Getting related party disclosures right

My recent article about 10 things you might not know about FRSSE prompted a wave of questions relating to various disclosure requirements, explains Steve Collings.

In this article I will cover some of the typical issues concerning related party disclosures and incorporate some of the more commonly asked questions.

Related parties and related party transactions

Most of us know what constitutes a related party and FRSSE states that two or more parties are related when, at any time during the financial period:

  • one party has direct or indirect control of the other party
  • the parties are subject to common control from the same source
  • one party has significant influence over the financial and operating policies of the other party, to an extent that the other party might be inhibited from pursuing its own separate interests

Continued...

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Comments
DMGbus's picture

DLA in credit yet disclosed in Abbreviated Accounts at CH

DMGbus | | Permalink

I have seen instances where Directors Loan Accounts (DLA) have been disclosed in Abbreviated Accounts  (as filed at Companies House [CH]) - even where in credit throughout an asccounting period.

Then I see that most Abbreviated Accounts seem to lack this data.

So, we have a minority of accounts preparers breaching client confidentiality by disclosing this data

OR alternatively

we have the majority of accountants (myself included) being non-compliant.

 

Personally I have no issues with shareholder / directors copy accounts disclosing the DLA balance in credit (it's commonsense to disclose this data in my opinion and in my book commonsense override is a very sensible principle), but I've never seen a convincing legal requirement to disclose a credit balance DLA in Abbreviated Accounts.

 

stevedpearce's picture

Dividends to director shareholders

stevedpearce | | Permalink

Am I correct in thinking dividends paid to director shareholders require disclosure as part of related party transactions? Or is this not correct?

Euan MacLennan's picture

Yes - Dividends must be disclosed

Euan MacLennan | | Permalink

Dividends paid to shareholding directors are transactions with related parties which must be disclosed as they do not come under the exemptions in the FRSSE for remuneration and pension contributions.

Euan MacLennan's picture

DLA in credit

Euan MacLennan | | Permalink

Yes - DLAs in credit must be disclosed as related party transactions/balances with directors in the full statutory accounts prepared in accordance with the FRSSE.

No - they should not be disclosed in small company abbreviated accounts to which the FRSSE does not apply.  The CA requirement, which does apply to abbreviated accounts, is only to disclose loans to directors.

Not sure I agree about dividends

Ayesha Bham | | Permalink

I cannot see anywhere in the FRSSE where it explicitly says dividends have to be disclosed therefore I am not sure it is right that disclosure has to be made. Is it right to disclose if FRSSE doesn't specifically mention dividends. I'm not sure it is.

Advances and credits which have been made to the director

Tony Nabarro | | Permalink

Does this cover something other than loan(s)?

jndavs's picture

Dividends

jndavs | | Permalink

I think you will find that dividends to related parties generally should be disclosed, not just directors - tempered by materiality of course.

Not sure about dividends

Huw Williams | | Permalink

As I understand it the FRSSE does not have an explicit requirement because it has a general requirement to disclose related party transactions.  Are shareholders related to the company - almost certainly yes in a small company.  Are dividends transactions - yes.

Locutus's picture

Dividends paid to directors

Locutus | | Permalink

I think requirement to specifically mention dividends paid to director shareholders within the related party transactions note arose following the Companies Act 2006.

Under the old 1985 Act, the director's report listed each director's shareholding, so it was easy to calculate the dividend each director received (assuming there were no dividend waivers in force).

When the 2006 Act dropped the requirement to list directors' shareholdings, then this information had to effectively be disclosed in the related party transactions note, which appear in the full statutory accounts, but not the abbreviated accounts.

Dividends paid to directors

derrickporter | | Permalink

You can of course still disclose the director's shareholdings in the directors report so you would not have to disclose the dividends as part of the related party note.

Tonykelly's picture

basically, the goalposts have been moved by various parties

Tonykelly | | Permalink

the changes to the directors report requirements is a red herring.

The requirements were (in the past) that the directors beneficial interests in the share capital of the company should be disclosed.

Example, husband (director)  5 shares

wife - non director 95 shares

disclosure  - husband 100 shares.

So, the disclosure in the directors report didn't really help with regard to dividends.

Some people choose to disclose, others don't.

My question is to Steve Collings and others: why is it now correct to disclose dividends to related parties when it was correct not to disclose them in the past. Please don't answer the question by citing the changes to the directors report, as this is clearly not the answer, as illustrated by my example above.

 

 

 

 

DMGbus's picture

Shareholdings in directors report = excellent

DMGbus | | Permalink

I favour what DerrickPorter says, as not only does it reduce the number of notes (*) in a set of accounts but under the commonsense override principle makes useful information instantly available in the Directors Report (as in shareholdings).

I tend to supplement the shareholdings details in the Directors Report with a sentence along the lines "All dividends paid are to the directors and their spouses" (or similar) - and out goes another note (directors interests) from the accounts (*).

