3.1.1.A Close members of a family

Close members of a family of a person are defined as ‘those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity’ including: [FRS 102 Appendix I]

1. that person's children and spouse or domestic partner;
2. children of that person's spouse or domestic partner; and
3. dependants of that person or that person's spouse or domestic partner.

This list of family members is non-exhaustive and does not preclude other family members from being considered as close members of the family of a person. As well as those specific family members described in (a) to (c) above, the definition also applies to any other family members who may be expected to influence or be influenced by that person in their dealings with the reporting entity. For example, this may include parents, siblings or relatives who are even more distant.

The IFRS Interpretations Committee confirmed in May 2015 that the definition of close members of a family of a person under IFRS (which is identical to the definition in FRS 102) appears to provide no scope to argue that there are circumstances in which the specific family members described in (a) to (c) above are not related parties. Dependants are not limited to children and may include other relatives depending on the facts and circumstances.

The Interpretations Committee observed that the definition of close members of the family of a person:

• is expressed in a principle-based manner and involves the use of judgement to determine whether members of the family of a person (including that person's parents) are related parties or not; and
• includes a list of family members that are always considered close members of the family of a person.

The IFRS Interpretations Committee further noted that the list of family members that are always considered ‘close members’ is non-exhaustive and does not preclude other family members from being considered as close members of the family of a person. Consequently, other family members, including parents or grandparents, could qualify as close members of the family depending on the assessment of specific facts and circumstances.¹

3.1.1.B Key management personnel

Key management personnel are those persons with authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. [FRS 102.33.6].

A related party includes all key management personnel of a reporting entity and of a parent of the reporting entity. This means that all key management personnel of all parents (i.e. the immediate parent, any intermediate parent and the ultimate parent) of a reporting entity are related parties of the reporting entity.

Some entities may have more than one level of key management. For example, some entities may have a supervisory board, whose members have responsibilities similar to those of non-executive directors, as well as a board of directors that sets the overall operating strategy. All members of either board will be considered to be key management personnel.

The definition of key management personnel is not restricted to directors. It also includes other individuals with authority and responsibility for planning, directing and controlling the activities of an entity. For example, a chief financial officer or a chief operating officer may not be directors but could meet the definition of key management personnel. Other examples of the type of persons who are not directors but may meet the definition of key management personnel include a divisional chief executive or a director of a major trading subsidiary of the entity, but not of the entity itself, who nevertheless participates in the management of the reporting entity. A reference to individuals who are not directors in a reporting entity's strategic review might indicate that those persons are considered to be key management personnel.

Key management personnel are normally employees of the reporting entity (or of another entity in the same group). However, the definition does not restrict itself to employees. Therefore, seconded staff and persons engaged under management or outsourcing contracts may also have a level of authority or responsibility such that they are key management personnel.

A related party of a reporting entity also includes an entity that provides key management personnel services to that reporting entity (see 3.1.9 below). However, it is unclear whether individuals employed by that management entity (e.g. key management personnel of the management entity) can be key management personnel of the reporting entity. IAS 24, which has an identical definition of a related party to FRS 102, does not require a reporting entity to look through a management entity to the compensation paid or payable by the management entity to the management entity's employees or directors on the grounds that it is impracticable to access the detailed information required. [IAS 24.17A, BC51]. In our view, as FRS 102 provides no specific guidance on this issue, an entity could use the hierarchy in Section 10 – Accounting Policies, Estimates and Errors (see Chapter 9) in order to apply the guidance in IAS 24 and not disclose any remuneration paid by a management entity to its employees or directors.

3.2.3.A Definition of and examples of related party transactions

A related party transaction ‘is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged’.

Examples of related party transactions include but are not limited to:

• transactions between an entity and its principal owner(s);
• transactions between an entity and another entity when both entities are under the common control of a single entity or person; and
• transactions in which an entity or person that controls the reporting entity incurs expenses directly that would have been borne by the reporting entity. [FRS 102.33.8].

Section 33 provides the following examples of transactions that shall be disclosed if they are with a related party:

• purchases or sales of goods (finished or unfinished);
• 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 agreements (including loans and equity contributions in cash or in kind);
• provisions of guarantees or collateral;
• settlement of liabilities on behalf of the entity or by the entity on behalf of another party; and
• participation by a parent or a subsidiary in a defined benefit plan that shares risks between group entities. [FRS 102.33.12].

