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FRS102 S1A Related Parties

FRS102 S1A Related Parties

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The disclosure requirements for Related Parties under FRS102 Section 1A are as follows: -

Particulars must be given of material transactions the small entity has entered into that have not been concluded under normal market conditions with:
(a) owners holding a participating interest in the small entity;
(b) companies in which the small entity itself has a participating interest; and
(c) directors

I understand that 'normal market conditions' is causing some debate, but what about (a) owners holding a participating interest?

It does not define in FRS102 what a 'participating interest' is but it does so in The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) which says "A “participating interest” means an interest held by an undertaking in the shares of another undertaking...

So according to my reasoning, (a) only applies if the owner is another undertaking, such as another company.  An individual shareholder is not an undertaking and so dividends paid to an individual shareholder (other than a director), or indeed any other transaction do not need to be disclosed.

What's more I understand that there is no requirement to name the related party, and so details may be given in aggregate. Also that companies under common control and directors close family are not related parties either.

It would appear that for most small companies, all that needs to be disclosed are aggregate transactions with 'the directors'.

Is it really that simple?

There was a lot on anxiety about FRS102 but it seems that on the disclosure side of things Section 1A is a massive simplification over FRSSE.

Anyone have any thoughts on this?

Replies (7)

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By johngroganjga
05th Sep 2016 19:53

I don't think you can be right about "owners holding a participating interest". That must include individual shareholders.

The "normal market conditions" point is far from a simplification. Yes it will lead to fewer disclosures being made, but just think of the intellectual hoops we all need to jump through with clients sorting out what does and does not need to be disclosed. It was much easier when all you had to know was that a transaction had occurred, without having to carry out a forensic analysis of the terms on which it had been carried out.

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By TerryD
09th Sep 2016 16:04

I agree with John. The definition of "participating interest" that you quote is, as you say, included in a schedule to the small companies accounts regulations, and so applies in that context and that context alone. As a generality, if a term is not defined, we must look to its meaning in common usage, and that is any person/undertaking holding 20% or more of the shares (or voting rights).

I also agree with John's point about the difficulty of interpreting "normal market conditions". In my view, in any owner-manager company ALL transactions with the owner/manager will be conducted under other than normal market conditions simply by virtue of their position to influence/control the company.

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Replying to TerryD:
By jon_griffey
12th Sep 2016 09:50

Thanks for your input Terry.

The definition of 'participating interest' is indeed defined in the Regulations (Small Companies and Groups(Accounts and Directors’ Report) Regulations 2008 (SI 2008/409)). I am not sure why you think that is a different context to FRS102.

The Regulations are the statutory framework for small company accounts and reference is made throughout FRS102 to them. That being the case I think it would be incorrect to look elsewhere for a definition.

I agree that it may seem a bit nonsensical that it does not extend to individual shareholders but that's what the Regulations appear to say.

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By TerryD
14th Sep 2016 14:24

The reason that I think that we cannot apply the definition in SI 2008/409 to a wider context is that the only references to participating interests in that SI are in the context of an entity holding shares in (or otherwise having an interest in) another entity, so I think we must read the definition with that in mind. Without there being specific reference made, I don't think that we can reasonably impute this narrow definition in SI 2008/409 to a completely different context in a document (FRS102) that had not been written when it came out.

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By vtsoftware
19th Sep 2016 19:28

The text quoted by the OP is in italics in FRS 102 which means it is a reproduction of Company Law. Hence we should look to the Companies Act and not FRS 102 for a definition of participating interest.

The disclosures for small companies are now much reduced and entirely governed by Company Law. They are conveniently reproduced in FRS 102 Section 1A Appendix C.

The FRC is prohibited from mandating additional disclosures and is reduced in FRS 102 Section 1A to encouraging certain additional disclosures such as a Statement of Changes in Equity. FRS 102 is only relevant to disclosures if additional disclosures are made in order to give a true and fair view.

Philip Hodgson
VT Software

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By TerryD
16th Sep 2016 15:07

Apologies - I forgot about the new paragraph 66 in SI2008/409. However, I still believe that we must interpret this with reference to what it is clearly intended to mean rather a pedantic interpretation arising out of poor drafting. Para. 66 also says that we must refer to IFRS24 for a definition of "related party" - but that defines neither "owner" nor "participating interest".

Actually, the whole line "owners holding a participating interest in the company" is nonsensical. In plain English, an "owner" is someone who owns something: in the context of a company that would mean over 50% (or maybe 100%?) of the shares - so he/she/it must be a participating interest. So we must assume that the line is intended to read: "owners of shares representing a participating interest...". If we have to do that to force it to make sense, then I don't think that it's a great leap to attribute a common sense interpretation to the whole expression.

However, I do accept that you have an arguable case in a totally pedantic fashion. For myself, though, I shall continue to interpret this in the way that I believe it was intended to be interpreted.

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By jon_griffey
19th Sep 2016 18:29

You can of course always disclose more than is prescribed on true and fair grounds if you feel that is the spirit of the law, but I don't think that anyone could be criticised for following the interpretation provided in the Regulations, even if it is a bit nonsensical.

In fact the whole thing is a complete nonsense. Why does a transaction with a 99% subsidiary need to be disclosed, but one with a 100% subsidiary doesn't? Why does a transaction with a director need to be disclosed, but one with their spouse doesn't?

Clients don't like related party notes and if they are now going to be on record at Companies House then I would be loathe to over-disclose.

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