With owner managed Ltd Companies it makes a lot of sense to have really useful information readily available, even if technically there's an "over disclosure" in this instance in the directors report which can cause no harm as only the owner managers see this document.

(*) Less notes = more meaningful accounts, hence show dividends (described as "Dividends paid in the accounting period" instead of "Reserve Movements") on the statutory P&L then this enables the Reserves Movement note (which typically unhelpfully omits comparatives) to be removed from the accounts.   The closing balance on the Statutory P&L then gives a logical flow through the accounts as it appears on the next page (the Balance Sheet) rather than appearing in a note several pages later that then refers back to the Balance Sheet.  Accounts thus become more user friendly. 

 

 

Steve Collings's picture

Dividends to Directors

Steve Collings | | Permalink

Hi,

The question relating to the disclosure of dividends to director-shareholders is one of the most commonly asked questions - particularly in lectures.  Before the requirement to disclose the shareholding of the director(s) in the director)s) report was repealed, it was generally accepted within the profession that the FRS 8 / FRSSE requirements were met because it was fairly easy to calculate the amount of dividend each director had received in their capacity of shareholder.  However, when the requirement was repealed it was found that the related party implications were no longer covered, hence disclosure had to be made in another form i.e. in the notes as a related party transaction.  Tonykelly, I understand this isn't what you wanted to see as an answer, but that was the reason.  It was considered that the user of the accounts could take the dividend in the accounts and work out the value of the dividend to the director-shareholder by reference to their shareholding in the director(s) report (if they wanted to, that is).

Now some firms do a similar sort of thing to what DMGBUS is suggesting and tagging the dividends on to the end of the P&L, but you need to be careful with this and make sure you do it in the following order:

Profit for the year after tax

Profit and loss reserves b/f

Dividends

Profit and loss reserves c/f

As dividends are debited to equity (FRS 25 para 35), following the order of the above will ensure that the dividends are debited to equity - but be careful - this argument won't work if dividends appear directly after post-tax profit for the year because this is inconsistent with the accounting for equity dividends per FRS 25.35.

I have met some accountants in lectures that have expressed their (sheer) disagreement with the disclosure of dividends as a related party transaction but the fact is, the disclosure of dividends as a related party transaction is required in the related party notes.

Regards

Steve

Hmmm

Ayesha Bham | | Permalink

I still don't think it is right. The reasons seem so pointless. For small clients like ours is anyone really bothered? I tend to agree that the directors shareholding reason is not REALLY the answer. It's not a convincing argument in my opinion.

Steve Collings's picture

Don't shoot the messenger!    1 thanks

Steve Collings | | Permalink

Hi Ayesha

You are not on your own with your frustrations regarding the disclosure of dividends - I have met lots of accountants who have vented their frustration (on me) about this disclosure!  In articles / books / lectures I can only convey information which is factually and technically correct.  As you can appreciate I cannot write statements such as "this is how X works, but if you don't agree with this then there is no need to bother" as this would be misleading and that's not how I operate.

The disclosure itself is not arduous and you can satisfy the requirements in as much as one line.  However, please understand that I don't make the rules, I merely write/lecture on them, so if you meet me in a lecture where this issue comes up, please don't make me wear my tin hat!!

All the best

Steve

 

 

Paul Scholes's picture

Thanks Steve

Paul Scholes | | Permalink

Must admit the dividend issue had passed me by.  As you say, it's only one line in a note, so no probs.

hitheflag's picture

Dividend disclosure and dividends waived

hitheflag | | Permalink

We have a situation with three shareholders two fo whom are directors.  One of these directors and the other shareholder have waived dividends leaving the other director/ shareholder, who incidentaly is the only one to actively work in the business, as the only one drawing a dividend.

We are re-writing the share structure using A and B shares but what dio we need to disclose in the abbreviated and full accounts in respect of dividends drawn??

 

HTF

Tonykelly's picture

dividends again!

Tonykelly | | Permalink

Steve Collings wrote:

 Before the requirement to disclose the shareholding of the director(s) in the director)s) report was repealed, it was generally accepted within the profession that the FRS 8 / FRSSE requirements were met because it was fairly easy to calculate the amount of dividend each director had received in their capacity of shareholder.

Unfortunately Steve, this is simply not true, despite what was generally accepted. This is a red herring, examples:

1. Disclosure requirements were to disclose directors' beneficial interest in the share capital of the company.

Husband (director) holds 60 shares -- wife (non-director) 40 shares. Dividends £100,000. Disclosure in directors' report was Director 100 shares. How can you calculate that the director was paid £60,000 in dividends from information in directors report? Answer: you can't.

2. Shareholdings of directors changes during the year.  How can you calculate dividends paid to directors. Fairly easy? no. Answer: you can't.