This list is not intended to be exhaustive. Information about commitments should be disclosed if necessary for an understanding of the potential effect of the related party relationship on the financial statements. [FRS 102.33.9].

Items of a similar nature may be disclosed in aggregate except where separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of an entity. [FRS 102.33.14].

3.2.3.B Disclosures required in respect of related party transactions and outstanding balances

If an entity has related party transactions of the type described at 3.2.3.A above, it shall disclose the nature of the related party relationship as well as information about the transactions, outstanding balances and commitments necessary for an understanding of the potential effect of the relationship on the financial statements. These disclosure requirements are in addition to the requirements to disclose key management personnel compensation (see 3.2.2 above). However, when, an entity takes advantage of the exemption from disclosing key management personnel compensation (see 3.2.2 above) it is not required to provide additional disclosure about directors' share-based payment arrangements.

At a minimum, disclosures shall include:

• the amount of the transactions;
• the amount of the outstanding balances, and:
  • their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and
  • details of any guarantees given or received;
• provisions for uncollectible receivables related to the amount of outstanding balances; and
• the expense recognised during the period in respect of bad or doubtful debts due from related parties. [FRS 102.33.9].

The disclosures required above shall be made in aggregate for each of the following separate categories:

• entities with control, joint control or significant influence over the entity;
• entities over which the entity has control, joint control or significant influence;
• key management personnel of the entity or its parent (in the aggregate); and
• other related parties. [FRS 102.33.10].

Section 33 stresses that an entity shall not state that related party transactions were made on terms equivalent to those that prevail in arm's length transactions unless such terms can be substantiated. [FRS 102.33.13]. However, there is no requirement to state that transactions have not been made on an arm's length basis.

There is no exemption from disclosure on the grounds of confidentiality. However, since there is no requirement to disclose the name of a related party (apart from the name of the parent, or if different, the ultimate controlling entity), this lack of exemption is likely to be less of a concern.

In determining whether an entity discloses related party transactions in financial statements, the general concept of materiality is applied. Section 33 does not refer specifically to materiality since this qualitative characteristic is described in Section 2 – Concepts and Pervasive Principles. Omissions or misstatements of items are material if they ‘individually or collectively, could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor’. [FRS 102.2.6].

This may have the effect that any related party transaction whose disclosure is considered sensitive (for tax reasons perhaps) is by definition material because it is expected by the reporting entity to influence a user of the financial statements. Therefore, it may not be possible to avoid disclosing such items on the grounds that they are financially immaterial. In addition, a transaction conducted at advantageous terms to either the related party or the reporting entity is more likely to be material than one conducted at arm's length. Since Section 33 requires disclosure of related party transactions irrespective of whether consideration is received, disclosure cannot be avoided on the argument that, since there is no consideration, the transaction must be immaterial.

3.2.3.C Disclosure exemption for state-related entities

An entity is exempt from the disclosure requirements discussed at 3.2.3.B above in relation to:

• • a state (a national, regional or local government) that has control, joint control or significant influence over the reporting entity; and
  • another entity that is a related party because the same state has control, joint control or significant influence over both the reporting entity and the other entity.

This is a generous exemption as there is no requirement to give even an indication of the type of transactions with the state or other state-related entity that is a related party.

However, the entity must still disclose a parent-subsidiary relationship as discussed at 3.2.1 above. [FRS 102.33.11].

3.2.4.A Disclosure of directors' remuneration – all companies

Disclosure of directors' remuneration is required for all entities and disclosures are required for both individual and group financial statements. The requirements are contained in Schedule 5 of The Large and Medium-sized Companies and Groups (Accounts and Report) Regulations 2008 (SI 2008/410) (The Regulations). It is beyond the scope of this publication to address the requirements at length which differ slightly between AIM listed and unquoted entities that are not AIM listed. The following summarises the major points: [5 Sch 1-15]

