of medium and large group reporters:

For the 2019 AIS, group reporters were required to comply with five reporting conditions. Below is the number of reporting groups that did not comply with the reporting conditions:

The ACNC will continue to review a sample of charities’ AFRs to ensure compliance with ACNC reporting requirements. We will also focus our efforts to ensure that the financial information charities provide in their AIS matches the information in their AFRs.

In particular we will:

• look at the completeness of AFRs – whether they include a complete set of financial statements, signed audit or review reports and signed Responsible Persons’ declarations
• examine whether charities made errors transposing information from the AFRs to AISs, with a specific focus on:
  • revenue from government, including grants
  • revenue from providing goods or services
  • donations and bequests
  • employee expenses
  • total expenses
  • net assets
• look at whether charities prepare and select the correct type of AFR
• check that when a charity submits a consolidated AFR, the information in its AIS only relates to the parent charity (unless they are an approved reporting group).
• ensure that the quality of disclosures is as required by the Australian Accounting Standards
• monitor the disclosures of government revenue according to the recommendations in our best practice guide to disclosing government revenue.

Although we selected some charity AFRs to review at random, many were not. We selected some charities that had made material errors in their 2018 AFRs for further review in the 2019 reporting period.

We, therefore, note the sample of AFRs reviewed as a non-probability sample.

It should be noted that non-probability sampling methods present challenges when attempting to draw broader conclusions about each group. Consequently, we cannot say whether the results of our review accurately reflect charity AFRs broadly.

People should exercise caution if attempting to use the results of these reviews to draw general or broader conclusions.

The results from our analysis were taken at a point in time before any charity was contacted to correct any errors we identified.

A charity may have stated in its basis of preparation that the financial statements it prepared were GPFS. However, upon closer inspection, they were more likely to be SPFS because they missed a number of disclosures required for GPFS.