There is discussion at the present time as to whether dividends paid to directors should be disclosed as related party transactions.

This appears to be arising because prior to 6 April 2007 (accounts issued before that date) it was necessary to disclose directors’ interests in the company’s share capital in the Directors’ Report; from this and the disclosure of dividends paid it was possible to work out the dividends paid to individual directors, even if it was not specifically disclosed.

This begs the question whether from 6 April 2007 this should have been disclosed in the accounts and, if so, why is the point only now being raised.

To answer the question it is necessary to look at FRS 8 and the FRSSE which require the disclosure of material related party transactions.

Para 19 of FRS 8 gives examples of related party transactions; this does not include dividends paid to related parties. Was this deliberate when FRS 8 was drafted or was it an oversight or was it because of the above comment about being able to work it out (not usually a criteria for non-disclosure)? Actually para 2.6 defines related party transactions as “the transfer of assets or liabilities or the performance of services by, to or for a related party”; would this include dividends paid?

Para 20 of FRS 8 sets out how materiality should be determined and is considered from the point of view of the company and the related party; this is slightly different in the FRSSE.

The question of whether a director is a related party is not in dispute; this is made clear in para 2.5 of FRS 8.

This potentially leaves unanswered the question whether dividends paid to directors (and always have been) require disclosure if they are material. The answer might depend on the approach to ‘if in doubt, disclose’. Certainly the inclusion of dividends as related party transactions does not sit comfortably with the explanation of the effect of related parties in paragraphs 8, 9 and 10 of FRS 8; none of the factors discussed here are applicable to dividends.

Having decided to disclose, the next question would be what to disclose. In principle it might be each dividend paid to each director. But then you would need to consider whether para 2.1 would also require disclosure of dividends paid to close family, and then whether separately or aggregated with the director. This would be affected by whether the close family member was also a director.

A further question that could be asked is whether dividends paid to shareholders who are not directors might also require disclosure. Para 2.5(a)(ii) says “a party is related to an entity if it has an interest in the entity that gives it significant influence over the entity”. What is significant influence? The previous version of FRS 8 referred to a person controlling more than 20% of the voting rights as being presumed to have significant influence; but this was removed in the 2008 amendments. However, if this were used as a benchmark for being regarded as having significant influence; does it mean that dividends paid to non-director shareholders with holdings exceeding 20% should be disclosed under related party transactions? If so shouldn’t these always have been disclosed?

John Major 
June 2009