International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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remuneration paid to that person before that person’s appointment as key management
personnel. Likewise, transactions with a party in the comparative period are not
disclosable as related party transactions if in the comparative period that party was not
related to the reporting entity. Transactions with a party are not disclosable in the current
year if the related party relationship had ceased before the beginning of the current period
although, transactions in the comparative period are disclosed.
The standard is unclear whether disclosure of outstanding balances at the reporting date
is required in situations where an entity ceases to be a related party during the reporting
period. In such situations, one view is that outstanding balances are not disclosable since
the entity is not a related party as at the reporting date. A second view is that if the
outstanding balances as at the reporting date comprise of amounts related to the
transactions when the entities were related, such outstanding balances should be included
in related party disclosures. In our view, either view is acceptable but an entity should
apply the approach that is necessary for users to understand the potential effect of the
relationship on the financial statements. However, if an entity becomes a related party
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during the year, outstanding balances as at the reporting date, that include amounts related
to transactions entered into when the entities were unrelated, are disclosable.
There is no requirement in IAS 24 to disclose information about related party
transactions in one comprehensive note. However, it may be more useful to users of the
financial statements to present information this way.
IAS 1 requires that, except where a standard permits otherwise (which IAS 24 does not),
comparative information in respect of the previous period must be disclosed for all
amounts reported in the current period’s financial statements. [IAS 1.38].
2.5.1 Materiality
In determining whether an entity discloses related party transactions in financial
statements, the general concept of materiality is applied. IAS 24 does not refer
specifically to materiality since this requirement is in IAS 1, which states that ‘an entity
need not provide a specific disclosure required by an IFRS if the information is not
material.’ [IAS 1.31]. Omissions or misstatements of items are material within IAS 1 ‘if they
could, individually or collectively, influence the economic decisions that users make 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.’ [IAS 1.7].
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 quantitatively
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 IAS 24 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.
2.6
Disclosure of key management personnel compensation
IAS 24 requires disclosure of key management personnel compensation including the
amount of outstanding balances and commitments. Outstanding balances with key
management personnel would include unpaid bonuses or liabilities under cash-settled
share-based payment transactions.
There is no requirement in IAS 24 to disclose individual key management personnel
compensation. Instead, the standard requires an entity to disclose key management
personnel compensation in total and for each of the following categories:
• short-term employee benefits;
• post-employment benefits;
• other long-term benefits;
• termination benefits; and
• share-based payment. [IAS 24.17].
Related party disclosures 2983
IAS 24 (see 2.2.9 above) clarifies that where an entity obtains key management
personnel services from another entity (‘management entity’) it is not required to apply
the requirements above to the compensation paid or payable by the management entity
to the management entity’s employees or directors. [IAS 24.17A].
2.6.1 Compensation
‘Compensation’ includes all employee benefits (as defined in IAS 19 – Employee
Benefits) including employee benefits to which IFRS 2 – Share-based Payment –
applies. Employee benefits are all forms of consideration given by an entity, or on behalf
of the entity, in exchange for services rendered to the entity. Employee benefits also
include such consideration paid on behalf of a parent of the entity in respect of the
entity. [IAS 24.9]. Therefore, the compensation disclosed by an entity in its financial
statements is that which is for services to that entity, irrespective of whether it is paid
by the reporting entity or by another entity or individual on behalf of the reporting
entity. Further, the disclosures must include outstanding balances and commitments.
Under IAS 24, compensation includes:
(a) short-term employee benefits, such as wages, salaries and social security
contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if
payable within twelve months of the end of the period) and non-monetary benefits
(such as medical care, housing, cars and free or subsidised goods or services) for
current employees;
(b) post-employment benefits such as pensions, other retirement benefits, post-
employment life insurance and post-employment medical care;
(c) other long-term employee benefits, including long-service leave or sabbatical
leave, jubilee or other long-service benefits, long-term disability benefits and, if
they are not payable wholly within twelve months after the end of the reporting
period, profit-sharing, bonuses and deferred compensation;
(d) termination benefits; and
(e) share-based
payment.
