IAS 24: Related Party Disclosures

This accounting standard is fairly straight forward and doesn’t involve any complex calculations or rules but it doesn’t mean you should neglect it in your studies. I found, when studying for F2 paper, I kept getting tripped up on questions on this accounting standard by making silly assumptions, so I thought it would be helpful to cover this on the site.

IAS 24: Related Party Disclosures

The purpose of this accounting standard is to ensure that the financial statements disclose to the shareholders the effect of the existence to related parties, any material transactions with them and outstanding balances.

I’ve highlighted the two key phrases above and will explain in a bit more detail what they mean in the context of IAS 24 Related Party Disclosures.

What is a related party?

Well, if a party is related to a company then it would have the following characteristics; if it has control over the entity, or the ability to exercise significant influence over it.

For instance; the subsidiary or an entity would be considered a related party and so would senior management (and even the family members – as they would be able to exercise significant influence over the senior management) of the entity would also be considered a related party.

Considered to be related parties:

  • Key Management
  • Close family members of key management
  • Shareholders controlling 20% or more of voting right of entity
  • Subsidiaries of an entity (although additional information is required to confirm)

NOT a related party to an entity:

  • Two entities that have a common director/key management
  • Finance providers (banks)
  • Customers and suppliers
  • Two joint venturers

What are related party transactions?

Quite simply put, it is the transfer of resources or obligations between related parties regardless whether a fee has been charged or not.

The key point here being the fact that money doesn’t have to change hands for it to be considered a related party transaction.

Examples of related party transactions:

  • Purchase/sale of goods  or services (parent to associate and vice versa)
  • Leasing arrangements
  • Management contracts
  • Transfers of finance arrangements (loans etc.)
  • Settlement of liabilities on behalf of the entity

Disclosure of Related Party Transactions

Now its been established who/what is a related party, we need to understand how this should be displayed in the financial statements. The minimum requirements for disclosure are as follows:

  • The amount of the transaction (even if it’s zero)
  • The amount of any outstanding balances.
  • Provisions for bad debts on outstanding amount
  • The expense recognised in the period in respect of the bad debts.

 

For further reading on IAS 24: Related Party Disclosures I would recommend this overview on the standard from BDO international.

 

 

 

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