Simplified Disclosures – What related party information is required?
Simplified Disclosures – What related party information is required?
Entities transitioning from special purpose financial statements (SPFS) to Tier 2 GPFS (Simplified Disclosures) for the first time in their 30 June 2022 financial statements will have to provide disclosures about related parties for the first time. This includes details of key management personnel compensation, as well as information regarding transactions with related parties during the period, and balances outstanding at reporting date.
Who is a related party?
The definition of a ‘related party’ in IAS 24 Related Party Disclosures is complicated. Correctly identifying all related parties is vital for ensuring that related party disclosure is provided regarding all persons and entities considered related parties under IAS 24.
More information
Please refer to our June 2022 Corporate Reporting Insights article for more information on identifying related parties. Our eLearning course also provides a step-by-step analysis and examples for each aspect of the related party definition.
Are the related party disclosures for Simplified Disclosures the same as IAS 24?
The related party disclosures contained in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Entities are essentially the same as those contained in IAS 24 but are summarised in some respects. This means that there is more aggregation of related party information provided for Simplified Disclosures. This is discussed further below.
Parent-subsidiary relationships
Details of the relationships between the parent entity and its subsidiaries must be disclosed, regardless of whether there have been any related party transactions during the period. The entity must disclose:
- The name of its parent entity
- If the ultimate controlling party of the entity is not its parent entity, the name of the ultimate controlling party.
If neither the parent entity or the ultimate controlling party produces financial statements available for public use, the entity must also disclose the name of the next most senior parent that does so.
Key managements personnel compensation
For Simplified Disclosures, only the aggregate amount of key management personnel compensation is disclosed. This would include all forms of compensation paid, payable, or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity. Compensation includes all employee benefits determined under IAS 19 Employee Benefits such as:
- Short-term employee benefits
- Post-employment benefits (for example, superannuation)
- Other long-term benefits
- Termination benefits
- Share-based payments.
If key management personnel services are provided by a ‘management entity’ rather than an individual, the expense is not disclosed as part of key management personnel compensation. However, the total amount paid to the ‘management entity’ for key management personnel services must be separately disclosed as a related party transaction.
Other related party transactions
After identifying all related parties, the entity (or group) must identify all transactions that have taken place with related parties during the period. AASB 1060 then requires the following information about related party transactions:
- the amount of the transactions;
- the amount of outstanding balances and:
- their terms and conditions, including whether they are secured and the nature of the consideration to be provided in settlement; and
- details of any guarantees given or received;
- provisions for uncollectable receivables related to the amount of outstanding balances; and
- the expense recognised during the period in respect of bad or doubtful debts due from related parties.
Such transactions could include purchases, sales or transfers of goods or services; leases; guarantees; and settlements by the entity on behalf of the related party or vice versa.’
AASB 1060, paragraph 198
It is important to note that the above disclosures do not need to be provided for each related party transaction separately. AASB 1060, paragraph 199 only requires the information to be provided in aggregate for each of the following categories:
- Entities with control, joint control, or significant influence over the entity
- Entities over which the entity has control, joint control, or significant influence
- Key management personnel of the entity or its parent (in aggregate)
- Other related parties.
If preparing consolidated financial statements, details of transactions and balances that eliminate on consolidation also need not be disclosed.
An entity is therefore not required to name each entity or person with which it has undertaken a related party transaction during the period. For example, if Entity A has sold $100 of goods to its joint venture, XYZ Joint Venture, this can simply be described as ‘Sales to entities over which the entity has joint control’ for $100. If Entity A has also sold $50 of goods to its Associate ABC, the related party disclosure for these two transactions would be ‘Sales to entities over which the entity has joint control and significant influence’ for $150.
Allowing this level of aggregation for related party disclosures, and not requiring the identify of specific related parties, should go some way to alleviating potential concern by some private companies that disclosing related party information will result in disclosing ‘sensitive’ information.
Arm’s length transactions must also be disclosed
Many preparers may think that related party transactions do not need to be disclosed if they were made on normal commercial terms, i.e. they are arm’s length transactions. This is not the case. Details of all related party transactions must be provided.
Terms and conditions of related party transactions are only required to be disclosed if there is a balance outstanding at reporting date (AASB 1060, paragraph 198(b)). For transactions which have been paid for during the period, and are not outstanding at reporting date, there is no requirement to disclose the terms and conditions (although this would be useful information). It is therefore implied that related party transactions are conducted on non-arm’s length terms unless otherwise noted.
Entities should not state that related party transactions were conducted on arm’s length terms unless such a statement can be substantiated.
Need assistance?
Preparing related party disclosures may be a daunting exercise for entities transiting to Simplified Disclosures for the first time. Please contact our IFRS & Corporate Reporting team if you require assistance.