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Section 33: Related Party Disclosures
Section 33 requires an entity to include in its financial statements the disclosures necessary to draw attention to the possibility that its financial position and profit or loss have been affected by the existence of related parties and by transactions and outstanding balances with such parties. It provides details on the disclosures required where such related party transactions exist.
Exclusions from Section 33 requirements
Extract from FRS102: Section 33.1A
33.1A Disclosures need not be given of transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member.
OmniPro comment
See application of the above exemption in the below examples. Under Company Law the notes to the financial statements are required to show the amounts owed to/from group companies and these need to be disclosed in aggregate.
Example 1: Group exemption
In the group below all entities within the group can avail of the exemption contained in Section 33.1A in each of the entity sets of financial statements. Although Subsidiary D is not 100% owned by either Subsidiary A or B, it is still owned 100% within the group. Therefore any transactions between Subsidiary A, Subsidiary B, Subsidiary C and Subsidiary D do not have to be disclosed.
Example 2: Group exemption
The section 33.1A exemption does not apply as Parent A does not own 100% of Company B. Therefore all transactions will need to be disclosed in Company B’s entity financial statements. In the parent consolidated financial statements the balances will be eliminated on consolidation so there are no issues.
Related party defined
Extract from FRS102: Section 33.2-.33.4A
33.2 A related party is a person or entity that is related to the entity that is preparing its financial statements (the reporting entity).
(a) A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
OmniPro comment
The term control, joint control, significant influence has the same meaning here as in Section 9 – Consolidated and Separate Financial Statements, Section 14 – Investment in Associates and Section 15 – Investment in Joint Ventures. Significant influence would generally be presumed where an entity owns 20% or more of the shares of an entity.
Appendix I of FRS 102 defines close members as ‘those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity including:
- that person’s children and spouse or domestic partner;
- children of that person’s spouse or domestic partner; and
- dependents of that person or that person’s spouse or domestic partner’.
This definition could include parents, siblings or relatives, in-laws, cousins, foster children, step children who may be expected to influence or be influenced by that person in their dealings with the reporting entity.
The term domestic partner would be a person whether of the same sex or not, who lives with the member of key management personnel as a partner in an enduring family relationship
Key management personnel
Key management personnel is defined in Section 33.6 as ‘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.’
The definition above makes it clear that a director is automatically considered to be classed as a member of key management personnel. However it does not exclude other employees in the company or in fact in a group of companies from coming within the remit of Section 33 ‘key management personnel’. The single factor that determines whether the personnel are considered key management personnel is if the individual has authority and responsibility for planning, directing and controlling the activities of the entity. Examples of key personnel would include:
- Shadow directors (i.e. although they are not a director they are performing the duties of a director);
- A body corporate who provides management personnel to work in the entity who have responsibility for planning, directing and controlling the activities of the entity.
A person does not have to be referred to as a manager in the entity for to be considered to be a member of key management personnel. The key thing to look at is whether they are responsible for planning, directing or controlling the activities of the entity.
Example 2A: Close family members
Two companies, Company A is 100% owned by Mr Y and Company B is 25% owned by Mrs Y. Mr and Mrs Y are married.
In this case in the books of Company A, the transactions entered into with Company B are related party transactions as Mr X controls Company A and Mrs Y has a significant influence in Company B.
In the books of Company B the transactions entered into are not related party transactions as Mrs Y does not have control or joint control of Company B, Mrs Y only has a significant influence.
Example 3: Close family members
Two companies, Company A is 25% owned by Mr Y and Company B is 25% by Mrs Y. Mr and Mrs Y are married.
In this case in the books there is no related party issues as neither party have control or joint control.
Related party defined
Extract from FRS102: Section 33.2 (b) and Section 33.4(a)
(b) An entity is related to a reporting entity if any of the following conditions apply:
(i) the entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) both entities are joint ventures of the same third party.
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) the entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
(vi) the entity is controlled or jointly controlled by a person identified in (a).
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) the entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
33.4A In the definition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate’s subsidiary and the investor that has significant influence over the associate are related to each other.
OmniPro comment
See examples below which illustrate some of the above points.
Example 4: entities are members of a group (Section 33.2(b)(i))
A group exists where a company owns greater than 50% of the ordinary shares or where there is a right to control the board of directors. Any transactions entered into by any of the below companies are related party transactions. However as stated above, Section 33.1A allows an exemption where the companies are wholly owned subsidiaries. Therefore in this case, no disclosure is required for transactions entered into between Parent A, Subsidiary A and Subsidiary B in each of these financial statements. Disclosure of transactions entered into with Subsidiary C & D will need to be disclosed. In the financial statements of Subsidiary C & D, all transactions entered into with the other group companies and each other will need to be disclosed.
Example 5: (Section 33.2(b)(ii) & (iv)
In the below, all Companies are related parties in each of the separate financial statements.
Example 6: (Section 33.2(b)(iii)
In this instance all companies are related parties in each of the separate financial statements.
Example 7: (Section 33.2(b)(vi)
In the illustration below, Company A and B are related parties. If Mr A owned 100% of Company B, they would also be related parties.
Example 8: (Section 33.2(b)(vii)
Company A and Company B are related parties as Mr A has a significant influence over Company B. Company B is a related party of Company A as Mr A controls Company A (Section 33.2(b)(vi)). If in the above example Mr A did not have any ownership in Company B but was one of the key management personnel of Company B, then Company A & B would still be related parties.
Example 9: (Section 33.4A)
In the example below Company A, is related to Company B, C, E and G. Company A is related to company E by virtue of Section 33.4A i.e. Company E is a subsidiary of Company A’s associate.
From Company A’s perspective, Company D is not a related party as it does not have significant influence over Company D i.e. it only owns 10% (20%*50%) of Company C and Company C does not have a subsidiary (i.e. Company D is only a joint venture).
From Company D’s perspective, Company C & F are related. The other companies are not.
Example 10: Pension funds (Section 33.2(b)(v)
Company A enters into a lease on a property with a pension fund which is held for the benefit of its directors. In this case the rent paid for the use of the property is a related party transaction as Company A and the pension fund are related under Section 33.2(b)(v).
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