In the interest of the users of the financial statements, the standard setting bodies and regulatory authorities prescribe the required disclosures in the financial statements for related party relationships, transactions and balances.  The Securities and Exchange Commission (SEC) issued Financial Reporting Bulletin No. 13, Presentation of Related Party Disclosures, dated January 24, 2013, to further clarify the disclosure required by PAS 24.

Related parties in the parlance of financial reporting is a wide concept.  Businesses keeps expanding and to achieve maximum results, they form, acquire or engage new companies and individuals to help them either finance or manage their operations.  Behind the operational complexities, there are certain disclosures required in financial reporting, specifically by Philippine Accounting Standard (PAS) 24, Related Party Disclosures.

What was Clarified?

The main point clarified by this financial reporting bulletin is that the disclosures should be presented in columnar format.  Of course, Financial Reporting Bulletin No. 13 also reiterate the required items to be disclosed. If you want to know what is a pre-settlement cash advance, it is best to check here!

In my own point of view, disclosure of related party relationships, transactions and balances can be done as what is presented below:

In addition to the above tabular/columnar format disclosure, the company also need to disclose the terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received; provisions for doubtful debts related to the amount of outstanding balances; the expense recognized during the period in respect of bad or doubtful debts due from related parties.  These can be disclosed in narrative.

Update – SEC Illustration During FINEX Presentation

During the presentation of the SEC General Accountant during her talk on “Update on Financial Reporting Regulations” for Finex last February 20, 2013, an illustration of the related party disclosure was shown.  Please see illustration below.

I believe that this illustration was the preference of the SEC and expects filers to adopt this format.  However, in certain circumstances where another presentation is necessary (as illustrated above) in order to understand more the impact of the related party transactions, the entity can modify this format.

Recent Related Regulation

The main objective is really to present the potential effect of the relationship of related parties in the financial statements.  Just recently, the Bureau of Internal Revenue issued Revenue Regulations (RR) No. 2-2013: Transfer Pricing Guidelines which, as the title suggests, provides guidelines for transfer pricing and is applicable to cross-border transactions between associated enterprises and domestic transactions between associated enterprises.

You can read more of Revenue Regulations (RR) No. 2-2013: Transfer Pricing Guidelines, click this link.

It is noted that regulators (SEC and BIR) have increased scrutiny over related party transactions as these there is a huge possibility that these can be a source of fraud in financial reporting and taxation.

Content of the SEC Financial Reporting Bulletin No. 13:

Philippine Accounting Standard (PAS) 24 provides that an entity should disclose information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements.  At a minimum, the disclosures shall include:

(a)    the amount of the transactions;

(b)    the amount of outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received;

(c)     provisions for doubtful debts related to the amount of outstanding balances;

(d)    the expense recognized during the period in respect of bad or doubtful debts due from related parties.

PAS 24 also provides that the said disclosures shall be made separately for each of the following categories:
(a) the parent;
(b) entities with joint control or significant influence over the entity;
(c) subsidiaries;
(d) associates;
(e) joint ventures in which the entity is a venture;
(f) key management personnel of the entity or its parent; and
(g) other related parties.

 To attain the objective of PAS 24 of providing an understanding of the potential effect of the relationship on the financial statements, the following requirements under the said standard must be observed by corporations:

1.      The required disclosures on transactions and outstanding balances shall be made separately for each of the following categories:
(a) the parent;
(b) entities with joint control or significant influence over the entity;
(c) subsidiaries;
(d) associates;
(e) joint ventures in which the entity is a venture;
(f) key management personnel of the entity or its parent; and
(g) other related parties.

2.      For each of said category, the following information shall be provided:

(a)   the amount of the transactions;

(b)   the amount of outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received;

(c)   provisions for doubtful debts related to the amount of outstanding balances;

(d) the expense recognized during the period in respect of bad or doubtful debts due from related parties.

3.      The presentation shall be made in columnar format according to the above categories and disclosure items.

Source: SEC

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