[IAS 24.9].
It is unclear from the standard the basis on which the amount for each of the categories
above is determined. There are alternative views that the disclosure is the amount:
• paid or payable by the entity (or on its behalf);
• recognised as an expense under the relevant standard by the entity (or on its behalf);
• attributed to the benefit for tax purposes;
• due under contract by the entity (or due on its behalf); or
• determined on some other basis.
It is observed in the Basis for Conclusions that the IASB noted that the guidance on
compensation in IAS 19 is sufficient to enable an entity to disclose the relevant
information, which suggests that the IASB is expecting the compensation amounts to be
based on the expense recognised under the relevant standards. [IAS 24.BC10]. I
t is helpful
to remember that the definition of compensation states that ‘employee benefits are all
forms of consideration paid, payable or provided by the entity, or on behalf of the entity
in exchange for services rendered...’. [IAS 24.9].
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Issues relating to each of the categories are discussed below.
For an illustrative example of the disclosure of key management personnel compensation,
see Extract 35.1 at 2.6.9 below.
2.6.2
Short-term employee benefits
As indicated at 2.6.1 above, these include wages, salaries and social security
contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if
expected to be settled wholly before twelve months after the end of the reporting
period). Most of these should not cause difficulty, since the expense for such items
under IAS 19 is generally equivalent to the amount payable for the period. The
disclosures would also include outstanding balances and commitments.
Non-monetary benefits (such as medical care, housing, cars and free or subsidised goods
or services) must also be included within the amount disclosed for short-term employee
benefits. [IAS 24.9]. In some cases, these might have been provided at no direct cost to the
entity. In such circumstances it would appear reasonable to either attribute a value for
non-monetary benefits (for example, the attributable tax benefit), so as to describe them
quantitatively, or to describe such benefits qualitatively.
2.6.3 Post-employment
benefits
As indicated at 2.6.1 above, these include pensions, other retirement benefits, post-
employment life insurance and post-employment medical care. The inclusion of this
category confirms that amounts are disclosed while members of key management are
providing services. If amounts were only disclosed when the benefits are payable, then in
many cases there would be no disclosure since the individuals would no longer be members
of key management. The definition of related party transaction includes ‘obligations
between a reporting entity and a related party’. This implies that post-employment benefit
obligations, including commitments, between the reporting entity and the members of the
key management during the period covered by the financial statements are disclosed.
For defined contribution plans, it seems appropriate that the amount included is based
on the total expense recognised under IAS 19, which is the equivalent of the
contributions paid or payable to the plan for service rendered in the period.
The main issue related to defined benefit plans is to determine an appropriate calculation
for the disclosable amount for the period. IAS 24 is silent on how the disclosable amount
should be determined. Normally, for defined benefit plans, the expense recognised under
IAS 19 differs from the contributions payable to the plan. Disclosing the contributions
payable usually does not always reflect the benefits provided by the entity in exchange
for the services rendered, particularly when the entity is benefitting from a contribution
holiday. One approach to determine the disclosable amount would be to include an
amount based on the total IAS 19 expense recognised in total comprehensive income. The
total amounts recognised under IAS 19 for defined benefit plans includes items such as
interest, actuarial remeasurement gains and losses and the effects of curtailments and
settlements. This approach requires an apportionment of the total expense to the extent
that it relates to the individuals concerned. Another approach would be to determine the
disclosable amount based only on the current service cost and, when applicable, past
service cost related to those individuals on the grounds that the other items relate more
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to the overall plan than to the individuals. An entity should adopt a consistent accounting
policy for determining the amounts disclosed.
