6.2 Related Parties

Question 1

What is the purpose of IAS 24

Answer 1

To ensure an entity’s FS contain disclosures to draw attention to the possibility that:
* Its FS may have been affected by the existence of related parties
FS may be affected by transactions and outstanding balances between related parties.

Question 2

What are the conditions that create a related party

Answer 2

• Controls, is controlled by, or is under common control with, the entity
• Has an interest in the entity that gives a significant influence over the entity
• Has joint control over the entity
• Is an associate
• Is a joint venture in which the entity is a venturer
• Is a member of the key management personnel of the entity or its parent
• Is a close family member (spouse/partner/children) of any of the above
• Is a post-employment benefit plan (pension) for the employees of the entity or of any entity that is a related party of the entity

Question 3

What are not examples of related parties

Answer 3

• Suppliers
• Customers
• Providers of finance, e.g. banks
• Governments/government departments
• Trade unions
• Utility providers
• Franchisor

Question 4

What is the key condition for a party not being related

Answer 4

These are not related parties to an entity as they have influence but are not able to partake in the entity’s activities.

Question 5

Why are related parties important to disclose

Answer 5

• Intra-group sales are not at arm’s length
• A substantial proportion of an entity’s production is bought by another entity within the group.
  o It may be that there is a limited market for the producing entity outside the group.
• Where 2 entities are under common control, the controlling party is in a position to influence activities of both entities.
• Need to show if the entity can exist without the related party
  o What is going on under the surface if it were alone

Question 6

What are the minimum disclosures for related parties

Answer 6

• The amount of the transactions
• The amount of outstanding balances, including terms and conditions, whether they are secured and the nature of the consideration to be provided
• Provisions for doubtful debts based on the amount outstanding
• The expense recognised during the period in relation to bad and doubtful debts

Question 7

What must always be disclosed with related parties

Answer 7

• Name of entity’s parent
• If different, the ultimate controlling party

Question 8

What must be disclosed if there are transactions between the parties

Answer 8

• The nature (not the name of the entity) of the related party relationships
• Information about the types of transactions
• The outstanding balances necessary for an understanding of the financial statements.
• Disclosure should be made irrespective of whether a price is charged

Question 9

What is a joint venture

Answer 9

A contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control

Question 10

What is a venturer

Answer 10

A party to a joint venture and has joint control over that joint venture

Question 11

What is an investor in a joint venture

Answer 11

A party to a joint venture and does not have joint control over that joint venture

Question 12

What is control

Answer 12

The power to govern the financial and operating policies of an activity so as to obtain benefits from it

Question 13

What is joint control

Answer 13

The contractually agreed sharing of control over an economic activity. Joint control exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers