When is management a related party

GRAP 20 on Related Party Disclosures became effective from 1 April 2019. Entities will therefore need to consider GRAP 20 in preparing their financial statements for the upcoming financial year ends.

As national, provincial and local government work together to achieve the same objectives, it is common that there are significant relationships between, and transactions among, entities. It is important for users of the financial statements to understand the effect – if any – of these relationships and transactions on an entity’s financial performance and financial position.

Related parties can be people or entities. Related party transactions can be the transfer cash, goods, and services - regardless of whether a price is charged - or amounts owing between the related party and the reporting entity.
People or entities are related parties when they control or jointly control an entity, or because they exercise significant influence over an entity. A person that is a member of the “management” of an entity is considered a related party of that entity based on their roles and responsibilities.

Who is management?

For a member of management to be considered a related party to the entity, the person must be “responsible for planning, directing and controlling the activities of the entity”. Management can include:

• Members of the governing body of the entity, e.g. members of the Board, or Council members.
• Key advisors of a member of the governing body or its sub-committees, where the advisor has the responsibility for planning, directing and controlling the activities of the entity.
• Members of senior management, which may include the chief executive officer or head of the entity (if not part of the governing body).

Management is not merely anyone with the title “manager” or “director” or similar in their job title. As entities in the public sector are structured differently, judgement needs to be applied to assess who is responsible for planning, directing and controlling the activities of an entity.

In the public sector, an employee may often be asked to “act” in another employee’s role. The role could be more senior or may be at the same level but have different responsibilities. The person “acting” in the position may be considered a member of management for the period in which they fulfil this role. Judgement needs to be applied to understand if the acting staff member has been given the responsibility to plan, direct and control the activities of the entity. The specific delegation of authority granted to the staff member should be reviewed to understand the specific powers conferred on them.
 
What should an entity disclose about management?

Entities are required to disclose the remuneration of management.

What is remuneration?

Remuneration includes the benefits in return for services provided to the entity in their capacity as members of management (e.g. as members of the governing body), or as employees. The following categories of remuneration should be disclosed:

• Fees for services as a member of management (e.g. board and other fees).
• Salary.
• Bonuses and performance related payments.
• Other short-term employee benefits.
• Post-employment benefits such as pensions, post-employment medical care, etc.
• Termination benefits.
• Other long-term benefits.
• Commission, gain or surplus sharing arrangements.
• Any other benefits received.

Remuneration excludes the reimbursement of expenditure incurred by a member of management for the benefit of the entity, for example, the refunding of hotel costs while away on work-related travel.

Apart from the remuneration of management, an entity should also consider whether there are any other transactions or outstanding balances between members of management and the entity that should be disclosed.

At what level must remuneration be disclosed?

Entities must disclose the:

• Remuneration paid to each member of management.
• Aggregate amount of remuneration paid to each class of management. Classes of management could include, as examples, the governing body and senior management.

Does materiality apply?

An entity should apply materiality when applying the disclosure requirements in GRAP 20. An entity should consider materiality in deciding:

• What to disclose, as materiality means that the disclosure requirements of a Standard of GRAP need not be applied if they are immaterial.
• At what level to disclose information as items of a similar nature, could be disclosed in aggregate except if separate disclosure is needed to provide relevant and reliable information to users.

Other FAQs on GRAP 20?

The Secretariat of the ASB has issued FAQs on the application of GRAP 20, which can be accessed by following this link: http://www.asb.co.za/wp-content/uploads/2019/11/FAQ-on-Standards-of-GRAP-updated-26-November-2019.pdf