Example 35.2: Close members of the family holding investments
Mr X
Mrs X
Entity A
Entity B
Mr X is the spouse of Mrs X. Mr X has an investment in Entity A and Mrs X has an investment in Entity B.
For Entity A’s financial statements, if Mr 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 Mr 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.
If Mr X has significant influence (but not control or joint control) over Entity A and Mrs X has significant
influence (but not control or joint control) over Entity B, Entities A and B are not related to each other
(see 2.3 below).
If Mr X is a member of the key management personnel of Entity A and Mrs X is a member of the key
management personnel of 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).
2.2.1.A Control
The definition of ‘control’ in IAS 24 is a cross-reference to the definition in IFRS 10.
IFRS 10 states that ‘an investor controls an investee when the investor is exposed, or
has rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee’. [IFRS 10 Appendix A].
2.2.1.B Joint
control
The definition of ‘joint control’ in IAS 24 is a cross-reference to the definition in IFRS 11
– Joint Arrangements. IFRS 11 defines joint control as ‘the contractually agreed sharing
of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control’.
[IFRS 11 Appendix A].
In the definition of a related party, a joint venture includes subsidiaries of the joint
venture. [IAS 24.12]. Therefore, for example, the subsidiary of a joint venture and the
investor who has joint control are related to each other.
2.2.1.C Significant
influence
The definition of ‘significant influence’ in IAS 24 is a cross-reference to the definition
in IAS 28 – Investments in Associates and Joint Ventures. IAS 28 defines significant
influence as ‘the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control of those policies’. [IAS 28.3].
In the definition of a related party, an associate includes subsidiaries of the associate.
Therefore, for example, the subsidiary of an associate and the investor who has
significant influence over the associate are related to each other. [IAS 24.12].
Related party disclosures 2971
2.2.1.D
Key management personnel
‘Key management personnel’ are those persons with authority and responsibility for
planning, directing and controlling the activities of an entity, directly or indirectly,
including any director (whether executive or otherwise) of that entity. [IAS 24.9].
A related party includes all key management personnel of a reporting entity and of a
parent of the reporting entity. This means that all key management personnel of all
parents (i.e. the immediate parent, any intermediate parent and the ultimate parent) of
a reporting entity are related parties of the reporting entity. When the reporting entity’s
financial statements represent a group, key management personnel of subsidiaries might
not be key management personnel of the group if those persons do not participate in
the management of the group.
Some entities may have more than one level of key management. For example, some
entities may have a supervisory board, whose members have responsibilities similar to
those of non-executive directors, as well as a board of directors that sets the overall
operating strategy. All members of either board will be considered to be key
management personnel.
The definition of key management personnel is not restricted to directors. It also
includes other individuals with authority and responsibility for planning, directing and
controlling the activities of an entity. The main intention of the definition is presumably
to ensure that transactions with persons with responsibilities similar to those of
directors, and the compensation paid to such persons, do not escape disclosure simply
because they are not directors. Otherwise, there would be an obvious loophole in the
standard. For example, in some jurisdictions, a chief financial officer or a chief operating
officer may not be directors but could meet the definition of key management
personnel. Other examples of the type of persons who are not directors but may meet
the definition of key management personnel include a divisional chief executive or a
director of a major trading subsidiary of the entity, but not of the entity itself, who
nevertheless participates in the management of the reporting entity. A reference to
individuals who are not directors in a reporting entity’s business review or management
discussion and analysis might indicate that those persons are considered to be key
management personnel.
‘Key management personnel’ are normally employees of the reporting entity (or of
another entity in the same group). However, the definition does not restrict itself to
employees. Therefore, seconded staff and persons engaged under management or
outsourcing contracts may also have a level of authority or responsibility such that they
are ‘key management personnel’.
