Not for Profit News Winter Edition By William Buck on 01/06/17 - Mins to read: 17 minutes Welcome to the Winter Edition of NFP News. I hope that you are coping with the cold weather and with the calendar year now over the half way point, I know that many of you will now be heading into the busy reporting season along with its associated deadlines. Last month, William Buck in association with Think Impact hosted a panel discussion on merging within the not-for-profit sector. We had some excellent speakers in attendance and included in this edition is an article by our Audit Principal, Corrine Siddles giving an overview of this highly informative event. This edition of NFP News also contains mainly important articles across the areas of governance, financial reporting and the latest from the ACNC. This is headlined by a detailed article covering financial reporting considerations in particular the new accounting standards on revenue and leases and their upcoming impact. These are two of the most important accounting standards to affect the sector in many years so an early understanding is most important. The ACNC has also just released a guidance on Remunerating Charity Board Members and we have some information on this. As usual we welcome any feedback that you may have on the content of this edition of NFP News, and you should feel free to contact any of the NFP team at William Buck with any of your queries. Accountants must act on suspicions A new standard requires accountants to consider their obligations if they uncover or suspect illegal acts such as fraud, corruption, bribery and money-laundering. A bundle of new non-compliance-with-laws-and-regulations (NOCLAR) requirements released by the Accounting Professional & Ethical Standards Board will change the game. The ground-breaking Australian standard adopts an international approach and requires accountants to set aside the principle of confidentiality when illegal acts are suspected. No longer can accountants ignore suspected non-compliance with laws and regulations. NOCLAR applies to accountants in commerce and industry, the public sector and not-for-profits, as well as accounting firms. Accountants will be obliged to act in accordance with a heightened public interest in compliance. NOCLAR covers acts of omission or commission, intentional or unintentional, committed by a client or those charged with governance, by management or by other individuals working for or under the direction of a client. Examples of NOCLAR are: Fraud, corruption, bribery Money-laundering, terrorist-financing, proceeds of crime Securities markets and trading Banking, financial products and services Data protection Tax and pension liabilities and payments Environmental protection, and Public health and safety. There are many real-life examples of breaches. You can read about them daily in the Press. So, it’s time we asked ourselves what we would do if we suspect non-compliance. The new ethical rules respond to the following key public-interest concerns: The duty of confidentiality in the code’s acting as a barrier to the disclosure by professional accountants of potential NOCLAR to public authorities Professional accountants and auditors simply resigning from employer/client relationships without NOCLAR issues being appropriately addressed, and A lack of guidance to help accountants in working out how best to respond to potential NOCLAR, a situation that may often be difficult and stressful. The responsibilities under APES 110 Code of Professional Ethics for Professional Accountants differ depending on whether an accountant is: An employee of an entity A senior professional (part of the management team or a member of governance) An auditor of an entity, and A member in public practice interacting with his or her client in a professional capacity. The NOCLAR rules are incorporated in new sections 225 (Members in Public Practice) and 360 (Members in Business) of APES 110. They are effective from 1 January next year. From an auditing perspective, NOCLAR requirements are reflected in ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report (now includes updated references to the APES 110 Code of Ethics for Professional Accountants resulting from the new standard NOCLAR) and ASA 2017-2 Amendments to Australian Auditing Standards (containing conforming amendments related to changes in the APESB Code). Both have an application date of 1 January 2018. Guidance on board remuneration The ACNC has released new guidance Remunerating Charity Board Members aimed at providing charities with practical advice on paying their board members. While the guidance is charity specific, its principles have application to all not-for-profits. The guidance provides an overview of issues relating to board remuneration, as well as some of the factors charities need to properly consider when making a decision on paying board members for their duties. ACNC Commissioner, Susan Pascoe AM, introduced the guide, saying it provided important points around which charities could base discussions. ‘Most board members of charities are unpaid and give their time freely as volunteers,’ Ms Pascoe said. ‘However, all charities are different and there are diverse views on the appropriateness of paying board members. At the end of the day the key question to ask is: is paying board members in the best interests of the charity? ‘There will be different answers according to the nature and complexity of the charity, the skills and time required of board members, as well as issues of diversity of the board. There is no one size fits all answer to this question.’ Commissioner Pascoe confirmed that registered charities can pay their board members under certain circumstances. ‘Our new guidance states that board members can be paid as long as this remuneration helps further the organisation’s charitable purpose, is allowed under the charity’s governing rules, is properly authorised, and is conducted in a transparent and robust way,’ Ms Pascoe said. ‘In addition to meeting reporting obligations, registered charities must also comply with the ACNC’s Governance Standards. This includes the requirement that charity board members act in the best interests of the organisation, and that they manage its finances in a responsible way.’ ‘The payment of board members may present a conflict of interest and this needs to be managed. We would expect a proper process to be undertaken to set a reasonable and proportionate level of remuneration.’ ‘Charities also need to be mindful of community expectations as well as the views of their members, supporters and the users of their services. If a charity feels uncomfortable disclosing and publicly justifying the level and nature of the remuneration, then this should be an alarm bell. ‘Any payments to board members that are unreasonable, unauthorised, or unjustifiable, may mean that the charity is not complying with the Governance Standards – which could be grounds for revocation of charity status. The ACNC will not hesitate to investigate in such circumstances.’ Commissioner Pascoe reminded charities that their finances should be managed with care and diligence. ‘Board members are custodians of a charity’s funds and these need to be applied for the benefit of the public,’ Ms Pascoe said. Charities can download the new guidance on the ACNC website at acnc.gov.au/boardremuneration. DGR discussion paper released The federal treasury has released a discussion paper outlining several proposals to strengthen deductible-gift-recipient governance, reduce administrative complexity and ensure that an organisation’s DGR eligibility is up to date. Around 20,500 of 28,000 DGRs are registered charities. DGR status entitles donors to claim tax deductions on their donations. The tax concessions amount to more than $1.3 billion a year and are a significant part of the government’s efforts to encourage philanthropy and support NFPs. A significant proposed reform in Tax Deductible Gift Recipient – Reform Opportunities would require DGRs to be registered with the ACNC. Benefits flowing from such a move would include: The increased credibility and transparency that comes with being a registered charity and being listed on the ACNC’s charity register Access to the Charity Passport – a ‘report once, use often’ framework Other red-tape reductions, including streamlined reporting across jurisdictions Regulation under a set of core, minimum, governance standards, which are the basis for strong internal governance, and The ACNC’s free education, guidance and support. The paper was based on intensive consultation. Among questions asked were: What are stakeholders’ views on a requirement for a DGR (other than a government one) to be a registered charity for it to be eligible for DGR status? What issues could arise? Are there likely to be DGRs (other than government DGRs) that could not meet this requirement and, if so, why? Are there particular privacy concerns associated with this proposal for private ancillary funds and DGRs more broadly? Should the ACNC require additional information from all charities about their advocacy activities? Is the annual information statement the appropriate vehicle for collecting this information? What is the best way to collect the information without imposing a significant additional reporting burden? What are stakeholders’ views on the proposal to transfer the administration of the four DGR registers to the ATO? Are there any specific issues that need consideration? What are stakeholders’ views on the proposal to remove the public-fund requirements for charities and allow organisations to be endorsed in multiple DGR categories? Are regulatory compliance savings likely to arise for charities that are also DGRs? What are stakeholders’ views on the introduction of a formal rolling review program and the proposals to require DGRs to make annual certifications? Are there other approaches that could be considered? What are stakeholders’ views on who should be reviewed in the first instance? What should be considered when determining this? What are stakeholders’ views on the idea of having a general sunset rule of five years for specifically listed DGRs? Should listings be reviewed at least once every five years to ensure that they continue to meet the ‘exceptional circumstances’ policy requirement for listing? Stakeholders’ views are