International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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that person’s family who has control or joint control over the reporting entity,
has significant influence over the reporting entity or is a member of key
management personnel of the reporting entity.’ [IAS 24.9].
This is intended to cover situations in which an entity is controlled or jointly controlled
by a person or close family member of that person and that person or close family
member also controls, jointly controls, has significant influence over, or is a member of
key management personnel of, the reporting entity. The situation whereby one
company owns another is covered by Example 35.3 above.
This is illustrated below:
Example 35.7: Persons who control an entity and are a member of the key
management personnel of another entity
Mrs X has a 100% investment in Entity A and is a member of the key management personnel of Entity S.
Entity M has a 100% investment in Entity S.
Mrs X
Entity M
100%
100%
Entity A
Entity S
For Entity S’s financial statements, Entity A is related to Entity S because Mrs X controls Entity A and is a
member of the key management personnel of Entity S.
For Entity S’s financial statements, Entity A is also related to Entity S if Mrs X is a member of the key
management personnel of Entity M and not of Entity S.
This outcome would be the same if Mrs X has joint control over Entity A (if Mrs X only had significant
influence over Entity A and not control or joint control then Entities A and S would not be related parties).
For Entity A’s financial statements, Entity S is related to Entity A because Mrs X controls Entity A and is a
member of Entity S’s key management personnel. This outcome would be the same if Mrs X has joint control
over Entity A and would further be the same if Mrs X is a member of the key management personnel of
Entity M rather than Entity S (see 2.2.8 below). Note that Entity A and Entity M would also be related parties
in this instance.
For Entity M’s consolidated financial statements, Entity A is a related party of the Group if Mrs X is a
member of the key management personnel of the Group.
For Entity M’s separate financial statements, Entity S is a related party. Further, Entity A will be a related
party if Mrs X is a member of the key management personnel of Entity M.
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2.2.8
Entities under significant influence of certain persons or close
members of their family
‘An entity is related to a reporting entity if:
...
(vii) A person or a close family member of that person who has control or joint
control over the reporting entity 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).’ [IAS 24.9(b)].
This is the reciprocal of 2.2.7 and is illustrated in Example 35.7 above.
Entities that are significantly influenced by the same person or close member of that
person’s family or who simply share the same key management personnel are not related
parties in the absence of any control or joint control by those persons (see 2.3 below).
2.2.9
Entities, or any member of the group of which they are a part, that
provide key management personnel services
‘An entity is related to a reporting entity if:
...
(viii) The entity, or any member of a group of which it is a part, provides key
management personnel services to the reporting entity or to the parent of the
reporting entity.’ [IAS 24.9(b)].
This is intended to cover situations in which an entity (described as a ‘management
entity’), or a member of its group, provides key management personnel services to the
reporting entity (see 2.6 and 2.8 below). It applies to the provision of key management
personnel services by the separate management entity. Staff acting for the management
entity that are responsible for planning, directing and controlling the activities of the
reporting entity are not considered to be key management personnel of the reporting
entity. It is not necessary to look through the management entity to determine natural
persons as key management personnel.
Example 35.8: Entities that provide key management personnel services to a
reporting entity
Entity B
100%
Entity A
Entity C
KMP services
100%
Entity D
Entity C provides key management personnel services to Entity A. For Entity A’s financial statements,
Entities B, C and D are all related parties.
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Entity A is not a related party of Entities B, C and D. The related party relationship between the management
entity and the reporting entity is not symmetrical. In the absence of any other indicator of a related party
relationship, the reporting entity (Entity A) cannot affect the management entity’s (Entity C’s) activities,
financial position or profit or loss.
2.2.10 Government-related
entities
A ‘government-related entity’ is an entity that is controlled, jointly controlled or
significantly influenced by a government. [IAS 24.9].