2.6.4
Other long-term benefits
As indicated at 2.6.1 above, these include long-service leave or sabbatical leave, jubilee
or other long-service benefits, long-term disability benefits and, if they are not expected
to be settled wholly before twelve months after the end of the reporting period, profit
sharing, bonuses and deferred compensation. Since the accounting for such items under
IAS 19 is on a similar basis to that for post-employment benefits similar issues to those
discussed at 2.6.3 above are applicable.
2.6.5 Termination
benefits
These should not cause difficulty, since an entity generally recognises such items, particularly
for key management personnel, in line with the recognition criteria included in IAS 19.
2.6.6
Share-based payment transactions
This category includes share options, share awards or cash-settled awards granted in
return for service by the members of key management. Such compensation is accounted
for under IFRS 2. For equity-settled share based payment transactions, such as share
options or share awards, IFRS 2 broadly requires measurement of their fair value at
grant date, and that expense is recognised over the period that employees render
services. For cash-settled share-based payment transactions, IFRS
2 requires
measurement and recognition based on the cash ultimately paid.
IAS 24 does not specify a basis on which the compensation disclosed should be
determined. One basis would be to disclose an amount based on the expense under
IFRS 2. Another basis would be to disclose amounts based on the fair value that the
individual received (based on the value of the shares at date of vesting, or at date of
exercise of share options or the cash that is ultimately payable) rather than over the
period of the service. An entity should adopt a consistent accounting policy for
determining the amounts disclosed. In determining an appropriate accounting policy,
the entity should also consider consistency with other disclosures related to key
management personnel compensation made outside the financial statements.
2.6.7
Reporting entity part of a group
One additional practical difficulty for an entity in a group is that the disclosure of its key
management personnel compensation is for the services rendered to the reporting entity.
Accordingly, where key management personnel of the reporting entity also provide
services to other entities within the group, an apportionment of the compensation is
necessary. Likewise, where the reporting entity receives services from key management
personnel that are also key management personnel of other entities within the group, the
reporting entity may have to impute the compensation received. Such apportionments
and allocations required judgement and an assessment of the time commitment involved.
2.6.8
Key management personnel compensated by other entities
A reporting entity also applies the principles set out at 2.6.7 above to situations in which
the other entity is a third party, outside of the group, but is a related party.
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2.6.9
Illustrative disclosure of key management personnel compensation
An example of the disclosure of key manage
ment personnel compensation can be found
in the financial statements of BP p.l.c.
Extract 35.1: BP p.l.c. (2017)
Notes on financial statements [extract]
32.
Remuneration of senior management and non-executive directors [extract]
Remuneration of directors and senior management
$ million
2017
2016 2015
Total for all senior management and non-executive directors
Short-term employee benefits
29
28 33
Pensions and other post-retirement benefits
2
3 4
Share-based
payments
29
39 36
Total
60
70 73
Senior management comprises members of the executive team, see pages 66-67 for further information.
Short-term employee benefits
These amounts comprise fees and benefits paid to the non-executive chairman and non-executive directors, as well as
salary, benefits and cash bonuses for senior management. Deferred annual bonus awards, to be settled in shares, are
included in share-based payments. Short-term employee benefits includes compensation for loss of office of $nil
in 2017 (2016 $2.2 million and 2015 $nil).
Pensions and other post-retirement benefits
The amounts represent the estimated cost to the group of providing pensions and other post-retirement benefits to senior
management in respect of the current year of service measured in accordance with IAS 19 ‘Employee Benefits’.
Share-based payments
This is the cost to the group of senior management’s participation in share-based payment plans, as measured by the
fair value of options and shares granted, accounted for in accordance with IFRS 2 ‘Share-based Payments’.
2.7
Disclosure of other related party transactions, including
commitments
IAS 24 requires an entity that has had related party transactions during the periods
covered by its financial statements to disclose the nature of the related party
relationship as well as information about those transactions and outstanding balances,
including commitments, necessary for users to understand the potential effect of the
relationship on the financial statements. [IAS 24.18].