Tiered financial reporting

Under the Act the financial reporting responsibilities of an incorporated association will depend on the tier that it falls into.  The tiered reporting system is intended to minimise the reporting burden for small associations while ensuring that larger associations are accountable for the significant resources they control.

Which tier applies to the association?

The tier an association falls under is based on its annual revenue.  The annual revenue is calculated based on the total amount of money received through the association’s activities during a financial year.

The tiers are set as follows:

Tier 1: less than $250,000 in revenue.
Tier 2: $250,000 to $1,000,000 in revenue.
Tier 3: over $1,000,000 in revenue.

Calculating revenue

Revenue is calculated in accordance with the Australian Accounting Standards and is the income that arises in the course of the ordinary activities of an incorporated association before any allowance is made for any relevant tax liabilities.

The following examples are likely to be revenue if they relate to the association’s ordinary activities:

  • fees and charges for provision of services;
  • interest earned;
  • government and other grants, donations, bequests, sales of goods and inflows from other fundraising activities.

The following is not included in the calculation of revenue:

  • gains from the sale of non-current assets (asset which is not easily convertible to cash and is not expected to become cash within the next year) eg club property;
  • unrealised gains (profit which has been made but not get realised through a transaction) eg revaluation of inventory or club property; and
  • amounts collected on behalf of third parties.

In the situation where an association has a one off increase in revenue such as the association applying for a special grant or fundraising for a particular purpose in addition to its usual activities.  It can apply to the Commissioner to be declared as a specific tier for that particular financial year.

This application must be made in writing no later than three months after the end of the financial year and should include details of the:

  • revenue for the previous financial year;
  • revenue for the current financial year;
  • one-off event that cause the revenue increase; and
  • projected revenue for the next financial year (for example a budget forecast).

The application will only be granted if the Commissioner is satisfied that the change in revenue is the result of unusual or non-recurring circumstances. 

Requirements for a Tier 1 association

To understand the reporting requirements of a Tier 1 association, the group must first establish whether it is operating on a cash or accrual basis of accounting.

Under cash accounting the income is recorded when it is received and the expenses when they are paid.

An association using accrual accounting will record the income the date it is earned (irrespective of whether the payment is actually received on that date) and the expenses when they are incurred. 

Accrual accounting is more common in organisations that deliver services in return for payment or receive grants to complete particular projects.

An association operating on a cash basis must prepare a financial statement that includes a:

  • statement of all the monies received and paid during the financial year;
  • reconciled statement of all bank account balances as at the end of the financial year; and
  • statement detailing the association’s total assets and liabilities as at the end of the financial year.

An association operating on an accrual basis must prepare a financial statement that may include:

  • statement of the income and expenditure for the financial year; and
  • balance sheet.

Auditing requirements for Tier 1 associations

A tier 1 association is not required to complete an audit or review of its accounts unless:

  • it is a requirement of the association’s rules that one be completed;
  • it is a requirement under the terms of the association’s funding agreement or licence;
  • the majority of members at a general meeting pass a resolution that an audit will be completed; or
  • the association is directed to do so by the Commissioner.

Requirements for a Tier 2 association

A Tier 2 association is required to prepare an annual report that complies with Australian Accounting Standards and contains all of the following:

  • the financial statements for the year;
  • the notes to the financial statements including all disclosures required by the accounting standards and information required to give a true and fair view of the financial position; and
  • the management committee’s declaration.

The Management Committee Declaration

The association’s committee must pass a resolution declaring whether:

  • there are reasonable grounds to believe that the association will be able to pay its debts when they become due and payable; and
  • the financial statements and notes have been prepared in accordance with the requirements of the Act.

The declaration included in the financial report must specify the date of the committee’s declaration and be signed by at least 2 committee members authorised by the management committee.

Review requirements for Tier 2 associations

All Tier 2 associations must have their financial reports reviewed.  The process of reviewing an association’s accounts is not as detailed as the process of completing an audit.  A reviewer will look over the association’s financial report and provide a statement whether anything has come to their attention which might suggest that the association’s report does not comply with the requirements of the Act.

In comparison, an auditor must collect evidence relating to the association’s financial records and transactions to satisfy themselves that the report is a true and correct reflection of the association’s finances.  This enables them to provide a formal opinion whether the accounts meet the relevant legal requirements.

A review may be conducted by:

  • a registered company auditor;
  • an audit firm; or
  • a current member of a relevant professional body such as the Institute of Chartered Accountants, the National Institute of Accountants or CPA Australia.

Before the appointed reviewer begins they must provide the committee with a written independence declaration and ensure their review is conducted in accordance with Australian Auditing Standards.

The reviewer’s report must include a statement whether they identified anything to suggest that the financial statements or report did not comply with the requirements of the Act.  If the reviewer believes that the financial statements or report do not meet the requirements of the Act, they must describe the matters and explain why they do not comply.

The reviewer is also required to write to the Commissioner advising of any suspected breaches of the requirements of the Act within 28 days of identification.

All Tier 2 associations are required to include a copy of the reviewer’s report with the financial report presented to members at each annual general meeting.

Auditing requirements for Tier 2 associations

The Act only requires a Tier 2 association to audit its financial report if:

  • the majority of members at a general meeting pass a resolution that an audit will be completed; or
  • the association is directed to do so by the Commissioner.

However if the association is required to report on its financial activities to another organisation such as funding bodies or licensing authorities, it should confirm with the organisations whether a reviewers report will satisfy these reporting requirements or whether an audit is required.

Requirements for a Tier 3 association

Tier 3 associations must prepare an annual financial report that complies with Australian Accounting Standards and includes the:

  • financial statements for the year;
  • notes to the financial statements; and
  • management committee’s declaration.

Unlike the other tiers, the Act requires all Tier 3 associations to ensure that their annual financial report is audited and a copy of the audit report is presented to the members at each annual general meeting.

Again the auditor must provide the committee with an independent declaration prior to commencing work on the audit.  The auditor must prepare a report which:

  • includes a statement whether, in their opinion the financial statements or report have been prepared in accordance with the Act.  If they are not of this opinion they must explain why.
  • describes any defects or irregularities identified in the financial statements or report;
  • includes any statements or disclosures required by the auditing standards; and
  • specifies the date the report was prepared.

If the auditor identifies any matters that they suspect breach the Act this information must be reported to Consumer Protection within 28 days of identification.