NFP sector: Regulatory and governance developments

In recent months, there have been number of regulatory developments relevant to the governance and management of not-for-profits (NFPs). The AICD also released the latest edition of the NFP Governance and Performance Study, which provides insights into how NFPs have been navigating the profound challenges of the pandemic.

In November, changes were made to Australian Charities and Not‑for‑profits Commission (ACNC) Regulations to amend annual reporting thresholds and introduce remuneration and related party disclosure obligations for the first time.

Reporting thresholds and disclosure obligations

The key changes are:

1. An increase in the annual reporting thresholds from 2021/22 period for small charities to $500,000 (previously $250,000), medium charities $500,000 to less than $3 million (previously $250,000 to less than $1 million) and large charities $3 million or greater (previously $1 million or greater);
2. An obligation on large charities to disclose the aggregated remuneration of responsible persons and senior executives in the charity’s Annual Information Statement (AIS) from the 2021/22 reporting period; and
3. An obligation on medium and large charities to disclose material related party transactions in financial statements and the AIS from the 2022/23 reporting period.

While the new reporting thresholds did not go as far as recommended under the ACNC Review, they do represent a lessening of the reporting burden on smaller NFPs and charities. This reduction in compliance costs for smaller organisations should ultimately result in charities and NFPs having more resources to pursue their purposes.

We understand that the ACNC will release guidance to assist charities meet these new obligations.  Comprehensive practical guidance will be key to ensuring charities are able to meet the requirements, including interpreting the relevant accounting standard and its application to particular remuneration arrangements or related party transactions.

NFP Governance and Performance Study

On 23 November 2021, the AICD released the 12th edition of the Not-for-Profit Governance and Performance Study. Despite the backdrop of COVID-19, with NFPs being under enormous pressure and disruption, the study tells a predominantly optimistic story.

For most organisations, the financial outlook is relatively positive over the medium-term, but for some it will take years to recover the ground lost through COVID-19. The effectiveness of organisations is well-rated, and the survey found directors continue to see improvements in the quality of governance, with risk management frameworks widely recognised as being effective.  The study found that 20 per cent of director respondents were being remunerated by their organisations, up from 18 per cent last year. The study also reflected that the time spent by directors in governance activities was continuing to increase, with many directors reflecting on the need to be closer to the operations of the organisation. Download the study here.

ACNC Governance Standard 3

A prominent and controversial issue for NFPs through 2021 was the Government’s proposed amendments to ACNC Governance Standard 3 – Compliance with Australian laws (Governance Standard 3). Broadly, the changes to Governance Standard 3 would have prohibited charities from acting (or failing to act) in a way that may be dealt with as a summary offence under Australian law – such as damage to property. Charities would also have been required to take steps to ensure that resources were not used to promote or support actions associated with a summary offence.

Concerns with the amendments focused on the potential to curtail the political speech of NFPs, the discretionary power provided to the ACNC Commissioner and the administrative burden on NFPs. The AICD made a submission to the Government in March 2021 raising significant concerns with the proposed changes (available here).

The proposed changes faced opposition in Parliament and were subject to a disallowance motion passed in the Senate on 25 November 2021. This means the changes to Governance Standard 3 will not commence. The Government has not announced whether it will continue to pursue the changes.

Accounting standard treatment of leases

In a welcome development, the Australian Accounting Standards Board (AASB) has made permanent a temporary policy decision on how NFPs account for leases that are below market rates (‘peppercorn leases’). The permanent change allows NFPs to account for these leases at cost instead of fair value. The AICD had campaigned for this temporary reform to be made permanent.