• Disclosure is required of:
  • the aggregate amount of remuneration paid to or receivable by directors (i.e. all directors including non-executive directors) in respect of qualifying services;
  • gains made by directors on share options in aggregate (as well as the number of directors who exercised share options);
  • the aggregate of the amount of money paid to or receivable by directors and the net value of assets (other than money or share options) received or receivable by directors under long term incentive plans in respect of qualifying services (as well as the number of directors in respect of whose qualifying services shares were received or receivable under long term incentive schemes);
  • the aggregate value of any company contributions paid, or treated as paid, to a pension scheme in respect of directors' qualifying services and contributions by reference to which the rate or amount of any money purchase benefits that may become payable will be calculated; and
  • the number of directors to whom retirement benefits are accruing in respect of qualifying services under both money purchase and defined benefit schemes.
• When aggregate remuneration of all directors, share option gains and amounts receivable on long-term incentive plans exceeds £200,000 disclosures are required of the total of those aggregates for the highest paid director of:
  • the amount of remuneration, share option gains and amounts receivable on long-term incentive plans;
  • the amount of any company contributions paid into a money purchase pension scheme;
  • the accrued pension and the amount of the accrued lump sum in respect of any defined benefit pension plan; and
  • whether the director has exercised any share options and whether any shares were received or receivable by that director in respect of qualifying services under a long term incentive scheme.
• Disclosure is required in aggregate of any excess retirement benefits paid or receivable by directors or past directors (compared to their entitlement when the benefits first became payable or as at 31 March 1997, whichever is the later).
• Disclosure is required of the aggregate amount of compensation paid to directors or past directors for loss of office (which includes loss of office as director, loss of any other office in connection with management of the company's affairs and any office as director or otherwise in connection with the management of the affairs of any subsidiary undertaking of the company).
• Disclosure is required of the aggregate amount of any consideration paid to or receivable by third parties (i.e. a person other than the director or a person connected with him or a body corporate controlled by him or the company or any of its subsidiary undertakings) for making available the services of any person as a director of the company or, while a director of the company, as director of any of its subsidiary undertakings or otherwise in connection with the management of the affairs of the company or any of its subsidiary undertakings.

‘Qualifying services’ are defined as a person's services as director of a company and his services at any time while he is a director of the company as a director of any of its subsidiary undertakings or otherwise in connection with the management of the affairs of the company or any of its subsidiary undertakings.

‘Remuneration’ means salary, fees, bonuses, sums paid by way of expense allowance (chargeable to UK income tax) and the estimated money value of other benefits received otherwise than in cash. It does not include the value of share options, gains made on exercise of share options, company contributions paid into a pension scheme or amounts paid/receivable under a long term incentive plan.

All amounts disclosed should include sums paid by or receivable from the company, its subsidiary undertakings or any other person. In other words, disclosures are required, regardless of who actually pays the director.

Payments made to persons connected with the director or persons connected with a body corporate ‘controlled’ by a director (as defined in sections 252-255 of CA 2006) are required to be included in the aggregate remuneration disclosed.

In group financial statements, the directors' remuneration disclosure requirements only extend to directors of the holding company.

In group situations, it is common practice for a holding company, whose directors also act as directors of subsidiary companies, to remunerate the directors in respect of their services to the subsidiary companies. In this situation, remuneration disclosures are still required in the subsidiary company's financial statements and there should be an apportionment of the remuneration received for qualifying services to each subsidiary. It may also be possible that, given the level of services required by each subsidiary company, the remuneration for qualifying services is £nil.

However, in the rare cases that the directors believe that it is not practicable to make such an apportionment, we believe that full disclosure of the total amount received as remuneration would be required, accompanied by a statement that it is not practicable to allocate this amount between services as directors of the company and services as directors of holding and fellow subsidiary companies. The note to the financial statements should explain that the charge disclosed as remuneration has been borne by the holding company or other group company.

It may be the case that a blanket management charge has been charged by a holding company to its subsidiaries in respect of a variety of expenditure incurred on its subsidiaries' behalf, including the remuneration of the subsidiaries' directors. The reporting company should seek to analyse the expenditure between types and thereby arrive at a figure for directors' remuneration.

3.2.4.B Directors' remuneration report – quoted companies only

Quoted companies are required to prepare a directors' remuneration report. A quoted company is a company whose equity share capital is included in the official list of the UK Listing Authority, officially listed in an EEA state or admitted to dealing on either the New York Stock Exchange or NASDAQ. [s385(2)]. AIM and OFEX companies are not quoted.

The contents of a directors' remuneration report are specified by Schedule 8 of The Regulations.

3.2.4.C Disclosure of directors' advances, credits and guarantees – all companies

Disclosure of directors' advances, credits and guarantees is required by section 413 of the CA 2006 for all entities. These disclosures are required for each credit, advance or guarantee.

Disclosure is required in respect of all transactions during the reporting period as well as balances outstanding at the reporting date. Disclosure is required of transactions with any person who was a director of the company at any time during the period, irrespective of whether that person was a director at such time that the transaction or arrangement was made. See Chapter 6 at 8.8 for further detail.