Related party disclosures - Company Reporting

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Key Management Personnel TransactionsIn addition to receiving compensation from the organisations within which they work key management personnel anddirectors impact the related party disclosures of a number of sample companies in other ways. There are two maininstances where this is the case. These are either where an individual has transacted with the company in their ownright or where another party over which the individual may have influence has transacted with the company.Each of the banks in our sample identifies key management personnel as related parties by virtue of the fact thatloans have been made to such individuals. There are, however, differences between companies in relation to theformat that disclosures take. Lloyd’s Banking Group, Commerzbank and UBS all disclose this information in a tabularformat giving information in relation to movements during the year. Lloyd’s Banking Group and UBS both discloseadditions and repayments separately whereas Commerzbank gives only a percentage change figure which combinesboth. In addition both Lloyd’s Banking Group and Commerzbank disclose the interest rates relevant to these loans.Within its related parties note to the accounts Commerzbank further analyses loans into those relating to itssupervisory board and board of management. In contrast, UBS presents no such breakdown in a note, but does so ina separate corporate governance report within which it identifies amounts paid to separate individuals. BNP Parabisand BBVA instead disclose amounts outstanding in a narrative format with the latter identifying board of directors andmanagement committee amounts separately. Lloyd’s Banking Group stands out from the others as it is the onlycompany to also present deposit information again in common with loans identifying the relevant interest rates.Of the sample companies six, across a range of different industries, identify as related parties entities within whichmembers of key management personnel have an interest. The sample companies in question are Accor, UBS, Fiat,Eni, Drax and BMW. Of these, Fiat, Drax and BMW fully explain why a related party relationship exists by identifyingthe actual member of management concerned and their position within the related party. The other companies onlystate that a related party relationship exists by virtue of an interest held by an unnamed member of key managementpersonnel. In each case, however, the entities transacted with, and the nature of the transactions undertaken, areidentified. In addition, with the exception of BMW which states that amounts are not material all companies quantifytransaction amounts including those outstanding at the year end.Associates and Joint VenturesAssociates and joint ventures are both identified as related parties by a significant number of sample companies with22 identifying the former and 18 the latter. Of the sample companies identifying associates and/or joint ventures asrelated parties Accor, Belgacom, Nestlé and L'air Liquide make reference to transactions not being significant. In thecase of Nestle such a statement refers only to transactions with associates with no mention being made of jointventure transactions other than that they are eliminated on consolidation in line with the Nestlé's percentage holding.The relevance of such a statement is hard to fathom as under IAS 24 the full amount of any transaction should bedisclosed. L'air Liquide also discloses superfluous and arguably misleading information within its related parties noteby identifying the contribution made to the consolidated balance sheet and income statement by proportionatelyconsolidated companies. Groupe Danone discloses only amounts outstanding at the yearend making no specificstatement about the existence or not of current year transactions.Related party transactions with associates and joint ventures can be split into two types: funding and trading with therebeing a cross over in relation to banks where the primary area of business is to provide financing. Each of the banks inour sample, provide funding to joint ventures and/or associates but there are differences in disclosure. BBVA andCommerzbank both identify associate and joint venture amounts in aggregate with each disclosing both incomestatement and balance sheet amounts in a tabular format. Lloyd’s Banking Group instead chooses to disclose theinformation in a narrative format giving separate information for its Sainsbury's Bank joint venture but in common withits peers, aggregate information for other joint ventures and associates. UBS and BNP Parabis in contrast to the otherbanks disclose associate and joint venture amounts separately with the latter including a detailed analysis of incomestatement and balance sheet amounts (Extract 4).Non-financial companies to disclose the provision of loan finance to joint ventures or associates include TeliaSonera,Anglo American, BG, BMW and Eni. BG discloses only the total for loans to all associates and joint ventures inaggregate identifying a range of interest rates which attach to these loans. BMW and Anglo American also aggregateloan amounts but only in relation to joint ventures. The latter disclosing separately a significant loan to an individualassociate. TeliaSonera also identifies a loan amount for an individual investment but the disclosures given by Eni areby far the most detailed. Eni identifies separately loans made to each of its investments giving some information inrelation to the purpose of each loan. For each individual investment loan receivables, payables, charges and gains areidentified. In addition, Eni states that it has acted as guarantor for a number of its associates and joint venturesdisclosing the amounts involved. Another company to act as guarantor for associate loans is Royal DSM.Each of the above non-financial companies also enters into trading transactions with its associates and joint venturesbut again the format of the disclosures given varies. BG in common with its disclosure of loan amounts aggregatesassociate and joint venture incomes and expenses as well as payables and receivables (Extract 5). TeliaSonera incontrast discloses individual sales and purchases amounts but opts to aggregate payables and receivables. AngloAmerican while disclosing that transactions were not significant also aggregates related party trade receivables and