3. One director waives his entitlement to a dividend. How can you calculate the dividends paid to the directors. Fairly easy? no. Answer: you can't.

4. Dividend paid to related party. Not a director. How can you calculate the dividends paid to related party. Fairly easy? no. Answer you can't.

So my question remains unanswered. Why is it now correct to disclose dividends to related parties when it was correct not to disclose them in the past?

(by the way Steve, thanks for the excellent article).

 

 

 

 

 

 

Steve Collings's picture

@Tony Kelly

Steve Collings | | Permalink

Thanks Tony.

The argument about dividend disclosure could go on for a lifetime and not everyone will agree with it.  Personally, I don't understand what the problem is relating to the disclosure.  If you look at the ICAEW guidance they are unambiguous in their requirements and confirm that dividends to directors DO meet the definition of a related party transaction and ARE disclosable as such.   However, pre 2007 it was the consensus of opinion that disclosure of shareholding in the directors report satisfied the FRS 8 / FRSSE disclosures.  Whether accountants view this as right, wrong or indifferent is not going to change the current position.  If you really do not want to make the disclosure about dividends then there's not really much else I can suggest - you'll need to thrash the argument out with the ASB.  As I have said in reply to Ayesha I can only write about what is factual/technically correct or generally accepted.  It was generally accepted that the shareholding disclosure satisfied the FRS 8 / FRSSE requirements.

I suppose to answer your question you should dissect FRS 8, but even then you're going to be hard-pressed to get a totally definitive (ie 100% satisfactory) answer to your question. 

Para 19 of FRS 8 gives examples of related party transactions, though does not specifically refer to the word 'dividend', hence some dissidents will cite this as a reason for non-disclosure.  But if you look to para 2.6 this this cites a transfer of assets or liabilities (dividends are paid in cash) and as cash is an asset presumably this catches a dividend as a disclosable related party transaction?  

It is clear from how a related party is defined in paragraph 2.5 that a director is a related party of an entity. Thus what is material in terms of directors?  Certainly a lot but if you look to paragraph 20 FRS 8, a transaction is material when its disclosure might reasonably be expected to influence the decisions of the users of the accounts.  FRS 8 requires disclosure of 'material' transactions - material being both in relation to the significance of the reporting entity as well as to the other related party (the director), though (as I discussed in the article), FRSSE only judges materiality from the viewpoint of the company, not the other related party.

Clearly the issue is controversial, but does the issue really warrant the attention from the profession it is getting?  As I mentioend in a previous comment, disclosing the dividends paid to director-shareholders in the full accounts (not abbreviated, as FRSSE doesn't apply to abbreviate accounts) is hardly moving mountains and takes less than a minute. 

The facts of the issue all boil down to the point that, no, FRS 8 and FRSSE do not specifically cite the word 'dividends' as requiring disclosure, BUT guidance from the professional bodies, DOES require the disclosure following the repealing of the directors' shareholdings disclosure in the directors report. 

Anyhow, it's Friday so let's forget about it now and move on to the weekend!!

All the best

Steve

I'm with Tonykelly on this

Ayesha Bham | | Permalink

Steve the whole issue is nonsensical and the facts are that the professional bodies are simply wrong. Dividends are not disclosable. If dividends don't appear in the accounting standards then they do not need disclosure. Accountancy bodies should look to the standards not make their own rules up.

DMGbus's picture

Professional bodies making things more complex

DMGbus | | Permalink

As I understand it:

1. Companies Act 2006 defines the rules per UK / Wales Law

2. Companies Act 2006 does NOT require disclosure of dividends as a "Related Party" transaction

3. FRSSE 2008 is  MEANT TO to SIMPLIFY accounts by REDUCING DISCLOSURES / making accounts disclosures LESS ONEROUS.

4. Someone involved in developing the FRSSE has been mischevious or incompetent  by actually INCREASING disclosures under FRSSE as compared to the Companies Act - seriously breaching the whole concept of FRSSE.  Just maybe, the person responsible for this mischief / error / incompetence has a "Big" company background and was therefore out of touch with small company objectives and reality.

5. Thankfully FRSSE 2008 does NOT apply to Abbreviated Accounts so these burdens created by FRSSE are not applicable there.

My own approach is as follows:

  1. Fewer notes = better accounts
  2. Fewer pages = better accounts (Ditch the ridiciculous "Contents" and "Company Information" pages as not required by Law)
  3. Do NOT include a "Reserves Note" (avoided by having a proper Stautory P&L showing dividends)
  4. Do NOT include a "Related Parties" / "Directors Interest" note (instead Directors Report states shareholdings and the the fact that dividends are paid to the directors)

 

Paul Scholes's picture

OCD or what?

