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Inside this issue:

 

The use of a non-profit Trust

The Statutory Audit requirement

Memorandum of Incorporation

Did you know?

 

Quarter 1: 2016

 

Welcome to The NPO Journal, the first issue of 2016, where we aim to present on a wide variety of issues (including legal, tax, management and finance) affecting the NPO sector in a simplified and easy-to-read manner.

 

In this issue, we will be looking at the use of a Trust as a legal structure to house the activities of a non-profit organisation, some changes to auditing landscape and an update on the Memorandum of Incorporation (MOI).

 

We’ve also added in a section for you to contribute your views/articles or share something of interest with us. Please email us at This email address is being protected from spambots. You need JavaScript enabled to view it.and we will endeavor to include these in upcoming newsletters.

Legal – The use of a non-profit Trust

A non-profit organisation (NPO) can operate within one of the following legal structures:

·       a Non-Profit Company (NPC) - previously known as a section 21 company, or

·       a non-profit trust; or

·       a voluntary association. 

Previously we focused on the NPC as a vehicle to operate within. In this issue we will review the basics of a trust.

A trust is established by means of a written document called a deed of trust. The activities of the trust are clearly stated and identified. The appointment, powers and responsibilities of the trustees who would administer the trust are recorded. A trust is administered in terms of the Trust Property Control Act (Act 57 of 1988). This Act, to a large extent supervises the trustees and to a lesser extent, the activities of the trust.

A trust deed is put into operation after it is executed. The trust deed needs to be signed and dated in the presence of independent witnesses, by those who are setting up the trust, namely, the founder (also known as the settler or donor) and the trustees in order for it to be executed.

Once a trust deed has been executed, it should be registered with the Office of the Master of the High Court in the region or province where its office or major assets will be held. The Master of the High Court approves the appointment of the trustees and has the power to override any of the clauses of the trust deed and has the final say in matters in dispute.

A trust:

·       does not have a legal personality of its own,  i.e. a trust cannot own land or sign documents in its own name.  Assets will be registered in the names of the trustees “acting on behalf of the trust” or “acting in their capacity as trustees of the trust”. However, should the non-profit organisation register with the Directorate of the Non-profit Organisations, it will attain a legal personality;

·       all debts and liabilities which the trustees  have incurred on behalf of the trust, can be met from the trust’s own funds. The trustees may be liable for the repayment of any debts if they have committed fraud or acted with gross negligence.

It may be appropriate to establish a trust where some or all of the following apply:

·        the organisation is to be run by a fairly small group of people;

·        there is no time limit on how long the trustees will be in office (although they can be appointed for a specific period of time if necessary);

·        the organisation is not going to rely on its membership for any part of its administration;

·        the administration of the organisation is going to be simple;

·        land and buildings are to be held on trust for permanent use for the purposes of the non-profit organisation.

One of the advantages of a trust is the flexibility in that it allows the draftsperson to include a variety of clauses that facilitate the easy functioning of the organisation. More simply put – whatever is contained in the Deed of Trust becomes the “law” of the organization and this is not regulated by another Act (e.g. the Companies Act) which imposes rules and regulations for NPC’s.

 

The Statutory Audit requirement

In terms of the new Companies Act, an NPO requires an audit if:

·       if it was incorporated:

o    directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company; or

o   primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; or

·       The public interest score (PIS) in that financial year is

o   350 or more; or

o   at least 100, but less than 350, if its annual financial statements for that year were internally compiled.*

*Internally compiled financials refers to a situation whereby the Annual Financial Statements are internally prepared by an individual within the organization or group structure.

 

What is the Public Interest Score (PIS)?

The PIS is a score used to determine which Financial Reporting Standards a company must use – i.e. whether a company must be audited or independently reviewed (see below) and is determined as followed:

·       A number of points equal to the average number of employees of the company during the financial year

  • One point for every R1 million (or portion thereof) in third party liability of the company at the financial year end
  • One point for every R1 million (or portion thereof) in turnover during the financial year
  • One point for every individual who, at the end of the financial year, is known by the company to directly or indirectly have a beneficial interest in any of the company's issued securities.

Where a company does not compulsorily require an audit in terms of its PIS, it may opt for an independent review.

 

Audit vs Independent Review

An independent review is an alternative form of external independent assurance of financial statements and differs from an audit in the following:

·       The level of assurance provided is moderate as compared to an audit which provides a high assurance level. Given that an independent review does not require detailed audit testing to be performed (but rather is mainly inquiry and analytical procedures) it thus provides a lower level of assurance;

·       There is no requirement to evaluate the organisations internal controls;

·       An in-depth understanding of the entity is not required;

·       Less expensive than an audit due to the reduction in time spent;

·       Can be performed by anyone that qualifies to practice as an Accounting officer as opposed to an audit which can only be done by a Registered Auditor; and

·       Not regulated by any professional body.

