How can you capture a complete picture of your related party transactions when you haven’t a complete picture of who your related parties are? Katherine Wilkes investigates the definition of a related party under FRS 102 and the Charity SORP and considers whether entities are doing enough to fulfil their statutory obligations.
No one likes to give out more personal information than they need to. I agree 100%. Why would you? But sometimes, it is necessary to give certain details to meet a statutory requirement and compiling a list of related parties is where this might be necessary.
The most common approach I come across in gathering related party information is for those on the board to declare any personal interests at the beginning of a meeting. This step is particularly important to ensure boards maintain good governance and avoid conflicts of interest. However, it does not proactively seek to identify exactly who the related parties are, and it makes the big assumption that everyone around the table understands exactly who and what is considered to be a related party. Most entities don’t maintain a full list of related parties, making the identification of related party transactions even more challenging.
To compile a list of related parties, we first need to understand who a related party is.
It is well understood that those who have significant influence over an entity, such as trustees and directors, are related parties. Related parties are also those who have control or joint control of an entity, such as the shareholders. In addition, key management personnel of the entity or of the parent of the entity are also related parties. Other related parties are less well-known, such as the close family of anyone considered to be a related party.
Close family are family members who may be expected to influence, or be influenced by, that person (identified as a related party above) in their dealings with the entity and include:
- That person’s children;
- Spouse or domestic partner;
- The children, stepchildren of a spouse or domestic partner; and
- Dependents of that person and spouse or domestic partner.
And the list of related parties goes on to include other entities, emphasising the importance of understanding the full group structure:
- Entities within the same group
- Associates or joint ventures of an entity within the group (and their subsidiaries)
- A fellow joint venture or associate
- Sponsoring employer if the entity is a post-employment benefit plan for the benefit of the employees
- An entity that is controlled or jointly controlled by a person identified as a related party
- Any member entity of a group which provides key management personnel services to the entity or to the parent of the reporting entity.
For charities, the SORP includes even more as related parties
- Any charity trustee and custodian trustee of the charity;
- A person who is the donor of any land to the charity (whether the gift was made on or after the establishment of the charity); and
- Any person who is:
- A child, parent, grandchild, grandparent, brother or sister of any such trustee (A) or donor (B) of land;
- An officer, agent or a member of the key management personnel of the charity;
- The spouse or civil partner of any of the above persons (A, B, C1 and C2);
- Carrying on business in partnership with any of the above persons (A, B, C1, C2 and C3);
- A person, or a close member of that person’s family, who has control or joint control over the reporting charity;
- A person, or a close member of that person’s family, who has significant influence over the reporting charity.
Charities with common trustees are not necessarily related. Charities are only considered related parties if one charity, in furthering its charitable aims, is under the direction or control of the trustees of another charity.
It’s also important to understand who is not considered to be a related party. FRS 102 states that the following are not related parties:
- Two entities with a common director or member of key management personnel;
- Two venturers with shared joint control over a joint venture;
- Providers of finance, trade unions, public utilities; and government departments and agencies undertaking normal dealings with the entity;
- A customer, supplier, franchisor, distributor or general agent who is economically dependent on the entity.
The list above is extensive and complex, and it comes as no surprise that FRS 102’s related party definition is generally poorly understood. It is, therefore, important for management, directors and trustees to fully understand the definition and supply the relevant information. Many entities use a related party declaration form, completed annually or when there is a significant change. Only once an entity has a full list of related parties can it search properly and thoroughly to capture all the related party transactions that may exist.
Find out more about Katherine Wilkes