CHAPTER 17 – RELATED PARTY DISCLOSURES

RELATED PARTY
• Parties are considered to be related if one party has:
o The ability to control the other party
o The ability to exercise significant influence over the other party
o Joint control over the reporting entity

CONTROL
• Power over the investee or the power to govern the financial and operating policies of an entity
so as to obtain benefits.
• Ownership directly or indirectly through subsidiaries of more than half of the voting power of an
entity

SIGNIFICANT INFLUENCE
• Power to participate in the financial and operating policy decision of an entity, but not control
of those policies.
• May be gained by share ownership of 20% or more

JOINT CONTROL
• Is the contractually agreed sharing of control over an economic activity

PAS 24 prescribes the necessary disclosures regarding related party relationships and transactions,
outstanding balances and commitments between an entity and its related parties.

PAS 24 recognizes that related party relationships are a normal feature of business and that the existence
of related party relationships and transactions between an entity and its related parties may have an
effect on the financial position and profit or loss of an entity. Necessary disclosures, therefore, should be
provided to draw users' attention to the possible effects of such relationships and transactions on the
financial statements presented.

The financial position and profit or loss 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.

This is because, in related party relationships, one party has the ability to control the other party or to
exercise significant influence or joint control over the other party in making financial and operating
decisions. Thus, even in the absence of related party transaction, the financial and operating decisions
made by a related party might have been influenced merely because of the existence of a related party
relationship.

Moreover, related parties may enter into transactions that unrelated parties would not (e.g., sale of
services or goods at cost and loan transactions at zero interests). Transactions between related parties
may not be made at the same amounts as between unrelated parties.
Knowledge of related party transactions, outstanding balances and relationships may affect assessments
of an entity’s operations by users of financial statements, including assessments of the risks and
opportunities facing the entity.

• Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
• Significant influence is the power to participate in the financial and operating policy decisions of
an entity, but is not control over those policies. Significant influence may be gained by share
ownership; statute or agreement.
• Joint control is the contractually agreed sharing of control over an economic activity.

PAS 24 requires disclosure of related party relationships, transactions and outstanding balances, including
commitments, in the consolidated and separate financial statements of a parent, venturer or investor
presented in accordance with PFRS 10 Consolidated Financial Statements and PAS 27 Separate Financial
Statements.

Related party transactions and outstanding balances with other entities in a group are disclosed in an
entity's separate or individual financial statements.

Intragroup related party transactions and outstanding balances are eliminated in the preparation of
consolidated financial statements of the group.
RELATED PARTIES
PAS 24 defines a related party as "a person or entity that is related to the reporting entity that is preparing
its financial statements."

The following are indicators of the existence of related party relationship:

a. A person or a 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.
b. An entity is related to a reporting entity 'if any of the following conditions applies:
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).
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).
iii. Both entities are joint ventures of the same third party.
iv. One entity is a joint venture of a third entity and the other e is an associate of the third
entity.
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.
vi. The entity is controlled or jointly controlled by a person identified in (a).
vii. A person identified in (a)(i) 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).
 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.

EXAMPLES OF RELATED PARTIES

1. Parent and its subsidiary
2. Fellow subsidiaries belonging to the same group with a common parent
3. Investor and its associate
4. Venturer and the joint venture
5. Key management personnel and an entity or its parent
6. Close member of the family of any individual referred in (1) through (4)
7. Post-employment benefit plan for the benefit of employees of either the reporting entity or an
entity related to the reporting entity
8. An investor in an associate and the subsidiary of its associate.
9. A venturer in a joint venture and the subsidiary of the joint venture.
10. A joint venture and an associate of a common investor.

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.

Close members of the family of an individual are those that members who may be expected to influence
or be influenced by individual in their dealings with the entity. They may include:
a. The individual’s domestic partner and children;
b. Children of the individual’s domestic partner; and
c. Dependents of the individual or the individual’s domestic partner.

Compensation includes all employee benefits (as defined in PAS 19 Employee Benefits) including
employee benefits to which PFRS 2 Share-based Payment applies. Employee benefits are all forms of
consideration paid, payable or provided by the entity, or on behalf of the entity, in exchange for services
rendered to the entity.

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 director (whether executive
or otherwise) of that entity.

UNRELATED PARTIES
Under PAS 24, the following are not related parties:
a. 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.
b. Two venturers simply because they share joint control over a joint venture.
c. 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).
 d. 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.

Illustration 1: Entities with inter-locking directors

Fact: A Co. and B Co. have Mr. X as their director in common.

Analysis: The related parties are A Co. and Mr. X and B Co. and Mr. X. A Co. and Mr. X are related parties
because Mr. X is a key management personnel of A Co. The same is true in the case of B Co. and Mr. X. A
Co. and B Co. are not related parties simply because they have Mr. X as their director in common.

Illustration 2: Co-venturers of a common joint venture

Fact: Mr. Y and Ms. Z are co-venturers of Ventures, Inc.

Analysis: The related parties are Mr. Y and Ventures, Inc. a and Ventures, Inc. Mr. Y and Ms. Z are not
related parties simply because they share joint control over a common joint venture.

The following are related parties to the reporting entity:

1. Associate, subsidiary or joint venture.
2. Key management personnel
3. Close family member
4. Post-employment benefit plan

DISCLOSURE
Relationships between parents 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, 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 also be disclosed.

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.

KEY MANAGEMENT PERSONNEL COMPENSATION

Key management personnel compensation shall be disclosed in total and for each of the following
categories:
a. Short-term employee benefits;
b. Post-employment benefits;
c. Other long-term benefits;
d. Termination benefits; and
e. Share-based payments.

If an entity obtains key management personnel services from another entity (the 'management entity’),
the entity is not required to disclose the foregoing to the compensation paid or payable by the
management entity to the management entity's employees or directors.

RELATED PARTY TRANSACTIONS

If there have been transactions between related parties, the entity shall 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:
i. The amount of the transactions.
ii. The amount of outstanding balances and their nature and terms.
iii. Provisions for doubtful debts related to the amount of outstanding balances.
iv. Expense recognized during the period in respect of bad or doubtful debts due from related
parties.

Examples of transactions that are disclosed if they are made with a related party:
a. Purchases or sales of goods, property, and other assets.
b. Rendering or receiving of services.
c. Leases.
d. Transfers of research and development.
e. Transfers under license agreements.
f. Transfers under finance arrangements (including loans and equity contributions in cash or in kind)
g. Provision of guarantees or collateral
h. Commitments to do something if a particular event occurs or does not occur in the future,
including executory contracts (recognized and unrecognized)
i. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party

Amounts incurred by the entity for the provision of key management personnel services that are provided
by a separate management entity shall be disclosed.

DISCLOSURE OF ARM'S LENGTH TRANSACTION

Disclosures that related party transactions were made on terms equivalent to those that prevail in arm's
length transactions are made only if such terms can be substantiated.

GOVERNMENT-RELATED ENTITIES
A reporting entity that is a government-related entity shall disclose the following for related party
relationship, transactions, and outstanding balances with a government that has control, joint control, or
significant influence over the reporting entity and other government-related entities under the control,
joint control, or significant influence of the same government.
a. The name of the government and the nature of its relationship with the reporting entity (i.e.
control, joint control or significant influence);
b. The following information in sufficient detail to enable users of the entity’s financial statements
to understand the effect of related party transactions on its financial statements:
i. The nature and amount of each individually significant transaction; and
ii. For other transactions that are collectively, but not individually, significant, a qualitative
or quantitative indication of their extent.