As noted above, since the time spent on an independent review is much less, the organisation will duly benefit from a reduction in fees.

The disadvantage of an independent review however could be the lower level of assurance provided as a potential donor or financier would not place as much reliance on independently reviewed financial statements as opposed to audited financial statements.

Another disadvantage is that, if an independent review is done in a particular year and the organisation experiences significant growth in the future and the public interest score requires an audit be performed, that first years audit opinion will be qualified on the basis that the opening balances were unaudited.

It is still recommended that NPOs undertake statutory audits as opposed to independent reviews, even though it may cost the NPO more.  In most cases donors would place more reliance on audited financial statements as the procedures are more rigorous.

 

Changes in reporting standards

NPO’s that are audited should be aware that the audit reporting standard has changed. All financial periods ending on or after 15 December 2016, will have to comply with the new audit report standards.

The revised audit report aims to improve transparency with the following notable changes:

·       Structure and layout of the report differs to the old report

·       Disclosure of a new section called “Key audit matters” only for listed entities

·       Going concern is given more prominence with its own paragraph

·       Auditors now make an affirmative statement regarding independence and ethical responsibilities

·       Inclusion of a section relating to “Other Information”

·       Enhanced description of the Responsibilities of Auditor, Management and those charged with governance

 

How will the above changes impact management?

The new audit report does not change the audit process; however it does impact the interactions between management and the auditors.

Management will have to evaluate the independence of their auditors annually especially when non –audit services are rendered. As there is increased focus on going concern, the going concern assessment process will also have to be evaluated.

If ‘Other Information’ is presented, management has to determine which documents will be within the scope of “Other information” through discussion with the auditors and through review of the relevant auditing standard.

The timing of the preparation and availability of the ‘Other information’ has to be discussed and agreed with the auditors. The ‘Other Information” has to be assessed for consistency with the annual financial statements.

For more information please email This email address is being protected from spambots. You need JavaScript enabled to view it., our lead audit partner.

Memorandum of Incorporation (MOI) in terms of the Companies Act, 2008

It has already been 5 years since the new Company’s Act came into effect and since the effective date of 1 May 2011 there still remains a large number of NPO’s that have not amended their founding documents i.e. the Memorandum of Incorporation (MOI) or Memorandum and Articles of Association as was previously known.

In fact whilst many considered this to be an additional burden to NPOs, more specifically Non-Profit Companies (NPC’s) or the old S21 Companies, others have seen it as an opportunity to review and “clean up “outdated founding documents (whether it be  MOI’s, Trust Deeds or Constitutions) which may have been drafted upon initial incorporation and not “in line” with the entity’s existing focus.

Given that these documents could have had a number of clauses that may be either irrelevant in today’s environment or in some instances non-compliant with legislation altogether. 

Some of the issues we have found to be prevalent are noted below:

·       Ancillary objects: The new Act does not refer specially to ancillary objects and thus NPOs are permitted to undertake other ancillary objectives (over and above the Main objects)

·       Powers: S19(1)(b) of the new Act grants the entity all of the relevant legal powers and capacity and thus the MOI does not have specifically list all of the powers, unless certain are to restricted or additional powers added

·       Business activities: The new Act does not place restrictions on an NPO.  The Income Tax also allows for trading activities subject to certain limitations

·       Members: NPC’s can now operate without a membership structure, whereas with the old Act a membership structure was mandatory

·       Audit: certain categories of companies, including NPCs, can choose an Independent Review as opposed to an audit if certain criteria are satisfied under the new Act

·       Electronic meetings: Section 73(3)(b) of the new Act  allows for directors to participate in meetings by means of electronic communication

·       Public Benefit Organisation: prescribed requirements as set out in the Income Tax Act, are often not incorporated within the existing statutory documents, which is critical for NPOs to maintain their PBO status

Whilst the above is not exhaustive and does not encompass all of the potential issues in existing founding documents of NPOs it serves to highlight the fact that it is imperative for management to consider reviewing founding documents to ensure that these remains relevant and compliant.

Did you know?

·       The Trust is an in-expensive structure to house the affairs of an NPO and considered as the most versatile vehicle for operations of the business.

·       The audit report has been amended from the previous required reports.

·       Using a standard MOI can be a major risk to an NPO as clauses will not be tailored according to an NPOs unique needs