The definition of key management personnel refers to ‘persons’. In some jurisdictions,
the term ‘person’ includes both a ‘corporate person’ and a ‘natural person’. Additionally,
in some jurisdictions, a corporate entity must by law have the authority and
responsibility for planning, directing and controlling the activities of an investment fund
for the benefit of the fund’s investors in accordance with the fund’s constitution and
relevant statutes (i.e. the corporate entity is the body acting as key management
personnel). IAS 24 clarifies that if a reporting entity receives key management personnel
services from another entity (described as a ‘management entity’) the disclosure
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requirements for key management personnel compensation (see 2.2.9 below) do not
apply to the compensation paid or payable by the management entity to the
management entity’s employees or directors. [IAS 24.17A]. Instead, amounts incurred for
the service fee paid or payable by the reporting entity to the separate management
entity for provision of key management personnel services are disclosed. [IAS 24.18A]. As
a result of identifying the management entity as a related party of the reporting entity,
other transactions with the management entity, such as loans, are also disclosed by the
reporting entity.
2.2.2
Entities that are members of the same group
‘An entity is related to a reporting entity if:
(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).’ [IAS 24.9(b)].
IAS 24 does not define group, parent and subsidiary. However, these terms are defined
in IFRS 10 as follows:
• a group is ‘a parent and its subsidiaries’;
• a parent is ‘an entity that controls one or more entities’; and
• a subsidiary as ‘an entity that is controlled by another entity’. [IFRS 10 Appendix A].
Therefore, all entities controlled by the same ultimate parent are related parties. This
would include entities where the reporting entity holds less than a majority of the voting
rights but which are subsidiaries as defined in IFRS 10. There are no exceptions to this rule.
Example 35.3: Entities that are members of the same group
Entity H
100 %
80 %
Entity S
Entity A
Entities H, S and A are all related parties to each other as they are members of the same group. Both Entity S
and Entity A are subsidiaries of Entity H.
Related party disclosures will be required in the financial statements of Entity S in respect of transactions
with Entities H and A, in the financial statements of Entity A in respect of transactions with Entities H and S
and in the separate financial statements of Entity H in respect of transactions with Entities S and A.
2.2.3
Entities that are associates or joint ventures
‘An entity is related to a reporting entity if:
...
(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).’ [IAS 24.9(b)].
Related party disclosures 2973
IAS 24 does not define associate or joint venture. However, these terms are defined in
IAS 28 and IFRS 11.
IAS 28 defines an associate as ‘an entity over which the investor has significant
influence’. [IAS 28.3].
IFRS 11 defines a joint venture as ‘a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement’.
[IFRS 11 Appendix A].
Any entity that a reporting entity determines is an associate under IAS 28 or a joint
venture under IFRS 11 is a related party. This requirement further applies to investments
in associates or joint ventures held by a venture capital organisation, mutual fund, unit
trust or similar entity including unit-linked insurance funds, even where the investment is
accounted for at fair value through profit or loss under IFRS 9 – Financial Instruments –
rather than under the equity method. Likewise, any reporting entity that is an associate or
joint venture of another entity must treat that investor entity as a related party.
As noted above, in the definition of a related party, an associate includes subsidiaries of
the associate and a joint venture includes subsidiaries of the joint venture. Therefore,
for example, an associate’s subsidiary and the investor that has significant influence over
the associate are related to one another. [IAS 24.12].
The definition also means that an associate of a reporting entity’s parent is also a related
party of the reporting entity.
However, the definition does not cause investors in a joint venture or an associate to be
related to each other (see 2.3 below). Investors in joint operations (as defined in IFRS 11)
are also not related to each other.
The application of these requirements is illustrated in the example below, which is
based on an illustrative example accompanying IAS 24. The example mainly focuses on
the application of the requirements to associate entities.
Example 35.4: Associates of the reporting entity’s group that are related parties
Parent
Associate 1
Associate 2
Subsidiary A
Subsidiary B
Subsidiary 1
Subsidiary C
Associate 3
Associate A
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In Parent’s separate financial statements, Associates 1 (including its subsidiary), 2 and 3 are related parties.
For Parent’s consolidated financial statements, Associates 1 (including its subsidiary), 2 and 3 are related to
the group.
For Subsidiary A’s financial statements, Associates 1 (including its subsidiary), 2 and 3 are related parties.
