Chapter 26
Related-party
disclosures
.
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Objectives of this lecture
• Understand what a related party is
• Be aware of some of the categories of related
parties
• Understand what is meant by a related-party
transaction
• Be aware of some of the risks and opportunities that
accrue as a result of transactions with related
parties
• Understand the rationale behind disclosing
information about related-party transactions
• Understand some of the various disclosure
requirements included within the Corporations Act
2001, and AASB 124 Related Party Disclosures
.
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Related-party relationship defined
• Related parties
– if one party has the ability to significantly influence or
control the activities of another, or
– if both parties are under the common control of
another party
• Related parties include:
– organisations that are controlling or controlled by the
entity, or are significantly influencing or significantly
influenced by the entity; and
– individuals such as key management personnel or
close family members
.
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Definition of related party as provided at par. 9 of
AASB 124 Related Party Disclosures
A party is related if
(a) directly, or indirectly through one or more
intermediaries, the party:
(i) controls, is controlled by, or is under common
control with, the entity (this includes parents,
subsidiaries and fellow subsidiaries);
(ii) has an interest in the entity that gives it
significant influence over the entity; or
(iii) has joint control over the entity;
(b) the party is an associate (as defined in AASB 128
Investments in Associates) of the entity;
(c) the party is a joint venture in which the entity is a
venturer (see AASB 131 Interests in Joint Ventures);
.
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Definition of related party as provided at par. 9 of
AASB 124 Related Party Disclosures (cont.)
(d) the party is a member of the key management
personnel of the entity or its parent;
(e) the party is a close member of the family of any
individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly
controlled or significantly influenced by, or for which
significant voting power in such entity resides with,
directly or indirectly, any individual referred to in (d)
or (e); or
(g) the party is a post-employment benefit plan for the
benefit of employees of the entity, or of any entity
that is a related party of the entity
.
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Related-party transaction defined
• Related-party transaction (AASB 124)
– The transfer of resources, services or obligations
between related parties, regardless of whether a price
is charged
.
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AASB 124 Related Party Disclosures
• Related-party transactions:
– cannot be presumed to be at arm’s length
– could occur at prices not reflecting fair values
 fair value is defined as ‘the amount for which an asset
could be exchanged, a liability settled, or an equity
instrument granted could be exchanged between
knowledgeable, willing parties in an arm’s length
transaction’
– can expose an entity to unique risks or opportunities
– could have a material effect on entity’s performance,
financial position, financing and investing activities
• Knowledge of related-party transactions, outstanding
balances and relationships can affect assessments of
the entity by financial statement users
.
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AASB 124 Related Party Disclosures
(cont.)
• In extreme cases, related-party transactions
could be undertaken to defraud other parties
• They could also be undertaken to minimise total
taxation payable by a group of related entities
• Corporate scandals have been driving forces for
related-party regulation
.
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AASB 124 is effectively presented in two
parts
• Paragraphs 1 to 22 of the standard equate to the requirements
incorporated within International Accounting Standard IAS 24
• Paragraphs Aus25.1 to Aus25.9.3 have been added to the
Australian standard. These additional paragraphs relate to
‘other key management personnel disclosures by disclosing
entities’
• These additional Australian disclosures, which need be applied
only to the consolidated financial report of the disclosing entity
(and not to the parent entity accounts unless the reporting entity
elects to do so), constitute 10 pages, or approximately 50% of
the material included in AASB 124
• In relation to the additional Australian disclosure material,
paragraph Aus1.1 of the Objective section states: ‘The objective
of paragraphs Aus25.1 to Aus25.9.3 of this Standard is to
require disclosing entities to disclose additional information
relating to key management personnel’
.
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Materiality considerations
• Different notions of materiality are applied to different parts of
AASB 124
• The ‘usual’ notions of materiality apply to paragraphs 1 to 22 of
AASB 124 (the disclosures that are the same as those required
by IAS 24). As paragraph Aus1.9 states:
The requirements specified in paragraphs 1 to 22 of this
Standard apply to the financial statements where information
resulting from their application is material in accordance with
AASB 1031 Materiality
• AASB 1031 provides quantitative criteria to help determine
whether a particular amount assigned to an item is likely to be
considered material by users of the financial statements
• The additional Australian provisions added to AASB 124 (that
is, Aus25.1 to Aus25.9.3) require disclosure of particular
amounts identified to the extent they occur, and they cannot be
withheld from disclosure on the basis of materiality
considerations. That is, transactions involving key management
personnel are all deemed material regardless of their quantum
.
