IAS 24- Related Party Disclosures

The existence of a related-party relationship

may have an effect on profit or loss and
the financial position of an entity. In order
to ensure transparency in financial
reporting, most accounting standards
around the world prescribe disclosures of
transactions with related parties.

Related party disclosures (IAS 24)

Related party relationships are a normal feature of
commerce and business. For example, entities
frequently carry on parts of their activities through
subsidiaries, joint ventures and associates.
A related party relationship could have an effect
on the income statement and financial position of
an entity. Related parties may enter into
transactions that unrelated parties would not.

Related party disclosures (IAS 24)

(Continued)
Examples where related party transactions
have significantly distorted results and financial
position and led to the entitys collapse and
subsequent investigation by regulatory bodies:
borrowing by the entity from the entitys pension
funds;
artificial sales and other transactions with special
purpose entities (SPEs) that are related to the
entity;
loans to key management personnel.

Objective
To inform users that its financial position
and performance may be affected by the
existence of related parties and by
transactions and outstanding balance with
such parties.

Scope
Both separate and consolidated financial
statements.

Purpose of related party

disclosures
Related party transactions may affect the
financial position and performance
Presence of control, joint control; and
significant influence
Mere existence not transaction may also
affect financial position and performance. for
example, a subsidiary may be instructed by
its parent not to engage in research and
development.

Related parties (Continued)

A party is related to an entity if:
(a)A person or close member of a persons family is
related to a reporting entity if that person:
(i) has control or joint control over the reporting
entity;
(ii) has significant influence over the reporting
entity; or
(iii) is a member of the key management
personnel of the reporting entity
or of a parent of the reporting entity.

Related parties (Continued)

Conditions of Related Party:
(i) The entity and the reporting entity are
members of the same group (which means that
each parent, subsidiary and fellow subsidiary is
related to the others).
(ii) One entity is an associate or joint venture of
the other entity (or an associate or joint venture
of a member of a group of which the other
entity is a member).
(iii) Both entities are joint ventures of the same
third party.
(iv) One entity is a joint venture of a third entity

Related parties (Continued)

v. The entity is controlled or jointly controlled by
a person identified
In a
(vii) A person identified in (a)(i) has significant
influence over the entity or
is a member of the key management personnel
of the entity (or of a
parent of the entity).
viii)The entity is a postemployment benefit plan
for the benefit of employees of either
the reporting entity or an entity related to the
reporting entity.

Related parties (Continued)

Close members of the family of a person are
those family members who may be
expected to influence, or be influenced by, that
person in their dealings with the
entity and include:
(a) that persons children and spouse or
domestic partner;
(b) children of that persons spouse or domestic
partner; and
(c) dependants of that person or that persons
spouse or domestic partner.

Substance of the relationship

IAS 24 contains an important overriding principle:
in considering each possible related party
relationship, attention should be directed to the
substance of the relationship and not merely the
legal form .
Examples of such situations follow:
1. Two entities having only a common director or
other key management personnel,
notwithstanding the specific requirements of IAS 24
above.

2. Agencies and entities such as:

a. Providers of finance (e.g., banks and creditors).
b. Trade unions.
c. Public utilities.
d. Government departments and agencies.
3. Entities upon which the reporting entity may be economically dependent,
due to
the volume of business the entity transacts with them. For example:
a. A single customer;
b. A major supplier;
c. A franchisor;
d. A distributor; or
e. A general agent.

Significant Influence
The existence of the ability to exercise significant influence
may be evidenced in one or more of the following ways:
1. By representation on the board of directors of the other
entity;
2. By participation in the policy-making process of the other
entity;
3. By having material intercompany transactions between
two entities;
4. By interchange of managerial personnel between two
entities; or
5. By dependence on another entity for technical information.

Example
Parties related in substance
Consider the following related party relationship and
indicate the disclosure that should be made by entity A
and entity C.
Entity A is in financial difficulties. It is owned by Mr
Xerox who is its sole director.
Entity A sells for EUR 500,000 PPE having a book
value of EUR 1m to entity B, which is owned by Mr
Zapatos who is also entity Bs sole director, for EUR
500,000.
Entity B then sells the same PPE for EUR 500,000 to
entity C which is also owned by Mr Xerox, who is its
sole director.

