Disclosing key management personnel pay
Who counts as a client's key management personnel, how IAS 24 asks for their pay to be disclosed, and where to find the figures the ledger lacks.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
In a company with three directors and forty staff, the directors' pay is often the single most sensitive number in the statements. It is also one of the figures most often presented carelessly: a total lifted from the payroll summary, with the company car, the medical aid contributions and the bonus paid in the following month left out, and nothing to show how the total breaks down.
IAS 24 asks for more than that, and readers of a small company's statements, such as lenders, minority shareholders and sometimes the tax authority, read this note closely. This article covers who to include, what the disclosure must show, the particular problems of owner-managed companies, and how to gather and draft it.
Who is key management personnel
Key management personnel matter in IAS 24 because of the related party rules. Under IAS 24, a person, or a close member of that person's family, is related to a reporting entity if that person has control, joint control or significant influence over the entity, or is a member of its key management personnel. So these people are related parties by virtue of their role, whether or not they own any shares.
Read the standard's own definition of the term before deciding who is in. In practice, for an owner-managed company, the people to consider are those who plan, direct and control the business. That usually means the directors, executive and non-executive, and sometimes a general manager or financial manager who runs the company day to day even without a board seat. A title is not decisive. A "managing director" who in fact takes no decisions, or an "operations manager" who in fact signs off every major contract, should be considered on the substance.
Record the list of people, and the reasoning for anyone included or left out, in the working papers. The list should be reconsidered each year as roles change.
Compensation in total and by category
IAS 24 requires an entity to disclose key management personnel compensation in total and by category as defined in the standard. Two things follow.
First, the total must be complete. Compensation is broader than salary. Ask about every form of reward the company provides to these people: bonuses, including those declared at year end but paid later; company cars and fuel; housing; medical and retirement contributions the company pays; school fees; share schemes; and any payments on leaving. Anything the company gives in return for their service as key managers is a candidate.
Second, the total must be split into the categories IAS 24 defines. Take the categories from the standard itself, map each element of the client's pay to one of them, and keep that mapping on file so next year's preparer applies it the same way.
The objective of IAS 24, in the IFRS Foundation's words, is to make sure the statements contain the disclosures needed to draw attention to the possibility that the entity's financial position and profit or loss may have been affected by related parties and by transactions and balances with them. Key management pay is the most common example of that in a small company.
Owner-managers paid through loan accounts or dividends
Owner-managed companies blur the line between pay and ownership. A director who is also the main shareholder may take a modest salary and draw the rest through the loan account or as dividends. For the disclosure, ask what each payment is for.
- Salary, bonus and benefits are compensation for service as a manager.
- Dividends are paid to the person as a shareholder, in proportion to the shares they hold, and are generally not compensation for management services, though they are still dealings with a related party.
- Drawings through a loan account need a closer look. If they are, in substance, the director's reward for running the business, treat them as such; if they are a genuine loan, they are a balance with a related party.
Either way, IAS 24 requires that where there have been related party transactions, the entity discloses the nature of the relationship and information about the transactions and outstanding balances, including commitments, needed for users to understand the potential effect on the statements. So the loan account balance and the dividends belong in the related party note even when they are not part of compensation; related party disclosures covers that note in full.
Collecting the figures the trial balance does not show
The ledger rarely holds key management pay in one place. Directors' salaries may sit in a general salaries account, their medical aid in a staff benefits account, the car in vehicle expenses, and a bonus in an accrual. Collect the figures from source:
- Payroll reports or payslip summaries for each person on the list.
- Records of fringe benefits and allowances.
- Bonus resolutions and accruals at year end.
- Retirement and medical scheme schedules showing employer contributions.
- Board minutes for any changes in pay, share awards or termination arrangements.
Agree the total to the payroll and the ledger, and keep the reconciliation. The staff costs note should agree with these figures where they overlap; building that note is covered in the staff costs note from payroll.
Reviewing AI-drafted note wording
In Achekam's Studio, notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]". Key management compensation by category is usually that kind of fact, so expect to complete it by hand from the schedule above. The Studio's standard policy wording is based on IFRS for SMEs and is labelled for review before issue, and staff can write their own wording.
Where an AI key is set up, AI can draft narrative text such as note wording, labelled "AI draft - review before issue", with figures still coming from code. There is no separate accept step for each paragraph; the safeguard is the firm's review stages and the partner's signature. For this note, check every sentence of an AI draft against the people list and the compensation schedule. A fluent paragraph that names the wrong categories, or describes a benefit the client does not provide, is still wrong.
The IFRS Foundation's IAS 24 page explains the disclosures the standard requires so readers can see how related parties may have affected an entity's results and position. Send the client the list of questions above at the planning stage, not in the last week before signing.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
