Related Party Disclosures for SMEs
The changes to the Maltese Companies Act as a result of the transposition of the EU Single Directive into Maltese law, which came into effect on 1st January 2016, had an impact on small and medium-sized entities. The option under Article 185 of the Companies Act for small companies to prepare abridged accounts has been removed and consequently a small company must deliver to the Registrar of Companies its full set of financial statements including the notes to the accounts. One note that was not required to be included in abridged accounts, hence not made public, was with respect to the disclosure of emoluments granted to the directors of a company for their services as directors and for their services in connection with the management of the affairs of the company. This included all fees, percentages, gifts, compensation for loss of office and other similar payments together with any commitments arising or entered into in respect of retirement pensions or other similar commitments for former directors of the company. This increased level of disclosure to be made public is encouraging businesses to look into the two accounting frameworks allowed to be adopted by Maltese small and medium-sized entities (GAPSME and IFRSs as adopted by the EU) and assess the disclosure requirements of the two.
The objective of Section 20 of GAPSME, similarly to IAS 24, is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties, and by transactions and outstanding balances, including commitments, with such parties. Both frameworks define a related party transaction as “a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged”. 1, 2
GAPSME in comparison to the previous GAPSE regulations provides more detail in the definition of what constitutes a related party, which is in line with that given by IAS 24. A related party is a person or an entity that is related to the entity that is preparing its financial statements. Related parties include:
- Persons with control, joint control or significant influence over the entity (and close members of their families)
- Parent company
- Fellow subsidiaries
- Associates of the entity and other members of the group
- Joint ventures of the entity and other members of the group
- Members of key management personnel of the entity or of a parent of the entity (and close members of their families)
- Entities (or any of their group members) providing key management personnel services to the entity or its parent
- Post-employment benefit plans
As for GAPSME, the disclosure requirements distinguish between a small company and a medium-sized company. However, small and medium-sized entities opting for IFRS as adopted by the EU have to disclose the same information as that required by large entities. Under GAPSME, small companies have lesser disclosure requirements as evidenced in Table 1 below. But it is important to note that small companies (both those adopting IFRS as adopted by the EU and those adopting GAPSME) are required to make disclosures concerning directors’ remuneration. Small companies under GAPSME are required to disclose only transactions with specific categories of related parties and these include the reporting entity’s board of directors.
One of the major differences in the disclosure requirements between IFRS and GAPSME is that IAS 24 requires the disclosure of the identity of the ultimate controlling party. No such disclosure is required by GAPSME if the ultimate controlling party is an individual.
Table 1 below highlights the disclosure requirements between IFRS and small and medium-sized entities for GAPSME.
Table 1: Disclosure requirements under GAPSME (small and medium-sized entities) and IFRSs as adopted by the EU (adapted from 1, 2)
# Under GAPSME entities are exempt from disclosing related party transactions with other group companies provided that such group companies are wholly owned by a member of the group.
Globally there is a greater interest in related party transactions given the need for more transparency in financial reporting. Hence, management should ensure that they have the necessary tools to collect the information to meet the disclosure requirements requested by the regulations.
- 1 L.N. 289 of 2015. Accountancy Profession Act (CAP. 281) Accountancy Profession (General Accounting Principles for Small and Medium-Sized Entities) Regulations, 2015. Section 20: Related party disclosures.
- 2 International Accounting Standard 24 Related Party Disclosures.