sought on requiring environmental organisations to commit no less than 25 per cent of their annual expenditure from their public fund to environmental remediation, and whether a higher limit, such as 50 per cent. What are the potential benefits and the potential regulatory burden? How could the proposal be implemented to minimise the burden? Stakeholders’ views are sought on the need for sanctions. Would the proposal to require DGRs to be ACNC-registered charities and therefore subject to ACNC’s governance standards and supervision ensure that environmental DGRs are operating lawfully? Submissions closed on 14 August. New report on our smallest charities Australia’s smallest charities account for more than a third of the charity sector, according to a new ACNC report. Australia’s Smallest Charities was produced by the commission in collaboration with the Centre for Social Impact and the Social Policy Research Centre at the University of New South Wales. Australia’s Smallest Charities is part of an annual analysis of annual information statements filed by charities of all sizes. ACNC commissioner Susan Pascoe highlighted the significant contribution that ‘extra small’ charities make to the sector and the wider community. ‘There are almost 19,000 extra small charities in Australia – that is, charities with annual incomes under $50,000,’ Ms Pascoe said. ‘Extra small charities account for 37 per cent of charities […] and make an important contribution to the local community. ‘These charities in particular often provide more specialised, locally-focused services – and […] communities appreciate their hard work and dedication.’ The report, which includes case studies from seven of Australia’s smallest charities, highlights the variety of activities undertaken and the causes supported. More than two-thirds of ‘extra small’ charities operate with volunteers only compared with only 39 per cent of all charities. More than 400,000 people donate their time and expertise to ‘extra small’ charities. They report a combined income of more than $300 million in 2015 and held assets worth more than $5 billion. Australia’s Smallest Charities and the Australian Charities Report 2015 are available for downloading at australiancharities.acnc.gov.au. Hundreds of charities revoked Almost 700 charities have had their ACNC registrations revoked after failing to submit annual reports on two successive years. Revocations will be published on the ACNC’s listing. Revoked charities will no longer be able to display the ACNC’s registered-charity tick. ‘Revoking charities that fail to meet their obligations is an important part of maintaining trust and confidence in the not-for-profit sector. The public need to be confident that the national regulator is displaying [only] eligible charities on the [register],’ Ms Pascoe said. The register provides the public and donors with accurate, up-to-date information about Australia’s 54,000 charities. Since it was launched in late 2012, it has been searched over 1.7 million times. Donors, grant-makers and volunteers can search the register at acnc.gov.au/findacharity. The list of revoked charities can be found at acnc.gov.au/doubledefaulters. AIS release set for July Consultations on proposed changes to annual information statements have concluded, and, in response, the ACNC has made several improvements to the 2017 online form, including improved auto-calculation and the ability to update responsible persons’ information. Charities in Tasmania and South Australia will benefit from streamlined reporting arrangements, additional jurisdictions likely to join over the coming months. The 2017 statement is set to be released in late July and will be accompanied by a range of resources and a redesigned online guide for easier use. Charities must meet governance standards As it is end of the financial year for many charities, a reminder of the five governance standards that charities must meet to be registered and remain registered with the ACNC is appropriate. The standards do not apply to basic religious charities. The governance standards are a set of core, minimum standards that deal with how charities are run, including their processes, activities and relationships. They require charities to remain charitable, operate lawfully, and be run in an accountable and responsible way. They help charities to maintain trust with the public and continue to do their charitable work. Because the governance standards are a set of high-level principles, not precise rules, each charity must decide how it will comply with them. Standard Principle Standard 1: Purposes and not-for-profit nature: Charities must be not-for-profit and work towards their charitable purpose. They must be able to demonstrate this and provide information about their purposes to the public. Standard 2: Accountability to members Charities that have members must take reasonable steps to be accountable to their members and provide them with adequate opportunities to raise concerns about how the charity is governed. Standard 3: Compliance with Australian laws: Charities must not commit a serious offence (such as fraud) under any Australian law or breach a law that may