Conflicts of interest and the related party – When to disclose the guest list
Posted on 9 September 2016
In the previous three blog posts, we discussed conflicts of interest (including ensuring you are making decisions in the best interests of your charity) and how to manage conflicts of interests in your charity’s rules document. In the fourth post in this series, we are going to cover what you need to do in terms of your financial reporting when your charity has related party transactions.
We get a lot of questions about this, and one of the things that seems to confuse people is the difference between a related party, and a related party transaction. All organisations will have related parties. As covered in the first post in the series, related parties are generally people who have influence over the way the charity is run (trustees, officers board members) and their close family members (parents, children, siblings, spouses and business partners). Related parties themselves do not need to be disclosed, it is any transactions with those people that do. Even then, the transaction only needs to be disclosed if it is either not at market rate (also known as at arms-length) or if it is significant* to the organisation. A market value or arms-length transaction means the same value that any other person who had no relationship to the charity would pay or receive for the same goods or services.
I’ll expand on this further with a fictional example:
Let’s pretend that I am a trustee for a charity that runs a day care centre. The market rate published on the website for a place at the day care is $4.50 an hour. I send my son to the day care, and I receive a discount of 50 cents an hour because of the volunteer hours I put into the Trust. This is not an arms-length transaction as it is not at market rate, therefore I would need to disclose this transaction.
During the year, there was a big storm and a tree fell through the roof of the day care. We needed to get the roof repaired. My husband and I happen to have a roofing business. The trustees get quotes from 3 roofing businesses including ours. The quotes come in at $22,000, $21,000 and $20,500. The trustees pick the lowest quote which happens to be from our company. The trustees have made the decision in the best interests of the charity by choosing the lowest quote and the quote is clearly at market value as it is very close to the other two obtained. However, we must disclose it as a related party transaction because the value is significant to the Trust.
Sometimes, you might also want to disclose related party transactions which are at market value and not significant simply because it adds to the transparency of your report. It’s about showing the reader that you’ve acted in the best interests of the charity, and not for any personal gain.
As mentioned in the previous blog posts, each entity should keep an interests register so that related party transactions are easy to identify. Using the example above, I would have “Shareholder and Director of Dave’s Roofing Business” by my name in the interests register. It’s good practice to keep a record of all related party transactions identified throughout the year to help you when you come to report.
You can use the following steps when you are preparing your related party disclosures in your Performance Report:
- Review the list of related party transactions and the interests register and talk to your governance group to ensure you have identified all transactions
- Establish whether any transactions aren’t at market value
- If they are at market value, ask yourself whether they are significant
- If the transactions aren’t significant, ask whether they should be disclosed anyway in the interests of transparency. The test we like to use is “If I didn’t disclose this, and someone questioned it, how would this look for my charity if it was published on the front page of stuff.co.nz?”
The information about related party transactions that you need to disclose in your Performance Report is:
- A description of the relationship between the charity and the related party;
- A description of the transaction;
- The value of the transaction; and
- Any amounts payable or receivable at balance date to the related party.
In the charitable sector, related party transactions are really common and that’s not a bad thing. It’s really great if you can get goods and services for less than you would normally have to pay. The key thing is that you disclose them so that everything is out in the open.
We have a really helpful section on our website about related party transactions which includes some good examples. If you are still unsure, then please call us on 0508 CHARITIES or e-mail us on firstname.lastname@example.org