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Key definitions related to categories
of related parties
• Control
– The power to govern an entity’s financial and
operating policies to obtain benefits from its activities
– The power does not have to be exercised
• Significant influence
– The power to participate in (but not control) an entity’s
financial and operating policy decisions
– The most common relationship in this regard is that
between investor and associate
.
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Key definitions (cont.)
• Key management personnel are:
– persons having authority and responsibility for an
entity’s planning, directing and controlling activities,
including any director of the entity
• Close family members of such personnel are
related parties, i.e. domestic partner, children
and dependants
• Refer to Worked Example 26.1 (pp. 807–809)—
Identification of related parties
.
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Disclosures
Pursuant to paragraph 18 of AASB 124, related-party
disclosures are required to be provided separately in
the following categories:
• Transactions with the entity’s parent entity
• Transactions with entities with joint control or
significant influence over the entity
• Subsidiaries
• Associates
• Joint venturers in which the entity is a venturer
• Key management personnel of the entity or its
parent
• Other related parties
.
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AASB 124 Related Party Disclosures
(cont.)
• Relationships between parents and subsidiaries
to be disclosed regardless of any transactions,
including such information as:
– name of parent and ultimate controlling entity
– if the parent is incorporated overseas, which entities
are incorporated overseas and the name of the
ultimate controlling entity incorporated in Australia
.
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AASB 124 Related Party Disclosures
(cont.)
• Disclosures regarding key management
personnel
– Compensation in total and for each of the following
categories:
 Short-term employment benefits (e.g. wages, salaries,
paid annual leave and sick leave)
 Post-employment benefits (e.g. pensions and other
retirement benefits)
 Other long-term benefits (e.g. long-service leave and
long-term disability benefits)
 Termination benefits
 Share-based payments
.
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AASB 124 Related Party Disclosures
(cont.)
• Related-party transactions in general
– Nature of related-party relationship
– Information about transactions and outstanding
balances:
 amount of transactions
 amount and terms of outstanding balances
 provisions for doubtful debts related to outstanding
balances
 bad and doubtful debts expense due from related parties
.
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AASB 124 Related Party Disclosures
(cont.)
• Disclosures made separately for:
–
–
–
–
–
–
–
.
parent
entities with joint control or significant influence
subsidiaries
associates
joint ventures
key management personnel
other related parties
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AASB 124 Related Party Disclosures
(cont.)
• Examples of transactions to be disclosed if they
are with a related party
–
–
–
–
–
–
–
–
–
.
Purchases or sales of goods
Purchases or sales of property and other assets
Rendering or receiving of services
Leases
Transfers of research and development
Transfers under licence agreements
Transfers under finance arrangements
Provision of guarantees or collateral
Settlement of liabilities
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Key management personnel disclosures required by
‘disclosing entities’—pars Aus25.1–25.9.3
• ‘Disclosing entity’ includes (Corporations Act):
– organisations with shares listed on a securities
exchange
– organisations that have lodged a prospectus with the
securities exchange
– issuers of managed investment products held by 100
or more people
• Where a disclosing entity is the parent in an
economic entity and the financial statements of
the parent are presented with the economic
entity’s consolidated financial statements:
– the additional disclosures for key management
personnel apply only to the consolidated financial
report
.
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Key management personnel (cont.)
• Rationale for extensive disclosure requirements
– Need for high level of accountability through disclosure
of transactions with entity and benefits gained
• All items, transactions and balances are deemed
material regardless of amounts involved
.
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Key management personnel (cont.)
• Details about key management personnel
– Name of individual
– Position held
– Dates identifying period of responsibility
• Remuneration
– Includes salaries, bonuses, fees, commissions,
expense allowances, perquisites, personal benefits,
equity instruments and post-employment benefits
– Excludes reimbursement for expenses incurred for
entity’s benefit
.
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Key management personnel (cont.)
