Tiered financial reporting

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

An association’s tier is determined by its annual revenue which 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: over $250,000 but under $1,000,000 in revenue.
  • Tier 3: $1,000,000 or above 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:

  • membership fees and subscriptions;
  • 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 eg club property;
  • unrealised gains (profit which has been made but not yet realised through a transaction) eg revaluation of inventory or club property; and
  • amounts collected on behalf of third parties.

One off increases in annual revenue

Sometimes an association’s revenue may increase because of a one off or unusual event and this increase pushes the association into a higher reporting tier. For example the association is awarded funding or receives a particularly large donation. If the association wishes to continue reporting in accordance with its usual tier an application can be made to the Commissioner to be declared as a specific tier for that particular financial year.

This application must be made no later than three months after the end of the financial year and will only be granted if the Commissioner is satisfied that the change in revenue is the result of unusual and non-recurring circumstances. 

Requirements for a Tier 1 association

To understand the reporting requirements of a Tier 1 association you need to know whether the association keeps its accounts on a cash or accrual basis.

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

Using accrual accounting the income is recorded the date it is earned (irrespective of whether the payment is actually received on that date) and the expenses when they are incurred. This method is more common where the association delivers services in return for payment or receives grants to complete particular projects.

The financial statements of an association operating on a cash basis may include 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 may prepare a financial statement that includes:

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

Auditing requirements for Tier 1 associations

Under the Act a tier 1 association is only required to complete a review or audit of its accounts 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.

If the decision to review or audit the accounts is made by a resolution of the members, the requirements of the Act regarding the qualifications, appointment and removal of the reviewer or auditor become applicable.

Where it is a condition of a funding agreement or licence that an audit be completed, the members will need to pass a resolution at a general meeting that an audit be undertaken.

Requirements for a Tier 2 association

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

  • the financial statements for the year (includes an income and expense statement, balance sheet, cash statement and statement of changes in equity);
  • 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 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 two authorised committee members.

Review requirements for Tier 2 associations

All Tier 2 associations must have their financial reports reviewed and the review report must be presented to members at each annual general meeting.

Reviewer qualifications

A review must be conducted by an independent person who is:

  • a member of Chartered Accountants Australia and New Zealand (CA or FCA), CPA Australia (CPA or FCPA) or Institute of Public Accountants (MIPA or FIPA);
  • a registered company auditor; or

Before the appointed reviewer begins they must provide the committee with a written independence declaration.

Differences between a review and audit

The process of reviewing an association’s accounts is not as detailed as completing an audit.  A reviewer will look over the report and advise whether anything has come to their attention to suggests that the report does not comply with the requirements of the Act.

In comparison, an auditor must collect evidence relating to the 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.

When an audit is required

Under the Act a tier 2 association is only required to audit its accounts 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.

Requirements for a Tier 3 association

Tier 3 associations must prepare an annual financial report in accordance with Australian Accounting Standards that includes:

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

The Act requires all Tier 3 associations to have their annual financial report audited and a copy of the audit report must be presented to the members at each annual general meeting.

Auditor qualifications

An audit must be conducted by an independent person who holds a current Certificate of Public Practice and is:

The auditor must provide the committee with an independence declaration prior to commencing work on the audit.  The audit report must:

  • include 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.
  • describe any defects or irregularities identified in the financial statements or report;
  • include any statements or disclosures required by the auditing standards; and
  • specify the date the report was prepared.