IAS 24 – Related Party Disclosures
The objective of the International Accounting standard – IAS 24 “Related Party Disclosures” is to make sure that the financial statements of an entity include the disclosures which are necessary to make the users of the financial statements aware of the possibility that the entity’s financial performance (shown in the financial statements) may have been impacted because of the existing relationships with the related parties, transactions with the related parties, outstanding balances, including commitments with the such parties.
Hence, the standard IAS 24 requires the entities to include disclosures with reference to the related parties, in their financial statements, irrespective of whether any transaction with these kind of parties has occurred during the accounting period which is covered by the financial statements.
This standard is designed to cover and to identify:
(a) The related parties of the entity as well as the transactions that have been carried out with such parties
(b) The Outstanding balances, also including commitments (whether contractual or non-contractual), between the entity and its related party
(c) The conditions and circumstances that makes the disclosures of points (a) and (b) necessary
(d) The purpose and nature of the disclosures that are required to be made with reference to the entity’s relationship with its related parties.
IAS 24 requires an entity to give disclosures with regards to its relationships with related parties in its financial statements and also in the consolidated financial statements if an entity is a parent to a subsidiary. Although, the intragroup outstanding balances and transactions with related parties, are eliminated when preparing a group’s consolidated financial statements.
Purpose of the Related Party Disclosures
• The transactions with the related parties are part of the normal course of economic and business activities. The entities often carry parts of their business activities or operations by making various arrangements through subsidiaries, associates and joint ventures. In situations like these the entities are powered with the ability to impact or influence the operating and financial policies with reference to the investee with the help of the existence of significant impact or influence, control or joint control in case of arrangements like these.
• Relationships and transactions with the related parties also give rise to an issue that the related party may enter into a transaction with the entity at the terms which the unrelated party is unlikely to accept. The example of it can be where a subsidiary provides services to its parent and charges a relatively low price when compared with the price it charges to its other customers.
• The existence of the related party relationships alone can affect the entity’s performance shown in its financial statements even if no transactions between the entity and its related party takes place during the course of the accounting period which the financial statements cover.
• Sometimes just the mere existence of the related parties is enough to influence or affect the entity’s relationship with the other parties. Now such a situation can occur where an entity restricts its subsidiary to take part in some particular activities.
• For all the reasons mentioned above, the information regarding the existence of the relationship between the entity and its related parties may influence the assessment of the entity’s financial performance by the users of the financial statements.
Definitions of Relevant terms
Reporting entity is an entity which is obliged to prepare general-purpose financial statements complying fully with accounting standards so that to assist the users in making financial and economic decisions.
A related party can be defined as an entity or person that is related to an entity that is preparing its financial statements (the reporting entity). An individual or entity can be related to another entity in the following ways:
(a) If the person or entity:
- either has complete or joint control with regards to the reporting entity
- has significant power to influence the reporting entity
- is part of the key management members or personnel of the entity
- is a close member of the family of the person who controls, or has joint control, or has significant power/ influence over the reporting entity
(b) If the entity as well as the reporting entity both are part of the same corporate group. This means that each member in the group is a related party to the other members of it. The members of a group that can be related include parent companies, subsidiaries and fellow subsidiaries.
(c) If an entity has a joint venture agreement with another entity
(d) If an entity is an associate of another entity
(e) If two different entities are in a joint venture agreement separately with a third party
(f) If an entity is controlled, or jointly controlled by the person mentioned in (a) above
(g) If the entity is a retirement benefit plan which has been set up for providing benefits to the employees of either the entity preparing its financial statements or of the entity that is in some way related to the entity reporting its financial results. If the entity reporting its financial results is in itself is a benefit plan then in that case the employers sponsoring the plan will also be considered as a related party to it.
Following are the parties that are not necessarily considered as related parties:
(a) The entities that have a member of management or a director in common but otherwise are not related to each other.
(b) Two ventures sharing control through another joint venture agreement.
(c) Providers of finance, public utilities, trade unions, and government agencies and departments that have no control or significant influence/ power over the reporting entity.
(d) The supplier, customer, general agent, franchisor or distributor with which an entity is involved in regular business transactions.
In case of determining the related party relationships, the entity should not only consider the legal status of its relationship with other parties but should also consider the substance of such relationships.