Paul Scholes | | Permalink

I sometimes get hung up on detail but come on, there's coffee brewing.  Do what is OK for you, they won't take your practiucing cert away or deny you PI cover and clients clients will pay the fee, whatever, they don't give a whatsit.

I've often thought that, in it's purest sence OCD should be CDO because it's in aphpa order and, if this topic really is a problem, then it fits nicely with Clear Dividends Out.

 

Apologies Steve

Ayesha Bham | | Permalink

Well I've since rung the technical enquiry service and they have cited exactly the same reasons as Steve as to why disclosure of dividends is needed. They said that there is a possibility that if you don't disclose them you won't comply with the accounting standards and as the standards are required to give a true and fair view the accounts won't give this if we don't comply. Quite worrying really when you think of the implications. Apologies Steve for my confusion.

Tonykelly's picture

Thanks for update

Tonykelly | | Permalink

Once again Steve, thanks for taking the time to answer the various queries. Many people post articles etc, but are then unavailable to answer any queries raised by the readers.

Just to clarify, I have no problem making any of the disclosures. In fact, I tend to over-disclose if anything, espeically the debtors and creditors.

I was just curious as to the reasons for the changes. Many thanks for taking the time to explain.

Steve Collings's picture

Thanks Tony

Steve Collings | | Permalink

No problem.  Sometimes I'm guilty of not replying to questions raised on my articles due to a lack of time but there are lots of others on here that provide good answers (thankfully).

Have a good week.

Steve

Comprehension

ThornyIssues | | Permalink

Tonykelly wrote:

Once again Steve, thanks for taking the time to answer the various queries. Many people post articles etc, but are then unavailable to answer any queries raised by the readers.

Just to clarify, I have no problem making any of the disclosures. In fact, I tend to over-disclose if anything, espeically the debtors and creditors.

I was just curious as to the reasons for the changes. Many thanks for taking the time to explain.

 

Why would you want to give information that you do not have to give! Do you not respect your client's right to restrict what information is placed in the public domain? Do you tell your client that you are disclosing information that you are not required to disclose? Could competitors of your client not use this information to jaundice the view of your client to potential customers?

DMGbus's picture

Reasons to over-disclose?

DMGbus | | Permalink

Never, ever, ever over-disclose in Abbreviated Accounts as these are public record and without specific approval this, in my opinion, is a serious breach of client data confidentiality.

From time to time making company searches I am surprised to see full accounts filed by small companies which should qualify for Abbreviated Accounts.  A recent example (4th September 2011 search) being accounts prepared by a LLP firm of ACCA based in Sutton Coldfield for companies called The Norvil Motorcycle Co Ltd and Vals Classic Coaches Ltd.  (NB. I am NOT breaching any confidentiality here - this data is in the public domain at Companies House).

I speculate that one of three things applies in such cases:

  1. Client wishes to have fuller financial information in the public domain and provides instructions to the accountant accordingly
  2. The accountant used is unaware or incapable of preparing Abbreviated Accounts
  3. The accountant used offers Abbreviated Accounts but only as an optional extra (extra fee!) and the client is unwilling to pay the extra fee

However, turning to the full statutory accounts (that only get distributed to directors who are most likely only shareholders) quite a different discipline applies: the accounts should be as meaningful as possible, so in my view quite OK in these NOT FOR PUBLIC RECORD accounts to give analysis of debtors, creditors.  

 

 

 

 

 

Paul Scholes's picture

Never, ever ever??    1 thanks

Paul Scholes | | Permalink

Very (very) rare in the 21st century to find anything that certain.

A handful of my clients (with my blessing) use their accounts as part of their marketing providing the full accounts with over-disclosed & opinioned Directors' Report.  Large companies and Government agencies with whom they do business expect to see such confidence & pride in how & what they do and are prepared to offer them tender possibilities, that might not have been the case with a puny set of "awfully 'umble" Abbs.

Tonykelly's picture

I suggest you read what has been posted a little more carefully

Tonykelly | | Permalink

ThornyIssues wrote:

Why would you want to give information that you do not have to give! Do you not respect your client's right to restrict what information is placed in the public domain? Do you tell your client that you are disclosing information that you are not required to disclose? Could competitors of your client not use this information to jaundice the view of your client to potential customers?

I guess you are a business owner whose accountant has done what you describe, and you are maybe feeling a little disgruntled.

However, this article by Steve Collings is primarily concerned with related party disclosures in the full accounts for directors and shareholders.

My postings have been related to this topic. What you are referring to are the accounts which are filed at Companies House. I am not going to explain the difference here. Please contact your accountant and he will explain it to you at your next meeting.

 

Husband's company trading with wife's company = RPT?

loz999 | | Permalink

Hi Steve

I was wondering if significant trade between 2 companies one owned by the husband and one by the wife would need to be disclosed as a related party transaction

 

 

I would be really interested

PatriciaRr | | Permalink

I would be really interested in this as well.