Related party transactions are a key area of risk for charities from a governance and a financial reporting perspective.
What is a related party transaction?
SORP definition: Related party transactions are the transfer of resources, services or obligations between related parties, regardless of whether a price is charged.
Why is it important?
It gives the reader of the accounts assurance that the charity is operating for the public benefit that the Trustees are acting in the interests of their charity and not for private benefit.
Who is a related party?
The definition may be wider than you think. It encapsulates more than just key management and trustees and their own business interests. It extends to their close family (parents, children, spouses/domestic partners, siblings and grandchildren).
How do you identify related party transactions?
Step 1
You need all trustees and key management personnel to complete a declaration of interest and update this at least annually. This form needs to disclose any interests they have, names of their close family and any interests their close family members have.
Step 2
Transactions with related parties should be discussed at board level with the relevant party removed from the discussion. Trustees should carefully assess the transactions appropriateness and ensure this is documented.
Step 3
As part of your year end closedown procedures you need to review the nominal ledger to see if any of the names or organisations that have been disclosed have had any transactions with the charity during the financial period.
Step 4
If they have, they need to be disclosed as related party transactions.
What are charities required to disclose?
Charities preparing accruals (SORP) accounts must disclose:
- trustees’ remuneration and benefits
- trustees’ expenses
- transactions with those persons and entities that are closely connected to the charity or its trustees, referred to as related parties.
- donations with conditions and an aggregate disclosure of the total amount of donations received without conditions.
If there have been no transactions of each type, this fact must be stated.
What is new in the SORP?
The latest update to the Charities SORP introduces a new requirement for charities to disclose commitments with related parties that exist at the reporting date. This adds an additional layer of transparency and reinforces the importance of accurate record keeping throughout the year.
The next step
Charities should regularly review their processes for identifying and managing related party transactions to ensure full compliance with the SORP and to maintain strong governance standards.
If you’d like to discuss any of the points raised in this blog, please contact your usual UHY charity adviser or get in touch using the contact form below.
