26-1 copyright 2007 mcgraw-hill australia pty ltd ppts t/a australian financial accounting 5e by...

26-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan

Chapter 26

Related-party disclosures


Learning objectives• 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’


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


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);


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.


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


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 report users


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


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 per cent 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’.


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 report 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.


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


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 (p. 881)


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



• 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



• 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 payment



• 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



• Disclosures made separately for– parent

– entities with joint control or significant influence

– subsidiaries

– associates

– joint ventures

– key management personnel

– other related parties



• Examples of transactions to be disclosed– 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


Key Management Personnel Disclosures by Disclosing Entities’ – par Aus25.1 -25.9.3

• ‘Disclosing entity’ includes (Corporations Act)– organisations with shares listed on a stock exchange– organisations that have lodged a prospectus with the

stock 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 report of the parent is presented in the economic entity’s consolidated financial report:– the additional disclosures for key management

personnel apply only to the consolidated financial report


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



• 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



• 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



• 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



• Examples of key management personnel remuneration

• (Abstract 14)– 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’



• All remuneration components (other than share-based 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 Payment’



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



• 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



• 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



• 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


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 dependent on performance condition


Section 300A of the Corporations Act (cont.)

• Annual remuneration plan to be put to non-binding 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


Examples of related-party disclosure notes

• Coles Myer Ltd’s 2006 annual report– eighteen pages of disclosures relating to key

management personnel and other related parties

– www.corporate.colesmyer.com

• BHP Billiton Ltd’s 2006 annual report– twelve 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


Examples of related-party disclosure notes (cont.)

• Qantas Ltd’s 2006 annual report– twelve pages of key management personnel disclosures

and three pages of other related-party transactions

– www.qantas.com.au


Summary

• The chapter 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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