Story Colin Parker FCA 
 
recent changes to this standard, which is now in operation, are complex and require a planned implementation approach.  
 
There are number of significant differences between the revised AASB 124 ‘Related Party Disclosures’ released in December 2005 and AASB 124 ‘Related Party Disclosures’ (July 2004) that formed part of the so-called ‘stable platform’. There are also some important changes to those proposed in ED 143 ‘Director and Executive Disclosures by Disclosing Entities: Removal of AASB 1046 and Addition to AASB 124’ (September 2005). The revised AASB 124 is operative for annual reporting periods ending on or after 31 December 2005.  
 
The revised AASB 124 ‘Related Party Disclosures’ incorporates the principles in AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’. In doing so, key management personnel replaces specified director and specified executive; much of the supporting commentary and guidance on items included in remuneration has been removed; and there have been some changes in disclosure requirements. As far as AASB 124 is concerned, there have been changes to its scope, removal of exemptions for parent entity disclosure, and some new disclosure requirements introduced.  
 
AASB 124 ‘Related Party Disclosures’ (December 2005) supersedes AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (January 2004), AASB 1046A ‘Amendments to Accounting Standard AASB 1046’ (September 2004), AASB 124 ‘Related Party Disclosures’ (July 2004) as amended by AASB 2004-2 ‘Amendments to Australian Accounting Standards’ (December 2004) and AAS 22 ‘Related Party Disclosures’ (May 1993). AASB 124 ‘Related Party Disclosures’ (December 2005) is based on ED 143 ‘Director and Executive Disclosures by Disclosing Entities: Removal of AASB 1046 and Addition to AASB 124’ (September 2005).  
 
Changes to Generic Related Party Disclosures  
The Application of AASB 124 (July 2004) included ‘each for-profit non corporate reporting entity’. It also permitted noncorporate entities to apply AASB 124, thereby being exempt from the requirements of AAS 22 ‘Related Party Disclosures’. AASB 124 (December 2005) does not apply to not-for-profit public sector entities.  
 
AASB 124 (July 2004) contained the following Australian specific definitions of ‘executive’, ‘former key management personnel’, ‘specified director’ and ‘specified executive’. These have been deleted. AASB 124 (December 2005) retains the definition of a director, which has been revised, and defines ‘disclosing entity’. The definition of director now addresses entities governed by bodies that are not called a ‘board of directors’. A definition of remuneration has been introduced.  
 
AASB 124 (July 2004) exempted the parent entity from disclosing information relating to its key management personnel, and entities related through them to the parent entity where the parent entity presented its financial report with the consolidated financial report. This exemption is removed in AASB 124 (December 2005).  
 
AASB 124 (December 2005) requires disclosure of related party transactions and outstanding balances in the separate financial statements of a parent, venturer or investor presented in accordance with AASB 127 ‘Consolidated and Separate Financial Statements’. This requirement was not contained in AASB 124 (July 2004).  
 
AASB 124 (July 2004) contained a specific Australian disclosure requirement for changes in specified directors during the period. Under AASB 124 (December 2005) disclosure has been extended to key management personnel, but limited to disclosing entities.  
 
 
AASB 124 (July 2004) contained specific disclosures of transactions or balances with former key management personnel. AASB 124 (December 2005) contains no such requirement.  
 
Incorporation of AAS B 1046 Disclosures into the Revised AAS B 124  
There are a number of significant differences between AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ (January 2004) and what has been incorporated into AASB 124 (December 2005). These disclosures are mandatory for disclosing entities.  
 
Under AASB 1046, disclosures were based on notions of a specified director (ie. a director at any time during the reporting period) and specified executive (ie. one of five or more executives who have the greatest authority for managing the economic entity, were employed by the entity or a subsidiary, and were not specified directors). AASB 124 (December 2005) is based on the concept of key management personnel.  
 
Under AASB 124 (July 2004) disclosing entities that provided the disclosures required by AASB 1046 ‘Director and Executive Disclosures by Disclosing Entities’ were deemed to have met the disclosure requirements for key management personnel, and entities related through them to the parent entity in the consolidated financial statements. AASB 124 (December 2005) does not contain such a concession.  
 
