EXPOSURE DRAFT 20 - RELATED PARTY DISCLOSURES
Proposed International Public Sector Accounting Standard
Comments from the Association of Chartered Certified Accountants
November 2001
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on ED 20, Related Party Disclosures. These comments have been prepared in consultation with members of the ACCA's Public Sector Technical Issues Committee, a group of experienced accountants working in the public sector.ACCA welcomes this proposed standard on related party disclosures. We believe, however, that the document does not address sufficiently the principles of openness and accountability. We consider that in a number of areas the proposed standard should require the disclosure of additional information. This is particularly the case with respect to the disclosure of the remuneration of members of the governing body and key management personnel. We believe that disclosure of this information should be on an individual basis rather than in aggregate.
General Issues
Objective1. ACCA believes that the objective of the proposed standard should be extended to include the principle of transparency. The objective should also include ensuring that disclosures indicate actual or potential conflicts of interest and any relationships which may influence decisions taken by the entity.
2. The purpose of related party disclosures should be to ensure proper accountability and transparency in the provision of information about the financial undertakings of an entity. Accountability and transparency are necessary in order to avoid situations where there is a real or potential risk of conflict of interest.
3. We appreciate that extending the objective of the proposed standard could be considered to be straying into the area of corporate governance disclosures. Given the absence of an international public sector code of practice for corporate governance, we believe, however, that such an extension is justifiable.
4. The proposed standard should ensure that disclosures enable a clear understanding of any actual or potential conflict of interest which may arise from the private interests or relationships of any member of the board of governors or key management personnel.
Scope
5. The IFAC Public Sector Committee may wish to consider the significance of non-commercial, for example political or religious, relationships between members of the governing body or key management personnel of the reporting entity and similar individuals in other entities. Where appropriate, the definition of related parties could be extended to include such non-commercial relationships.
6. We believe that the proposed standard should include a reference to any independent consultant or service provider whose opinions concerning the entity may be relied upon by the governing body or key management personnel. For example, a consultant may be retained to advise the entity on the letting of a contract. A related party transaction may then arise if the contract is let to a company owned or controlled by the consultant.
Materiality
7. At paragraph 22, the proposed standard correctly identifies, that, irrespective of its size, a related party transaction may be a material item. We also believe that materiality should be judged from the point of view of the individual concerned, not just the reporting entity. For example, a transaction may not be considered to be material in relation to an entity's accounts, but it could be considered to be material in terms of the income of the manager concerned or of a company which s/he controls.
Remuneration Policy
8. ACCA believes that the proposed standard should require comprehensive disclosure of:
- the entity's remuneration policy
- remuneration provided to its key management personnel
and - any remuneration which may have been paid to members of its governing body.
- public sector entities should establish formal and transparent procedures for developing policy on executive remuneration and for fixing the remuneration packages of individual members of governing bodies
- the annual report of a public sector entity should
contain a statement on the remuneration policy and details of the remuneration
of members of the governing body. This statement should include:
- the entity's policy on executive members' remuneration
- the total of the executive and non-executive members' earnings and those of the Chairperson and highest paid director with separate figures shown for salary, fees, other benefits and other performance-related elements
- the number of governing body members and top managers whose remuneration
exceeds a defined sum, expressed in bands
and - for performance-related remuneration, the basis on which performance is measured.
10. ACCA believes that the proposed standard should make it clear that, where this is relevant, pension contributions should be included within the remuneration figures which are disclosed.
11. We also believe that the proposed standard should include the requirement to disclose guarantees provided to members of the governing board and key management personnel. These should, for example, include guarantees provided by the reporting entity as part of an agreement for a loan with a bank or other financial institution.
Definition of close family
12. We believe that the definition of close family member, contained in paragraph 5 of the proposed standard, should be extended to presume that grandchildren, cousins, nephews and nieces satisfy the definition of close family members in the absence of information to the contrary.
Specific Matters for Comment
Should the Standard require disclosure of related party transactions in the financial statements of all public sector reporting entities other than Government Business Enterprises?13. ACCA believes that the proposed standard should require disclosure of related party transactions in the financial statements of all public sector reporting entities other than Government Business Enterprises.
14. We believe that the actual disclosure could be made more specific, for example, by requiring the names of the parties involved to be shown. In addition, we note that government business enterprises will be subject to International Accounting Standard 24 and thus will be subject to a less onerous regime, in that they will not have to disclose related party transactions with other public sector entities. In comparison, public sector entities generally will be required by the proposed standard to disclose any such transactions undertaken on terms which would be expected from arm's length transactions.
Should the Standard include additional guidance on the meaning of key management personnel?
15. We welcome the inclusion of more detailed interpretation of the meaning of key management personnel. We believe, however, that, where an outsider or contractor is contracted to carry out a specific task, which is otherwise the responsibility of key management personnel, that outsider should also be included as a member of key management personnel during the period in which the task is being undertaken.
Should the Standard require disclosure of remuneration of key management personnel?
16. ACCA believes that the proposed standard should require disclosure of the remuneration of key management personnel. The details of our recommended requirements are discussed at paragraphs 8 to 12 above.
Should a Standard be developed which requires the disclosure of certain information where economic dependency exists?
17. We agree that a standard should be developed on the disclosure of certain information where economic dependency exists. We recognise, however, that it may be difficult for a public sector body to identify whether there is such a relationship with any of its private sector suppliers. In addition, private sector entities which may not rely to any great extent on the business of a single public sector entity may, nevertheless, rely on the government or public sector as a whole for most of their work. For these reasons, we believe that the development of such a standard is complex and should not be considered a high priority.
Should the Standard require the separate disclosure of the remuneration of the responsible Minister or other elected or appointed representative?
18. We support the view that there should be separate disclosure of the remuneration of the responsible Minister or other elected or appointed representative of the government. Should related party disclosures also be required by entities reporting on the cash basis?
19. We believe that information about related party disclosures is just as relevant when the cash basis of accounting is used. For this reason we believe that such information should also be reported by any entity adopting the cash basis of accounting.