Financial reporting and control relationships

Updated 13 September 2024

Financial reporting needs to tell a story about what you do, the resources you use to do it and how well set up you are to continue it. To tell this story, you may need to consider whether you have control relationships with other organisations. If you have control relationships, this could affect the story that needs to be told and the reporting tier that your charity is eligible to use. 

It can be hard to work out if and when charities have a control relationship. You need to think carefully about the nature of the relationships between the organisations involved. A control relationship can exist in a variety of ways and the underlying circumstances will vary. 

For example, some charities set up separate organisations to carry out some of their activities. A charity might establish a trust to manage its properties and investments, or an incorporated society to run a second-hand shop that provides income. In these situations, the charity is likely to have a control relationship with the trust or incorporated society. If so, the charity may need to include information about them in its performance report (Tier 3 and Tier 4) or financial statements (Tier 1 and Tier 2). 

What is control?

The reporting standards define control as when “an entity controls another entity when the entity is , or has rights, to variable benefits from its involvement with the other entity and has the ability to affect the nature or amount of those benefits through its power over the other entity”.

But what does that mean? In simple terms: 

Benefits can be financial or non-financial, and they can be something the charity has the potential to get, not just something it already received.

Signs of power

The charity has the ability to:

• veto, overrule or modify decisions of the organisation’s governing group;
• appoint or remove members from the organisation’s governing group;
• set or modify policy about how revenue is raised or how money is spent by the organisation; or
• close or wind up the organisation.
  
  

Signs of benefit

The charity benefits by:

• receiving all or a portion of the organisation’s profits/, or even being responsible for the organisation’s losses (negative benefit);
• the organisation providing goods or services which contribute to the charity’s objectives; or
• having access to specialised knowledge of the other entity.
  
  

Signs of influence

The charity can:

• use its power to direct the organisation’s work to further its objectives;
• use its power to direct the organisation to sell assets to pass on profit to the charity;
• use its power to direct funding to further its objectives.
  
  

It can be hard to work out if and when charities have a control relationship. You need to think carefully about the nature of the relationships between the organisations involved. A control relationship can exist in a variety of ways and the underlying circumstances will vary. 

For example, some charities set up separate organisations to carry out some of their activities. A charity might establish a trust to manage its properties and investments, or an incorporated society to run a second-hand shop that provides income. In these situations, the charity is likely to have a control relationship with the trust or incorporated society. If so, the charity may need to include information about them in its performance report (Tier 3 and Tier 4) or financial statements (Tier 1 and Tier 2). 

How can control affect the reporting tier?

If a registered charity has control relationships with other organisations, these organisations are considered part of that charity’s reporting entity. The size of this reporting entity is what determines which reporting tier you use, rather than the size of the individual organisations in the group. 

The combined expenditure of the organisations in a reporting entity may mean the charity needs to report in a higher tier. Combined expenditure does not include transactions between the organisations within the reporting entity. For example:

The controlling charity in a reporting entity must prepare consolidated financial statements. They must submit these to Charities Services together with their annual returns. The information provided on the controlling charity’s annual return form will also need to be consolidated information.

Tier 4 charities should carefully consider their control relationships. Where a reporting entity contains several Tier 4 charities and the combined expenditure is over $140,000, they will need to prepare their performance report either at Tier 3, Tier 2 or Tier 1. This would involve consolidation and a shift from the cash-based accounting method of Tier 4 to the accrual-based accounting method, which is required at all other tiers.

Reporting entities which have a combined expenditure of less than $140,000 and still meet the requirements of Tier 4, do not need to prepare consolidated financial statements. They can continue preparing individual accounts using the Tier 4 reporting standard. Alternatively, these charities can choose to report at a higher Tier and will need to prepare consolidated financial statements.

What are consolidated financial statements?

Consolidated financial statements present information about a charity and the organisations it controls (called controlled entities) as a single reporting entity. The controlling entity combines its assets, liabilities, equity, income, expenses and cash flows with those of the controlled entities and presents the combined amounts. Non-financial service performance information (such as purpose, outcomes and outputs) is also combined in the consolidated statements. 

If your charity has to prepare a consolidated performance report, you must follow the processes for consolidated under the Tier 2 Standard "PBE IPSAS 35: Consolidated Financial Statements". 

Do we submit the consolidated financial statements or the separate financial statements to Charities Services?

If your charity controls other organisations, you must submit the consolidated financial statements or performance report to Charities Services, together with a completed annual return form.

If the entities that your charity controls are also registered charities, those charities must also submit their separate financial statements or performance report with their annual return form.

There is an exception where a charity is registered only as a “group” or where separately registered charities have also created a “group” registration. More information about group registration can be found on our website.

For example: if the head office of a religious organisation and all its parishes are separately registered under the Charities Act 2005:

• the head office would submit consolidated financial statements; and
• the parishes would each submit separate financial statements that are compliant with the applicable reporting standards covering their own activities, balances etc.

Examples of a control relationship

Scenario one

A registered charity, Green Ocean, sets up a separate organisation, a charitable trust, called Blue River. The purpose of Blue River is to reduce the pollution of local streams and rivers. Blue River keeps its finances and management separate from Green Ocean. The Blue River governing board is made up of members of the community and members of Green Ocean. Green Ocean appoints the Chair of Blue River and is able to veto any person nominated for the Blue River’s governing board. Green Ocean can also direct the areas where Blue River will work.

Green Ocean’s ability to appoint the Chair and veto board members is an indicator of power. Green Ocean benefits by achieving some of its objectives through the reduction of pollution of local streams and rivers through the work of Blue River. Green Ocean can also influence the nature of the benefits by directing the location of the work. Together these indicate that Green Ocean has a control relationship with Blue River.

Scenario two

The head body of a religious organisation is a registered charity. The charity is responsible for the governing document of the church and they can make changes to this document. The document sets out a number of matters, including the tenets of their faith, the mission and objectives of the church, the structure of the church (which includes regional bodies and local parishes) and how local parishes must use any funds received. It also requires a portion of the funds received by the congregation be provided to the head body. The head body can dissolve a local parish in certain circumstances and close a parish in consultation with the congregation. If a parish is dissolved or closed, any assets transfer to the head office.

The charity’s ability to set and change the document containing the operating and financial policies of the church is an indication of power over local parishes. The charity receives financial benefits from the local parishes, and can influence the amount of those benefits through its power to change the document. The charity also benefits from the parishes providing services to the congregation to achieve the overall objectives and mission of the church. These factors indicate that the head body has a control relationship with the parishes.

More information

Charities Services cannot tell you whether you are in a control relationship. You are best placed to do this, as you have a good understanding of your organisation, and the nature of any relationships you have with other organisations. You may want to seek professional advice, especially if your structure is complex.

If you think you may have a control relationship with another organisation, refer to the standards and guidance material on the External Reporting Board's website(external link).

Relevant documents include:

• XRB A1: Application of the Accounting Standards Framework(external link)
• PBE IPSAS 34: Separate Financial Statements(external link)
• PBE IPSAS 35: Consolidated Financial Statements(external link)
• EG A8: The Reporting Entity, and(external link)
• EG A9: Identifying Relationships for Finanical Reporting Purposes(external link)