AASB 124 Related Party Disclosures came into effect on 1 July 2016 for not-for-profit public sector entities. The purpose of disclosures about related parties is that knowledge of an entity’s financial relationships with related parties may affect how a user of the financial statements assesses an entity, including the appropriateness of its transactions with, and exposures to, related parties.
Although many public sector entities, such as departments and statutory bodies, have been disclosing compensation paid to key management personnel (KMP) for many years, these disclosures will be new for some entities such as local governments.
There are two key areas of disclosure that are likely to result in the greatest impact on public sector entities:
- Disclosure requirements – KMP compensation
Key management personnel (KMP) are those persons with authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. The KMP of an entity includes its board members, councilors or equivalent (if any), and usually also includes the accountable officer or chief executive and their direct reports.
- Disclosure requirements – other transactions with related parties
The standard also requires disclosure of other transactions with each category of related party, which includes KMP of the entity or its parent and their close family members.
The greatest challenge that public sector entities face is establishing the fundamental policies, procedures and capture of information that will enable the disclosures in the financial statements to be compiled. If not already completed, public sector entities should have:
- Documented the policies that set out key definitions relevant to their entity in relation to what is
- a related party relationship,
- a related party transactions, and
- what is considered significant
- Established procedures that will allow the identification of related party transactions, at the same time have controls in place to preserve the privacy of the information, and only allow key staff to have access to the declarations.
- Review their systems for the ability to capture relevant transactional information that relates to any identified related party transaction.
While there is a focus on placing the onus of identifying related party transactions through disclosure by the relevant KMP, public sector entities must still establish a process to identify other related entities which may include reviewing financial records to identify investments in other entities, joint ventures, and associates, review minutes of executive management groups and approvals for the establishment of entities.
Finally the public sector entity will need to assess the materiality of the disclosures from the perspective of its financial statements. It will have both quantitative and qualitative considerations. Specific exclusion do exist in relation to Ordinary Citizen Transactions, but a final assessment must still be considered in relation to what does a reader of the financial statements need to know in order to make informed decisions about the performance of the public sector entity.
By John Zabala
Partner – Audit and Assurance