result in a penalty of 60 penalty units (currently $10,200) or more. Standard 4: Suitability of responsible persons Charities must take reasonable steps to: Be satisfied that its responsible persons (such as board or committee members or trustees) are not disqualified from managing a corporation under the Corporations Act 2001 (Cth) or disqualified from being a responsible person of a registered charity by the ACNC commissioner, and Remove any responsible person who does not meet these requirements. Standard 5: Duties of responsible persons Charities must take reasonable steps to make sure that responsible persons are subject to, understand and carry out the duties set out in this standard. Charities must have evidence of meeting the standards that they can provide if requested. ACNC financial reporting obligations A charity’s reporting obligations to the ACNC depend on whether it is small (annual revenue less than $250,000), medium (annual revenue more than $250,000 but less than $1m) or large (annual revenue more than $1m). Obligations may be summarised as: Small Medium Large Annual Information Statement Financial Report (Optional) 1 1 Basis of accounting Cash or accrual Accrual1 Accrual1 Type of financial statement2 Can choose to submit a financial statement. The financial statement can be the same as a medium or large charity Special-purpose financial statement (if not a ‘reporting entity’) or reduced-disclosure regime general-purpose financial statement or full general-purpose financial statement Review or audit No obligation for review or audit Financial reports either reviewed or audited2 Financial report audited 1 Unless the charity is a basic religious charity or other transitional arrangements apply. 2 Note that the charity’s constitution/governing document or grant-funding agreements may state the type of financial statement the charity must prepare and whether the financial report needs to be reviewed or audited. Revenue should be calculated using relevant accounting standards, for example, AASB 118 Revenue, AASB 1004 Contributions and AASB 117 Leases issued by the Australian Accounting Standards Board. Financial reporting considerations for 30 June At each reporting period, directors and management committees of not-for-profits need to be aware of changes that might affect their financial statements. While changes for 30 June this year are expected to be minimal, the tornado of change in the next wave of standards approaches. In its swirl are revenue, leases and financial instruments. New standards effective at 30 June The list of accounting standards effective for the first time at 30 June is long, but we do not expect many of them to have an impact on private-sector NFPs. An overview is provided below. Accounting standards Our assessment AASB 14 Regulatory Deferral Accounts / AASB 2014-1 Amendments to Australian Accounting Standards Applicable to entities with rate regulated activities – no impact expected for NFPs. AASB 1057 Application of Australian Accounting Standards / AASB 2015-9 Amendments to Australian Accounting Standards – Scope and Application paragraphs Standard includes all the application paragraphs for AASB standard – no changes to recognition, measurement or disclosure requirements. AASB 2014 – 3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations [AASB 1 and AASB 11] Clarifies that if an entity acquires a joint operation that is a business then AASB 3 Business Combinations should be used in determining the appropriate accounting – little, if any impact expected for NFP entities. AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation Clarifies that revenue-based depreciation methods are not appropriate – no impact expected for NFPs. AASB 2014-6 Amendments to AASB 116 and AASB 141 for bearer plants Moves bearer plants into the scope of AASB 116 Property, Plant and Equipment from AASB 141 Agriculture. Allows these assets to be held at cost rather than the fair value – impact for any NFP entities with an agricultural component to their operations. AASB 2014-9 Equity method in separate financial statements (Amendments to AASB 127) Allows equity accounting to be used in separate (parent) entity financial statements for associates and joint ventures as an alternative to cost or fair value – accounting policy choice available to NFP entities with equity accounted investments that present separate financial statements. AASB 2015 – 1 Annual improvements (2012 – 2014 cycle) Minor clarifications to several accounting standards – no impact for NFPs. AASB 2015-2 Disclosure Initiative – Amendment to AASB 101 Minor presentation amendments to financial statements regarding restructuring of the notes – may be used by NFP to de-clutter / restructure financial statements – no changes to recognition, measurement or disclosure requirements. AASB 2015-5 Investment Entities: Applying the Consolidation Exception Clarifications to the use of the investment-entity concept – no change expected for NFPs. AASB 2015 – 6 Amendments to Australian Accounting Standards – Extending Related Party Disclosures to Not-for-Profit Public Sector Entities Requires public-sector NFPs to include related-party disclosures in the