Related party transactions for Tier 3 and Tier 4 charities

The Tier 3 and Tier 4 financial reporting standards require charities to report related party transactions. Related party transactions are recorded in the Notes section of the performance report.

A related party transaction is a transfer of money, goods or services between a charity and those who are closely associated and have the ability to influence the charity.

Charities typically rely on volunteers and donated goods or services, especially from related parties such as officeholders and members of the governing group. Therefore, reporting related party transactions is an important requirement to ensure accountability and transparency of transactions between the charity and any related parties. It will also show the level of contribution and support the charity receives from related parties through donated and discounted goods or services.

Who are related parties?

Related parties can be people or organisations, including:

• people who have significant influence over the strategic and financial decisions of the charity (such as officeholders, committee members, or managers) and close members of their families (such as a parent, partner, sibling, or child)
• other organisations that have significant influence over the charity (for example, an organisation that appoints one of the members of the governing group of the charity).

Note: People are not considered to have significant influence if they are involved only in the day-to-day running of the charity and have no involvement in its strategic or financial decisions.

What are related party transactions?

A related party transaction is a transfer of money, goods or services between a charity and a related party.

You must report transactions with a related party that are:

• significant to your charity (in nature or financial value), or
• not on normal terms and conditions (for example, discounted or donated goods, or discounted or volunteered professional services).

What is considered ‘significant’ will mean different things for different charities. What is considered significant for a small charity may not be significant for a larger charity. Use your best judgement to decide what is significant. Ask yourself, could including or excluding the information change a reader’s understanding of your charity and its performance report? 

‘Normal terms and conditions’ is how a type of transaction would normally take place. Because of the relationship a related party has with the charity, terms and conditions can often be different. For example, a charity might pay less than the market price (including free goods or services), or the opportunity or agreement would not be available to someone who was not a related party.

Charities are required to show the following information about related party transactions:

• description of the related party relationship
• description and amount (where a dollar value is applicable) of the transaction(s) during the financial year
• amount due to, or from, related parties at balance date.

Do we separately list every single related party transaction?

The focus should be on the separate reporting of transactions that are:

• significant to your charity, or
• outside the normal day-to-day operations of your charity, or outside the normal day-to-day role of members of the governing group. 

Other related party transactions may be sufficiently reported by grouping them together or providing a general statement.

For example, members of the governing group will often use their professional skills and knowledge to assist the charity. A general statement that members of the governing group have used their professional skills to provide services at no charge to the charity will be sufficient to acknowledge the normal day-to-day role of members of the governing group.

Charities will need to use their best judgement to decide which transactions should be separately reported and when a general statement or grouping them together is sufficient.

Examples of decisions about related party transactions

The following fictional examples have been created to help you understand how to report related party transactions. Three questions are used to help decide when and how to report:

1. Are they a related party?
2. Should the transaction be reported?
3. Should it be reported separately?

Example 1:  Judy – a treasurer who is an accountant

Judy West, an accountant, is a trustee and the treasurer for a small charity. Judy uses her expertise to manage the charity’s finances and prepares financial reports, free of charge.

1. Judy is a related party because she is a member of the governing group.
2. Providing this work for free would be considered not normal terms and conditions, as Judy normally charges for accounting work. Therefore, this transaction should be reported.
3. The services that she provides are typical of services provided by trustees as part of their normal day-to-day role. Therefore, the following general statement could be used to provide information about this and similar transactions: 

Example 2:  Tim – a trustee who provides professional services

Tim Jones is a trustee of a large Tier 3 trust and is also a partner of TUV Law Firm. The trust owns a building and there have been some serious legal issues in relation to the building. The trustees need to involve a lawyer to resolve the issues. The trustees ask TUV Law Firm to act on behalf of the trust and agree they will be charged at the usual rate. The matter gets resolved by TUV Law Firm at a cost to the trust of $10,000. The last invoice for $750 for these services was received just before year end and is yet to be paid. 

1. TUV Law Firm is a related party because Tim is both a partner in the firm and a member of the charity’s governing group.
2. The work he carries out in his professional capacity is on normal terms and conditions, however it is significant in nature to the charity. Therefore, this transaction should be reported.
3. Because it is significant and it is outside his normal day-to-day role as a trustee, it should be reported separately. For example:

Example 3:  Karen – a committee member who makes an anonymous donation

Karen Lee is a member of the committee of the charity Project Green. Karen makes a significant donation of $12,000 to Project Green on the basis that it remains anonymous. The donation is for the particular purpose of building a glass house at their plant nursery.

1. Karen is a related party as she is a a committee member.
2. The donation is of significant value to the charity. Therefore, this transaction should be reported.
3. As it is significant, it should be reported separately. For example:

Example 4:  Sam – a chief executive’s son who provides professional services

Scenario one:

Maraea Paki is employed as the chief executive of Central Community Centre. Her son, Sam Paki, is an electrician who often helps out at working bees and doing odd jobs, which have included replacing a broken light fitting and installing an outdoor sensor light.

1. Sam is a related party because he is a close family member of someone who has significant influence over the charity.  
2. The extent of the work Sam does for the charity may not be considered financially significant, but it is not on normal terms and conditions as Sam would normally charge people for this type of work. Therefore, this should be reported as a related party transaction.
3. This type of volunteer activity is part of the normal day-to-day running of the charity. The following general statement, which groups together the similar work of family members, could be used to provide information about this and similar transactions: 

Scenario two:

Another year, Central Community Centre had to rewire the premises it owns. Sam did all the electrical work and only charged for the cost of materials, which was $2,000.  It would have cost about $7,000 in total had Sam charged his usual commercial rates.

1. Sam is a related party.
2. The work is not on normal terms and conditions as Sam only charged for materials.  Therefore, this transaction should be reported.
3. Sam’s services are over and above the type of assistance usually provided to the charity by volunteers (outside normal day-to-day operations) so it should be separately reported. For example:

If the charity does not know how much the work would have cost at commercial rates it could say “The commercial value is not known.”

Example 5:  Paul – a board member’s partner who is employed by the charity

Kerry O'Brien is a board member of the Little Bay Arts Centre, a small Tier 4 charity. Kerry’s husband, Paul O'Brien, is employed by the Little Bay Arts Centre as a full-time administrator to look after the day-to-day running of the centre. Paul is the only employee and a large portion of the charity’s operating payments are used to pay his salary, which was $44,500 this year and $42,500 the year before.

1. Paul is a related party as his wife is a board member.
2. He is paid a salary which is financially significant to the charity. Therefore, this transaction should be reported.
3. It should be separately reported as it is significant to the charity. For example: