REGULATIONS
IASB to Add Related Party Disclosure Project Related to China
July 24, 2006
John Rieger, AFP

"Assuming that the IASB takes on this project, there are some very serious concerns that would need to be addressed," says John Rieger. ARTICLE TOOLS Print Version Reprints RECENT ARTICLES Different cities, same customers China is the region's top stop for exporting Improving wire transfers Quantifying your banks' performance

The International Accounting Standards Board (IASB) agreed at its July board meeting to add a project that will update and clarify the requirements in IAS 24 on Related Party Disclosures. The objective of the project is to address:

• The requirements of IAS 24 for state-controlled entities when they have transactions with similar entities

• Whether, when an associate of an entity is preparing its own financial statements, the requirements of IAS 24 should include as related party transactions, transactions between the associate and a subsidiary of the associate’s significant investor

The primary reason for initiating this project is to soften accounting rules for the benefit of converging IFRS with Chinese Accounting Standards. According to the Chinese, IAS creates the following concerns:

• It is onerous, (and in some cases impossible), for a state-controlled entity to identify all of its related parties. Identification will involve extensive work, the accuracy of which will be limited because of practical difficulties. Furthermore, China is implementing substantial privatization; thus, even when a list of related parties is established, it will constantly need updating.

• The number of transaction that need to be disclosed could be excessive and in some cases related party disclosure for a large percentage of the total transactions of the entity will be required. For example, purchases, sales, deposits of cash etc may need to be identified and disclosed as related party transactions. The majority of these transactions will be on normal trading terms, thus the benefit from disclosure is less than for other related party transactions. Further, the utility of such extensive amounts of information to users is questionable, and important related party disclosures could be hidden among trivial information.

Assuming that the IASB takes on this project, there are some very serious concerns that would need to be addressed. The purpose of having disclosures of related party activity is to discourage improper transactions that may be detrimental to shareholders and/or stakeholders. The concept of disclosing related party activity was to encourage arms length transactions which are at a fair value and without favoritism. Allowing a certain exemption for state-controlled entities calls into question good corporate governance and through this type of opaque reporting promotes improper transactions that may favor one person or entity over another. This is particularly concerning for a country which has been struggling with an image of being prone to corruption.

In many countries where the state owned many of the largest companies, there is a process taking place of allowing for partial privatization of these companies. This is done by the company selling off only a portion of the company either through stock exchanges or through an auction process. In these cases, the state still retains a controlling interest in the entity. The combination of state control and opaque reporting of related party transactions places the minority owners at a disadvantage.

Freeze on New Accounting Standards

IASB also announced that they will not require the application of new International Financial Reporting Standards (IFRS) currently under development or major amendments to existing standards before January 1, 2009.

The IASB believes that providing additional clarity about its plans for effective dates for ongoing projects will benefit the marketplace, without affecting the IASB’s ability to pursue the objectives described in the FASB-IASB Memorandum of Understanding of February 2006.

The IASB appears to be overwhelmed with the workload and perhaps has received criticisms on certain new projects such as the leasing project and fair value accounting which would have a major impact upon corporate balance sheets.

How this announcement plays out with the FASB and the SEC seems a little unclear. The FASB was focused on converging with the IASB. This will either force the FASB to shift into the same slower track or will result in some divergence if the FASB develops a separate independent path.

Another issue revolves around the SEC roadmap to eliminate the reconciliation requirement for foreign companies between IFRS and U.S. GAAP. The roadmap was conditional upon the SEC being satisfied that there was enough convergence that differences were not a material issue.

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