IFRS Lectures IAS 24 Related Parties

Learning Objectives

Purpose of IAS 24 Scope of IAS 24 Key terms of IAS 24 Non-related party relationships Types of transactions with related parties that should be disclosed Disclosures required under IAS 24

Purpose of IAS 24

To ensure that financial statements draw readers attention to the possibility that companys financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties Related parties may enter into transactions that unrelated parties would not. Transactions between related parties may not be made at the same amounts as between unrelated parties. IAS 24 focuses on identifying related parties and outstanding balances IAS 24 does not address measurement of related party transactions

Purpose of IAS 24(Continued)

The profit or loss and financial position of an entity may be affected by a related party relationship, even if related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the transactions of the entity with other parties. Knowledge of related party transactions, outstanding balances, and relationships may affect assessment of the operations by users of the financial statements, including assessments of risks and opportunities facing the entity.

Scope of IAS 24

The Standard shall be applied in:

Identifying related party relationships and transactions Identifying outstanding balances between an entity and its related parties Identifying the circumstances in which disclosure of the items above is required Determining the disclosures to be made about those items

Key terms of IAS 24

A party is related to an entity if at least one of the following is true: (a) Directly, or indirectly through one or more intermediaries, the party:

Controls, is controlled by, or is under common control with, the entity (e.g., parents, subsidiaries, and fellow subsidiaries) Has an interest in the entity that gives it significant influence over the entity Has joint control over the entity

(b) The party is an associate of the entity (c) The party is a joint venture in which the entity is a venturer

Key terms of IAS 24 (continued)

A party is related to an entity if at least one of the following is true: (d) The party is a member of the key management personnel of the entity or its parent (e) The party is a close member of the family of any individual referred to in (a) or (d) (f) The party is an entity that is controlled, jointly controlled, or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or (g) The party is a post-employment benefit plan for the benefit of employees of the entity or of any related party of the entity

Key terms of IAS 24 (continued)

Key Management Personnel Those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.

Key terms of IAS 24 (continued)

Close Family Members of an Individual Those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. These members include the individual's domestic partner and children, the children of the individual's domestic partner, and dependents of the individual or of his or her domestic partner.

Key terms of IAS 24 (continued)

Control The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Joint Control The contractually agreed-upon sharing of control over an economic activity. Significant influence The power to participate in the financial and operating policy decisions of an entity, without having control over those policies. It may be gained by share ownership, statute, or agreement.

Non-related party relationships

Two entities just because they have a common director Two venturers that share joint control over a joint venture The entity and its providers of finance The trade unions with which it deals Public utilities and government departments and agencies Its major customers, suppliers, and other parties with which it transacts a large enough volume of business to create economic dependence

Related Parties Exercise

If H is the reporting entity, and there are transactions between entities H & A, H & S and S & A, pick the statement(s) that is/are true? A. Transactions between entities H & A should be disclosed in Hs financial statements B. Transactions between entities H & S should be disclosed in Hs financial statements C. Transactions between entities S & A should be disclosed in Hs financial statements

Related Parties Exercise

If H is the reporting entity, and there are transactions between entities H & A, H & S and S & A, pick the statement(s) that is/are true? A. Transactions between entities H & A should be disclosed in Hs financial statements TRUE B. Transactions between entities H & S should be disclosed in Hs financial statements TRUE C. Transactions between entities S & A should be disclosed in Hs financial statements - TRUE

Related Parties Disclosures

Disclosure of controlling relationships

To enable users of financial statements to form a view about the effects of related party relationships on an entity, it is appropriate to disclose the related party relationship when control exists, irrespective of whether there have been transactions between the related parties A related party transaction is defined as a transfer of resources, services or obligations between related parties, regardless of whether a price is charged

Disclosure of related party transactions

key management personnel compensation

purchases or sales of goods (finished or unfinished) purchases or sales of property and other assets rendering or receiving of services leases transfers of research and development transfers under licence agreements transfers under finance arrangements (including loans and equity contributions in cash or in kind) provisions of guarantees or collateral settlement of liabilities on behalf of the entity or by the entity on behalf of another party

Related Parties Disclosures (contd)

In determining whether related party transactions need to be disclosed in financial statements, the general concept of materiality should be applied Materiality is dealt with in IAS 1 - Presentation of Financial Statements Permits aggregation of items of a similar nature, except when separate disclosure is necessary for an understanding of the effects of the related party transactions in the financial statements of the entity At a minimum, the disclosures shall include: the amount of the transactions the amount of outstanding balances their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement details of any guarantees given or received provisions for doubtful debts related to the amount of outstanding balances the expense recognised during the period in respect of bad or doubtful debts due from related parties

Transaction Disclosures (continued)

The categories of related parties for which separate disclosures are required are:

The parent Entities with joint control or significant influence over the entity Subsidiaries Associates Joint ventures in which the entity is a venturer Key management personnel of the entity or its parent Other related parties.

Key Management Compensation

Compensation payable to key management must be disclosed in total and analysed into:

Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments

State Controlled Entities

Entities that are controlled or significantly influenced by the state may not always be aware that transactions have been conducted with fellow subsidiaries or associates. As a result, these entities may have difficulties in obtaining information to be disclosed by IAS 24.

Question 1
A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged. Is the statement above true or false?

Question 2
The objective of IAS 24 is to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties. Is the statement above true or false?

Question 3
Under IAS 24, an entity must disclose all of the following except which item?

The pricing policies between the reporting entity and the other entities that are part of the same group must be disclosed. The reporting entity must disclose the name of its parent and, if different, its ultimate controlling party. If neither the parent nor the ultimate controlling party produces financial statements for public use, the name of the next-most-senior parent must be disclosed. Relationships between a parent company and its subsidiaries must be disclosed irrespective of whether there have been transactions between them during the reporting period.

Question 4

According to IAS 24, two companies with a common director are related parties. TRUE FALSE

Question 5
Which of the following is not a category of related parties for which separate disclosures are required?

Employees that are not a part of key management personnel Subsidiary Parent Key management personnel

Question 6
If Mr. Smith owns 100 percent of an entity while a close family member of Mr. Smith is a member of the key management personnel of another entity, are these two entities related parties? Yes No

Question 7
How should key management personnel compensation be disclosed?
A. In total B. For each of the following categories: short-term benefits, postemployment benefits, share-based payment, termination benefits, and other long term benefits. C. A and B D. No disclosure is required

Questions?

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