Companies’ Disclosure Requirements under Accounting Standards
In addition to satisfying statutory disclosure requirements under the Companies Acts financial statements must also comply with accounting standards in order for those financial statements to give a true and fair view. Accounting standards contain guidance as to how certain matters should be dealt with in a company’s financial statements.
The accounting standard most relevant to the subject matter of this guidance is Financial Reporting Standard 8 (FRS8) Related Party Disclosures. FRS8 requires the disclosure of information on related party transactions. For the purposes of FRS8, parties related to a company include, inter alia, its directors and the directors of any of its parent undertakings i.e. holding company, its holding company and its subsidiaries, and members of the close family of the directors and directors of any parent undertakings.
The information required to be disclosed in company financial statements by FRS 8 is as follows:
- The names of the transacting related parties
- A description of the relationship between the parties
- A description of the transactions
- The amounts involved
- Any other elements of the transaction necessary for an understanding of the financial statements
- The amounts due to or from related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date
- The amounts written off in the period in respect of debts due to or from related parties.
This is only a summary of the provisions of FRS 8 and company directors should seek professional advice from an accountant in order to ensure that company financial statements are fully in compliance with the requirements of the FRS and that its disclosure requirements are fully satisfied.
While FRS 8 applies to all companies, small companies can exempt themselves from the requirements of FRS 8 if they choose to apply the provisions of the Financial Reporting Standard for Smaller Entities (FRSSE). Where a small company elects to apply the provisions of the FRSSE, less onerous disclosure requirements apply, Section 15 of the FRSSE sets out the disclosures required in respect of related party transactions. Where the reporting entity (i.e. the company) purchases, sells or transfers goods and other assets or liabilities, or renders or receives services, or provides or receives financial support to, from or on behalf of a related party, then such material transactions should be disclosed, including the names of the transacting related parties, a description of the relationship between the parties, a description of the transactions the amounts involved any other elements of the transactions necessary for an understanding of the financial statements the amounts due to or from related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date, and amounts written off in the period in respect of debts due to or from related parties.
The FRSSE states that transactions with related parties may be disclosed on an aggregated basis (aggregation of similar transactions by type or related party) unless disclosure of an individual transaction, or connected transactions, is necessary for an understanding of the impact of the transactions on the financial statements of the reporting entity or is required by law.