Related party disclosures under HKFRS: what Hong Kong companies must report

Related Party Disclosures for Hong Kong Companies Under HKFRS

A company must identify and report every transaction with a party that can control or significantly influence it. Hong Kong Financial Reporting Standards (HKFRS) define a related party as a person or entity related to the reporting entity. This includes key management personnel, their close family members, and the entities they control or significantly influence. These disclosures sit in the financial statements and are subject to statutory audit. The directors’ report must also include particulars of material related party transactions. The detailed disclosure goes in the notes to the accounts.

Hong Kong Related Party Transactions

Hong Kong related party transactions cover any transfer of resources, services or obligations, whether or not a price is charged. Examples include sales of goods between a company and a shareholder-controlled entity, the provision of services by a director’s close family member, or loans to or from a director. The disclosure must include the nature of the relationship, the amount of the transaction, outstanding balances and their terms, and any provisions for doubtful debts. The Companies Ordinance (Cap. 622) also requires disclosure of material transactions with directors in the directors’ report. The HKFRS disclosure is more comprehensive.

HKFRS Related Party Disclosure Requirements

HKAS 24 Related Party Disclosures sets out the requirements. The standard applies to all entities that prepare financial statements under full HKFRS.

• Disclose the name of the entity that controls the reporting entity, and if different, the ultimate controlling party.
• Disclose key management personnel compensation in total and by category: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payments.
• Disclose related party transactions separately for each category of related party: parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures, key management personnel, and other related parties.
• For each transaction, disclose the amount, the amount of outstanding balances, their terms and conditions, guarantees given or received, and provisions for doubtful debts.
• Disclose that the terms of transactions with related parties are at arm’s length only if they can be substantiated.

Wholly-owned subsidiaries are exempt from disclosing transactions with their parent or fellow subsidiaries if the parent prepares consolidated financial statements available for public use. This exemption does not apply to transactions with key management personnel.

Director Loan Disclosure Hong Kong

Any loan made to a director or key management personnel is a related party transaction. Disclose the amount of the loan, the interest rate, repayment terms, and any security provided. If the loan is interest-free or at below-market rates, disclose the imputed interest benefit. The Companies Ordinance (Cap. 622) section 359 also requires disclosure of directors’ loans in the directors’ report. The HKFRS disclosure is more detailed and appears in the notes to the financial statements.

The statutory audit will scrutinise director loans for compliance with both HKFRS and the Companies Ordinance. The auditor’s report will include a modified opinion if director loans are not properly disclosed or if the terms are not at arm’s length. Maintain clear documentation of loan agreements, repayment schedules, and any interest calculations.

Key Management Personnel Compensation

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, including directors and senior executives. Disclose the total compensation paid to key management personnel, broken down into the five categories specified in HKAS 24: salaries, bonuses, director fees, pension contributions, and share-based payments. The disclosure is required regardless of whether the compensation is paid by the company or by a related party.

Reporting Exemption and Reduced Disclosure

Companies that qualify for the reporting exemption under section 359 of the Companies Ordinance may prepare financial statements under the SME Financial Reporting Framework and Standard (SME-FRF and SME-FRS) rather than full HKFRS. The SME-FRS has reduced disclosure requirements for related party transactions. It does not require the detailed breakdown of key management personnel compensation by category, and the disclosure of related party transactions is less granular. The exemption does not remove the audit requirement. The statutory audit must still verify that the disclosures made are complete and accurate under the applicable framework.

Control and Significant Influence

Control is the power to govern the financial and operating policies of an entity to obtain benefits from its activities. Significant influence is the power to participate in the financial and operating policy decisions of an entity but not control them. A related party relationship exists if one party controls, jointly controls, or has significant influence over the other, or if they are under common control or common significant influence. Close family members of key management personnel are also related parties if they could be expected to influence or be influenced by the individual in dealings with the entity.

Outstanding Balances and Guarantees

For each related party transaction, disclose outstanding balances, including commitments, and their terms and conditions. Include details of guarantees given or received. Disclose the amount of any provisions for doubtful debts related to outstanding balances. Disclose the expense recognised during the period for bad or doubtful debts due from related parties.

Statutory Audit and Directors’ Report

The statutory audit will test the completeness and accuracy of related party disclosures. The auditor will request a list of all related parties and transactions from management. The auditor’s report will state whether the financial statements comply with HKFRS and the Companies Ordinance. Incomplete or misleading related party disclosures may result in a modified opinion. The directors’ report must also include particulars of material related party transactions. The detailed disclosure is in the notes to the financial statements.

Practical Compliance for Hong Kong Companies

Maintain a register of related parties and document all transactions with them. This includes director loans, transactions with shareholder-controlled entities, and compensation to key management personnel. Ensure that the terms of related party transactions are at arm’s length and properly documented. The financial statements must include the required disclosures. The directors’ report must reference material transactions. The statutory audit will verify these disclosures, and the auditor’s report will reflect any deficiencies.

For companies using the reporting exemption, the reduced disclosure under SME-FRS applies. The company must still disclose related party transactions that are material to the financial statements. Consult with your auditor or accountant to ensure compliance with the applicable framework.