A Brave New World - Related Party Disclosures for councils

LG Leader July 2017

By now, we are sure that readers will be at least aware of, if not familiar with, the term ‘Related Party Disclosures’. It is an accounting term, from Accounting Standard AASB 124, made by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001.

We would not be surprised if our readers were to ask why it has any relevance to local government. Particularly as the Standard seeks to ensure that the financial statements of an entity contain disclosures necessary to draw attention to how the financial position and the profit and loss may be affected by the existence of transactions and outstanding balances (including commitments), with related parties.

This is all very well in the private sector where such relationships are a normal feature of commerce and business. However, it is not common in local government, particularly given the public integrity framework in which local government operates.

AASB 124 is not new – it has applied in the private sector for some years. The change is that the Australian Accounting Standards Board has amended it to apply to previously exempt not-for-profit sector entities, and other entities, including local government, for the annual reporting period beginning 1 July 2016. In other words, it is relevant (for the first time) to the annual financial statements for the 2016/2017 year, those statements that are about to be finalised and audited in accordance with the requirements of the Local Government Act 1999.

Therefore, readers must be aware of at least some of the key issues arising from AASB 124 as follows:

• ‘Key Management Personnel’ (‘KMP’) are ‘related parties’ to the Council;
• the term ‘KMP’ captures all elected members, the CEO, directors and other senior management personnel;
• the obligation to make a disclosure is upon the Council. The Council is the reporting entity;

through its financial statements. This is now provided for in the Model Financial Statements prepared by the LGA – as per section 127 of the Local Government Act and the Local Government (Financial Management) Regulations 2011;

• the disclosure obligation upon the Council is based upon the information provided to it (disclosures made) by the KMP;
• the obligation, on elected members, the CEO and senior managers is, therefore, to disclose any ‘related party transaction’ as each is a ‘related party’ to the Council;
• the disclosure captures transactions with ‘close family members’ of the KMP and any entity controlled or jointly controlled by the KMP and/or those close family members;
• a ‘related party transaction’ is defined as “a transfer of resources, services or obligations between a reporting entity [i.e. the Council] and a related party, regardless of whether a price is charged”
• the LGA Model Financial Statements confirm that only ‘material’ transactions need to be disclosed.

All of the above means that elected members and senior managers will be required to make disclosures for the purposes of the council’s 2016/2017 Financial Statements. It will likely be a process overseen by the council’s finance team which will, undoubtedly, provide guidance. Indeed, the council may even adopt a policy about these requirements.

Whilst, the finance team will be a valuable information source about such matters, it is also necessary that each person required to complete a disclosure form understands the requirements upon them.

For further information please contact Michael Kelledy on 8113 7103 or mkelledy@kelledyjones.com.au.