FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland outlines the presentation and disclosure requirements for small companies in Section 1A Small Entities and this includes the disclosure requirements for small entities.
In comparison to previous UK GAAP, the related party disclosure requirements for small entities are minimal.
There are, however, two types of related party transactions applicable to a small company which must be disclosed in respect of:
- Directors; advances, credit and guarantees; and
- Related party transactions.
Directors’ advances, credit and guarantees
Directors’ advances, credit and guarantees are required to be disclosed by virtue of section 413 of the Companies Act 2006. Specifically, section 413 requires details of advances and credits granted by the small entity to its directors and guarantees of any kind entered into by the small entity on behalf of its directors must be shown in the notes to the financial statements.
The details required of an advance or credit are:
(a) its amount;
(b) an indication of the interest rate;
(c) its main conditions;
(d) any amounts repaid;
(e) any amounts written off; and
(f) any amounts waived.
Monetary amounts are required to be disclosed in respect of items (a), (d), (e) and (f).
The details required of a guarantee are:
(a) its main terms;
(b) the amount of the maximum liability that may be incurred by the small entity; and
(c) any amount paid and any liability incurred by the small entity for the purpose of fulfilling the guarantee (including any loss incurred by reason of enforcement of the guarantee).
Related party transactions
The level of disclosure for related party transactions for a small entity is significantly reduced in comparison to previous UK GAAP (e.g. the FRSSE) and under FRS 102 a small entity must provide particulars of material related party transactions, not concluded under normal market conditions, entered into with:
(a) owners holding a participating interest;
(b) companies in which the entity has a participating interest; and
(c) directors (or members of the entity’s governing body).
FRS 102 does not define ‘normal market conditions’ and hence professional judgement would be needed in this area. For example, where a director introduces a loan to the small company and charges a rate of interest below market rate, this would be caught under the related party disclosure rules as the loan is not at market rate and hence has not been concluded under normal market conditions. Therefore, where a related party transaction has not been concluded under normal market conditions, the particulars required to be disclosed are:
(a) the amount of such transactions;
(b) the nature of the related party relationship; and
(c) other information about the transactions necessary for an understanding of the financial position of the small entity.
The example above illustrates how the disclosures may look if the company is medium-sized/large, small and micro, hence the larger the company, the more comprehensive the disclosure notes.
The requirement to disclose directors’ remuneration and other benefits in the financial statements of a small entity was repealed by SI 2015/980 which transposed the requirements of the EU Accounting Directive into legislation. As many small companies are now applying FRS 102, Section 1A for the first time from December 2016 year-ends onwards, some practitioners have expressed surprised at the absence of the directors’ remuneration disclosure. However, just because it is no longer a legal requirement does not mean that it can be forgotten about entirely!
In practice, it is not uncommon for a director-shareholder of a small company to receive a salary equivalent to the PAYE threshold and the balance of his/her remuneration to be paid by way of dividend as quite often there are tax advantages of structuring the director’s remuneration in this way. The question that must be asked for related party disclosure purposes is ‘is this considered normal market conditions?’ If the answer is ‘yes’ then no disclosure is required; if the answer is ‘no’ then disclosure is required.
There is no clear-cut answer where this situation is concerned, although it is expected that most small companies will not disclose directors’ remuneration on the basis that the directors consider a salary up to the PAYE limit and the balance in dividends to be normal market conditions. In addition, many automated accounts production software systems appear to be defaulting to non-disclosure, presumably because it is no longer a legal requirement. However, do bear in mind that this may not always be the case and professional judgement is needed.
The advice at the present time is to document any conclusions as to whether disclosure has, or has not, been made and why remuneration has been judged to be/not to be concluded under normal market conditions in case such decisions are challenged further down the line.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.