Reviewing charities’ financial information and annual financial reports - 2020

Selection methodology

We selected a random sample of 250 AISs and AFRs from this period for full review.

Our review examined AISs and AFRs submitted for the 2020 reporting period. Charities have different reporting dates depending on their financial year end date and the 2020 reporting period refers to 2020 AIS submissions between July 2020 and December 2021.

What we checked for

We reviewed 250 AIS and AFR submissions from the 2020 reporting period 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 2020 AIS. Specifically, we focused on revenue from government, donations and bequests, total revenue, employee expenses, total expenses and net assets.
• each charity correctly reported the type of financial report they prepared in the AIS.
• each charity complied with the minimum accounting standards as set out in the Australian Charities and Not-for-profits Commission Regulation 2013 (Cth) (the ACNC Regulation), including the new recognition and measurement disclosure requirements for SPFS in AASB 1054 Australian Additional Disclosures.
• AISs did not include any financial information for non-registered entities in consolidated groups. The ACNC does allow parent entity charities that are reporting individually to the ACNC to submit consolidated financial statements (in accordance with AASB 10). The financial information in an individual charity’s AIS must relate only to the parent entity.

We also recorded the adoption of the following new Australian Accounting Standards, now mandatory (if relevant) for charities preparing GPFS:

• 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)

We also checked whether any charities preparing GPFS chose to adopt AASB 1060 before it became compulsory to do so. The simplified disclosure requirements under AASB 1060 replace the GPFS-RDR framework for reporting periods effective from 1 July 2021.

Of the AISs and AFRs we selected for full review, we made the following observations:

Improvements compared to the previous year

• 71% of the AFR’s reviewed correctly identified the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (the ACNC Act) as the relevant reporting framework, an increase of 3% compared to the previous year.
• 79% of auditor’s or reviewer’s reports made the required reference to the ACNC Act compared to 70% in 2019.
• In the 2020 AIS, 98% of charities correctly identified whether or not they had provided a consolidated financial report for multiple entities, an improvement from 94% in the previous year.
• Where charities did present expenses by function in their AFRs, 83% made the required separate disclosure regarding depreciation, amortisation and employee expenses. This is up from 70% in the previous year.
• 97% of charities attached a Responsible Persons declaration with their AFR, a significant improvement from 91% in the previous year.
• 89% of charities receiving government revenue made separate disclosures of that revenue in their AFRs, up from 80% the previous year.

Observations across years

• In 2020 AFRs, 66% of charities submitted a complete set of financial statements. While this was down from 70% in 2019, the average number of missing statements or notes in these cases actually decreased. This meant that, overall, fewer statements and notes were missing from incomplete sets of financial statements.
• 89% of Responsible Persons declarations attached to AFRs in the 2020 reporting year were correctly signed and dated, compared to 93% in 2019. Of these attached reports, 66% of charities mentioned compliance with the ACNC Act, down from 70% in the previous year.
• 23% of charities incorrectly reported expenses using a mixture of nature and function in 2020, compared to 16% in 2019.
• Similar to the figures in last year’s reviews, only a small number of charities provided incorrect financial information in their AIS from their AFR - particularly the Total Revenue category and Total assets and liabilities fields, which were 6% and 5% respectively.
• In the 2020 reporting year, 91% of charities attached an auditor’s or reviewer’s report, compared to 92% in the previous year. Of these reports, 96% were signed and dated, and 93% complied with the new auditing standards.
• In the 2020 review, 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. This was the same percentage as the previous year.
• Most of the common disclosure issues identified in 2019 were also present in the 2020 review, including insufficient or no disclosure of:
  • whether the entity is a for-profit or not-for-profit for financial reporting purposes,
  • related party transactions, including compensation for key management personnel for charities preparing general purpose financial statements (GPFS).
• In the 2020 review, for charities preparing GPFS (excluding GPFS-RDR) and SPFS, 64% included a disclosure note in their financial report disclosing the fees to the auditor or reviewer of the financial statements. This was similar to the previous year (63%).