financial statements – significant disclosure impact for public-sector NFPs. AASB 2015 -10 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 (Sale or contribution of assets between an investor and its associate or joint venture) Amends the effective date for the amendments to annual-reporting periods beginning on or after 1 January 2018 – no impact for NFPs. AASB 1056 Superannuation Entities Provides the accounting requirements for APRA-regulated superannuation entities – no impact for NFPs. Standards issued not yet effective The list of standards effective in the future is not quite so long but the impact will be substantial. Here we highlight the new standards expected to have most effect on NFPs. Revenue for NFPs Two new revenue standards for NFPs become effective for annual reporting periods beginning on or after 1 January 2019 (that is, 30 June 2020 year ends). They are AASB 15 Revenue from Customer Contracts and AASB 1058 Income of Not-For-Profits Entities. While some time off, implementation needs a significant amount of work, including potential amendments to grant agreements. NFPs should not delay in looking at the impact. AASB 15 Revenue from Customer Contracts applies to goods and services under a contract with a customer where there are sufficiently specific performance obligations and enforceable rights – the AASB has issued appendix C to AASB 15 (included in AASB 2016 – 8) that will assist NFPs to interpret these requirements. AASB 15 requires deferral of revenue concerning the transfer of control of promises to customers but grant agreements and other contracts will need to be reviewed to ensure that they meet the sufficiently specific and enforceable criteria as the deferral of grant income is not automatic. Any peppercorn leases will need to be reviewed and considered as we expect the fair value of the right to use assets granted under lease agreements will be recorded on statements of financial positions with a corresponding entry to revenue/retained earnings (on transition only). As the lease term progresses, this right to use assets will be depreciated, which may result in some NFPs making a loss due to depreciation charges. We encourage NFPs to review AASB 15 and begin determining the impact on relevant revenue streams. AASB 1058 Income of Not-For-Profits Entities will require revenue that falls outside the scope of AASB 15 to be recognised when control is received. This is most likely to be on receipt of funds as well as dealing with areas such as peppercorn leases and volunteer services. Leases AASB 16 Leases is effective at the same time as the revenue standards – annual reporting periods beginning on or after 1 January 2019 (that is, 30 June 2020). This standard requires most leases held by an NFP to be brought onto the balance sheet (statement of financial position). The distinction between operating and finance leases will be removed. If the agreement meets the definition of a lease then it is within the scope of the standard. There are limited exceptions for short-term leases and low-value assets, however these will not apply to leases of premises, which we expect to be most of the NFP leases. Income statements will no longer show rental income. Instead, we will see depreciation expense (relating to the right-of-use asset) and interest expense (relating to the lease liability). The recording of a right-of-use asset (non-current) and lease liability (apportioned between current and non-current) may cause issues for bank covenants and other balance-sheet ratios. NFPs need to ensure as soon as possible that they have considered these business impacts. Financial Instruments AASB 9 Financial Instruments is applicable for annual reporting periods beginning on or after 1 January next year (that is 30 June 2019 year-ends) and contains a few significant changes. For NFP entities, the impact of AASB 9 should be low. We anticipate that the biggest change is likely to be the treatment of available-for-sale investments (shares in listed entities held on a long-term basis as part of an investment strategy). These investments are no longer required to be tested for impairment and their movements in fair value will remain in other comprehensive income as well as any gains or losses on sale. The change should reduce the time and effort spent on analysing whether an instrument has been subject to a significant or prolonged decline in value. NFPs will need to consider this change and make the decision about whether to designate the instruments through other comprehensive income. If the designation is not made, instruments will be measured through fair value, which will result in unrealised gains and losses being taken to the result for the year. NFP entities that might have more complex financial instruments should commence a full review of AASB 9 to assess their impact. A tip and a reminder NFP entities need an implementation plan: Governance and management should ensure that progress is monitored against plans and action taken where milestones are not reached Identify systems, processes, and any associated internal control changes needed to produce information required under the new standards, including related