Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–1 Chapter 24 Related-party disclosures

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–2 Learning objectives 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 Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–3 Learning objectives (cont.) Understand the rationale behind disclosing information about related-party transactions Understand some of the various disclosure requirements included within the Corporations Act 2001, AASB 124 ‘Related Party Disclosures’ and AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–4 Status of newly converged accounting standards Previous standard was AASB 1017 ‘Related Party Disclosures’ AASB 1017 has been replaced by two standards: 1. AASB 124 ‘Related Party Disclosures’ 2. AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ In 2004, extensive changes were made to s. 300A of the Corporations Act 2001

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–5 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 Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–6 Related-party relationship defined (cont.) Related-party transaction (AASB 124) – The transfer of resources, services or obligations between related parties, regardless of whether a price is charged

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–7 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 report users Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–8 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 Materiality is to be considered in deciding whether or not to disclose related-party transactions: – all director- and executive-related transactions are deemed material (AASB 1046) Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–9 AASB 124 ‘Related Party Disclosures’ (cont.) 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 Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–10 AASB 124 ‘Related Party Disclosures’ (cont.) Key management personnel are: – persons having authority and responsibility for an entity’s planning, directing and controlling activities, including any director of the entity Close family members of such personnel are related parties, i.e. domestic partner, children and dependants Refer to Worked Example 24.1 Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–11 AASB 124 ‘Related Party Disclosures’ (cont.) Relationships between parents and subsidiaries to be disclosed regardless of any transactions, including such information as: – name of parent and ultimate controlling entity – if the parent is incorporated overseas, which entities are incorporated overseas and the name of the ultimate controlling entity incorporated in Australia Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–12 AASB 124 ‘Related Party Disclosures’ (cont.) Disclosures regarding key management personnel – Compensation in total and for each of the following categories: ▪ short-term employment benefits (e.g. wages, salaries, paid annual leave and sick leave) ▪ post-employment benefits (e.g. pensions and other retirement benefits) ▪ other long-term benefits (e.g. long-service leave and long-term disability benefits) ▪ termination benefits ▪ share-based payment Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–13 AASB 124 ‘Related Party Disclosures’ (cont.) Disclosure of names of directors and date of appointment and resignation where appropriate Disclosure of names of directors defined as a person appointed: – to the position of director – to the position of alternate director – to governing body, council, etc. Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–14 AASB 124 ‘Related Party Disclosures’ (cont.) Related-party transactions in general – Nature of related-party relationship – Information about transactions and outstanding balances: ▪ amount of transactions ▪ amount and terms of outstanding balances ▪ provisions for doubtful debts related to outstanding balances ▪ bad and doubtful debts expense due from related parties Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–15 AASB 124 ‘Related Party Disclosures’ (cont.) Disclosures made separately for: – parent – entities with joint control or significant influence – subsidiaries – associates – joint ventures – key management personnel – other related parties Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–16 AASB 124 ‘Related Party Disclosures’ (cont.) Examples of transactions to be disclosed: – purchases or sales of goods – purchases or sales of property and other assets – rendering or receiving of services – leases – transfers of research and development – transfers under licence agreements – transfers under finance arrangements – provision of guarantees or collateral – settlement of liabilities

