New disclosure standards affect SMEs.
SMEs should be aware that new reporting rules require companies to disclose some of their most private transactions and relationships.
Although the rules, known as Financial Reporting Standard No.8 (FRS8), were actually introduced in October 1995, they are an important issue at present, as they apply to all those companies drawing up financial statements relating to their business activities for periods beginning after 23 December 1995 ie for year ends on or after 31 December 1996. Previously, far fewer disclosures were deemed necessary. Most importantly, there are no exemptions in the rules for small or medium-sized companies.
Transactions between parent and subsidiary companies, joint ventures, directors or shadow directors need to be revealed. On top of this, the activities of company pension funds set up for the employees' benefit are also covered by the new rules of disclosure. Also under the microscope could be other key managers, 20%-plus shareholders and their close family.
But what exactly must be disclosed? The list includes material transactions undertaken by the company with a related party (irrespective of whether a price is charged), the names of involved parties, a description of the relationship between the parties, any amounts involved and anything else necessary for an understanding of the financial statements. And out into the open must come the amounts due to or from related parties at the balance-sheet date, any provisions for doubtful debts and any debts written off.
All bad news for those who prefer to keep their cards close to their chests, but one saving grace is that similar transactions by type of related party can be aggregated. Disclosure of related party transactions is not required in consolidated financial statements of any transactions or balances eliminated on consolidation. Neither are they necessary in a parent's own statements, if these are presented together with its consolidated financial statements, in the financial statements of 90%-plus owned subsidiary undertakings, or fees or salaries earned as an employee (not director) of the company.