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Amendment to FRS 8 Related party disclosure



Introduction

The amendment to FRS 8 has been made to reflect certain changes in the law introduced by ‘The large and medium-sized companies and groups (accounts and reports) regulations’ (the regulations), which reflects the implementation into UK law of a European Directive. 

There are three consequences of introducing the regulations:

  • The definition of related party has the same meaning as in international accounting standards.
  • Removal of the exemption from disclosure by a parent company in its individual accounts where those accounts are presented with consolidated accounts.
  • There is still an exemption from disclosing transactions between group companies, but this is only available to subsidiaries that are wholly owned.  Currently the exemption is available where a subsidiary is owned 90% or more within the group.

It was the ASB’s original intention to issue the international standard on related parties (IAS 24); however that standard is currently subject to revision.  The ASB have therefore amended FRS 8 to reflect the requirements within legislation.

In addition, whilst not a consequence of the amendment to FRS 8, previous changes in Company Law have resulted in a requirement to disclose dividends paid to directors as related party transactions.  This is considered further below.

Definitions

The definitions within FRS 8 and IAS 24 are broadly similar and unlikely to give rise to any significant changes other than possibly in one area.

Key management personnel

The unamended version of FRS 8 includes key management personnel within the list of those ‘presumed’ to be related parties; however IAS 24 (and therefore the amended version of FRS 8) states that they are related parties.

The definition is also slightly different and the revised definition is as follows:

‘Those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity’.

Effect on disclosure

Parent company

The parent individually needs to disclose all other related party transactions, including those with non-wholly owned subsidiaries.

Exemption within groups

Group structures will need to be reviewed to identify subsidiaries which were in the 90%+ category and therefore able to take the exemption in the subsidiary single entity accounts, but which will no longer be able to do so.  Intra-group transactions will then be required to be disclosed within the relevant financial statements and comparative information will also need to be presented.

Key management personnel

Consideration of whether there are any individuals other than the directors who meet the definition of key management needs to be made on all assignments.   For most entities the respective operational responsibilities of directors and other key employees means that those employees will not usually meet the definition of key management personnel.  However, careful consideration will be needed where the management of the entity is more devolved from the directors, for example subsidiaries of overseas companies where none of the directors are based in the UK.

Directors’ dividends as related party transactions

Dividends payable to directors have, historically, not been included within related party disclosures.  Although they fall within the definition of a related party, non-disclosure was usual based on the fact that because director shareholdings and dividend rates were disclosed, it was easy to calculate the dividend payable to the director.  With the removal of the requirement to disclose directors’ shareholdings in the Directors’ report, this has ceased to be the position and dividends payable to directors should be disclosed.

Implementation

The amendments are applicable for periods beginning on or after 6 April 2008.

Additional guidance

The table below summarises the requirements as they apply to groups.

 

Individual Accounts

Group Accounts of Parent Co Limited

Parent Co Limited

Disclose all RPTs other than those with its 100% owned subsidiaries

 

 

Disclose all RPTs other than those that eliminate on consolidation 

100% subsidiary

Disclose all RPTs other than those with their parent and with other subsidiaries that are 100% owned within the group

< 100% owned subsidiary

Disclose all RPTs

 

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