New observations

• 21% of SPFS AFRs included some sort of voluntary disclosure about related party transactions.
• No charities in our sample that prepared General Purpose Financial Statements (GPFS) chose to voluntarily adopt AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities. This simplified disclosure requirement replaces the GPFS-RDR framework for reporting periods effective from 1 July 2021.
• 45% of charities preparing Special Purpose Financial Statements (SPFS) included some sort of disclosure note regarding compliance with the recognition and measurement requirements now required by AASB 1054 Australian Additional Disclosures.
• 28% of AFRs included a disclosure note regarding the impacts of COVID-19.

We will continue to review charities' AISs and AFRs to ensure they comply with ACNC reporting requirements.

We reviewed 250 AFRs submitted by medium and large charities, with four of those from charities that report to the ACNC as part of a reporting group.

A breakdown of sampled charities by size

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

Overall, 70% of the financial statements we reviewed were SPFS. 23% were GPFS-RDR and 7% were GPFS.

Breakdown of financial reports reviewed by charity location

Breakdown of financial reports reviewed by charity legal structure

Selecting the correct type of financial statements

65% of charities correctly selected the type of financial statements they had prepared in their AIS, compared with 66% the previous year.

Of the charities that selected the incorrect type of financial statements, 69% prepared SPFS but stated they had prepared GPFS. The next most common error was charities preparing GFPS-RDR but incorrectly stating their AFR was just GPFS.

Transposing financial information from AFRs to AISs

The AIS requires charities to complete a summary income statement and balance sheet to cover specific financial data elements. We compared the financial information in charities’ AFRs with the financial information in their AISs 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.

Comparison of information in charities AISs and AFRs

In reviewing the AFRs of charities that incorrectly transposed figures from their income statement and balance sheet to the AIS, in some cases we found the error may have been due to the AFR not separately disclosing the same items required by the AIS (because, for example, separate disclosure was not required by Australian Accounting Standards for charities preparing financial reports).

This meant some charities had to decide themselves how to aggregate or disaggregate the financial information in their AFR in order to allocate it to the AIS, increasing the chances of error when transposing the figures.

Most charities that receive funds from government made further disclosures of government revenue in their AFR. 89% of charities that reported revenue from government in the AIS also provided disclosures of government revenue in their AFR.

Whether a charity received funds from government, the amount it received, and the sources from which it received funds is of interest to charity donors, funders, supporters, and the public. Making disclosures about government revenue is usually straightforward and we have published best practice guidance on annual financial report disclosures to help charities make these important disclosures.

Recommended disclosures that convey useful information to charity donors, funders, supporters and the public include:

• the source of government revenue, including total revenue received from each level of government, and the names of the government departments or agencies from which a charity received funds,
• the revenue from providing goods and services to beneficiaries who receive related financial assistance from government,
• the extent to which a charity is economically dependent on government revenue,
• funding received from government but not yet recognised as revenue.

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 can include information relating to non-registered entities for reporting groups, the financial information provided in the AIS must only relate to registered charities.

Of all the AFRs we reviewed, 4% were consolidated AFRs and 96% were single-charity AFRs.
Our reviews found that 98% of charities correctly answered the consolidated question in their AIS. 2% incorrectly identified their single-charity AFRs as consolidated AFRs.

We identified errors in the AIS figures for 30% of individual charities that did submit a consolidated AFR. In these cases, the charities incorrectly provided income statement and balance sheet figures for the entire consolidated group rather than financial information for the single charity submitting the AIS.

Providing complete sets of financial statements

Charities’ 2020 AFRs had to comply with AASB 101 Presentation of Financial Statements, unless they were eligible to participate in an ACNC transitional reporting or streamlined transitional reporting relief arrangement.

AASB 101 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 charities required to comply with all ACNC reporting requirements, 66% submitted a complete set of financial statements.

While this represented a decrease from the 70% that submitted a complete and correct set of financial statements in 2019, the average number of missing statements or notes in reports reviewed in 2020 actually decreased in comparison to the previous year.

This meant that, overall, fewer statements and notes were missing from incomplete sets of financial statements in 2020 than in 2019.

The table below shows percentage of charities that correctly submitted each of the required statements and the notes. For example, all charities whose reports we reviewed correctly included the statement of profit or loss.

We noted that if the notes to the financial statements stated that the ACNC Act was the relevant reporting framework, then the required statements were much more likely to be included (for example, 96% all financial reports that referenced the ACNC Act included a statement of changes in equity).

