International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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2.7.1.A
Aggregation of items of a similar nature ................... 2987
2.7.1.B Commitments
................................................................
2988
2.7.2
Disclosures required for related party transactions,
including commitments .................................................................... 2989
2.8
Disclosure of expense incurred with management entity ......................... 2992
2.9 Disclosures
with
government-related entities ............................................. 2992
List of examples
Example 35.1:
Person as investor .............................................................................. 2969
Example 35.2:
Close members of the family holding investments ..................... 2970
Example 35.3:
Entities that are members of the same group .............................. 2972
Example 35.4:
Associates of the reporting entity’s group that are related
parties ....................................................................................................2973
Example 35.5:
Entities that are joint ventures of the same third party ............. 2974
Example 35.6:
Entities that are joint ventures and associates of the same
third entity ........................................................................................... 2975
Example 35.7:
Persons who control an entity and are a member of the
key management personnel of another entity ............................. 2976
Example 35.8:
Entities that provide key management personnel services
to a reporting entity ........................................................................... 2977
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Example 35.9:
Disclosure of parent, ultimate parent and ultimate
controlling party.................................................................................. 2980
Example 35.10:
Application of the disclosure exemption for government-
related entities .................................................................................... 2993
Example 35.11:
Individually significant transaction carried out on non-
market terms ....................................................................................... 2995
Example 35.12:
Individually significant transaction because of size of
transaction ........................................................................................... 2995
Example 35.13:
Collectively significant transactions .............................................. 2995
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Chapter 35 Related party disclosures
1 INTRODUCTION
Related party relationships and transactions between related parties are a normal
feature of commerce and business. Many entities carry on their business activities
through subsidiaries, joint ventures, and associates and there are inevitably transactions
between these parties. The investor, in these circumstances, has the ability to affect the
financial and operating policies of the investee. [IAS 24.5]. It is also common for entities
under common control, which are not a group for financial reporting purposes, to
transact with each other. The disclosures considered necessary in such circumstances
are addressed by IAS 24 – Related Party Disclosures.
1.1
The related party issue
The problems posed by related party relationships and transactions are described in
IAS 24 as follows:
‘A related party relationship could have an effect on the profit or loss and financial
position of an entity. Related parties may enter into transactions that unrelated
parties would not. For example, an entity that sells goods to its parent at cost might
not sell on those terms to another customer. In addition, transactions between
related parties may not be made at the same amounts as between unrelated parties.
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. For example, a subsidiary may terminate relations with a trading
partner on acquisition by the parent of a fellow subsidiary engaged in the same
activity as the former trading partner. Alternatively, one party may refrain from
acting because of the significant influence of another – for example, a subsidiary may
be instructed by its parent not to engage in research and development.’ [IAS 24.6-7].
1.2 Possible
solutions
1.2.1
Remeasurement of related party transactions at fair values
One solution to the problems posed by related party relationships and transactions is to
adjust the financial statements to value related party transactions as if they occurred
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with an independent third party and recognise any such transactions at an arm’s length
price. However, the consensus for over thirty years is that it is often impossible to
establish what would have been the terms of any non-arm’s length transaction had it
been negotiated on an arm’s length basis. This is because no comparable transactions
may have taken place and, in any event, the transaction might never have taken place
at all if it had been negotiated using different values.
1.2.2
Disclosure of transactions
Because of this problem, accounting standards internationally require disclosure of
related party transactions and relationships, rather than adjustment of the financial
statements. This approach is adopted by the IASB in IAS 24 which is a disclosure standard.
IAS 24 does not establish any recognition or measurement requirements. Related party
transactions are accounted for in accordance with the requirements of the IFRS
applicable to the transaction. The disclosures required by IAS 24 are in addition to those
required by other IFRSs. For example, a loan to a related party will also be subject to the
disclosure requirements of IFRS 7 – Financial Instruments: Disclosures.
The purpose of disclosing information required by IAS 24 is to give users of the financial
statements information about transactions and whether they are at market terms,
outstanding balances, including commitments, and relationships with related parties
that may affect their assessment of an entity’s operations, including assessments of the
risks and opportunities facing an entity. [IAS 24.8].
2
REQUIREMENTS OF IAS 24
2.1
Objective and scope
2.1.1 Objective
IAS 24 states that its objective ‘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, including commitments, with such parties’.
[IAS 24.1].
Accordingly, IAS 24 requires disclosure of relate
d party transactions and outstanding
balances, including commitments, together with the names of any parties who control
the reporting entity.
2.1.2 Scope
IAS 24 applies in:
(a) identifying related party relationships and transactions;
(b) identifying outstanding balances, including commitments, between an entity and
its related parties;
(c) identifying the circumstances in which disclosure of the items in (a) and (b) is
required; and
(d) determining the disclosures to be made about those items. [IAS 24.2].
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The standard explicitly requires disclosure of related party relationships, transactions
and outstanding balances, including commitments, in both the consolidated and
separate financial statements of a parent or investors with joint control of, or significant
influence over, an investee presented in accordance with IFRS 10 – Consolidated
Financial Statements – or IAS 27 – Separate Financial Statements. The standard also
applies to individual financial statements. [IAS 24.3].