‘Government’ in this context refers to government, government agencies and similar
bodies whether local, national or international. [IAS 24.9]. This is the same as the definition
used in IAS 20 – Accounting for Government Grants and Disclosure of Government
Assistance. The Board decided that it would not provide a more comprehensive definition
or additional guidance on how to determine what is meant by ‘government’. In the Board’s
view, a more detailed definition could not capture every conceivable government
structure across every jurisdiction. In addition, judgement is required by a reporting entity
when applying the definition because every jurisdiction has its own way of organising
government-related activities. [IAS 24.BC41]. This implies that there may well be diversity in
practice across different jurisdictions in defining what is meant by ‘government’.
Where an entity is controlled, jointly controlled or significantly influenced by a
government then relationships, transactions and outstanding balances, including
commitments, with that government are related party transactions. Similarly, transactions
and outstanding balances, including commitments, with other entities controlled, jointly
controlled or significantly influenced by that government are related party transactions.
However, not all such transactions should be disclosed, only those that are material
(see 2.7.1 below). Transaction may be for significant amounts be still be immaterial from
an IAS 1 – Presentation of Financial Statements – perspective (e.g. telecommunication
costs with a government-controlled operator when these are at market conditions).
Related party transactions with government-related entities are subject to certain
disclosure exemptions. These are discussed at 2.9 below.
2.3
Parties that are not related parties
Having included such a detailed definition of related parties, the standard clarifies that
the following are not related parties:
• two entities simply because they have a director or other member of key
management personnel in common or because a member of key management
personnel of one entity has significant influence over the other entity;
• two venturers simply because they share joint control over a joint venture;
• providers of finance, trade unions, public utilities and departments and agencies of
a government that do not control, jointly control or significantly influence the
reporting entity, simply by virtue of their normal dealings with the entity (even
though they may affect the freedom of action of an entity or participate in its
decision-making process); and
• a customer, supplier, franchisor, distributor or general agent with whom an entity
transacts a significant volume of business, simply by virtue of the resulting
economic dependence. [IAS 24.11].
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The reason for these exclusions is that, without them, many entities that are not usually
regarded as related parties could fall within the definition of related party. For example,
a small clothing manufacturer selling 90% of its output to a single customer could be
under the effective economic control of that customer.
These exclusions are effective only where these parties are ‘related’ to the reporting
entity simply because of the relationship noted above. If there are other reasons why a
party is a related party, the exclusions do not apply. Consider the following examples:
• A water company that supplies the reporting entity is not a related party if the only
link between the two is the supply of water. If, however, the water company is also
an associate of the reporting entity, the exclusion does not apply; the two are related
parties, and the transactions relating to the supply of water are disclosed if material.
• Two investors in the same entity are not related parties simply because one holds a
controlling interest and the other shareholder (not in the group) holds a non-controlling
interest in a subsidiary of the group. Even if the investor holding the non-controlling
interest exercises significant influence over the subsidiary, provided it is not otherwise
related to the controlling investor, it is not normally a related party of the controlling
investor. However, the non-controlling investor might have significant influence over
the group if the subsidiary was significant to the group in which case the group,
including the controlling investor and the non-controlling investor are related parties.
• Two entities are not related parties simply because they share common key
management personnel. However, if the common member of key management
personnel exerts control or joint control over one or more of the entities then they
are related parties. See 2.2.7 or 2.2.8 above.
• An administrator, custodian, broker and fund manager of the same fund are not
related parties, to each other or to the fund to which they provide services simply
because they each provide services to the fund, even if any of the parties are
economically dependent upon the income from such services. However, any such
party could meet the definition of ‘key management personnel’ of the fund if it
provides key management personnel services (see 2.2.9 above). In addition, any
shared ownership (e.g. control, joint control, or significant influence) between such
parties should be evaluated to determine if the parties are related.
An interest in an unconsolidated structured entity as defined by IFRS 12 – Disclosure of
Interests in Other Entities – held by a reporting entity does not make the structured entity
a related party to the reporting entity unless it would otherwise meet the definition of a
related party (e.g. because the structured entity is an associate of the reporting entity).
2.4
Disclosure of controlling relationships
IAS 24 asserts that, in order to enable users of financial statements to form a view about
the effects of related party relationships on an entity, it is appropriate to disclose the
related party relationship when control exists, irrespective of whether there have been
transactions between the related parties. [IAS 24.14]. Accordingly, the standard requires
an entity to disclose:
• the name of its parent and, if different;
• the ultimate controlling party.