For Subsidiary B’s consolidated or separate financial statements, Associates 1 (including its subsidiary), 2
and 3 are related parties. For Subsidiary C’s financial statements, Associates 1 (including its subsidiary), 2
and 3 are related parties.
For the financial statements of Associates 1 (consolidated or separate), 2 and 3, Parent and Subsidiaries A, B
and C are related parties. Associates 1, 2 and 3 are not related to each other. In addition, for the separate
financial statements of Associate 1, Subsidiary 1 and Associate A are also related and for the consolidated
financial statements of Associate 1, Associate A is related.
For the financial statements of Subsidiary 1, Associate 1, Associate A, Parent and Subsidiaries A, B and C
are related parties. For the financial statements of Associate A, Associate 1 and Subsidiary 1 are related.
2.2.3.A Joint
operations
IAS 24 defines ‘joint ventures’ of the reporting entity as related parties. The definition
of a joint venture in IFRS 11 excludes joint operations, so that an investment in a joint
operation is not a related party.
A transaction with a joint operation is either a transaction by the reporting entity with
itself or a transaction with the other joint operator which would not be a related party
unless it otherwise met the related party definition in IAS 24 for some other reason (e.g.
because it was an entity controlled by a member of key management personnel).
2.2.4
Entities that are joint ventures of the same third party
‘An entity is related to a reporting entity if:
...
(iii) Both entities are joint ventures of the same third party.’ [IAS 24.9(b)].
This is illustrated by the following example:
Example 35.5: Entities that are joint ventures of the same third party
Entity H
50%
50%
Entity S
Entity A
100%
Entity C
In this example, Entities S and A are joint ventures of Entity H and are therefore related parties. Entity C, as
a subsidiary of Entity A, is also a related party of Entity H and Entity S.
If, however, Entities S and A were only associates (rather than joint ventures) of the
same third party then they would not be related parties. In the Basis for Conclusions to
Related party disclosures 2975
IAS 24, it was explained that a distinction was made between joint ventures and
associates because the IASB considered that ‘significant influence’ was not as close a
relationship as control or joint control. [IAS 24.BC19(a)].
As noted above, in the definition of a related party, a joint venture includes subsidiaries
of the joint venture. Therefore, for example, a joint venture’s subsidiary and the investor
that has joint control over the joint venture are related to each other. [IAS 24.12].
2.2.5
Entities that are joint ventures and associates of the
same third
entity
‘An entity is related to a reporting entity if:
...
(iv) One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.’ [IAS 24.9(b)].
This definition treats joint ventures in a similar manner to subsidiaries as illustrated in
Examples 35.3 and 35.5 above and therefore an associate and a joint venture are related
parties where they share the same investor. This is illustrated in the example below:
Example 35.6: Entities that are joint ventures and associates of the same third
entity
Entity Z
Entity H
50%
30%
50%
Entity S
Entity A
Entity S is a joint venture of Entity H and Entity A is an associate of Entity H. Therefore, Entities S and A
are related parties.
However, Entities Z and H are not related parties (see 2.3 below).
2.2.6
Post-employment benefit plans
‘An entity is related to a reporting entity if:
...
(v) The entity is a post-employment benefit plan for the benefit 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.’ [IAS 24.9(b)].
The standard does not indicate why a post-employment benefit plan is a related party
of the entity. Presumably, the reason for including this category is that an entity
sponsoring a post-employment benefit plan generally has at least significant influence
over the plan.
The definition is quite wide-ranging and includes post-employment benefit plans of any
entity related to the reporting entity. This includes, for example, post-employment
2976 Chapter 35
benefit plans of an associate or joint venture of the reporting entity or a post-
employment benefit plan of an associate of the reporting entity’s parent.
Sponsoring employers are also related parties of a post-employment benefit plan.
2.2.7
Entities under control or joint control of certain persons or close
members of their family
‘An entity is related to a reporting entity if:
...
(vi) The entity is controlled or jointly controlled by a person or close member of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 590