Streamlined reporting arrangements

One of the ways we reduce red tape across the sector is by working to allow charities previously required to report to state and territory regulators to only report to the ACNC.

This occurs through streamlined reporting arrangements.

Previously, where no streamlined arrangement was in place, many incorporated associations and charitable fundraisers that were required to submit financial reports to other state or territory regulators were instead able to submit the same financial report to the ACNC.

We would then accept those reports as meeting ACNC requirements.
However, most of these charities are now able to utilise streamlined reporting arrangements and report directly to the ACNC. The ACNC then shares the information it collects through the AIS with other charity regulators.

The financial reports of charities eligible for streamlined reporting arrangements must meet ACNC financial report requirements, including the provision of a full set of financial statements and notes.

Where we have new streamlined reporting arrangements, we provide charities with two years of ‘transitional reporting relief’ before they are required to meet all of our financial reporting requirements.

As part of our review, we examined the financial reports of charities in the sample now eligible for streamlined reporting to determine whether they were meeting ACNC financial report requirements.

Charitable fundraisers

For the 2020 reporting period, charities incorporated in the Northern Territory were in the second year of their transitional reporting relief period. Fundraisers in Victoria and Western Australia both entered the first year of their transitional relief period.

100% of the charitable fundraiser charities from ACT, South Australia and Tasmania whose reports we reviewed complied with the ACNC requirements and provided a complete set of financial statements.

Incorporated associations

Charities incorporated in NSW and VIC were required to meet all ACNC reporting requirements for the 2020 AFR as their two-year transitional reporting period had ended.

The table below shows an improvement for almost all financial report elements compared to 2019.

State and territory breakdown of the percentage of each financial statement included in AFR by incorporated associations

^{Note: The 'percentage of submission in NT' column shows as N/A because we did not have any incorporated associations from the NT in our 2020 sample.}

Presenting expenses

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

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

Presenting expenses by both nature and function is not permitted, and a charity’s decision on how it presents expenses – either by nature or function - may depend on historical and industry factors, as well as the nature of the charity itself.

Of the charities that submitted an AFR, 70% reported expenses using the nature of expense method, while 7% used the function of expense method. The remaining 23% of charities incorrectly reported using a mixture of nature and function of expenses.

Where charities did present expenses by function in their AFRs, 83% made the required separate disclosure regarding depreciation, amortisation and employee expenses. This compared favourably to the 70% that did so in 2019.

Types of AFRs prepared by charities

The type of AFRs medium and large charities prepare depends on whether the charity is a reporting entity.

Charities that are reporting entities

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 for the 2020 reporting period, charities could choose to prepare either:

• full GFPS,
• GPFS-Reduced Disclosure Requirements (RDR), or
• Voluntarily adopt the new simplified disclosure standard AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities. This new simplified disclosure requirement replaces the RDR framework for reporting periods from 1 July 2021; however none of the charities in our sample voluntarily adopted AASB 1060 early.

Our review found that 6% of charities incorrectly selected GPFS-SDR as their financial statement type instead of choosing a full GPFS.

Charities that are not reporting entities

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 Regulation. In this year’s sample, we found that 70% of the financial statements provided by charities were SPFS.

Observations of whether financial statements included in our reviews met selected GPFS and SPFS disclosure requirements

A significant percentage of charities that prepared GPFS (14%) and SPFS (54%) did not clearly provide disclosures of appropriate accounting estimates and judgements that their management made when applying the charity’s accounting policies. Around half the charities that prepared GPFS (50%) and SPFS (54%) also lacked a disclosure about the charity being a for-profit or not-for-profit entity for the purposes of preparing financial statements.

29% of GPFS did not include disclosures of key management personnel remuneration or related party transactions as required by AASB 124.

In addition, we found that the notes for the basis of preparation often did not disclose that the statutory basis for the financial report was the ACNC Act, although results did improve compared to last year.

While it is not mandatory for SPFS to provide related party disclosures, our review found that 23% provided a disclosure note of some kind regarding related party transactions. Further, of the SPFS preparers who disclosed their related party transactions in their financial reports:

• 5% voluntarily reported remuneration to key management personnel, and
• 11% provided a disclosure note disclosing the nature of relationship, amount of transactions and any outstanding balances within the charity.

