Chapter 4.6 Notes to the financial statements
Notes are an integral part of a school’s financial statements, as they provide explanatory information and greater level of detail. Some note disclosure is compulsory, in accordance with NZ IFRS, but schools may choose to include notes that will add value or understanding to the reader.
Kiwi Park School model financial statements – differential and non-differential – include suggested wording for compulsory disclosure notes, most of which are self-explanatory therefore additional information is provided below for only a few areas.
Note: the grey boxes in the model financial statement notes are for explanatory purposes only and should be removed before presenting the draft accounts to the board of trustees or the auditor.
4.6.1 Related parties
Who is a related party?
A party (usually a person) is related to a school board of trustees if they can control or exert significant influence over the decisions made by the board of trustees ie, key management personnel at the school and their close family.
1. Key management personnel
Key management personnel are those persons either directly or indirectly, having authority and responsibility for planning, directing and controlling the activities of the school. Key management personnel include:
- trustees of the board
- committee members
- the Principal.
Key management personnel may also include the:
- Associate Principal
- Deputy Principal
- Assistant Principal
- Executive Officer/Business Manager
- heads of departments and any senior staff with employing or contracting responsibilities.
In general, key management personnel will include the board plus all those employees who form part of the school’s ‘senior management team’ (or whatever name the group is called).
2. Close family members
Close family members include those family members who maybe expected to influence, or be influenced by, that individual in their dealings with the school.
This includes:
- the individual’s domestic partner and children
- children of the individual’s domestic partner
- dependants of the individual or individual’s partner.
- It may also include other family members.
What is a related party transaction?
A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged.
What should be disclosed in the related parties note?
If there have been transactions between related parties, a school must disclose the nature of the related party relationship, as well as information about the nature of the transactions and outstanding balances. This is necessary for an understanding of the potential effect of the relationship on the financial statements.
Example: Nicholas Reid is a trustee of the board of Kiwi Park School. Nicholas is also the general manager of Computer City Ltd that has been used to maintain and service the school’s computer hardware and software. The total value of transactions for the year is $10,000 and no amounts remain outstanding at year end. All transactions with Computer City Ltd have been on normal trading terms and Nicholas declared his interest to the board prior to the decision to engage the company’s services.
The board needs to ensure (and have minuted) that Nicholas absented himself from meetings as soon as the topic arose. The board should also obtain alternative quotes to ensure that the services provided by Computer City Ltd are the best value for money.
This is a related party transaction. The board needs to disclose the payment of $10,000 with Computer City Ltd as a note in the financial statements. As the total value does not exceed $25,000 no approval is required from the Secretary for Education.
Example: Angela Ashby is the Principal of Kiwi Park School. In November the board purchased $24,000 of playground equipment from Big Fun Ltd. Angela’s husband Tom is the Managing Director of Big Fun Ltd. At 31 December $10,000 remained outstanding to Big Fun Ltd. All transactions have been on normal trading terms.
This is a related party transaction. The board need to disclose the payment of $14,000 and outstanding balance of $10,000 with Big Fun Ltd as a note in the financial statements. As the total value does not exceed $25,000 no approval is required from the Secretary for Education.
For a purchase of this significance the board should also undertake an RFP (Request for Proposal) or tender process to ensure there is a transparent selection mechanism for supply of the equipment. The government provides a centralised online tendering service through GETS (Government Electronic Tender System). The board should contact its Ministry of Education Regional Financial Advisor should it require assistance with this.
Under Schedule 6 of the Education Act Angela should exclude herself from the board meeting when the contract is discussed and approved since she has a pecuniary interest in the matter.
Example: Ben Moore is the Deputy Principal of Kiwi Park School. During the year, Ben Moore hired a number of relief teachers in the fourth term. A relief teacher for the accounting class was Karla Moore, Ben’s wife.
This is a related party transaction. The board needs to disclose the relationship between the Deputy Principal, Ben Moore, and his wife as a relief teacher as a note in the financial statements.
The board should review the procedure for selecting staff (even relieving staff) who are relatives of trustees or other staff and seek NZSTA advice if they are uncertain.
An appropriate disclosure note could be: ‘Ben Moore, Deputy Principal, is a member of the key management personnel of the school. His wife is employed as a relief teacher on terms and conditions that are no more favourable than the board would have adopted if there was not a relationship to a member of the key management personnel’.
back to top
Key management personnel compensation
Only schools that do not qualify for differential reporting exemptions are required to comply with this disclosure requirement (Kiwi Park School – Non-Differential).
Each school shall disclose key management personnel compensation in total and for each of the following categories:
- 1. Short-term employee benefits
- Post-employment benefits
- Other long-term benefits
- Termination benefits.
1. Short-term employee benefits include:
- salary and wages
- bonus and extra pays or gratuities
- allowances
- payments on account of a personal liability or expense incurred by the employee
- contributions to a personal superannuation plan, life or health insurance.
2. Post-employment benefits include other retirement benefits and post employment medical insurance.
3. Other long-term benefits include long-service and sabbatical leave.
4. Termination benefits include amounts paid in connection with termination of employment by:
- resignation
- retirement or redundancy
- any payment in settlement of an employment relationship problem or personal grievance.
Refer to the Kiwi Park School – Non-Differential model for an example of the necessary disclosure for key management personnel compensation.
back to top
Public benefit entities exemption
It is not necessary to report related party transactions between entities that form part of the New Zealand public sector, despite the fact that they are subject to common control or significant influence by the Crown (if the transactions are carried out at arm’s length). For example, schools and New Zealand Post are entities within the Crown Reporting entity. However, disclosure of information by a school about purchasing stamps from New Zealand Post does not provide users with useful information.
Financial interests that disqualify persons from being trustees
An individual is not allowed to be a trustee of a board or member of a committee of a board if contracts made between the board and that person (or that person is concerned or interested in the contracts) exceed $25,000 including GST (or an amount by notice in the Gazette) in any one financial year. An individual is not disqualified under section 103A of the Education Act if the Secretary approves the contract at the request of the board. Refer to Chapter 3.3.5 - Conflicts of Interest. This is a legislative requirement and does not relate to the financial reporting disclosure requirements.
4.6.2 Commitments
Earlier versions of the model financial statements for schools included a Statement of Uncommitted Funds, which is no longer required. Schools may choose to include such a statement, but it should be at the end of the financial statements so that it can be excluded from the audited information.
Schools are required to include a note on Commitments, disclosing their capital and operating commitments for up to five years in the future.
4.6.3 Contingencies
If the board is aware of any matters at 31 December that are unresolved and which may result in expenditure by the board but which is not otherwise allowed for in the accounts (such as a redundancy or severance payment), such potential for additional expense should be included as a note under Contingencies.