Chapter 25

Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 16-1

Chapter 25

Related party disclosures


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


Some recent changes to the Australian standard on related party transactions

• In late 2011 there were major changes made to AASB 124.

• AASB 124 had included extensive requirements in relation to individual key management personnel.

• These disclosure requirements in AASB 124 were ‘Australian specific’—that is, they were unique to AASB 124 and were not included within IAS 24.

• In late 2011 the AASB issued an ‘amending standard’ that removed all the individual key management personnel (KMP) disclosures contained within AASB 124.


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


Related parties defined

From the above definition of ‘related party’ we can see that related parties would include organisations (that are controlling or controlled by the entity, or are significantly influencing or significantly influenced by the entity) as well as individuals (such as key management personnel or close family members of key management personnel).


Related party transaction defined

• Related party transaction (AASB 124)– ‘a transfer of resources, services or

obligations between a reporting entity and a related party, 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

– 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


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


Objectives of AASB 124

The objective of this Standard is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties.


Materiality considerations• AASB 124, paragraph Aus1.8 states:

The requirements 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.

• Related party information is material if its omission, non-disclosure or misstatement has the potential to affect decisions about the allocation of scarce resources by users of the financial statements and consolidated financial statements, or the discharge of accountability by directors


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:

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.

• Close family members of such personnel are related parties, i.e. domestic partner, children and dependants

• Refer to Worked Example 25.1 (pp. 826–827)—Identification of related parties


Disclosures

Pursuant to paragraph 19 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 joint venture

• Key management personnel of the entity or its parent

• Other related parties



• Relationships between parents and subsidiaries to be disclosed regardless of the existence of any transactions.

• Disclosures regarding key management personnel benefits and share-based payments

• Related party transactions in general



• Disclosures required in regard to related party transaction should be 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 if they are with a related party


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)


Section 300A of the Corporations Act (cont.)

• Annual remuneration plan to be put to non-binding vote of shareholders

• The vote on the remuneration report is merely advisory, since it does not bind the directors of the company

• While the vote on the remuneration report is non-binding, amendments were made to the Corporations Act in 2011 and a mechanism which has become known as the ‘two-strikes policy’ was introduced

• The new law applying to resolutions on the remuneration report as put to annual general meetings held from 1 July 2011


Remuneration report • Under the new section of the Corporations Act, a ‘two-

strikes and re-election’ process will be introduced in relation to the non-binding shareholder vote on a listed company’s remuneration report.

• The ‘first strike’ occurs when a company’s remuneration report receives a ‘no’ vote of 25 per cent or more of the shareholders at the Annual General Meeting.

• Where this occurs, the company’s subsequent remuneration report—which is included within the annual report—must include an explanation of the board’s proposed action in response to the ‘no’ vote, or if no action was taken, an explanation of why no action was been taken.


Remuneration report (cont.)• The ‘second strike’ occurs where a company’s

subsequent remuneration report receives a ‘no’ vote of 25 per cent or more at the next Annual General Meeting.

• Where this occurs, shareholders will vote at the same meeting to determine whether the directors will need to stand for re-election. This has become known as a ‘spill resolution’.

• If this spill resolution passes with 50 per cent or more of eligible votes cast, then the ‘spill meeting’ will take place within 90 days.


The requirement to produce information about the relationship between remuneration policy and company’s performance—further considerations of the s.300A disclosure requirement

• ‘Performance conditions’ are utilised in the compensation plans provided to key management personnel.

• Organisations will have missions, goals and objectives.

• Their corporate governance systems (policies and procedures) will be developed to assist in the achievement of these missions, goals and objectives.

• The disclosures required by s.300A will help to inform readers about how particular compensation schemes are likely to motivate key management personnel to take certain actions.


Summary

• The lecture considers related party transactions

• Accounting standard on related party disclosures is AASB 124

• Must also consider the Corporations Act 2001

• The requirements relate to disclosures of information—subject to materiality—and do not provide any requirements in relation to how related party transactions shall be measured

Documents

Chapter 25