CR Common PracticesRelated Party Disclosurespayable amounts. These aggregate totals are identified within the trade payables and receivables notes rather thanthe related parties note. Once again, however, the stand out company in relation to the disclosure of associate andjoint venture related party transactions is Eni with individual sales, purchases, receivables and payables disclosed foreach investment (Extract 6). In addition, Eni presents a narrative description of the most significant transactions. Enigoes further, however, by presenting a related parties income statement, balance sheet and cash flow statementimpact analysis as well as including separate related party columns on the face of its primary financial statements(Extract 7).Fellow Italian company Fiat discloses equally as detailed related party information but instead of including relatedparty columns on the face of the primary financial statements publishes separate supplementary statements so as notto compromise an overall reading of the statutory statements (Extract 8). In addition Fiat presents in a note to theaccounts an analysis of related party amounts as they relate to discontinued operations. The detailed related partyinformation presented by both Italian companies is in respect of Italian legislation introduced in 2006. While the detailgiven by other companies is not so high there is variety in relation to the information disclosed. BAE Systems forexample publishes a table which shows amounts in respect of individual equity accounted investments separatelyincluding sales, purchases, receivables, payables, lease amounts and management recharges (Extract 9). In additionto disclosing the figures involved ITV also explains the nature of related party transactions undertaken with associatesand joint ventures. In contrast, Smith & Nephew and BASF while disclosing associate and joint venture related partyinformation separately do not give amounts for individual joint ventures and associates.Governments and other parties with a significant shareholdingOf the companies in our sample nine identify related party relationships in respect of either governments or otherparties with a significant shareholding. Six sample companies identify related party information in relation togovernments. Of these Aegon, Commerzbank and Lloyd’s Banking Group are financial institutions which due tocurrent economic conditions have sought government support. In the case of Commerzbank and Lloyd’s BankingGroup, this has led to the German government owning a 25% shareholding in the former and the UK governmentowning a 41% stake in the latter. Both banks state that transactions are carried out with government entities in thenormal course of their business, however, only Commerzbank makes quantified disclosures in relation to suchtransactions (Extract 10). Lloyd’s Banking Group does, however, make reference to conditions that have been placedon it in return for government support. It has undertaken to loan a predetermined amount to businesses and to pay afee so that the government would guarantee the issue of debt. Aegon gives a detailed breakdown of the financialsupport that it has received from the Dutch government in the form of convertible loans including terms and conditions.Under the support agreement dividends cannot be paid until the government loans are repaid.Two further companies, Belgacom and TeliaSonera are government owned telecommunications providers with theBelgian government having a 53.5% stake in the former and the Swedish and Finnish governments having a 37.3%and 13.7% shareholding in the latter respectively. Although both companies state that telephony services are madeavailable to the governments in question no quantified information is disclosed on grounds of materiality. TeliaSonera,however, does disclose a number of fees that it pays to the government such as for the use of numbers, radiofrequencies and to fund measures to ensure electronic communications are not disrupted. The last company todisclose a government as a related party is Eni which gives a detailed breakdown of transactions with governmentcontrolled entities.Companies to disclose related party transactions with significant or controlling shareholders other than governmentsare BBVA, Novozymes and Iberdrola Renovables. BBVA within its related parties note identifies transaction amountsin relation to significant shareholders in aggregate without identifying the parties in question. Analysis of the financialstatements as a whole reveals that no party owns more than 5.07% of the shares. In the case of the other twocompanies a controlling shareholder is identified with 70.1% of Novozymes owned by the Novo Nordisk Foundationwww.companyreporting.comMonitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports© Company Reporting, 11 John’s Place, Edinburgh EH6 7EL Scotland, UKPublished on 10 January 2012. For more information, please email cp@companyreporting.com5
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