Introduction
Charities often work with other organisations across both the for-profit and not-for-profit spheres in order to achieve their aims and fulfil their charitable purpose.
But in doing so, charities and their people can face situations that give rise to actual, potential or perceived conflicts of interest that they must manage appropriately. One such situation comes in the form of a related party transaction.
Related party transactions are common and are not necessarily a problem in and of themselves. In fact, they can sometimes bring about benefits for charities through, for example, access to discounted goods or services.
However, related party transactions can also bring about issues with potentially damaging conflicts of interest, meaning there is a risk that a related party transaction may not be in the best interests of the charity.
Skills Insight Policy Statement
Skills Insight will carefully manage any related party transactions to ensure they are handled:
- appropriately,
- transparently, and
- in the best interests of Skills Insight.
Skills Insights financial decisions will be made in its own best interests, and not in the interests of related parties or key management personnel. Skills Insight will manage this risk to ensure that related parties or key management personnel do not receive significant private benefits from our operations (for key management, this is benefits beyond normal salaries, entitlements and reimbursements.
Skills Insight will maintain good records as a key way for charities to properly manage related party transactions consistent with our record-keeping obligations when reporting on related party transactions.
What is a related party?
We define a related party differently according to the definition from the Australian Accounting Standards (AASB 124).
In summary, a related party is:
What is a related party transaction?
A related party transaction is a transfer of resources, services, or obligations between related parties. It does not have to include financial payment.
A related party transaction can include:
Charity reporting and related party transactions
Skills Insight will report on its related party transactions through our Annual Information Statement to the Australian Charities and Not-for-profits Commission (ACNC).
Skills Insight does not report ‘immaterial’ related party transactions.
Material related party transactions
Information in a financial report is considered ‘material’ if omitting, misstating or obscuring it could reasonably be expected to influence someone using that information to make a decision. It depends on the size, nature and circumstances of the transaction.
The materiality of a related party transaction is determined in the context of a charity’s specific circumstances and does not have a dollar value.
When reporting, a charity should consider whether excluding information about a related party transaction would affect a stakeholder’s understanding of its operations or its financial performance and position.
To determine when and how to disclose related party transactions, Skills Insight will refer to AASB 124 Related Party Disclosures or AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (paragraphs 189-203 and Appendix A).
Examples of related party transactions that are generally material
Related party transactions that are not material
A related party transaction is not considered material if it:
Examples of related party transactions that are generally not material
- a gift of a box of chocolates to charity board members to say thank you for their pro-bono service
- donations received by the charity from a related party
- reimbursement of reasonable out-of-pocket expenses incurred by a related party in their duties for the charity
- volunteer services provided by a related party that are the same as (or similar to) services
- provided by the charity’s other volunteers
- a related party receiving goods or services from the charity as a beneficiary on the same terms as other beneficiaries
- a related party buying goods from the charity on the same terms offered to the public.
Related party transactions that may not be reportable but could be material
There may be situations where a medium or large charity has a related party transaction that is not ‘reportable’ to the ACNC through its Annual Information Statement but could be seen by the charity to be ‘material’.
An example of this could be where professional services are provided free of charge by charity board members to the charity.
Generally, this type of transaction is not reportable to the ACNC in the Annual Information Statement. However, some charities may decide this transaction is ‘material’ – and therefore report it separately in their financial reports – because the information is important for those charities’ stakeholders:
- to make it clear to charity stakeholders that board members who provided professional services were not paid fees to do so
- to acknowledge the extra work done by these board members for no payment
- where the charity is dependent on those services, and it could not operate without them being provide free of charge.
It would be for the charity and its professional advisors to determine whether there is sufficient interest in these transactions from the charity’s stakeholders to make them ‘material’ and so require disclosure in the charity’s financial report.
Managing related party transactions
Skills Insight will, when entering an arrangement that could result in the potential for related party transactions and conflicts of interest, will follow these steps.
We will maintain a register
For each related party transaction, the register will record information about the related party and the transaction. The information will inform the reporting requirements in the Annual Information Statement or for the relevant disclosure note in the financial statement.
Formal documentation of any related party relationship will include:
- objectives of the arrangement
- financial details
- roles and responsibilities within the arrangement
- performance and reporting expectations
- how the relationship will be regularly monitored, reviewed and evaluated
- how the charity’s board or committee will monitor the relationship to ensure it remains in Skills
Insight’s best interest.
Follow this policy and procedure
This policy and procedure will ensure that we record and disclose related party transactions appropriately.
The CEO will report significant related party issues to the board who will provide direction about the best way to make a decision in relation to any significant related party transactions on a case by case basis and will recommend what criteria should be met before for entering into a related party transaction to assist the board decision making process.
The board process will demonstrate that the transaction was appropriate and necessary to meet Skills Insights purpose.
Decisions that involve Skills Insight entering into a relationship with a related party will be conducted transparently, for example, through an open procurement process that considers multiple, unrelated parties.
This would also see due diligence undertaken on related parties as part of the selection process, and anyone with a conflict of interest not involved in the process.
Related party transactions involving directors’ conflicts or perceived conflicts will be advised to the board in a process agreed without the involvement of any conflicted directors will be determined by the board in the absence of any such directors.
If any key personnel have a conflict in relation to a related party transaction that person will not be involved in the design in the process or in any decisions arriving at a process including the decision itself.
This will ensure:
- decisions are made at arms’ length,
- Skills Insight can demonstrate decisions have been made in its best interests, and
- that Skills Insight is complying with the ACNC’s Governance Standards.
This policy and procedure will reduce the risk that Skills Impact’s decisions are influenced by the interests of others.
Manage conflicts of interest
Related party transactions can give rise to a perceived, potential, or actual conflict of interest.
Governance Standard 5 requires Skills Insight to take reasonable steps to make sure its Responsible People meet certain duties, including:
- to act honestly and fairly in the best interests of the organisation and for its charitable purposes
- to not misuse their position
- to disclose any actual or perceived conflict of interest
- to ensure that the charity’s financial affairs are managed responsibly.
Conflicts of interest (whether actual or perceived) may arise when a related party has an interest that may conflict with the best interests of the charity. If a Responsible Person has an interest with a related party, it may be difficult to demonstrate that they are acting in the best interests of the charity.
Charity Responsible People will declare any potential conflicts of interest and Skills Insight will record these in a register. When it is time for Skills Insight to make a decision, anyone with a conflict (whether actual or perceived) will not be involved in the decision-making process. See more about managing conflicts of interest.
Register of Related Party Transactions (example register)
Full name of related party | Nature of relationship | Description of transaction | Amount of transaction | Date(s) of transaction | Approval details (date and approval process) |
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