Representation of related party relationship

(Continued)
Entity A has sold a property to a third party (entity B),
unconnected to its director, at an amount below its book
value. It might be understandable that the sale is below
book value as it might be a forced sale: in fact, entity A
is in financial difficulties. However, entity B makes
neither profit nor loss on the deal and appears to be an
agent or intermediary for the transfer from entity A to
entity C. Taking the transaction as a whole, the
substance of this arrangement appears to be that a
transaction has occurred between entity A and entity C.
This has been facilitated via an intermediary:

(Continued)
entity B. As entity A and entity C are subject to common
control, they are related parties. In substance, a
transaction has occurred between these two parties and
this should be disclosed in accordance with IAS 24.2 In
the financial statements of both entity A and entity C,
details of the transaction should be disclosed alongside
the fact that the transaction has been undertaken via an
intermediary.3

Significant influence and control by

the same source
IAS 24 para 10 requires that in considering each
possible related party relationship, attention should
be directed to the substance of the relationship and
not merely the legal form. This may be applied in
two ways:
First, it may be applied to a situation where, for
example, a special purpose entity (SPE) is formed
in which an entity would appear to have no
ownership interest (using perhaps a trust
arrangement to hold the investors interest), but
where the entity, in fact, exercises control.

Significant influence and control by

the same source (Continued)
In such a situation, the substance is that the entity
has control and, thus, the investee falls within the
definition of a related party in the standard.
Secondly, it may be applied to a situation where
two parties are related to a third party, but not to
each other, according to the definitions in the
standard. This situation is dealt with below.

Figure 17.9

Different scenarios of control and significant influence from the same source

(a) In all of the scenarios in Figure 17.9, entities A and B

are related parties under IAS 24.
(b) In all of the above scenarios, entities A and C are
related parties under IAS 24.
(c) In all of the above scenarios, entities B and C are not
related parties under the definitions in IAS 24, unless
entity C has entered into transactions under the
influence of entity A that are not independent and at
arms length. If this it the case, entity B should include,
in its disclosure of transactions with entity A, details of
any transactions with entity C that have been entered
into (together with any resulting balances) as a result
of the exercise of the control held by entity A.

Financial Statement Disclosures

IAS 24 provides examples of situations where related-party transactions may lead to
disclosures by a reporting entity in the period that they affect:
Purchases or sales of goods (finished or unfinished, meaning work in progress).
Purchases or sales of property and other assets.
Rendering or receiving of services.
Agency arrangements.
Leasing arrangement.
Transfer of research and development.
License agreements.
Finance (including loans and equity participation in cash or in kind).
Guarantees and collaterals.
Commitments linked to the occurrence or nonoccurrence of particular events,
including executory contracts (recognized and unrecognized).
Settlement of liabilities on behalf of the entity or by the entity on behalf of another
party

disclosures
1.

Relationship between parent and subsidiaries should

be disclosed. Disclosures requirements are governed
by IAS 27, 28 and 31 regarding consolidation, joint
control and associates respectively
2. An entity shall disclose key management personnel
compensation in total and for each of the following:
a) Short term employee benefit
b) Post employment benefit
c) Other long term benefit
d) Termination of benefit
e) Share based payment

3. If there is a transaction between related party

an entity shall disclose the followings:
a) The amount of the transaction
b) Outstanding balances
c) Terms and conditions of the outstanding
balances
d. Provision for doubtful debt related to the
amount of outstanding balances
e. Expense recognized during the period
regarding bad debts due from related party

4. Separate disclosures should be made for each

of the followings:
a) Parent
b) Entities with joint control or significant influence
over the entity
c) Subsidiaries
d) Associates
e) Joint venture where entity is a venture
f) Key management personnel of the entity or its
parent
g) Other relate party.

Arms-length transaction
price assertions.
The assertion that related-party transactions were made at terms
that are normal or that the related-party transactions are at
arms-length can be made only if it can be supported. It is
presumed that it would rarely be prudent to make such an
assertion. The default presumption is that related-party
transactions are not necessarily conducted on arms-length
terms, which is not taken to imply that transactions were
conducted on other bases

 IAS 24 specifically cites other IFRS which also

establish requirements for disclosures of related-party
transactions. These include:
IFRS 10, which requires disclosure of a listing of
significant subsidiaries.
IAS 28, which requires disclosure of a listing of
significant associates.
IFRS 11, which requires disclosure of a listing of
interests in significant joint arrangements