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Amendment to FRS 8 - Related Parties. By Steve Collings

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16th Jan 2009
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2008 saw a very quiet year down at the Accounting Standards Board (ASB). The ASB issued no new accounting standards – in fact the last standard to be issued by the ASB was FRS 29 Financial Instruments: Disclosures as a result of the IASB’s issuance of IFRS 7 in December 2005.

The ASB have, however, issued an amendment to FRS 8 Related Party Disclosures as a result of the Companies Act 2006. Undeniably FRS 8 does sometimes cause confusion amongst accountants and can be a difficult standard to apply because of its subjective nature.

It is to be noted at this point that the amended FRS 8 is effective for financial years beginning on or after 6 April 2008 i.e. in line with the Companies Act 2006 adoption.

Convergence with IFRS

The ASB aims to keep UK GAAP in line with IFRS because of the impending switchover from UK GAAP to IFRS for the rest of the UK (the IASB have said they hope to issue a standard for the SME sector to switch to IFRS during the first quarter of 2009). The amended FRS 8 is not completely converged with its international counterpart, IAS 24, but allows for adequate disclosures about related party transactions.

So what has actually changed?

The amendments to FRS 8 are:

  • An amendment to the definition of ‘key management’;
  • An amendment to the definition of ‘related parties’;
  • Withdrawal of the scope exclusion for 90% owned subsidiaries;
  • The effective dates;
  • Amended explanation of the effect of related parties; and
  • An amended explanation of exempt subsidiary undertakings.
  • Key Management

    The previous version of FRS 8 referred to key management as:

    “Those persons in senior positions having authority or responsibility for directing or controlling the major activities and resources of the reporting entity.” (Paragraph 2.3 FRS 8). Para 2.3 FRS 8.

    This is now replaced with:

    “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.” Para 2.3 FRS 8 (revised).

    Related Parties

    Previously, the definition of a related party (paragraph 2.5 FRS 8) was very long-winded to say the least. The previous definition of related parties said that two or more parties are related parties when at any time during the financial period (para 2.5(a) FRS 8):

    • One party has direct or indirect control of the other party; or
    • The parties are subject to common control from the same source; or
    • One party has influence over the financial and operating policies of the other party to an extent that the other party might be inhibited from pursuing at all times its own separate interests; or
    • The parties, in entering a transaction, are subject to influence from the same source to such an extent that one of the parties to the transaction has subordinated its own separate interests.
    • The previous standard then went on to define, for the avoidance of doubt, who were related parties such as (para 2.5(b) FRS 8):

      • Ultimate and intermediate parent undertakings, subsidiary undertakings and fellow subsidiary undertakings;
      • Associates and joint ventures;
      • Investors or venturers in respect of which the reporting entity is an associate or joint venture;
      • Directors of the reporting entity and the directors of its ultimate and intermediate parent undertakings; and
      • Pension funds for the benefit of employees of the reporting entity or of any entity that is a related party of the reporting entity.

      It then went on! (para 2.5(c) FRS 8) to say that the following are presumed to be related parties if the reporting entity unless it can be demonstrated that neither party has influenced the financial and operating policies of the other:

      • Key management of the reporting entity and key management of its parent undertaking(s);
      • A person owning or able to exercise control over 20% or more of the voting rights of the reporting entity, whether directly or through nominees;
      • Each person acting ‘in concert’ in such a way as to be able to exercise control or influence over the reporting entity; and
      • An entity managing or managed by the reporting entity under a management contract.

      And it went on even further! (para 2.5(d) FRS 8) which said that because of their relationship with certain parties that are, or not, presumed to be, related parties of the reporting entity, the following are presumed to be related parties of the reporting entity:

      • Members of the close family of any individual falling under the parties mentioned in points 1 to 3 of para C above; and
      • Partnerships, companies, trusts or other entities in which any individual or member of the close family in points 1 to 3 of para C above has a controlling interest.
      • Thankfully the ASB have deleted paragraphs (a) to (d) of paragraph 2.5 of FRS 8.

        The revised definition of a party states that a party is related to an entity 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 (including 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 of the entity (as defined in FRS 9 Associates and Joint Ventures) of the entity;

        (c)The party is a joint venture in which the entity is a venturer (as defined in FRS 9 Associates and Joint Ventures);

        (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 subparagraph (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) above; or

        (g)The party is a retirement benefit scheme for the benefit of employees of the entity, or of any entity that is a related party of the entity.

        Withdrawal of the scope exclusion for 90% owned subsidiaries

        In the previous FRS 8, the FRS did not require disclosure of related party transactions in a parent’s own financial statements when those financial statements are presented together with its consolidated financial statements.

        This exemption is withdrawn in the revised FRS 8.

        Also where a parent owned 90% or more of the voting rights of subsidiary undertakings then paragraph 3 (c) stated:

        “The FRS does not, however require disclosure in the financial statements of subsidiary undertakings, 90% or more of whose voting rights are controlled within the group, of transactions with entities that are part of the group or investees of the group qualifying as related parties, provided that the consolidated financial statements in which that subsidiary is included are publicly available.”

        This paragraph has been deleted and replaced with:

        “The FRS does not require disclosure of transactions entered into between two or more members of a group, provided that any subsidiary undertaking which is a party to the transaction is wholly owned by a member of that group.”

        Effective Date

        The date from which this revised standard has been changed in paragraph 7A so an entity shall apply the amendment set out in the revised FRS 8 for accounting periods commencing on or after 6 April 2008.

        Paragraph 7B of FRS 8 has also been amended because there is no longer an exemption from providing disclosure in the financial statements of subsidiaries where 90% or more of the voting rights are owned within the group (see Withdrawal of the scope exclusion for 90% owned subsidiaries above). Exemption is only allowed for wholly owned subsidiaries. The effect of this runs into FRS 28 ‘Corresponding Amounts’. Because of the amendments, corresponding amounts need not be provided where this information cannot be obtained in the first year the revised FRS 8 is adopted.

        Explanation – the effect of related parties

        The last sentence of the previous FRS 8 in paragraph 9 made reference to the requirement not to disclose related party transactions with a subsidiary undertaking where 90% or more of the voting rights are controlled within the group. As a result of this exemption being withdrawn, this sentence has also been withdrawn.

        Explanation – exempt subsidiary undertakings

        Again these details are contained within paragraph 17 of FRS 8 and make reference to the previous exemptions granted where 90% or more of the voting rights of subsidiaries are controlled within the group. As the revised FRS 8 withdraws this exemption, paragraph 17 is replaced with:

        “In December 2008 the ASB amended paragraph 3(c) to provide exemption only for transactions entered into between two or more members of a group, provided that any subsidiary undertaking which is a party to the transaction is wholly owned by a member of that group. Disclosure would be required, however, of transactions with related parties of the reporting subsidiary other than those that are excluded by the exemption.”

        Conclusion

        The amendments to FRS 8 need to be taken on board by preparer’s of financial statement for clients who have related party transactions. Please note the revised FRS 8 does not take effect until accounting periods commencing on or after 6 April 2008. Related parties will continue to be a ‘grey area’ for accountants merely because of their subjective nature but hopefully the reduced definition of related parties will help clarify complex issues.

        Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates Ltd (www.lwaltd.com)

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