The accounting standard AASB 1054 requires charities to provide a disclosure note disclosing fees to their auditor or reviewer of the financial statements (optional for GPFS-RDR preparers). 81% of GPFS disclosed their fees to their auditor or reviewer, whereas only 57% of charities who prepared SPFS did so.

Adopting new Australian Accounting Standards

A number of new Australian Accounting Standards apply to annual reporting periods beginning on or after 1 January 2019 and are compulsory for reporting entities.

These include AASB 1058 Income of Not-for-profit Entities and AASB 15 Revenue from Contracts with Customers. These two standards replaced the not-for-profit requirements in the previous revenue standards AASB 118 Revenue and AASB 1004 Contributions.

A new leasing standard - AASB 16 Leases - also came into effect for annual reporting periods beginning on or after 1 January 2019.

We examined AFRs for disclosures regarding the adoption of these new standards, noting that many charities - especially those operating on a calendar year basis - had already adopted these standards since the 2019 reporting period.

Percentage of AFRs that included disclosures regarding the adoption of the new accounting standards

Application of new recognition and measurement requirements of AASB 1054

New disclosure requirements regarding compliance with the recognition and measurement requirements under AASB 1054 Additional Australian Disclosures apply from the 2020 reporting period onwards for charities preparing SPFS.

We noted that 45% of charities preparing SPFS included some sort of disclosure note regarding compliance with the recognition and measurement requirements.

Disclosure notes confirming compliance with the recognition and measurement requirements of all relevant accounting standards were the most commonly observed note of this type.

Auditor/reviewer report requirements

Medium-sized charities can have their financial report reviewed or audited while large charities must have their financial report audited.

91% of the AFRs we examined had an auditor’s or reviewer’s report attached. Of the AFRs with an auditor or reviewer report attached:

• 91% had an auditor's report attached, and
• 9% had a reviewer’s report attached (78% of medium charities in the sample had their financial report audited, 22% had it reviewed).

Of the audit reports reviewed, 93% complied with the new auditing standards and 96% of them were signed.

Excluding charities using transitional reporting arrangements, 79% of auditor/reviewer reports reviewed provided an opinion about whether the AFR complied with the ACNC Act.

7% of 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 6% of 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 due to the impacts of the COVID-19 pandemic.

Responsible Persons’ declaration

Of the AFRs we reviewed, 97% included a Responsible Persons’ declaration.

Of the Responsible Persons’ declarations provided, 89% were signed and 94% included the required statement about whether the charity was able to pay all its debts when they became due and payable.

For the charities that did not use transitional reporting arrangements, 66% included the required statement about whether the financial statements and notes satisfy the requirements of the ACNC Act.

The ACNC will continue to review charities’ AFRs to ensure compliance with ACNC reporting requirements and to confirm the financial information charities provide in their AISs matches the information in their AFRs.
We will continue to monitor the disclosures of government revenue in charities’ AFRs with reference to the recommendations in our best practice guide to disclosing government revenue.

We will continue to update ACNC reporting guidance and our AFR checklist to help charities meet their reporting obligations, particularly the new key management personnel remuneration and related party transactions reporting requirements which apply from the 2022 and 2023 AIS respectively.

We will also continue to conduct webinars on financial reporting matters.

In past AFR reviews, the sample of charities each year was not a random sample because it included specifically selected charities (for example, charities who had previously been subject to compliance action, had a transitional reporting arrangement in place, or had previous material errors).

For 2020, the charities selected were a random sample of 250 medium and large charities. A random sample was chosen so that conclusions could be drawn about the wider population of medium and large size charity financial reports.

However, caution is recommended before attempting to draw some conclusions about the broader population of charities over time. In particular, the 2019 AFRs reviewed last year were from a non-probability sample, which impacts comparisons between the 2019 and 2020 results.

Also, the sample of 2020 AFRs had a significantly higher percentage of SPFS AFRs than the 2019 sample. As the results above show, errors were often more common in SPFS AFRs so the higher percentage of SPFS in the 2020 sample should also be considered when making comparisons with 2019 results.