This is the fifth of a series of legal updates that Kott Gunning is producing throughout 2016 on the key features and reforms under the new Associations Incorporation Act 2015 (WA) (Act).
This instalment deals with the new financial reporting and accountability requirements introduced under the new Act.
Tier 1, tier 2, and tier 3 associations
An association is classified into one of three tiers based on the revenue for the financial year. This will determine the financial reporting obligations under the Act.
- Tier 1 financial year revenue is less than $250,000.
- Tier 2 financial year revenue is $250,000 or more but less than $1,000,000.
- Tier 3 financial year revenue is or exceeds $1,000,000.
Revenue is to be calculated in accordance with the accounting standards issued by the Australian Accounting Standards Board.
The three tiers have been set with a view to balancing the reporting burden on associations commensurate with their size and the need to be accountable to members.
Financial reports of a tier 2 and tier 3 association
The financial report for a tier 2 or tier 3 association consists of:
- the financial statements for the year;
- notes to the financial statements; and
- the management committee's declaration.
- The notes to the financial statements are:
- the disclosures required by the regulations (if any);
- notes required by the Australian accounting standards; and
- any other information required to give a fair and true view of the financial position and performance of the association.
The management committee's declaration is a declaration by the management committee stating whether, in the management committee's opinion:
- there are reasonable grounds to believe that the association will be able to pay its debts as and when they become due and payable; and
- the financial statements and notes are in accordance with Part 5 of the Associations Incorporation Act 2015.
The management committee's declaration must be made in accordance with a resolution of the management committee, specifying the date on which the declaration is made, and must be signed by at least 2 members of the management committee who are authorised by the management committee to make the declaration.
Commissioner can declare association to be a tier 1 or tier 2 association
Within three months after the end of the financial year, an incorporated association may apply to the Commissioner for a declaration that the association is a tier 1, or tier 2, association for the financial year.
This is to allow for unusual and non-recurring circumstances that may have caused an association's revenue to temporarily exceed the tier 1 or tier 2 threshold, so that an unnecessary compliance burden is not placed on an incorporated association.
The Commissioner may only make a declaration if he or she is satisfied that unusual and non-recurring circumstances warrant the making of the declaration.
Obligation to keep financial records
An association must keep financial records that:
- correctly record and explain its transactions and financial position and performance; and
- enable true and fair financial statements to be prepared in accordance with Division 3 of the Act.
A penalty of $2,750 applies.
Retention of financial records
An association must retain its financial records for at least 7 years after the transactions covered by the records are completed.
A penalty of $2,750 applies.
The association's financial statements may be reviewed or audited
An association's financial statements or financial reports may be reviewed or audited under the Associations Incorporation Act 2015.
An audit is a detailed process that provides a high level 'positive form' of assurance on whether the financial statements or reports have been prepared (in all material respects) in accordance with an applicable financial reporting framework and are free from material misstatement.
A review provides a 'negative' (limited) form of assurance about the financial statements, i.e. that nothing has come to the reviewer's attention to suggest that the financial reports have not been prepared in accordance with the applicable financial standards.
A tier 1 association – must prepare financial statements
Within 6 months after the end of each financial year, a tier 1 association must prepare financial statements using the cash or accrual method of accounting.
A penalty of $2,750 applies.
A tier 1 using the cash method of accounting must prepare a:
- statement of receipts and payments;
- reconciled statement of bank account balances; and
- statement of assets and liabilities.
A tier 1 association using the accrual method of accounting must prepare a:
- statement of income and expenditure; and
- balance sheet.
The Act does not specify any minimum qualifications for a person preparing financial statements for a tier 1 association. The financial statements could be prepared by someone without a professional accounting qualification, provided they are proficient in bookkeeping.
Tier 1 – review or audit of financial statements
The financial statements (for a financial year) of a tier 1 association do not need to be reviewed or audited unless a majority of members at a general meeting make a resolution to that effect, or the Commissioner directs a review or audit.
A resolution or direction must specify whether the financial statements are to be reviewed or audited.
Tier 1 – financial reporting to annual general meeting and Commissioner
A tier 1 association must present its financial statements for its last financial year at the annual general meeting.
A penalty of $5,500 applies.
If the majority of members at a general meeting resolve that the financial statements be reviewed or audited, then the association must present at the annual general meeting:
- the financial statements reviewed or audited as required; and
- a copy of the report of the review or the auditor's report
A penalty of $5,500 applies.
If the Commissioner directs that the financial statements for the financial year be reviewed or audited, then the association must give to the Commissioner as soon as practicable after receiving them:
- the financial statements reviewed or audited as required; and
- a copy of the report of the review or the auditor's report
A penalty of $5,500 applies
Tier 2 association – obligation to prepare annual financial report
Within 6 months of the end of each financial year, a tier 2 association must prepare a financial report for the financial year.
A penalty of $2,750 applies.
The financial statements for the year and notes to the financial statements that are included in the financial report must give a fair view of the financial position and performance of the association, and comply with the accounting standards.
Tier 2 – financial report must be reviewed
A tier 2 association financial report for the financial year must be reviewed in accordance with Divisions 5, 6 and 7 of the Associations Incorporation Act 2015.
A penalty of $2,750 applies.
The tier 2 financial report does not have to be reviewed if an audit is required.
The tier 2 financial report will only need to be audited if:
- a majority of members present at a general meeting make a resolution to that effect; or
- the Commissioner directs that an audit take place.
A copy of the report of the review and the financial report must be presented at the annual general meeting.
Tier 2 – financial reporting to annual general meeting and Commissioner
A tier 2 association must present at the annual general meeting:
- its financial report for its last financial year reviewed as required; and
- a copy of the report of the review of the financial report.
A penalty of $5,500 applies.
If the majority of members at a general meeting resolve that the financial report for the financial year be audited, then the association must present at the annual general meeting:
- the financial report for the financial year audited as required; and
- a copy of the auditor's report.
A penalty of $5,500 applies.
If the Commissioner directs that the financial report for the financial year be audited, then the association must give to the Commissioner as soon as practicable after receiving them:
the financial report for the financial year audited as required; and a copy of the auditor's report.
A penalty of $5,500 applies
A tier 3 association – obligation to prepare annual financial report
Within 6 months of the end of each financial year, a tier 2 association must prepare a financial report for the financial year.
A penalty of $2,750 applies.
The financial statements for the year and notes to the financial statements that are included in the financial report must give a fair view of the financial position and performance of the association, and comply with the accounting standards.
A tier 3 – audit of financial report (s.75)
A tier 3 association financial report must be audited in accordance with Divisions 5, 6, and 7 of the Associations Incorporation Act 2015.
A penalty of $2,750 applies.
Tier 3 – financial reporting to annual general meeting (s.76)
A tier 3 association must present at the annual general meeting:
- its financial report for its last financial year audited as required; and
- a copy of the auditor's report.
Who can prepare tier 2 and tier 3 financial reports?
tier 2 and tier 3 associations must prepare financial records that comply with accounting standards. This would require someone who has professional accounting experience in financial reporting, and preferably who is a member of a professional accounting body
When will associations have to comply with the financial reporting requirements under the Act?
If the association's financial year runs from 1 July to 30 June, the association must comply with the new financial reporting requirements from 1 July 2016.
If the association's financial year runs from 1 January to 31 December, the association must comply with the new financial reporting requirements from 1 January 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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