Related Parties and Conflicts of Interest – Directors Responsibilities 1


integrity conceptual compassThe disclosure requirements for Related Party Transactions in published accounts are a common cause of confusion, on the face of it, its sounds easy but getting it right is often a balance between compliance and relevance. The rules are set out in the Companies Act 2006, FRS8 and for smaller companies FRSSE (April 2008). The rules apply to both Full and Abbreviated Accounts.

  • FRS 8 defines a related party to include an entity’s subsidiaries, associates, joint venture interests, directors and close family members of directors.
  • The standard requires an entity’s transactions with related parties, regardless of whether a price is charged, to be disclosed in that entity’s financial statements.

FRS 8 section 3 and FRSSE section 15.7 states that disclosure of the following is not required:

  1. Pension contributions paid to a pension fund
  2. Emoluments in respect of services as an employee or the reporting entity
  3. Transactions with parties simply because of their role as:
  • Providers of Finance
  • Utility Companies
  • Government Departments
  • Customer, Supplier, Franchiser, Distributor or Agent

The disclosure under FRS8 and FRSSE should include:

(a)   the names of the transacting related parties
(b)   a description of the relationship between the parties
(c)   a description of the transactions
(d)   the amounts involved
(e)   any other elements of the transactions necessary for an understanding of the financial statements
(f)     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
(g)   amounts written off in the period in respect of debts due to or from related parties.

Dividends to directors do meet the definition of related party transactions and are disclosable as such.

Trival items don’t require disclosure and the principle of materiality should be applied.

An item of information is material to the financial statements if its misstatement or omission might reasonably be expected to
influence the economic decisions of users of those financial statements, including their assessments of management’s stewardship.

The Companies Act 2006 places a statutory duty on directors in relation to potential conflicts of interest:

A director must “avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”.

Related Party Transactions will often create a potential conflict of interest.

Authorisation may be given by the directors—

(a)where the company is a private company and nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
(b)where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.

The authorisation is effective only if—

(a)any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
(b)the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.

So it is vital that Directors disclose any potential conflict of interest and seek authorisation from the Board of Directors.

steve@bicknells.net

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