As I have mentioned in previous blogs on the subject. FRS 102 represents a complete new accounting framework and as such it is likely that unforeseen problems will arise when people implement it.
One such issue that has recently arisen involves related party transactions.
One of the more controversial proposals in the new SORP was that the accounts should disclose, in aggregate, the rental income received and rent arrears of governing body members (para 16.8).
All related party transactions, including transactions with board members, and any balances outstanding at the year end, must be disclosed in a note to the financial statements regardless of whether they are carried out on an arm’s length basis. Paragraph 33.13 of FRS 102 permits the disclosure of items of a similar nature in aggregate and therefore, for example, disclosure of transactions with tenant board members for rents received during the year and year end arrears, is required in aggregate only
There are a few things worth noting in this paragraph in the SORP. Firstly, it refers to ‘all related party transactions’ and secondly the requirement to disclose tenant member’s rent received and rent arrear balances is given as an example of something that can be disclosed in aggregate. So this covers more than just tenant member rent and arrears.
The overall requirement is that related party transactions be disclosed. So this would include any other transactions with governing body members, for example factoring transactions for members that receive a factoring service from the RSL. However, the requirement may be more onerous than you would initially think.
Paragraph 16.3 of the SORP sets a list of individuals or groups that will always be considered to be related parties for RSLs
The following are considered to be related parties for all social landlords:
(a) Key management personnel (this includes board members) and their close family
(b) Subsidiaries, associates, collaborations and joint venture entities not fully eliminated on consolidation, and
(c) Pension schemes for the benefit of employees of either the reporting entity or an entity related to the reporting entity.
This suggests that not only are tenant governing body members considered to be related parties, but their close family are as well. This would mean that not only would the RSL have to disclose the rental income and rent arrears of tenant members, but also those of their close family. The same would apply for tenant members who receive a factoring service or any other service from the RSL.
In a moment of clarity the SORP defines what is meant by ‘close family’:
Those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity including:
(a) That person’s children and spouse and domestic partner
(b) Children of that person’s spouse or domestic partner, and
(c) Dependents of that person or that person’s spouse or domestic partner.
Overall, we would suggest that SORP instructs RSLs to disclose, in aggregate, the transactions with governing body members and their close family members. Whether this was the intention when the SORP was drafted is another matter.
This is likely to have an impact on community-based RSLs who will often have tenant governing body members who are likely to have close family that are also tenants. RSLs should consider whether they currently capture the necessary information for this disclosure (e.g. through declaration of interest forms) or whether this information will need to be obtained from governing body members.
It should be emphasised to governing body members that these disclosures are aggregated and details of individual rent and arrears balances are not disclosed (unless of course there is only one tenant member on the governing body).
This is one of a number of issues that are likely to arise when the new SORP is first implemented and we will endeavour to keep our clients informed as and when we become aware of issues.
If anyone has any queries, or questions regarding this blog, or FRS 102 in general please contact us.