Key Management Personnel
These are those persons who are powered with authority together with responsibility with reference to planning and executing the entity’s activities either directly or through in-direct ways.
Close family Members
It basically covers those family members of a person that is in the position to have impact or influence that person’s relationship and dealings with the entity (reporting entity) and the examples of close family members are as follows:
- The person’s domestic partner or spouse
- The person’s children
- The children of the domestic partner or spouse of the person
- The Individuals which are dependent either on the person or on the domestic partner or spouse of the person or on both.
IAS 24 basically mentions the related parties with reference to which an entity is required to give disclosures and these include each of the following:
(a) The parent to an entity that has utmost control over it
(b) Any entity that has power to control, jointly control or has power to significantly influence or impact the policies and decisions of the entity
(c) Subsidiary of an entity or its associate
(d) The entity’s joint ventures which the entity jointly controls with another entity
(e) The member of either of the entity’s key management personnel or of its parent.
In case, transactions with related parties occur during the period which is covered by the financial statements, the entity is required to give disclosures about the following:
(a) The nature and purpose of the transactions with the related parties
(b) The amount involved in the transactions with reference to the related parties
(c) The amount relating to any outstanding balance, also including commitments with reference to the related parties
(d) All the terms and conditions on the basis of which the transactions are being carried out, also giving information with regards to whether they are secured or not
(e) The nature and medium of the consideration that will be used for the settlement of the transaction with the related party.
(f) Any provision made for doubtful debts in relation to the outstanding balances
(g) The balances due from the related parties being treated as Bad debts.
In case of key management personnel the entity shall disclose their total compensation in each of the following cases:
(a) Short term employee benefits like salaries, bonuses, wages and annual pay leaves
(b) Post-retirement benefits like pension or benefits related to retirement
(c) Share based benefits
(d) Termination benefits
(e) Other long term benefits.
Related party Transactions
The transactions with the related parties basically involve the exchange or transfer of goods, services, resources or obligations, irrespective of whether any price is charged.
The entity’s transactions with the related parties may include:
(a) The purchase and sale of property, goods or other assets
(b) Exchange or rendering of services
(c) The arrangement made between the related party and the entity with regards to the lease of an asset
(d) Provision made in relation to collateral or guarantees
(e) The transfers made with reference to research and development
(f) The transfers made with regards to the finance arrangements and license agreements between the two parties
(g) The commitment to perform an activity in the foreseeable future, also including executor contracts.
(h) Provision made in relation to essential and technical services
(i) The liabilities being settled by the entity on related party‘s behalf or the related party settling the liabilities on the entity’s behalf.
(j) The member of the group either a parent or a subsidiary or both participating in the defined benefit plan of the group which actually shares the risks among the members of the group entities.
An entity can also made a disclosure with regards to the transactions being carried out with the party that is related to the entity, on terms equivalent to those on which an arm’s length transaction is conducted, only if this can be shown or demonstrated.
As per IAS 24, an entity gets exemption from the requirement of giving out related party disclosures with reference to the transactions (and balances that are yet to be settled) in relation to the government who has control, or which jointly controls, or which has significant influence with regards to that entity. In a situation where an exemption like this is applied then the entity will be required to give disclosures giving information about the name of the government department/ institution, the nature of the relationship the department/ institution of the government has with the entity and the details regarding significant transactions.
(a) Amanda is a major shareholder and a director of A Ltd. Her daughter, Natalia, is a businesswoman running her own business. In 2013 Natalia’s company performed various transactions with the A Ltd.
(b) James is a director of K Ltd. K Ltd is also one of the major customers of J Ltd. In 2013 James also joined J Ltd as one of their directors.
Discuss whether parties are related in the above situation
(a) Amanda is related to the company ASD Ltd as she has major shareholding in the ASD Ltd and she is also a member of the key management personnel and has the power to influence the decisions with regards to its operations and performance. Therefore it can be said that Amanda is one of the related parties of ASD Ltd. Now as per IAS 24 Amanda’s daughter Natalia completely fulfills the criteria of a close family member and she is also expected to be able to influence Amanda to get contracts from ASD Ltd for her own company.
(b) In this scenario James is definitely related to both K Ltd and J Ltd as he is director of both the companies and has the power to influence the decisions being made at both the companies, but the two companies are not related to each other as having a director in common is not enough for the two entities to be related to each other as per IAS 24.