A summary of IAS 24 on Related Party Disclosures

Ruchi Gandhi

10 Sep, 2022

A parent entity is required by International Accounting Standard 24 to disclose its transactions with associates, joint ventures, or subsidiaries, commonly referred to as related party transactions. As a result, a related party is defined as an entity or person who is related to the reporting entity.

The objective of IAS 24

The goal of this standard is to draw attention to the fact that transactions with related parties might have an impact on an entity’s financial statements and profit or loss, as well as to disclose outstanding balances, including liabilities to such parties.

Scope of IAS 24

This accounting standard (IAS 24) applies to the following:

• Identification of related parties and the transactions with related parties
• Determining the reporting entity’s outstanding balances and commitments to related parties.
• Recognizing the conditions in which the above-mentioned disclosures will be needed
• Deciding what information needs to be shared.

The standard also requires related party relationship transactions, outstanding balances, and obligations to be disclosed in the consolidated financial statements, separate financial statements, and individual financial statements. If a statute, regulatory agency, or equivalent competent authority regulating an entity forbids the entity from sharing specific information needed by this accounting standard, then such disclosure is not warranted. Banks and stock brokerage firms, for example, are not permitted to reveal client information, therefore such information is not required to be shared.

The rationale for the disclosure of related party transactions

In today’s environment, related party transactions are an essential aspect of doing business. Transactions between related parties are typically undertaken on agreed terms and conditions, and as such, they must be declared. Furthermore, knowledge of associated parties allows an investor to make a more educated decision to invest in an entity. Additionally, the comprehensive disclosure of all related party relationships, transactions, and outstanding balances provide an accurate picture of an entity’s risk and opportunity to every reader of the financial statements.

Which disclosures are needed in IAS 24?

The disclosures that are required to be made in IAS 24 are as follows:

• Relationships between parents and subsidiaries should be indicated whether or not any transactions have occurred between them. Further, if the entity’s parent or ultimate controlling party fails to publish consolidated financial statements, the next senior parent must be identified in the consolidated financial statements for public access.
• Short-term employee benefits, termination benefits, share-based payments, post-employment benefits, and other long-term benefits are all examples of compensation to senior management employees that must be reported by the entity in total and as per each category separately.
• If key management services are procured from another company, just the costs incurred for the provision of such services must be declared. In other words, if an entity acquires key management manpower services from an outside management entity, then the entity is not obligated to disclose the management entity’s compensation paid or due to the management entity’s employees or directors. Instead, the entity publishes the amounts expended by it for the procurement of key management staff services rendered by the separate management entity.
• If the corporation has transactions with a related party during the relevant financial year, it must disclose the nature of the transactions as well as all relevant information, including the amount, outstanding balances, commitments, provision for doubtful debts, and the expense recognized for bad and doubtful debts.
• The foregoing disclosures shall be disclosed separately for a parent, subsidiaries, associates, entities with joint control or considerable influence over the other company, joint ventures in which the entity is the venturer, key management staff of the entity or parent, and other connected parties.
• Except when separate disclosure is required to comprehend the implications of related party transactions on the financial statements, disclosures for similar items can be given in aggregate. Purchase and sale of commodities and assets, giving or receiving services, leases, transfers, and so on are examples of related party transactions.

The reporting entity has been exempted from the disclosure requirement of related party transactions with the government that has control or any joint control or a significant influence over the reporting entity and transactions with another entity that is a related party because the same government has control or joint control or significant influence over both the reporting entity and the other entity. As a result of the exemption, the company is not required to disclose related party transactions or outstanding balances, including obligations. If the aforementioned exception applies, the following information must be disclosed:

• The government’s name and the nature of its relationship with the reporting entity
• The nature and value of each individually important transaction, as well as a qualitative or quantitative indicator of the extent of other transactions that are collective but not individually significant.

Furthermore, an organization must produce and disclose information that allows users of financial statements to analyze the financial consequences of government grants and other types of government aid.

Definitions under IAS 24

A related party is defined as an individual or organization that is associated with the reporting entity (i.e., the entity that is generating its financial statements). Further, a person or a close family member is said to be associated with the reporting entity if he possesses control or joint control over the reporting entity, if he enjoys a significant influence over the reporting entity, or if he is a member of the key managerial personnel of the reporting company or the parent of the reporting company.

An entity is said to be associated with a reporting entity if the following requirements are met:

• The reporting entity, as well as the entity, are belonging to the same group.
• One of them is an affiliate or joint venture of the other entity or the same third party.
• The entity acts as a post-employment arrangement/benefit plan for the reporting entity or any entity associated with the reporting entity.
• The person mentioned above controls or is jointly controlling the entity, or the person mentioned has considerable influence over the entity.
• The entity or any member of the group offers key management employees’ services to the reporting company or the reporting entity’s parent.

Related party transactions are referred to as the transfer of services or responsibilities, as well as resources, between a reporting company and a related party, regardless of whether a price is charged.

The government, government agencies^[1], and comparable entities, whether municipal, national, or worldwide, are referred to as the government.

A government-related entity is one that is controlled, jointly controlled, or strongly affected by the government.

Compensation encompasses all job benefits, including short-term employment benefits, any post-employment benefits, various long-term employer benefits, share-based payments, and termination benefits.

The key management staff is individuals with power and responsibility for planning, leading, and supervising the business’s activities, whether directly or indirectly, including any directors (whether executive or otherwise) of the entity.

Conclusion

Corporates are also required to report disclosures about transactions with their numerous affiliates, joint ventures, and subsidiaries when submitting their financial statements. The IAS 24 establishes standards for making such disclosures, which are known as related-party disclosures in accounting.

To provide assistance to the users of financial statements to generate conclusions regarding the impact of related parties on an entity, it is acceptable to disclose such related-party relationships whenever control exists, regardless of the presence of any transactions between the related parties.

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