• Disclosure of components of remuneration
– Short-term employee benefits:
 cash salary, fees and commissions
 cash profit-sharing and other bonuses
 non-monetary benefits
– Post-employment benefits
 pension and superannuation benefits
 prescribed benefits
 other post-employment benefits
.
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Key management personnel (cont.)
• Disclosure of components of remuneration
(cont.)
– Equity compensation:
 value of shares and units
 value of options and rights
 if terms of vested options or rights have been altered,
any increase in value
 value of other equity compensation
– Other compensation benefits:
 termination benefits
 prescribed benefits
 all other benefits
.
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Key management personnel (cont.)
• Examples of key management personnel
remuneration
–
–
–
–
–
–
–
.
Private assurance or insurance premiums
Use of company home
Use of office and secretarial services
Use of company-owned holiday home
Low-interest-rate loans
Motor vehicles
‘Golden handcuffs’
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Key management personnel (cont.)
• All remuneration components (other than sharebased payments) to be measured at cost to the
entity
• Computing value of options and rights can be
complicated and reliant on particular valuation
models—required to make reference to AASB 2
Share-based Payments
.
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Key management personnel (cont.)
Disclosure is required for remuneration of
specified key management personnel of:
– principles used to determine nature and amount
– whether, and if so how, principles establish
relationship between remuneration and entity’s
performance
– terms and conditions of each grant of a cash bonus,
performance-related bonus or share-based payment
.
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Key management personnel (cont.)
• For options and rights over equity instruments,
disclosure is required of:
– number of options and rights granted and vested
– terms and conditions of each grant made
• Disclosures regarding loans for each aggregate of
loans made, guaranteed or secured to:
– all key management personnel and their personally
related entities
– each key management personnel and their related
parties by name whose aggregate loan exceeded
$100 000
.
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Key management personnel (cont.)
• Details to be disclosed regarding loans
– Amount outstanding at start of period
– Amount of interest paid and payable
– Difference between interest paid and what would
have been charged if on an arm’s length basis
– Each write-down and allowance for doubtful
receivables
– Amount outstanding at reporting date
– For each key management person, highest amount
of indebtedness during period
.
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Key management personnel (cont.)
• Disclosures regarding loans (cont.)
– For key management personnel, the number of
individuals in each group aggregate
– Summary of terms and conditions of loans
• ‘Catch-all’ disclosure requirements
–
–
–
–
.
Type of transaction of different nature
Terms and conditions of each type of transaction
Names of persons involved
Aggregate amounts recognised
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Section 300A of the Corporations Act
• ‘Remuneration Report’ section to appear in
Directors’ Report
– Remuneration of all directors and five highest
remunerated executives of a listed company and
consolidated group
– Board’s policy for determining remuneration
– Relationship between remuneration policy and
company’s performance
• Information about value of options
• Details about remuneration that is dependent on
performance conditions (also known as ‘at risk’
remuneration)
.
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Section 300A of the Corporations
Act (cont.)
• Annual remuneration plan to be put to nonbinding vote of shareholders
• Shareholder approval required to pay
prospective executive or director a retirement
benefit greater than:
– final salary multiplied by number of years of service
• Duplication between s. 300A and AASB 124
– ASIC Class Order allows organisations to avoid
duplication
.
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Examples of related-party disclosure
notes
• Coles Myer Ltd’s 2008 annual report
– seven pages of disclosures relating to key
management personnel and other related parties. The
remuneration report is 17 pages long
– www.corporate.colesmyer.com
• BHP Billiton Ltd’s 2008 annual report
– 12 pages of directors’ and executives’ disclosures, six
pages of employee shareholder acquisition plans and
one page of non-director-related party disclosures
– www.bhpbilliton.com.au
.
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Examples of related-party disclosure
notes (cont.)
• Qantas Ltd’s 2008 annual report
– three pages of key management personnel
disclosures and six pages of other related-party
transactions
– www.qantas.com.au
.
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Summary
• The lecture considers related-party transactions
• The disclosure of these transactions is highly
regulated within Australia
• Accounting standard on related-party disclosures
is AASB 124
• Must also consider the Corporations Act 2001
• Key management personnel-related transactions
are subject to highest degree of required
disclosure
• Cost of preparing and reporting the information
would be high
• Regulators consider these costs to be outweighed
by benefits
.
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