RELATED PARTY DISCLOSURES (IAS 24)

Objective of IAS 24

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.

Who are related parties?

A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to
as the ‘the reporting entity’) [IAS 24.9]
 (a) A person or a close member of that person’s family is related to a reporting entity if that person:
o Has control or joint control over the reporting entity;
o Has significant influence over the reporting entity; or
o Is a member of the key management personnel of the reporting entity or of a parent of the reporting
entity
 (b) An entity is related to a reporting entity if any of the conditions applies:
o 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)
o One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group pf which the other party is a member)
o Both entities are joint ventures of the same third parties
o One entity is a joint venture of a third entity and the other entity is an associate of the third entity
o The entity is a post-employment defined benefit plan for the benefits of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a
plan, the sponsoring employers are also related to the reporting entity.
o The entity is controlled or jointly controlled by a person identified in (a)
o A person identified in (a.1) 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)
o The entity, or any member of a group of which it is part, provides key management personnel
services to the reporting entity or to the party of the reporting entity*.

*Requirement added by Annual Improvements to IFRSs 2010-2012 Cycle, effective for annual periods beginning on or
after 1 July 2014.

The following are deemed not to be related: [IAS 24.11]

 Two entities simply because they have a director or key manager in common
 Two venturers who share joint control over a joint venture
 Providers of finance, trade unions, public utilities, and departments and agencies of a government that does
not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal
dealings with an entity (even though they may affect the freedom of action of an entity or participate in its
decision-making process)
 A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a
significant volume of business merely by virtue of the resulting economic dependence
What are related party transactions (RPT)?

A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of
whether a price is charged. [IAS 24.9]

Disclosure

Relationships between parent and subsidiaries. Regardless of whether there have been transactions between a
parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling
party. If neither the entity’s parent nor the ultimate controlling party produces financial statements available for
public use, the name of the next most senior parent that does so must be disclosed. [IAS 24.16]

Management compensation. Disclose key management personnel compensation in total and for each of the
following categories: [IAS 24.17]
 Short-term employee benefits
 Post-employment benefits
 Other long-term benefits
 Termination benefits
 Share-based payment benefits

Key management personnel are those persons having authority and responsibility for planning, directing, and
controlling the activities of the entity, directly or indirectly, including any directors (whether executive or otherwise)
of the entity. [IAS 24.9]

If an entity obtains key management personnel services from a management entity, the entity is not required to
disclose the compensation paid or payable by the management entity to the management entity’s employees or
directors. Instead the entity discloses the amounts incurred by the entity for the provision of key management
personnel services that are provided by the separate management entity*. [IAS 24.17A, 18A]

*These requirements were introduced by Annual Improvements to IFRSs 2010-2012 Cycle, effective for annual periods
beginning on or after 1 July 2014.

Related party transactions. If there have been transactions between related parties, disclose the nature of the
related party relationship as well as information about the transactions and outstanding balances necessary for an
understanding of the potential effect of the relationship on the financial statements. These disclosures would be
made separately for each category of related parties and would include: [IAS 24.18-19]
 the amount of the transactions
 the amount of outstanding balances, including terms and conditions and guarantees
 provisions for doubtful debts related to the amount of outstanding balances
 expenses recognized during the period in respect of bad or doubtful debts due from related parties
Examples of the kinds of transactions that are disclosed if they are related party
 purchase or sales of goods
 purchase or sales of property and other assets
 rendering or receiving of services
 leases
 transfers of research and development
 transfers under license agreement
 transfers under finance arrangements (including loans and equity contributions in cash or in kind)
 provisions of guarantees or collateral
 commitments to do something if a particular event occurs or does not occur in the future, including
executory contracts (recognized or unrecognized)

A statement that related party transactions were made on terms equivalent to those that prevailing arm’s length
transactions should be made only if such terms can be sustained. [IAS 24.21]

CASE STUDY
Storm Inc. is a manufacturer of automobile spare parts. It transacts business through a business model that has
worked for several years and has made the entity successful enterprise that is rated in the top 10 businesses in its
field by a trade journal. Storm Inc. believes in working with reliable and dependable vendors and also sells only to
entities that it can either control or exercise significant influence over. The business model works in this way:

a. Storm Inc. purchases everything it needs from Zone Inc., a well-known supplier. Due to the high quality of
the material that Zone Inc. has provided over the last 10 years, Storm Inc. has never purchased from any
other supplier. Thus it may be considered economically dependent on Zone Inc.

b. Storm Inc. sells 70% of its output to a company owned by a director and the balance to an entity that is it’s
“associate” by virtue of Storm Inc. owning 35% of the share capital of that company.

c. Storm Inc. stores inventory in a warehouse that is leased from the wife of its director. The lease rentals are at
arm’s length.

d. Storm Inc. has provided an interest-free loan to a company owned by the CEO of Storm Inc. for the
purposes of financing the purchase of delivery vans which the company owned by the CEO is using for
transporting goods from the warehouse of the supplier to the warehouse used by Storm Inc. for storing
inventory.
However, the IASB goes on to state that
such relationships are not as close as a
relationship of control or joint control.
All direct relationships involving
control, joint control or significant
influence are related party relationships.
Further if one entity (or person) controls
(or jointly controls) a second entity and
the first entity (or person) has
significant influence over a third entity,
the second and third entities are related
to each other. Conversely, if two entities
are both subject to significant influence
by the same entity (or person), the two
entities are not related to each other.
Finally, if one party is related to a
second party, the second party is also
related to the first party because of the
symmetrical nature of their
relationship.