IAS 24 Related Party

Disclosures
Objective
• This is the related parties issue and IAS 24 tackles it by ensuring that
financial statements contain the disclosures necessary to draw
attention to the possibility that the reported financial position and
results may have been affected by the existence of related parties and
by material transactions with them. In other words, this is a standard
which is primarily concerned with disclosure.
Definitions
• Related party, a related party is a person or entity that is related to the entity
that is preparing its financial statements.
• A person or a close member of that person's family is related to a reporting entity if that
person:
• Has control or joint control over the repotting entity;
• Has significant influence over the reporting entity; or
• Is a member of the key management personnel of the reporting entity or of a parent of the reporting
entity.
• An entity is related to a reporting entity if any of the following conditions applies:
• Both entities are joint ventures of the same third party.
• One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
• The entity is a post-employment defined benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity.
• The entity is controlled or jointly controlled by a person identified in (person)
• A person identified in (person) 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).
• 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.
Definitions - continue
• 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.
• Close members of the family of an individual are those family members
who may be expected to influence, or be influenced by, that individual in
their dealings with the entity. They may include:
• The individual's domestic partner and children;
• Children of the domestic partner; and
• Dependents of the individual or the domestic partner
• The most important point to remember here is that, when considering
each possible related party relationship, attention must be paid to the
substance of the relationship, not merely the legal form.
Exemption for government-related entities
• The disclosures listed above need not be made in respect of transactions with:
• A government that has control, joint control or significant influence over the reporting entity,
and
• Another entity that is a related party because the same government has control, joint control
or significant influence over both the reporting entity and the other entity.
• Instead, the reporting entity should disclose:
• The name of the government and the nature of its relationship with the reporting entity
• Information in sufficient detail to enable users of the financial statements to understand the
effect of related party transactions on those financial statements, including:
• The nature and amount of each individually significant transaction, and
• For other transactions that are collectively significant, a qualitative or quantitative indication of their
extent.
Disclosure
• The standard lists some examples of transactions that are disclosed if they are with a
related party:
• Purchases or sales of goods (finished or unfinished)
• Purchases or sales of property and other assets
• Rendering or receiving of services
• Leases
• Transfer of research and development
• Transfers under licence agreements
• Provision of finance (including loans and equity contributions in cash or in kind)
• Provision of guarantees and collateral security'
• Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.
• Relationships between parents and subsidiaries must be disclosed irrespective of
whether any transactions have taken place between the related parties.
• Permits similar items to be aggregated and disclosed, but only if this would not affect the
user's understanding of the effect of those items on the financial statements
Example
• Discuss whether the following events would require disclosure in the
financial statements:
❑ The company agreed to finance a management buyout of a group
company, AB, a limited company. In addition to providing loan
finance, the company has retained a 25% equity holding in the
company and has a main board director on the board of AB. RP
received management fees, interest payments and dividends from
AB.
Example
❑ IAS 24 does not require disclosure of transactions between companies and providers of finance
in the ordinary course of business. As RP is a merchant bank, no disclosure is needed between RP
and AB. However, RP owns 25% of the equity of AB and it would seem significant Influence exists
(IAS 28, greater than 20% existing holding means significant influence is presumed) and therefore
AB could be an associate of RP. IAS 24 regards associates as related parties.
The decision as to associate status depends upon the ability of RP to exercise significant influence
especially as the other 75% of votes are owned by the management of AB.
Investment banks tend to regard companies which would qualify for associate status as trade
investments since the relationship is designed to provide finance.
IAS 28 presumes that a party owning or able to exercise control over 20% of voting rights is a related
party. So an investor with a 25% holding and a director on the board would be expected to have
significant influence over operating and financial policies in such a way as to inhibit the pursuit of
separate interests. If it can be shown that this is not the case, there is no related party relationship.
If it is decided that there is a related party situation then all material transactions should be
disclosed including management fees, interest, dividends and the terms of the loan.
Example
• On 1 July RP sold a wholly owned subsidiary, X, a limited company, to Z, a public
limited company. During the year RP supplied X with second-hand office
equipment and X leased its factory from RP. The transactions were all contracted
for at market rates.
• IAS 24 does not require intragroup transactions and balances eliminated on
consolidation to be disclosed. IAS 24 does not deal with the situation where an
undertaking becomes, or ceases to be, a subsidiary during the year.
• Best practice indicates that related party transactions should be disclosed for the
period when X was not part of the group. Transactions between RP and X should
be disclosed between 1 July and 31 October but transactions prior to 1 July will
have been eliminated on consolidation.
• There is no related party relationship between RP and Z since it is a normal
business transaction unless either parties interests have been influenced or
controlled in some way by the other party.
Example
• The retirement benefit scheme of the group is managed by another investment bank. An
investment manager of the group retirement benefit scheme is also a non-executive director of
the RP Group and received an annual fee for his services of $25,000 which is not material in the
group context. The company pays $16m per annum into the scheme and occasionally transfers
assets into the scheme. In property, plant and equipment of $10m were transferred into the
scheme and a recharge of administrative costs of $3m was made.
• Employee retirement benefit schemes of the reporting entity are included in the IAS 24 definition
of related parties.
• The contributions paid, the non current asset transfer ($10m) and the charge of administrative
costs ($3m) must be disclosed.
• The pension investment manager would not normally be considered a related party. However, the
manager is key management personnel by virtue of his non-executive directorship.
• Directors are deemed to be related parties by IAS 24, and the manager receives a $25,000 fee. IAS
24 requires the disclosure of compensation paid to key management personnel and the fee falls
within the definition of compensation. Therefore, it must be disclosed.