disclosures, and Determine the effect on compliance with financial-condition requirements, including thresholds for regulatory reporting. NFPs have small financial teams and need to consider the transitional arrangements for these standards to obtain the most favourable outcomes. Work should start soon. The standards are complex, and NFPs will need to consider whether they have the resources to implement them. If they don’t, how will they comply? Remember that each of these standards requires comparatives (and transitional provision apply) and that a third statement of financial position is required for the start of the comparative period. NFPs, in fact, might have less time than they think. Red tape reduction progress in Victoria The Victorian Consumer Acts Amendment Bill 2016 has been passed, leading to significant red-tape reduction for thousands of the state’s registered charities. The omnibus bill facilitates streamlining across consumer affairs in Victoria. Importantly, it allows appropriate state-government ministers to exempt cohorts of incorporated associations from having to report direct to Consumer Affairs Victoria (CAV). It is expected that this new power will see an end to the duplicate reporting of Victorian incorporated associations registered as charities. The ACNC will work with the consumer-affairs minister Marlene Kairouz and CAV to ensure that the charities will be required to report only to the ACNC. The commission is confident that announcements by other state and territory governments are on the horizon. To Merge or Not to Merge - Industry Updates Authored by Corrine Siddles – Principal, Audit and Assurance William Buck recently held a special panel presentation of ‘To Merge or not to Merge’. The panel discussion was facilitated by Kevin Robbie (Director, Think Impact) and featured key members of the sector who have been through mergers in recent times: David Crosbie (CEO, Community Council for Australia) Paul Ronalds (CEO, Save the Children) Jayne Myer Tucker (founder JMT Inc. and former CEO of Good Beginnings) Mark Watt (CEO, Whitelion) An audience of CEOs, CFOs, Senior Executives and Board members gathered for the discussion on the pros/cons, potential pitfalls of and lessons learned from mergers. The event touched on many practical case studies, induced plentiful discussion and questions from the crowd. A snapshot of some of the key points raised on the night are detailed below. Consolidation within the not for profit sector is seen as being inevitable. With increased levels of competition, reduced levels of government funding and declining levels of giving, smaller organisations are struggling to thrive. The consensus from the panel was that significant change will be taking place in the next 5 -10 years. Regardless of whether an organisation is poised to enter into a transaction, when considering the current status in the industry, organisational leaders need to be ready and open to the idea of a possible merger. There is often significant lead time required when entering into such a transaction, organisations need to commence discussions from a position of strength, it’s normally too late once the organisation is distressed and failing. Boards need to ensure that their organisations are adaptive to change. As a first step it’s essential that an environmental scan is performed in readiness. This will ensure that the Board and all involved understand the key internal and external factors impacting the organisation and assist to highlight key objectives. This process may also identify that other collaborative options may be better suited over merging. These could include opportunities to enter into partnership arrangements, share real estate or back office functions or enter into an auspicing arrangement. Above all else, the key success factor is ensuring the focus remains on mission and purpose throughout the process. Quite often the Board is somewhat removed from the organisations mission and can lack this vision. It is therefore imperative that there is a strong relationship between the CEO’s, and open communication is maintained at all times. The organisational structure and mechanics shouldn’t form the focus, but rather a means to achieve the final goal. A recommendation was made to employ independent person to oversee the process towards the end of the merger project. This person should not be looking at the transaction from a legal perspective but as a mediator with a commercial background to ensure that all key areas have been addressed and dealt with fairly. Put personal or organisational differences aside and work towards achievement of the end goal. The cultural approach in this scenario needs to be to that of collaboration. If there is a larger organisation involved it shouldn’t necessarily be over ruling the smaller. Systems and processes of both sides should be considered during the due diligence process. Don’t underestimate resources required once the deal has been done, practically integrating can be much harder than anticipated. Change is upon us and leaders need to embrace this, be bold and ensure the focus remains on strategy execution and the achievement of the overall mission.