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–17 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ ‘Disclosing entity’ includes (Corporations Act): – organisations with shares listed on a stock exchange – organisations that have lodged a prospectus with the stock exchange – issuers of managed investment products held by 100 or more people Where a disclosing entity is the parent in an economic entity and the financial report of the parent is presented in the economic entity’s consolidated financial report: – AASB 1046 applies only to the consolidated financial report Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–18 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Rationale for extensive disclosure requirements – Need for high level of accountability through disclosure of transactions with entity and benefits gained All items, transactions and balances are deemed material regardless of amounts involved Specified directors – All directors required to prepare financial report Specified executives – Five or more executives (other than specified directors) with greatest authority Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–19 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Details about specified directors and executives: – name of individual – position held – dates identifying period of responsibility Remuneration: – includes salaries, bonuses, fees, commissions, expense allowances, perquisites, personal benefits, equity instruments and post-employment benefits – excludes reimbursement for expenses incurred for entity’s benefit Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–20 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Disclosure of components of remuneration – Primary benefits : ▪ cash salary, fees and commissions ▪ cash profit-sharing and other bonuses ▪ non-monetary benefits – Post-employment benefits ▪ pension and superannuation benefits ▪ prescribed benefits ▪ other post-employment benefits Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–21 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Disclosure of components of remuneration (cont.) – Equity compensation: ▪ value of shares and units ▪ value of options and rights ▪ if terms of vested options or rights have been altered, any increase in value ▪ value of other equity compensation – Other compensation benefits: ▪ termination benefits ▪ prescribed benefits ▪ all other benefits Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–22 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Examples of directors’ remuneration (Abstract 14): – private assurance or insurance premiums – use of company home – use of office and secretarial services – use of company-owned holiday home – low-interest-rate loans – motor vehicles – ‘golden handcuffs’ Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–23 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) All remuneration components (other than share- based payments) to be measured at cost to the entity Computing value of options and rights can be complicated and reliant on particular valuation models For each specified director and executive, disclosure is required of: – total remuneration for period – components of individual’s remuneration Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–24 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Aggregate of total remuneration for individuals and aggregate for each component disclosed for: – specified directors; and – specified executives Disclosure is required for remuneration of specified directors and executives of: – principles used to determine nature and amount – whether, and if so how, principles establish relationship between remuneration and entity’s performance – terms and conditions of each grant of a cash bonus, performance-related bonus or share-based payment Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–25 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) For options and rights over equity instruments, disclosure is required of: – number of options and rights granted and vested – terms and conditions of each grant made Disclosures regarding loans for each aggregate of loans made, guaranteed or secured to: – all specified directors and executives and their personally related entities – each specified director and executive by name whose aggregate loan exceeded $ Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–26 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Details to be disclosed regarding loans: – amount outstanding at start of period – amount of interest paid and payable – difference between interest paid and what would have been charged if on an arm’s length basis – each write-down and allowance for doubtful receivables – amount outstanding at reporting date – for specified persons, highest amount of indebtedness during period Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–27 AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (cont.) Disclosures regarding loans (cont.) – for each group of specified persons, the number of individuals in each group aggregate – summary of terms and conditions of loans ‘Catch-all’ disclosure requirements: – type of transaction of different nature – terms and conditions of each type of transaction – names of directors involved – aggregate amounts recognised

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–28 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 dependent on performance condition Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–29 Section 300A of the Corporations Act (cont.) Annual remuneration plan to be put to non- binding vote of shareholders Shareholder approval required to pay prospective executive or director a retirement benefit greater than: – final salary multiplied by number of years of service Duplication between s. 300A and AASB 1046: – ASIC Class Order likely to avoid duplication

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–30 Examples of related-party disclosure notes Coles Myer Ltd’s 2003 annual report: – twenty pages of disclosures relating to directors, senior managers and other related parties – BHP Billiton Ltd’s 2004 annual report: – twelve pages of directors’ and executives’ disclosures, seven pages of employee shareholder acquisition plans and one page of non-director-related party disclosures – Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–31 Examples of related-party disclosure notes (cont.) Qantas Ltd’s 2004 annual report: – eleven pages of executives’ and directors’ disclosures and three pages of other related-party transactions –

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–32 Summary The chapter considers related-party transactions The disclosure of these transactions is highly regulated within Australia Accounting standards on related-party disclosures include AASB 124 and AASB 1046; and the Corporations Act 2001 Director- and executive-related transactions are subject to highest degree of required disclosure Cost of preparing and reporting the information would be high Regulators consider these costs to be outweighed by benefits

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–33 Summary of main changes to accounting standards Now we have a standard devoted to director and executive disclosures (AASB 1046) AASB 124 focuses on ‘key management personnel’ instead of directors Terms such as ‘relatives’ now replaced by ‘close family members’ Definition of ‘related party’ in AASB 124 different from that in ‘old’ AASB 1017 Remuneration of directors and executives no longer to be disclosed in bands of $ Continues/ …

Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 24–34 Summary of main changes to accounting standards (cont.) AASB 124 does not use the concept of the ‘wholly owned group’ AASB 1046 provides extensive guidance on valuing options granted to directors and executives