All entities within a group that prepare their financial statements under IFRS must
disclose related party transactions and outstanding balances with other entities in the
group in the entity’s own financial statements. [IAS 24.4]. There are no disclosure
exemptions for subsidiaries, or for parent companies that produce separate financial
statements even where those separate financial statements are issued with the
consolidated financial statements of the group of which they are a part. The IASB
considers that the financial statements of an entity that is part of a consolidated group
may include the effects of extensive intragroup transactions. Therefore, it concluded
that the disclosures required by IAS 24 are essential to understanding the financial
position and financial performance of such an entity and should be required for separate
financial statements presented in accordance with IAS 27. The IASB also believes that
disclosure of intragroup transactions is essential because external users of the financial
statements need to be aware of the interrelationships between related parties, including
the level of support provided by related parties, to assist in their economic decisions.
[IAS 24.BC16-17].
The standard notes that ‘intragroup related party transactions and outstanding balances
are eliminated in the preparation of consolidated financial statements of the group’.
[IAS 24.4]. This implies that disclosure of such transactions and balances is not required
in the group’s consolidated financial statements since, so far as those financial
statements are concerned, such items do not exist. However, transactions and balances
between an investment entity and those of its subsidiaries, held as part of an investment
portfolio that are measured at fair value through profit or loss and not consolidated in
accordance with IFRS 10 should be disclosed in the consolidated financial statements.
[IAS 24.4].
2.2
Identification of a related party and related party transactions
A related party is defined as ‘a person or entity that is related to the entity that is
preparing its financial statements (the “reporting entity”)’. [IAS 24.9]. The definition of
related parties is reciprocal. The use of the word ‘party’ means that the disclosure
applies to both individuals and to entities. The factors considered in the identification
of a related party is consistent whether the controlling party is a person or an entity.
The Standard applies the notion of an extended group. The extended group includes
joint ventures and associates of the parent (that are related to the subsidiaries of the
parent), joint ventures and associates of a parent’s subsidiary (that are related to the
subsidiaries of the parent) and subsidiaries of an associate or a joint venture (that are
related to the parent).
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The standard contains a multi-part definition of ‘related party’ and the following are
considered to be related parties of the reporting entity:
• certain persons or a close member of that person’s family (see 2.2.1 below);
• entities that are members of the same group (see 2.2.2 below);
• entities that are associates or joint ventures (see 2.2.3 below);
• entities that are joint ventures of the same third party (see 2.2.4 below);
• entities that are joint ventures and associates of the same third entity (see 2.2.5 below);
• post-employment benefit plans (see 2.2.6 below);
• entities under control or joint control of certain categories of persons or close
members of such a person’s family (see 2.2.7 below);
• entities under significant influence of certain categories of persons or close
members of such a person’s family (see 2.2.8 below);
• entities, or any member of the group of which they are a part, that provide key
management personnel services (see 2.2.9 below); and
• government-related entities (see 2.2.10 below).
The standard emphasises that attention should be directed to the substance of the
relationship and not merely the legal form. [IAS 24.10].
A related party transaction is a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a price is charged. [IAS 24.9].
2.2.1
Persons or close members of a person’s family that are related parties
A person or close member of that person’s 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. [IAS 24.9].
Close members of a family of a person are defined as ‘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 person’s children and spouse or domestic partner;
(b) children of that person’s spouse or domestic partner; and
(c) dependants of that person or that person’s spouse or domestic partner. [IAS 24.9].
The Interpretations Committee confirmed in May 2015 that the definition appears to
provide no scope to argue that there are circumstances in which the specific family
members described in (a) to (c) above are not related parties. Dependants are not limited
to children and may include other relatives depending on the facts and circumstances.
The Interpretations Committee observed that the definition of close members of the
family of a person:
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• is expressed in a principle-based manner and involves the use of judgement to
determine whether members of the family of a person (including that person’s
parents) are related parties or not; and
• includes a list of family members that are always considered close members of the
family of a person.
The Interpretations Committee further noted that the list of family members that are
always considered ‘close members’ is non-exhaustive and does not preclude other
; family members from being considered as close members of the family of a person.
Consequently, other family members, including parents or grandparents, could qualify
as close members of the family depending on the assessment of specific facts and
circumstances. Therefore, the Interpretations Committee determined that neither an
Interpretation nor an amendment to the Standard was necessary and therefore decided
not to add this issue to its agenda.1
IAS 24 does not elaborate on the meaning of ‘may be expected to influence, or be
influenced by, that person’. A narrow interpretation is that the standard explicitly
mentions only those instances where such influence is expected without doubt.
Thus, a relationship with, for example, siblings or relatives that are even more
distant would need to be assessed to determine whether there is evidence of
sufficient influence. A broader interpretation would support the fact that the mere
existence of the family relationship is sufficient to trigger the disclosure
requirements included in IAS 24.
Relationships involving a person or close family members as investors are illustrated in
the following examples, which are based on illustrative examples published by the IASB,
which accompany, but are not part of IAS 24.
Example 35.1: Person as investor
Mrs X
Entity A
Entity B
Mrs X has an investment in Entity A and Entity B.
For Entity A’s financial statements, if Mrs X controls or jointly controls Entity A, Entity B is related to
Entity A when Mrs X has control, joint control or significant influence over Entity B.
For Entity B’s financial statements, if Mrs X controls or jointly controls Entity A, Entity A is related to
Entity B when Mrs X has control, joint control or significant influence over Entity B.
However, if Mrs X has significant influence over both Entity A and Entity B, Entities A and B are not related
to each other.
If Mrs X is a member of the key management personnel of both Entity A and Entity B, Entities A and B are
not, in the absence of any other indicator of a related party relationship, related to each other (see 2.3 below).
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