Directors’ obligations this reporting season
10 September 2020 at 7:00 am
Travis Rickard from HLB Mann Judd shares some of the points boards need to consider for 30 June financial reports in light of the uncertain future facing many organisations today.
The past six months have been a whirlwind for Australian businesses with many struggling to cope with the financial implications and fallout of COVID-19; NFPs included. Those with large workforces and a mission of service delivery to those in need (particularly those organisations in aged care and disability) have had to manage the increased costs associated with managing the spread of the infection, whilst continuing to provide services to their clients.
This has translated into significant increases in direct service costs without a proportionate increase in revenue, resulting in reduced surplus or in some instances increased deficits. Some organisations face the prospect that they will not be able to pay their debts when they fall due in the foreseeable future and thereby risk trading insolvent. Others may be in a stronger position but are still impacted by the financial fallout of COVID-19, resulting in a deferral of planned growth initiatives or delays in capital expenditure commitments.
Is your management reporting telling the right story?
To navigate through this uncertain time, boards need to be provided with accurate, relevant and timely information that enables them to make necessary decisions for the future. For some organisations, traditional profit and loss reporting will not be enough and cash flow reporting will need to be adopted.
Many organisations have delayed the annual budgeting process until certainty is provided on their sector’s future. Now is the right time to forecast where the organisation’s cash position will be in three, six and 12 months. Even with this level of uncertainty, a cash flow forecast in current conditions will provide a base point of the financial life and viability of the organisation.
What to consider for 30 June financial reports?
Responsible persons (defined generally as boards or committees) for charities registered with the ACNC need to ensure their organisation complies with ACNC legislation, as well as fulfilling their own duties under the ACNC governance standards. They are responsible for the fair presentation of their financial reports in accordance with Australian Accounting Standards and for such internal control determined necessary to enable the preparation of a financial report that is free from material misstatement, whether due to fraud or error.
There are a number of key aspects to consider this reporting season:
- Cash flow and going concern. Can your organisation pay its debts when they fall due? Responsible persons sign a statement to this effect in the 30 June 2020 financial report which covers a minimum period of 12 months from date of signing the 30 June 2020 financial report. Since March, JobKeeper has been the lifeline for many organisations who may be severely impacted without it going forward. This begs the question as to what the organisation is going to look like after JobKeeper 1.0 is finished?
- Impairment of assets. As a result of reduced financial performance, and deteriorating operational cash flows (important impairment indicators), is the carrying value of land and buildings impaired? Are clients and customers facing the same financial difficulty? This could cast doubt over their debts to the organisation and whether they are collectable. If so, directors may need to consider impairment in the financial report this year.
- Fraudulent financial reporting. Are there any pressures or motives for management to manipulate revenue and expenses to achieve a desired result for the year? There is certainly the incentive for organisations that are struggling to be able to qualify for JobKeeper and other government stimulus. Is there a potential risk of manipulation of an organisation’s financial results in order to continue receiving this stimulus?
Boards should be monitoring these points more regularly going forward considering the uncertain future facing organisations today.
Many organisations have taken lessons learned from COVID-19 as an opportunity to pivot their strategic focus and embrace new ways of doing business. Some may be in a position where recovery is doubtful and insolvency is a real threat. For these organisations they need to get onto the front foot and develop a plan to address this before not being able to pay staff wages.
Having discussions now about your organisation’s plan could be the difference between operational success for years to come or financial failure in the near future. Seeking professional advice early will assist in this process.
Visit HLB Mann Judd’s COVID-19 Resource Centre for insights to help you and your organisation during this challenging time.