Foundation Assets in Indonesia: Key Rules on Sources, Use, and Reporting

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Authors

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Background

Under Law No. 16 of 2001 concerning Foundations, as amended by Law No. 28 of 2004 ("Foundation Law"), a foundation (yayasan) is a legal entity consisting of separated assets designated to achieve specific purposes in the social, religious, and humanitarian fields and has no members.

The establishment of a foundation, including the applicable initial-asset requirements, was previously discussed in our ARMA Update — A Guideline to Foundations in Indonesia. This ARMA Update focuses on the principal requirements governing the sources, use, transfer, distribution, and reporting of foundation assets under the Foundation Law as well as the Government Regulation No. 63 of 2008, as amended by Government Regulation No. 2 of 2013 ("Foundation Regulation").

Sources of Foundation Assets

The Foundation Law recognises that a foundation may build and maintain its assets from several lawful sources. In addition to the assets initially separated by its founder in the form of money or goods, a foundation may obtain assets from:[1]

1. non-binding donations or assistance, which refers to voluntary donations or assistance received from the State, the public, or another party that do not conflict with applicable laws and regulations;
2. waqf (endowments);
3. grants;
4. testamentary grants; and
5. other sources that do not conflict with its articles of association or applicable laws and regulations, such as dividends, bank interest, building rental income, and proceeds from the foundation's business activities.

These sources provide a foundation with several means of supporting its activities, while remaining subject to the requirement that all foundation assets be used to achieve its stated purposes.

Use and Distribution of Foundation Assets

All assets obtained from the sources recognised under the Foundation Law must be used to achieve the foundation's purposes.[2] Foundation assets, whether in the form of money, goods, or other assets, must not be transferred or distributed, directly or indirectly, to members of the Board of Trustees (Pembina), Board of Management (Pengurus), or Board of Supervisors (Pengawas), whether as salaries, wages, honoraria, or another form that can be valued in money.[3]

As a limited exception, the articles of association may provide that a member of the Board of Management receives a salary, wage, or honorarium where that person:[4]

1. is not a founder and is not affiliated with the founder, Board of Trustees, or Board of Supervisors. Such affiliation means a family relationship by marriage or descent up to the third degree, horizontally or vertically; and
2. manages the foundation directly and on a full-time basis, meaning that such management duties are performed in accordance with the foundation's working days and hours and not on a part-time basis.

The remuneration must be determined by the Board of Trustees in accordance with the financial capacity of the foundation.[5] The foundation must nevertheless pay costs or expenses incurred by its organs in carrying out their duties for the foundation.[6]

A member of a foundation organ who violates the restrictions on the distribution of foundation assets may be subject to imprisonment for up to five years. In addition, the relevant person may be required to return the money, goods, or other foundation assets transferred or distributed.[7]

Transfer and Encumbrance of Foundation Assets

To safeguard foundation assets and ensure that they remain available for the achievement of the foundation's purposes, the Foundation Law limits the authority of the Board of Management in relation to certain transactions. The Board of Management is not authorised to:[8]

1. bind the foundation as a guarantor of debt;
2. transfer foundation assets without the approval of the Board of Trustees; or
3. encumber foundation assets for the benefit of another party.

The foundation's articles of association may impose further restrictions on the authority of the Board of Management to perform legal acts for and on behalf of the foundation. For specified transactions, the articles of association may require prior approval from the Board of Trustees and/or the Board of Supervisors.[9]

Financial Records and Annual Reports

The Board of Management must prepare and retain records containing information concerning the foundation's rights, obligations, and other matters relating to its activities. It must also prepare and retain financial documents consisting of accounting records and supporting financial-administration data.[10]

Within five months after the end of each financial year, the Board of Management must prepare a written annual report containing at least:[11]

1. a report on the condition and activities of the foundation during the preceding financial year and the results achieved; and
2. financial statements consisting of a statement of financial position, statement of activities, cash-flow statement, and notes to the financial statements.

Additionally, transactions with other parties that give rise to rights and obligations for the foundation must also be reported in detail in the annual report, reflecting the principles of transparency and accountability to the public.[12]

The annual report must be signed by the Board of Management and Board of Supervisors in accordance with the articles of association and approved by the meeting of the Board of Trustees. A member who does not sign the report must state the reason in writing.[13]

Where an annual report is incorrect and misleading, the Board of Management and Board of Supervisors are jointly and severally liable to the injured party, which may include the foundation, the public, and/or the State.[14]

Publication and Audit Requirements

A summary of the annual report must be displayed on the notice board at the foundation's office.[15] The financial-statement summary forming part of the annual-report summary must also be published in an Indonesian-language daily newspaper in the event that the foundation:[16]

1. receives State assistance, foreign assistance, and/or assistance from another party amounting to IDR 500,000,000 or more in one financial year; or
2. has assets, excluding waqf assets, amounting to IDR 20,000,000,000 or more.

The financial statements of a foundation meeting either threshold must be audited by a public accountant. The audit results must be submitted to the Board of Trustees, with copies provided to the Minister of Law and the relevant institution. The financial statements must be prepared in accordance with the applicable financial accounting standards.[17]

A foundation receiving State assistance is also required to submit an annual activity and financial report to the government authority providing the assistance.[18] Such assistance may only be used in accordance with the foundation's purposes, the activities specified in its articles of association, and its work programme. State assistance must not be transferred or distributed, directly or indirectly, to the foundation's organs or another party.[19]

Closing Remarks

Foundation assets must remain dedicated to the achievement of the foundation's purposes. The Foundation Law therefore regulates not only the sources from which those assets may be obtained, but also their use, transfer, distribution, documentation, disclosure, and audit.

Compliance with these requirements forms an integral part of the foundation's governance and accountability framework.

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Footnotes

[1] Article 26 paragraphs (1) and (2) of the Foundation Law. ↩

[2] Article 26 paragraph (4) of the Foundation Law. ↩

[3] Article 5 paragraph (1) of the Foundation Law. ↩

[4] Article 5 paragraph (2) of the Foundation Law. ↩

[5] Article 5 paragraph (3) of the Foundation Law. ↩

[6] Article 6 of the Foundation Law. ↩

[7] Article 70 paragraphs (1) and (2) of the Foundation Law. ↩

[8] Article 37 paragraph (1) of the Foundation Law. ↩

[9] Article 37 paragraph (2) of the Foundation Law. ↩

[10] Article 48 paragraphs (1) and (2) of the Foundation Law. ↩

[11] Article 49 paragraph (1) of the Foundation Law. ↩

[12] Article 49 paragraph (2) of the Foundation Law. ↩

[13] Article 50 paragraphs (1) to (3) of the Foundation Law. ↩

[14] Article 51 of the Foundation Law. ↩

[15] Article 52 paragraph (1) of the Foundation Law. ↩

[16] Article 52 paragraph (2) of the Foundation Law. ↩

[17] Article 52 paragraphs (3) to (5) of the Foundation Law. ↩

[18] Article 24 of the Foundation Regulation. ↩

[19] Article 25 paragraphs (1) to (4) of the Foundation Regulation. ↩

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Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.

Go to

1. Background
2. Sources of Foundation Assets
3. Use and Distribution of Foundation Assets
4. Transfer and Encumbrance of Foundation Assets
5. Financial Records and Annual Reports
6. Publication and Audit Requirements
7. Closing Remarks

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