As a result of the removal of the definition of specified executive, the number of key management personnel to be disclosed is no longer restricted to five or more. All key management personnel, regardless of the number, must be included in the disclosures required by AASB 124 (December 2005).  
 
The definition of a ‘personally related entity’ in AASB 1046 has been replaced by references to related parties of the key management personnel, ie. close family members; or an entity that is controlled, jointly controlled, or significantly influenced by a close family member. As a result, the following may no longer be considered related parties (unless a dependant): parent or remote lineal ancestor; remote issue of a son or daughter; brother or sister; and a spouse of the preceding groups. Also an entity under joint control or several control, or significant influence, of any of the preceding may also not be related parties.  
 
The components of remuneration differ in title and, in some instances, their parts from AASB 1046 to AASB 124 (December 2005). AASB 124 (December 2005) identifies five components of compensation (ie. Shortterm employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payments), whereas AASB 1046 identified four components of remuneration (ie. primary, post-employment benefits, equity compensation and other).  
 
The specific requirement to disclose prescribed benefits (ie. post employment benefits required by the Corporations Act to be approved by members) has been deleted. The detailed guidance (Appendix 1 of AASB 1046) on what constitutes directors’ remuneration and what should be excluded is not contained in AASB 124 (December 2005).  
 
AASB 124 expands the ‘principles of compensation’ for each key management person to include the policy, relationship to performance, details of performance conditions, justification of performance criteria, methods used to assess performance, and information about external benchmarks.  
 
The disclosure requirements in AASB 1046 that have been incorporated into AASB 124 (December 2005) remain largely unchanged, apart the change from specified director and specified executive to each key management person. AASB 1046 contained supporting commentary to these general disclosure principles that has not been included in AASB 124 (December 2005).  
 
Changes from ED 143 to AAS B 124 ‘Related Party Disclosures’  
There are also some important changes to those proposed in ED 143 ‘Director and Executive Disclosures by Disclosing Entities: Removal of AASB 1046 and Addition to AASB 124’ (September 2005) to the revised AASB 124 ‘Related Party Disclosures’ (December 2005).  
 
The scope of AASB 124 (December 2005) has been extended to the general-purpose financial reports of all reporting entities, but excludes not-for-profit public sector entities (under ED 143 the exclusion was for public sector entities, both for-profit and not-for-profit).  
 
AAS 22 ‘Related Party Disclosures’ has been withdrawn. AAS 22 applied to each non corporate private sector reporting entity. For-profit public sector entities are now required to apply the revised AASB 124.  
 
A parent entity in a group that presents its separate financial statements, together with the consolidated financial statements, need not provide in its financial report the additional disclosures required of disclosing entities. ED 143 had not proposed this exemption, but it is consistent with the exemption in AASB 1046.  
 
The proposed guidance on the applicability and implementation to registered managed investment schemes (MIS) and other similar entities has been not been carried forward into the revised AASB 124 (December 2005).  
 
The Australian disclosure requirements for information about each key management person, and changes therein between the reporting date and the date the financial report is authorised for issue, have been restricted to disclosing entities. Previously, such disclosure was proposed for all entities applying the revised standard.  
 
The five appendices in ED 143 have not been carried forward into the revised AASB 124. The appendices addressed: managed schemes; illustrated compensated disclosure; illustrated equity holdings disclosures; illustrated loans disclosure; and applying the additional Australian disclosure requirements for disclosing entities.  
 
Conclusion  
The revised ‘Related Party Disclosures’ is operative from 31 December 2005 annual reporting periods. While there may be a degree of familiarity with the topic of related parties through the July 2004 version and AASB 1046, there are a number of differences that need to be understood and implemented. For a disclosure standard, AASB 124 is complex and requires a planned implementation approach in the individual circumstances of the entity.  
 
The Institute’s website contains a detailed review of revised AASB 124 ‘Related Party Disclosures’. Visit www.icaa.org.au/tech. to access the review.  
 
Colin Parker FCA is the principal of GAAP Consulting www.gaap.com.au.  
 
 
DISCLAIMER: The views and opinions of the authors appearing in Charter are not necessarily those of the Institute of the Chartered Accountants and should be viewed as such.