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If neither the entity’s parent nor the ultimate controlling party produces consolidated
financial statements available for public use, the name of the next most senior parent
that does so must also be disclosed. [IAS 24.13].
The ‘next most senior parent’ is the first parent in the group above the immediate parent that
produces consolidated financial statements available for public use. [IAS 24.16]. Consequently,
in some circumstances, an entity may need to disclose the names of three parents.
Disclosure must be made even if the parent or ultimate controlling party does not prepare
financial statements. In the situation when the ultimate controlling party is an individual,
rather than an entity, the reporting entity is likely to have to disclose the name of the next
most senior parent in addition since the individual undoubtedly does not produce
financial statements for public use. IAS 1 also requires disclosure of the ‘ultimate parent’
of the group. [IAS 1.138(c)]. This is not necessarily synonymous with the ‘ultimate controlling
party’ where that party is an individual. This is illustrated in the example below.
Example 35.9: Disclosure of parent, ultimate parent and ultimate controlling party
Entity S is controlled by Entity P which in turn is controlled by Entity H which in turn is controlled by
Entity Y. The ultimate controlling party of Entity Y is Mr A. Entities P and Y do not produce consolidated
financial statements available for public use.
The group structure is illustrated as follows:
Mr A
Entity Y
Entity H
Entity P
Entity S
For Entity S’s financial statements, IAS 24 requires disclosure of Entity P (the parent), Entity H (the next most
senior parent that produces consolidated financial statements available for public use) and Mr A (the ultimate
controlling party). In addition, IAS 1 requires disclosure of Entity Y (the ultimate parent of the group).
For Entity P’s financial statements, IAS 24 requires disclosure of Entity H (the parent) and Mr A (the ultimate
controlling party). In addition, IAS 1 requires disclosure of Entity Y (the ultimate parent of the group).
For Entity H’s financial statements, IAS 24 requires disclosure of Entity Y (the parent) and Mr A (the ultimate
controlling party). IAS 1 does not require any additional disclosure.
For Entity Y, IAS 24 requires disclosure of Mr A (ultimate controlling party).
The ultimate controlling party could be a group of individuals or entities acting together.
IAS 24 is silent on the issue of individuals or entities acting together to exercise joint control.
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However, IFRS 3 – Business Combinations – states that a group of individuals can be
regarded as a controlling party when, as a result of contractual arrangements, they
collectively have the power to govern that entity’s financial and operatin
g policies so as to
obtain benefits from its activities. [IFRS 3.B2]. In such circumstances, these entities or
individuals should be identified as the controlling party. However, as discussed at 2.2 above,
IAS 24 emphasises that attention should be directed to the substance of any related party
relationship and not merely the legal form. It is likely that such an informal arrangement
would at least give such individuals acting collectively significant influence over the
reporting entity and as such, those individuals would be related parties to the reporting
entity under IAS 24.
The standard also clarifies that the requirement to disclose related party relationships
between a parent and its subsidiaries is in addition to the disclosure requirements of
IAS 27 and IFRS 12. [IAS 24.15]. IFRS 12 requires an entity to disclose information to
enable users to understand the composition of a group – see Chapter 13 at 4.1.
2.5 Disclosable
transactions
A related party transaction is defined as ‘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]. Read literally, this definition requires many transactions to be disclosed more than
once. For example, if an entity buys goods on credit from a related party and pays for them
30 days later, both the original purchase and the final payment represent a ‘transfer of
resources ... between a reporting entity and a related party’ and, therefore on a literal reading,
are required to be separately disclosed. However, we doubt that this reading is the IASB’s
intention, and the nature of the disclosures required by IAS 24 seems to support this view.
The definition of a related party transaction implies that transactions are disclosable only
for the period in which parties are related. For example, where a reporting entity has
disposed of a subsidiary during the reporting period, only transactions with the subsidiary
up to the date of disposal are related party transactions in the financial statements of the
reporting entity. Similarly, if a person became a member of key management personnel
of a reporting entity during a reporting period, no disclosure is required of any